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present value of the deferred consideration will be held as part of the general investment portfolio of the Company. The present value of the deferred consideration has been calculated to reflect Arrowpoint Capital’s projected performance, and in turn, timing for any payments. The terms of the Notes are set out in Part IV of this document. On receipt of shareholder and regulatory approvals and with Completion, the Group will make a US$287.5 million (£151 million) capital contribution into the US Regulated Entities. The Group has given Arrowpoint Capital limited representations and warranties, all of which are customary in a transaction of this kind. Following Completion, several existing support arrangements will remain in place, including the aggregate excess of loss reinsurance agreement (the ‘‘ADC’’) and a letter of credit (the ‘‘Company LOC’’). The ADC is a reinsurance arrangement set up between the Group and the US Operation in 2003 whereby the Group has reinsured certain policy losses of the US Operation. The ADC attaches when paid losses exceed US$4.01 billion and covers up to a maximum of an additional US$1.225 billion. The ADC is at its policy limit and is therefore not subject to further insurance risk. Furthermore, it is supported by collateral through a combination of funds withheld in trust and through a letter of credit. A potential timing risk exists in the event that the payment of claims under the ADC become due to the US Operation before sufficient resources exist within the funds withheld account. In this event there would be a charge against the Group’s net assets. However the Directors believe that the ADC does not represent a material risk to the Group given its nature, timing and likelihood. In 2003, the Company LOC was established between the Group and the US Operation in support of certain third party reinsurance recoverables, which under US statutory accounting rules would not be admitted as an asset of the US Operation for regulatory capital purposes. The collateral provided by the Company LOC allows the recoverables to be admitted for regulatory capital purposes. The Company LOC cannot in any event exceed US$150 million. The recoverables covered by the Company LOC, which are subject to adjustment, presently stand at US$145 million and at the time of writing this document the Company LOC had not been drawn down against. The Purchase Agreement provides that after two years following Completion, the Company LOC will thereafter be able to be reduced by up to US$50 million per year as long as any reduction does not cause the risk based capital ratio of Royal Indemnity to drop below 300%. If the Company LOC is drawn against, an amount equal to any such drawdown will be added to the Notes. In this event, up to US$100 million will be repaid to the Group on a priority basis in advance of any dividend payment by Arrowpoint Capital. Further details on these arrangements are set out in Part IV of this document. The Disposal is conditional upon, amongst other things, receipt of the required Governmental Entity Approvals in the United States and Bermuda, without any limitation or condition being imposed. The Group is targeting Completion by year end 2006 and further details on the regulatory process are set out in Part IV of this document. The Purchase Agreement also contains certain other customary conditions to Completion, including, without limitation, the approval of the Purchase Agreement and the transactions contemplated thereby by the Shareholders at the Extraordinary General Meeting. If Shareholder and regulatory approvals are not received the Disposal cannot complete. Further details of the terms of the Disposal are set out in Part IV of this document. 6. FINANCIAL EFFECTS OF THE DISPOSAL The Group is selling the US Operation to Arrowpoint Capital for a deferred consideration of £160 million (US$300 million). The deferred consideration will be funded from the future performance of the US Operation through dividends paid by the US Regulated Entities to Arrowpoint Capital. In the table on page 9, the deferred consideration is discounted to its present value to reflect the fact that it is dependent upon Arrowpoint Capital’s future performance and that any payments are subject to regulatory approval. Therefore the final consideration received may be different to the total deferred consideration of £160 million as described above. The transaction is conditional upon, inter alia, 8
shareholder and regulatory approvals. On receipt of these approvals and with Completion, the Group will make a £151 million (US$287.5 million) capital contribution into the US Regulated Entities. The net capital contribution, write off of net assets and other related costs result in an estimated pre tax loss on disposal of £443 million. This is subject to an adjustment based on the net assets as at Completion and foreign exchange fluctuations. The table below details the estimated pre tax loss on disposal. £m £m Net assets as at 30 June 2006 (322) Capital contribution (151) Present value of deferred consideration 70 Net contribution (81) Transaction and other costs (including the legal fees of Arrowpoint Capital) (29) Foreign exchange previously taken to reserves (11) Estimated pre tax loss on disposal (443) A pro forma statement of the net assets of the Remaining Group has been prepared for illustrative purposes only to show the effect of the disposal as if it had occurred at 30 June 2006. This statement is set out in Part III of this document. 7. USE OF PROCEEDS As part of the transaction there is deferred consideration of US$300 million (£160 million), in the form of the Notes, payable dependant on the future financial performance of Arrowpoint Capital. The present value of the deferred consideration will be held as part of the general investment portfolio of the Group. The net consideration, based on £160 million (US$300 million) of deferred consideration and the £151 million (US$287.5 million) capital contribution, is £9 million. 8. RELATED PARTY TRANSACTION Arrowpoint Capital Corp. is an entity formed and owned by, inter alia, the US Directors and which in turn owns 100% of Arrowpoint Capital LLC. The US Directors and the Purchaser are each related parties of the Company and the Disposal therefore constitutes a related party transaction for the purposes of the Listing Rules. Each US Director is a related party by virtue of being a director of one or more subsidiaries (of the Company) which form part of the US Operation. The Purchaser is a Related Party by virtue of the fact that it is an associate of each of the US Directors who are, in aggregate, able to exercise or control the exercise of 30% or more of the votes able to be cast on all, or substantively all, matters at general meetings of the Purchaser. As a related party transaction, the Disposal is of sufficient size relative to the size of the Group that the approval of Shareholders is required before Completion can occur. The approval of Shareholders is therefore being sought for the Disposal at an Extraordinary General Meeting of the Company to be held at the offices of Slaughter and May, One Bunhill Row, London, EC1Y 8YY on Wednesday, 1 November 2006 at 9.30 a.m. To the extent any Related Party holds shares in the Company, such party will abstain from voting at the Extraordinary General Meeting and the Related Parties have taken all reasonable steps to ensure that their associates also abstain from voting at the Extraordinary General Meeting. Further information on the Related Parties involved in the Disposal is set out in Part V of this document. 9. EXTRAORDINARY GENERAL MEETING You will find at the end of this document a formal notice convening the Extraordinary General Meeting of the Company to be held at 9.30 a.m. (UK time) on Wednesday, 1 November 2006. 9
Page 1 and 2: THIS DOCUMENT IS IMPORTANT AND REQU
Page 3 and 4: CONTENTS Page Definitions..........
Page 5 and 6: ‘‘IFRS’’ ‘‘Listing Rule
Page 7: 3. INFORMATION ON THE US OPERATION
Page 11 and 12: PART II FINANCIAL INFORMATION ON TH
Page 13 and 14: Summary Consolidated Balance Sheet
Page 15 and 16: (a) (b) (c) (d) (e) (f) the right o
Page 17 and 18: educe over time as liabilities for
Page 19 and 20: 3. US Directors’ service contract
Page 21 and 22: 6. Material Contracts With the exce
Page 23 and 24: s uncertainty over the timing of a
Page 25 and 26: 7.8 Reinsurance The Group is expose
Page 27 and 28: The original loan portfolio had a f
Page 29 and 30: ROYAL & SUN ALLIANCE INSURANCE GROU
Page 32: The paper used for this circular is

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