Supplemental IE Report RSAI Sun & Marine - Royal and Sun Alliance

Milliman Client Report
Supplemental Report of the Independent Expert on the proposed transfers of some
insurance business from:-
• the UK Subsidiaries of Royal & Sun Alliance Insurance plc to Royal & Sun
Alliance Insurance plc;
• Royal & Sun Alliance Insurance plc and certain UK Subsidiaries of Royal &
Sun Alliance Insurance plc to The Marine Insurance Company Limited; and
• certain UK Subsidiaries of Royal & Sun Alliance Insurance plc to Sun
Insurance Office Limited
Prepared for:
Royal & Sun Alliance Insurance plc
Prepared by:
Milliman Limited
Gary Wells
FIA
11 Old Jewry
London,
EC2R 8DU
United Kingdom
Tel +44 (0)20 7847 1500
Fax +44 (0)20 7847 1501
milliman.co.uk
November 30, 2011

Milliman Client Report
TABLE OF CONTENTS
1. INTRODUCTION 3
2. BUSINESS DEVELOPMENTS IN THE RSA GROUP 5
3. CHANGES IN LIABILITIES UP TO THE EFFECTIVE DATE 6
4. CHANGES IN CAPITAL AND SOLVENCY 8
5. THE EFFECT OF THE TRANSFERS ON THE REINSURANCE ASSET 12
6. POST-TRANSFERS REINSURANCE ARRANGEMENTS 13
7. OTHER CONSIDERATIONS 15
8. CONCLUSION 17
APPENDIX A. KEY DATA AND INFORMATION RECEIVED 18
APPENDIX B. LETTER OF REPRESENTATION 19
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1. INTRODUCTION
1.1 I, Gary G Wells, prepared three reports (the “Reports”) to the Court dated 4 July 2011 entitled:-
• “Report of the Independent Expert on the proposed transfer of some insurance business from the UK
Subsidiaries of Royal & Sun Alliance Insurance plc to Royal & Sun Alliance Insurance plc” (the “Report for
the RSAI Scheme”);
• “Report of the Independent Expert on the proposed transfer of some insurance business from Royal & Sun
Alliance Insurance plc and certain UK Subsidiaries of Royal & Sun Alliance Insurance plc to The Marine
Insurance Company Limited” (the “Report for the MIC Scheme”); and
• “Report of the Independent Expert on the proposed transfer of some insurance business from the UK
Subsidiaries of Royal & Sun Alliance Insurance plc to Sun Insurance Office Limited” (the “Report for the Sun
Scheme”).
1.2 The conclusions of these Reports were based on financial information up to 31 December 2010 and other information
available to me when I prepared the Reports. Since preparing the Reports I have been provided with more recent
financial information and other information in respect of the relevant companies. Details of the further information I
have received are set out in Appendix A.
1.3 In the light of the further information available to me I am providing in this report (the “Supplemental Report”) an
update on the conclusions set out in the Reports. In the Reports I stated that I would address the following in this
Supplemental Report:-
• The extent to which changes in assets and liabilities of the companies party to the proposed RSAI, MIC and
Sun Schemes (collectively the “Schemes”), relative to their respective positions as at 31 December 2010,
have been in line with expectations;
• The effect of the proposed transfers on the transferring reinsurance asset;
• My review of the RSA Group’s 2011 ICA;
• Arrangements between members of the RSA Group and the Institute of London Underwriters ("ILU"); and
• The extent to which the operational plans of the RSA Group (relative to their respective positions as at the
date of the Reports) have been in line with expectations.
I have addressed all these areas below, and I also comment on the final draft terms of the post-transfers reinsurance
arrangements.
1.4 In addition to the reports listed in paragraph 1.1 above, I also prepared a report to the Court dated 4 July entitled
“Report of the Independent Expert on the proposed transfer of the general insurance business of PA(GI) Limited to
Royal & Sun Alliance Insurance plc and The Marine Insurance Company Limited” (the “Report for the PAGI
Schemes”). I have produced a separate supplemental report updating my conclusions set out in the Report for the
PAGI Schemes.
1.5 This Supplemental Report should be read in conjunction with the Reports, as well as the Report for the PAGI
Schemes and the supplemental report for the PAGI Schemes, and the full terms of the Schemes and the PAGI
Schemes. This Supplemental Report has been produced on the same bases as set out at Section 1 of the Reports. In
particular, it has the same scope, and is subject to the same reliances and limitations. Terms used in this
Supplemental Report have the same meanings as in the Reports.
1.6 Reliance has also been placed upon, but not limited to, the additional information detailed in Appendix A. My opinions
depend on the substantial accuracy of this data, information and the underlying calculations. RSAI has provided me
with details of the procedures and processes it uses to ensure that the data it uses for setting claims reserves and for
use within their internal capital model is fit for purpose. I am satisfied that appropriate measures are in place to ensure
that data is fit for purpose; I have not however undertaken checks on the data underlying the information I have been
provided and give no warranty as to its accuracy. RSAI has confirmed to me in writing that to the best of its
knowledge and belief all data and information it has provided to me is accurate and complete (see Letter of
Representation, Appendix B).
1.7 All information I have requested from the RSA Group in relation to the Schemes has been provided to me.
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1.8 The conclusions set out in this Supplemental Report are based largely on data provided by RSAI as at 30 September
2011 (and in some cases as at 30 June 2011). RSAI has informed me that there have been no developments since
the latest data made available to me which are relevant to the Schemes.
1.9 This Supplemental Report has been prepared in accordance with the following applicable Technical Actuarial
Standards (“TASs”), as issued by the Board for Actuarial Standards: the Insurance TAS, Transformations TAS, TAS-
R (Reports); and to the extent relevant TAS-D (Data) and TAS-M (Modelling). This Supplemental Report, together
with the Reports and the Report for the PAGI Schemes and supplemental report for the PAGI Schemes are intended
to form an “aggregate report” as defined in TAS-R.
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2. BUSINESS DEVELOPMENTS IN THE RSA GROUP
2.1 In the 9 months to 30 September 2011, the UK managed business of RSAI wrote net premiums of £2,318m, up by 7%
from the same period in 2010. This increase was said to be as a result of rate increases and targeted organic growth
and deals.
2.2 In the same period, net written premiums in the Italian business (written in Sun, Sea and National Vulcan) amounted
to £175m. This represented a 7% increase versus 2010 (or 6% at constant exchange rates). This increase was said
to be driven by rating actions on the motor portfolio.
OPERATIONAL PLANS
2.3
2.4
In the period since writing my Reports, there have been no changes in the operational plans of the RSA Group that
have led me to alter my conclusions as set out in the Reports. Further, RSAI has confirmed to me that it has no
planned future changes to its operational plans that would have a material effect on the security of its policyholders.
I believe that it is unlikely that any events occurring between the date of this Supplemental Report and the Effective
Date would affect the conclusions set out in the Reports and in this Supplemental Report.
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3. CHANGES IN LIABILITIES UP TO THE EFFECTIVE DATE
3.1 I have reviewed actual changes in liabilities (as reported to me by RSAI) for the nine month period to 30 September
2011 and have considered the extent to which they have been in line with expectations.
3.2 I have not attempted to review in detail the calculations performed by RSAI’s internal actuaries. Instead I have
reviewed the reports produced by the internal actuaries, the approach followed by the internal actuaries, the process
by which reserves are set, the key areas of reserve uncertainty and the apparent strength of the reserves. In my view,
the actuarial methods used by RSAI continue to be in line with normal actuarial practice.
RSAI AND THE TRANSFERORS
3.3 I have reviewed the actuarial analysis, prepared by the RSAI internal actuaries, of the UK managed business as at 30
September 2011, in order to satisfy myself that it is reasonable for me to rely on their work. The analysis is based on
data as at 30 June 2011. RSAI has also provided me with a separate roll-forward analysis for the three month period
to 30 September 2011. As well as reviewing these documents I have also discussed the processes and key issues
arising from my review with the internal actuaries.
3.4 The actuarial analysis is concerned with the UK managed business (including the Risk Solutions Europe business
written by the European branches of Royal and Sun Alliance Insurance (Global) Limited and Royal International
Insurance Holdings Limited, but excluding the Italian business written by Sun, National Vulcan and Sea). This
includes business written by RSAI, and that hived-up to it from the transferors. While the analysis includes legacy
business (which forms the majority of the business transferring under the Schemes and the PAGI Schemes), the
ultimate value of claims for the asbestos account (the most significant part of the legacy book) has been left
unchanged pending the results of an external review of these claims that will not be completed until the end of the
year. RSAI has however provided me with some statistics concerning the actual versus expected development of the
asbestos liabilities and a qualitative assessment of how reserves are likely to change following the completion of the
external review.
3.5 I have reviewed the actuarial analysis of the UK managed business for the 9 month period to 30 September 2011 as
prepared by RSAI. Overall, my review indicates that the claim development has been within expectations.
3.6 For the asbestos claims, I have reviewed the actual versus expected analysis for the 9 month period to 30 September
2011 as prepared by RSAI and considered the qualitative information regarding the actual development of asbestos
claims. Overall, my review indicates that there is unlikely to be a significant revision to the estimated ultimate
asbestos claims as a result of the external review mentioned in paragraph 3.4 above.
3.7 Notwithstanding the uncertainty relating to the asbestos liabilities I am satisfied that reserving levels in RSAI continue
to be reasonable.
SUN, SEA AND NATIONAL VULCAN
3.8 I have been provided with papers from the Italy Reserve Committee meeting showing the development of reserves to
30 June 2011. This covers the “live” Italian branch business of Sun, Sea and National Vulcan. As well as reviewing
these documents I have also discussed the processes and key issues arising from my review with the internal
actuaries.
3.9 The papers show that there has been significant reserve deterioration. Across all lines of business there was €24.8m
of deterioration on 2010 and prior accident years. €22.5m of the deterioration relates to Sun, €1.4m to National
Vulcan and €0.9m to Sea. Much of the deterioration on Sun is attributable to third party motor liability claims.
3.10 I am informed by RSAI/Sun that the deterioration of motor third party liability claims was attributable to reserve
strengthening in respect of large losses, particularly on the 2010 accident year, as well as changes to the “Milan
Tables” (settlement tables used for bodily injury claims in Italy). The 2011 accident year has been reserved on the
basis that large losses will revert to pre-2010 levels. I am further informed by RSAI/Sun that experience on the 2011
accident year to date is said to be tracking to expected levels.
3.11 As a result of the continuing adverse development on Sun, RSAI injected an additional £17.5m of capital into Sun in
September 2011. RSAI injected a further £30m of capital into Sun in November 2011.
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3.12 The motor third party liability claims continue to give rise to significant uncertainty in the reserve level of Sun, and as
such the RSA Group regards them to be high risk and of high materiality to the financial results of Sun, although not
to the RSA Group.
3.13 Notwithstanding the uncertainty relating to motor third party liability claims, based on my review, the reserves of Sun,
Sea and National Vulcan appear reasonable at present.
THE MARINE INSURANCE COMPANY
3.14 I have been provided with technical provisions for Marine as at 30 June 2011 together with an analysis of incurred
movements in the period since 31 December 2010.
3.15 The majority of Marine’s gross liabilities are in respect of fronting for aviation business, for which no liability is retained
in Marine. There was a small release from these gross liabilities in the six months to 30 June 2011.
3.16 The remainder of the liabilities are almost entirely in respect of US surplus lines business, on which overall reserves
moved in line with expectations over the 6 months to 30 June 2011.
3.17 I continue to be satisfied that the reserves in Marine appear reasonable at present.
CONCLUSION
3.18 I believe that the Schemes are unlikely to have a materially adverse impact on the reserve strength provided
to policyholders affected by the Schemes.
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4. CHANGES IN CAPITAL AND SOLVENCY
4.1 Table 4.1 below shows the solvency positions, measured on a Solvency I basis, of all the entities involved in the
transfers (except PAGI) as at 30 September 2011, together with the position as at 31 December 2010, as shown in
my earlier Reports.
Table 4.1
Solvency Positions as at 31 December 2010 and 30 September 2011
Position as at 31/12/2010 Position as at 30/9/2011
Transferor
Capital
Resources
(£'000)
MCR (£'000)
Free Assets
(£'000)
Solvency I
Cover Ratio
Capital
Resources
(£'000)
MCR (£'000)
Free Assets
(£'000)
Solvency I
Cover Ratio
Alliance Assurance Co Ltd 4,626 3,040 1,586 1.5 4,750 3,040 1,710 1.6
Liverpool Marine & General Insurance Co Ltd 5,570 3,040 2,530 1.8 5,731 3,040 2,691 1.9
London Guarantee & Reinsurance Co Ltd 9,497 3,040 6,457 3.1 9,762 3,040 6,722 3.2
National Vulcan Engineering Insurance Group Ltd 13,376 3,040 10,336 4.4 13,955 3,040 10,915 4.6
Royal & Sun Alliance Insurance (Global) Ltd 99,401 9,667 89,734 10.3 102,575 9,667 92,908 10.6
Royal Insurance (UK) Ltd 4,601 3,040 1,561 1.5 4,756 3,040 1,716 1.6
Royal International Insurance Holdings Ltd 2,176,618 663,976 1,512,642 3.3 1,973,839 721,271 1,252,568 2.7
Royal & Sun Alliance Reinsurance Ltd 70,386 29,337 41,049 2.4 79,437 25,388 54,049 3.1
Sun Alliance & London Insurance plc 58,144 27,360 30,784 2.1 73,741 27,360 46,381 2.7
Sun Alliance Insurance International Ltd 19,666 6,080 13,586 3.2 20,546 6,080 14,466 3.4
Sun Alliance Insurance UK Ltd 6,423 3,040 3,383 2.1 6,640 3,040 3,600 2.2
Sun Insurance Office Ltd 84,465 53,998 30,467 1.6 57,365 53,998 3,367 1.1
The British & Foreign Marine Insurance Co Ltd 8,326 3,040 5,286 2.7 8,577 3,040 5,537 2.8
The Century Insurance Co Ltd 5,006 3,040 1,966 1.6 5,104 3,040 2,064 1.7
The Globe Insurance Co Ltd 2,118,458 638,410 1,480,048 3.3 1,938,255 692,256 1,245,999 2.8
The London Assurance 15,382 6,080 9,302 2.5 15,323 6,080 9,243 2.5
The Marine Insurance Co Ltd 70,435 3,040 67,395 23.2 71,271 3,040 68,231 23.4
The Northern Maritime Insurance Co Ltd 4,230 3,040 1,190 1.4 4,353 3,040 1,313 1.4
The Sea Insurance Co Ltd 9,075 3,040 6,035 3.0 9,661 3,040 6,621 3.2
The Union Marine & General Insurance Co Ltd 3,872 3,040 832 1.3 4,011 3,040 971 1.3
RSAI (consolidated) 2,990,523 1,475,617 1,514,906 2.0 2,893,928 1,671,162 1,222,766 1.7
4.2 The Solvency I cover ratios (i.e. the ratio of capital resources to minimum capital requirement or “MCR”) have
remained broadly unchanged for most entities over the period. The cover ratio of Sun has, however, reduced
significantly, and as at 30 September 2011 the capital resources in Sun were only around 6% higher than the MCR.
As discussed in paragraph 3.11 above, on-going poor performance on the Sun’s Italian motor business led RSAI to
inject £17.5m of additional capital into Sun in September 2011 in order to ensure the company continues to maintain
an adequate level of capital for Solvency I purposes. RSAI also injected a further £30m of capital into Sun in
November 2011.
4.3 The RSA Group has provided me with a final copy of its 2011 ICA report (based on 31 December 2010 data). I have
reviewed the report and have discussed the results of the ICA and methodology used with internal RSAI staff. I
continue to consider the methodology and modelling techniques used by RSAI to be appropriate and in line with
current market practice and my judgement is that the results provided appear reasonable, but recognise that other
results could have been generated using different sets of assumptions that are within the bounds of reasonableness.
4.4 Due to limitations on the degree of disclosure permitted by the FSA, I am not able to give details of the ICA in this
Supplemental Report. However, the ICA report does show that, over the period since the previous ICA review, the
ICA increased and the level of capital resources in the RSA Group available to meet the requirement decreased.
Therefore the surplus capital reduced. This reduction in surplus was attributed principally to reducing investment
yields, acquisitions and increased intangible software asset spend, combined with greater business volumes
increasing the amount of risk.
4.5 Despite this reduction in surplus, the capital resources in the RSA Group remained comfortably in excess of the ICA
as at 31 December 2010.
4.6 The ICA report also details the RSA Group’s own economic capital assessment (“ECA”). The conclusions of this
assessment are similar to those of the ICA, with the surplus falling, but available assets remaining comfortably in
excess of the ECA.
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4.7 The RSA Group has provided me with updated ICA and ECA surplus figures as at 30 September 2011. Both the ICA
surplus and the ECA surplus fell over the 9 month period to 30 September 2011, by approximately 20% and 30%
respectively. In both cases falling yields were the primary driver behind the reduction. As at 30 September 2011, the
ECA surplus stood at £0.7 billion.
4.8 RSAI has also provided me with an updated estimate of RSAI’s solvency capital requirement based on QIS5. The
original QIS5 exercise was undertaken as at 31 December 2009; the revised draft figures are as at 31 December
2010. The capital available remained comfortably in excess of the requirement, albeit by a lower margin than the 2009
estimates. Again, I note that the standard formula under Solvency II has yet to be finalised, and as such the QIS5
figures only illustrate the likely standard formula SCR amounts under the new solvency regime.
4.9 RSAI has also provided me with projections of the capital requirements and surpluses, on both a Solvency I and QIS5
basis, for each of RSA Re, Marine and Sun after the transfers and post-transfer reinsurance arrangements have been
effected, at 1 January 2012, 31 December 2012 and 31 December 2013. The results show very comfortable
surpluses in each entity on both bases. The MCR surplus in Sun is projected to improve significantly over time as the
full allowance for the reinsurance cover is accounted for in the calculation.
4.10 Recent developments in the eurozone have caused yields on peripheral European government debt to increase with
subsequent falls in market value, in particular on Greek bonds. The RSA Group’s direct holdings in peripheral
European government debt (as at 30 September 2011) amount to £146m or around 1% of the total investment
portfolio. Of this amount around £75m was in respect of Irish sovereign debt and £43m Italian. In addition, the RSA
Group has exposure to bank debt in peripheral European countries that amounted to £115m as at 30 September
2011.
4.11 While the degree of uncertainty surrounding these investments has increased as a result of the ongoing situation in
the eurozone, they remain small in relation to the RSA Group’s overall investment holdings.
4.12 Overall, I am satisfied that the level of capital within the RSA Group, and within the individual entities party to the
transfers, continues to be adequate and I do not have reason to change the conclusions set out in the Reports as to
the effect of the transfers on the levels of financial security of policyholders affected by the Schemes.
4.13 Tables 4.2 to 4.4 below show the effect on the balance sheets of RSAI, Marine and Sun of the Schemes, based on
financial data as at 30 June 2011.
Table 4.2
Simplified Balance Sheets for RSAI as at 30 June 2011
£m Pre-transfers
Post-transfers
(before RI)
Post-transfers
(after RI)
Assets
Investments 15,176 15,435 15,464
Reinsurers' share of technical provisions 1,027 1,033 1,033
Debtors 20,946 20,938 20,938
Other Assets 1,180 1,313 1,342
Withheld RI premiums from Sun and Marine 511
38,329 38,719 39,288
Liabilities
Capital & Reserves 4,819 4,814 4,844
Dated Loan Capital 864 864 864
Technical provisions 6,962 7,111 7,650
Creditors 24,809 24,873 24,873
Other liabilities 876 1,057 1,057
38,329 38,719 39,288
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Table 4.3
Simplified Balance Sheets for Marine as at 30 June 2011
£m Pre-transfers
Post-transfers
(before RI)
Post-transfers
(after RI)
Assets
Investments 72 157 152
Reinsurers' share of technical provisions 125 188 281
Debtors 35 43 43
Other Assets 3 3 2
Liabilities
235 391 478
Capital & Reserves 90 95 90
Technical provisions 142 283 283
Creditors 3 13 13
Other liabilities 0 0 0
Funds withheld premium to RSAI 92
Table 4.4
Simplified Balance Sheets for Sun as at 30 June 2011
235 391 478
£m Pre-transfers
Post-transfers
(before RI)
Post-transfers
(after RI)
Assets
Investments 372 400 400
Reinsurers' share of technical provisions 43 47 493
Debtors 121 127 127
Other Assets 119 131 83
Liabilities
655 704 1,102
Capital & Reserves 91 116 95
Technical provisions 473 494 494
Creditors 70 72 72
Other liabilities 22 23 23
Funds withheld premium to RSAI 0 0 419
655 704 1,102
4.14 Under the MIC Scheme and the PAGI (marine business) Scheme, RSAI will transfer assets to Marine equal to the net
liabilities transferring plus an uplift to reflect the risk premium for the business being accepted. Based on the balance
sheet position as at 30 June 2011 RSAI will transfer assets to the value of £84.2m to Marine. This will be made up of
cash and a portfolio of US corporate bonds with durations of less than 2 years and credit rating of typically A or
higher. The assets that will transfer to the funds withheld account will consist of cash and the bond portfolio
transferred from RSAI, together with assets currently held by Marine to back its existing insurance liabilities.
4.15 Under the Sun Scheme, all assets will be transferred out of National Vulcan and Sea to Sun. Sun will issue shares to
National Vulcan and Sea equal in value to the net value of assets transferring to Sun under the Sun Scheme. The
assets that will form the funds withheld account will include a portfolio of euro-denominated fixed income securities
currently held in Sun, with a market value (as at 30 June 2011) of £299m. The securities making up this portfolio are a
mixture of corporate and government bonds, with an average duration of around 2 years and credit rating of mainly A-
or higher. The funds withheld account will also be made up of around £52m of debtors, and £68m of cash.
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4.16 The majority of the business transferring to RSAI under the RSAI Scheme is already hived-up to RSAI and therefore
no additional assets will transfer to RSAI in relation to these liabilities. The liabilities that will transfer to RSAI that are
not currently hived-up to RSAI are mainly in respect of business written in the overseas branches of Royal and Sun
Alliance Insurance (Global) Limited and Royal International Insurance Holdings Limited. Under the RSAI Scheme,
assets will transfer from these entities to RSAI. Such assets will include those currently backing the transferring
liabilities, and will be composed of cash and fixed income securities.
4.17 I am satisfied that the nature of the assets to be transferred under the Schemes (and the PAGI Schemes), and that
will form the funds withheld accounts, does not generate any material additional risk to the security of policyholders
affected by the Schemes (and the PAGI Schemes).
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5. THE EFFECT OF THE TRANSFERS ON THE REINSURANCE ASSET
5.1 In my Reports I stated that I would provide an update in my Supplemental Report on the analysis of the reinsurance
asset and associated risk mitigation being carried out by RSAI.
5.2 RSAI has carried out significant further work to identify the legal jurisdiction of the entire transferring reinsurance
asset and to mitigate any risks through engaging with reinsurers.
5.3
5.4
Across the Schemes (and the PAGI Schemes), based on 31 December 2010 figures, approximately £279.9m of
external reinsurance will transfer. Of this amount RSAI has identified £38.0m that is potentially at risk due to the law
governing the contract or seat of arbitration being in a non-UK country which may not recognise Part VII transfers.
Allowing for changes in reserves to 30 June 2011 RSAI estimates the amount potentially at risk to be £40.7m (or
£37.4m on a discounted basis).
While recognising that a residual legal risk remains, RSAI has further analysed the risk associated with this asset and
categorised it according to commercial considerations. The categories used are “lowest”, “low” and “moderate”. The
“lowest” risk contracts include those in respect of fronting arrangements for captive insurers; those where the asset is
held with a UK reinsurer, but the governing law is not UK; those where, in certain jurisdictions, reinsurers have been
notified and no response has been taken as implied consent to the transfers; and where discussions with the
reinsurers concerned have indicated that objections are not likely to be raised. “Low” risk asset includes contracts that
RSAI have not been able to find, but where the cover note identifies that the reinsurer is UK domiciled. “Moderate”
risk includes exposure to non-EEA governed contracts. I have been informed by RSAI that, as at the date of this
Supplemental Report, no reinsurer objections have been received to any of the proposed transfers.
5.5 Of the £37.4m of asset potentially at risk, only a very small amount is deemed to be of “moderate” risk,
the asset being categorised as “lowest” risk.
with most of
5.6 Of the transferring potentially at risk asset, 71% , 22% and 7% will transfer to RSAI, Marine and Sun respectively.
5.7 I have reviewed the work undertaken by RSAI and consider its conclusions reasonable. In consequence, it is to be
expected that only a very small proportion of the transferring reinsurance asset is actually at risk. Nonetheless, I
remain satisfied that even if all of the potentially “at risk” reinsurance asset were not to transfer under the Schemes,
the impact on RSAI/Marine/Sun would not be significant in the context of the available capital of the RSA Group.
5.8 I am satisfied that the risks associated with the transferring reinsurance asset are unlikely to have a materially
adverse effect on the security of policyholders affected by the transfers.
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6. POST-TRANSFERS REINSURANCE ARRANGEMENTS
AGGREGATE EXCESS OF LOSS AGREEMENTS
6.1 As described in my Reports, following the completion of the Schemes, RSAI will wholly reinsure each of Marine and
Sun under aggregate excess of loss reinsurance arrangements. The final draft terms of these arrangements have
now been agreed.
6.2 The premium to be paid by each of Sun and Marine will be the booked value of net Technical Provisions to be
reinsured as at 31 December 2011 less deferred acquisition costs plus any future premiums (on the business
reinsured), plus a 5% margin on the aforesaid net Technical Provisions.
6.3
6.4
A margin is included in the premium in order to ensure that the reinsurance arrangements are deemed to be priced at
“arm’s length”, and that RSAI receives an adequate return on capital for entering into the agreements. The margin will
be paid up-front to RSAI and will not form part of the funds withheld account. All of the rest of the premium will be paid
into the funds withheld account.
Both the Sun and Marine will receive additional capital to cover the respective margins payable to RSAI either prior to
or as part of the Schemes becoming effective.
6.5 Under the terms of the aggregate excess of loss reinsurance arrangements, as the premium is withheld, the amount
(calculated on quarterly settlement dates) which RSAI is due to pay to the reinsured by way of reinsurance claims will
be calculated by reference to the claims which the reinsured company has settled with its policyholders in the
preceding quarter. That amount will be netted against the amount of premium in the funds withheld account. In
between the quarterly settlement dates, each of Marine and Sun will seek to settle claims of its policyholders from its
own assets and, as a result, each would be exposed to the risk that the value of its assets may not be sufficient to
meet the claims of its policyholders. In order to address this risk, RSAI has agreed to enter into a deed of indemnity
with each of Marine and Sun, under which RSAI will indemnify the relevant company against the risk that its assets
are insufficient to settle, when due, that company’s policyholder claims in respect of which the aggregate excess of
loss agreement covers the company. Therefore, the existing and transferring policyholders of Sun and Marine will,
post-transfer, enjoy a level of security that is not materially different from that currently enjoyed under the current
internal risk transfer arrangements (including the DMG).
CREDIT RISK INSURANCE AGREEMENT
6.6 Following the completion of the Schemes, RSAI will also enter into a “credit risk insurance agreement” with RSA Re.
RSA Re currently has nil net liabilities and much of its reinsurance asset is held within the RSA Group (including
some RSA Group companies not party to the DMG), but some is held with external reinsurers. RSA Re is currently
party to the DMG and, as such, if it suffered difficulties as a result of the failure of an external reinsurer or reinsurer
not party to the DMG, RSAI and the other parties to the deed would be required to meet its policyholder obligations.
Following the implementation of the Schemes the DMG will be terminated. In order that the security of policyholders
of RSA Re is not adversely affected as a result of the termination of the DMG, RSAI will insure RSA Re’s reinsurer
credit risk in respect of reinsurers other than RSAI, Sun and Marine.
6.7 RSA Re’s current external reinsurers consist mainly of highly rated major international reinsurers. Over 95% of the
external reinsurance asset (based on 30 June 2011 figures) is held with reinsurers with a credit rating of A+ or higher
(i.e. higher than RSAI’s own rating). A+ rated reinsurer HDI-Gerling is the largest reinsurer, with more than 80% of the
external asset.
6.8 RSA Re will pay an initial premium to RSAI of 1.4% of its reinsurers’ share of Technical Provisions in respect of
reinsurers other than RSAI, Sun and Marine, at the Effective Date to cover the credit risk. This will be paid out of the
capital of RSA Re; however the overall solvency capital ratio of RSA Re will remain strong based on the position as at
30 September 2011.
QUOTA SHARE REINSURANCE AGREEMENTS
6.9 As described in the Reports, following the implementation of the transfers, in addition to the reinsurance
arrangements covering the existing business of Marine and Sun, RSAI will also reinsure the future (new/renewed)
insurance liabilities net of inuring reinsurance of each cedant company on a 100% quota share basis.
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6.10 Final terms of these quota share reinsurance agreements have now been agreed. The agreements have been priced
on an “arm’s length” basis and ensure an adequate return on capital to RSAI. The premium and claims payments
under each quota share agreement will be subject to a quarterly
settlement mechanism and each quota share
agreement will be subject to annual renewal.
CONCLUSION
6.11 Each party to the DMG has undertaken to each other party to “guarantee and indemnify” that other party “in respect of
the due performance of all policies and contracts in respect of general insurance business” of that other party. In this
way, through the DMG each party currently benefits from the capital strength of RSAI and its UK insurance
subsidiaries (that are also party to the DMG) as a whole.
6.12 Following the implementation of the transfers, although the DMG will be terminated:
• The business transferred to RSAI will be merged with the existing business of RSAI;
• The existing business of and the business transferred to Marine and Sun (as the case may be) will be wholly
reinsured by RSAI through the aggregate excess of loss agreements thereby merging the financial interests
with those of RSAI; and
• To the extent that the existing (non-transferred) business of RSA Re is not already reinsured by RSAI,
Marine or Sun, the credit risk associated with the residual business reinsured externally from these
companies will be insured by RSAI, thereby merging the overall financial interests of RSA Re with those of
RSAI.
6.13 It therefore follows that the financial interests of all policyholders currently benefiting from the DMG will be bound
together with those of the policyholders of RSAI. RSAI is the ultimate parent of all the companies currently party to the
DMG, and the ultimate beneficiary of all surplus assets, therefore all parties will continue to benefit from the capital
strength of RSAI as a whole.
6.14 I have reviewed the aggregate excess of loss agreements, deeds of indemnity, quota share agreements and credit
risk insurance agreement and have taken independent legal advice that confirms the terms, conditions and operation
of these agreements.
6.15 I am satisfied that the post-transfers (re)insurance agreements, as outlined above, will provide policyholders with a
comparable level of security as provided by the DMG, and that no policyholders will be materially adversely affected
as a result of the termination of the DMG.
6.16 Furthermore, as the premium (excluding the margin) under the aggregate excess of loss agreements will be withheld,
I am satisfied that the policyholders of the business of Sun and Marine (as the case may be) reinsured under the
respective aggregate excess of loss agreements will not be materially adversely affected as a result of transferring
assets backing net Technical Provisions out of their respective companies.
6.17 I am satisfied that the conclusions I set out with regard to the post-transfers reinsurance arrangements in the
Reports are unchanged as a result of the agreed terms of the post-transfers reinsurance arrangements as set
out above, including the modified arrangements applicable to RSA Re.
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7. OTHER CONSIDERATIONS
ILU GUARANTEE
7.1 Under the Schemes, the transferring business includes some insurance business originally written through the
Institute of London Underwriters ("ILU"). Such business enjoys the benefit of guarantees in relation to the payment of
claims. These guarantees are provided by companies in the RSA Group, and in some cases by PAGI.
7.2 Subsequent to the Reports, RSAI has held discussions with representatives of the ILU regarding arrangements
between members of the RSA Group and the ILU in relation to the insurance business transferring in connection with
the Schemes. The outcome of those discussions is that a replacement guarantee is to be given in relation to the
relevant transferring policies following their transfer to Marine (I am informed by RSAI that all the relevant business
will be transferred to Marine under the MIC Scheme and PAGI (marine business) Scheme) and that the new
guarantor will be RSAI.
7.3
I have obtained independent legal advice that this new guarantee is a satisfactory replacement to the original
guarantees. Where the guarantee is currently provided by a company in the RSA Group, that company currently relies
on RSAI to provide its ultimate security through the DMG and so the security provided is essentially unchanged.
Where the guarantee has been provided by PAGI, although PAGI is an external company not party to the DMG, it is
wholly reinsured by RSAI and in the circumstances that the guarantee would be called upon would in all likelihood be
unable to provide support. The replacement ILU guarantee, to come into force from the Effective Date, will remove
this consideration as RSAI will be the only guarantor.
7.4 Therefore, in my view, transferring policyholders with policies written through the ILU will enjoy essentially the same
benefit both pre and post the proposed transfers.
PAGI SET-OFF RIGHTS
7.5 I am informed by RSAI that through the terms of the sale of the RSA Group UK life business (completed on 30
September 2004) whereby PAGI left the RSA Group, a financial true-up and final settlement took place 30 days after
completion, upon which it was agreed by the contracting parties that, as soon as practical after completion of that sale
and in any event within 12 months thereafter (30 September 2005), all rights of or against any Phoenix Group
Company (involving PAGI) or Member of the RSA Group respectively would be waived
7.6 In consequence, RSAI regards any rights, such as set off rights, which may have been in place as at 30 September
2004 (the completion date) to have fallen away from 30 September 2005 at the very latest.
7.7 It follows therefore that RSAI believes that no PAGI set off rights against any RSA Group company remain in place at
the date of this Supplemental Report, and in my view this conclusion is reasonable.
POLICYHOLDER CONCERNS
7.8 I have been informed by RSAI that Ms Mayda Balboa, a managing/sole member of Blue Seas Holding LLC ("Blue
Seas") has expressed concerns relating to the Schemes and the PAGI Schemes. These concerns relate to the MIC
Scheme and the PAGI (marine business) Scheme and are based, primarily, on the level of secur ity provided to
Marine's existing policyholders and policyholders transferring to Marine under the MIC Scheme and the PAGI (marine
business) Scheme. In particular, it is alleged that if the MIC Scheme and the PAGI (marine business) Scheme are
sanctioned by the Court, Marine is at risk of insolvency for the following reasons:
• The Reports and the PAGI Report are inaccurate as the information on which they are based comes directly
from RSAI, and RSAI “did not outline the major risks that are developing on a daily event that will seriously
affect [Marine’s] liquidity to settle outstanding claims [sic]”; and
• Marine “is a defendant in a $640 million dollar breech of agreement for failing to settle on an All Risk Policy
that they were a part of [sic]…”, and it has “other high financial liabilities of unsettled claims”.
7.9 I can confirm that RSAI has supplied me with all the relevant and requested information relating to Marine in order for
me to reach the conclusions in the Reports and the PAGI Report.
7.10 I am informed that RSAI/Marine has no knowledge of a $640 million breach of agreement.
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7.11 My views, as set out in the Report for the MIC Scheme and the Report for the PAGI Schemes, were in summary that:
• Prior to the Effective Date, the policyholders of Marine enjoy a strong level of security, which in turn is bound
together with RSAI by the DMG;
• On and after the Effective Date, the Schemes (in conjunction with the post-transfers reinsurance
arrangements with RSAI) and the PAGI Schemes will not adversely affect to any material extent the security
of the exiting policyholders of Marine or the policyholders (including PAGI policyholders) transferring to
Marine; and
• The post-transfers (re)insurance arrangements with RSAI covering the portfolios of Marine, Sun and RSA Re
will have no material impact on RSAI’s overall risk exposure, and hence policyholder security and service
levels for PAGI, Marine, RSAI, Sun and RSA Re.
7.12 I am informed by RSAI that the claim made by Blue Seas is being handled in the usual way and in accordance with
RSAI/Marine protocols (which are intended to be TCF compliant). Further, I am informed that there is a substantial
amount of information still outstanding from the claimant before Marine can proceed to an Examination under Oath of
the claimant and other relevant parties.
7.13 I have updated my analysis of the Schemes as described in this Supplemental Report, and that for the PAGI
Schemes as described in my supplemental report for the PAGI Schemes. Based on my updated analyses I continue
to believe that the Schemes (and the PAGI Schemes) will not have a materially adverse impact on the security
provided to Marine's existing policyholders and policyholders transferring to Marine; and that the proposed Schemes
(and the PAGI Schemes) will not have a materially adverse impact on Marine's existing policyholders and
policyholders transferring to Marine in relation to the way their policies are managed and administered, relative to their
position prior to the Schemes (and the PAGI Schemes) being implemented.
7.14 I am not aware of any other policyholder concerns that I need to address at the date of this Supplemental Report.
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8. CONCLUSION
CONFIRMATION OF OPINION
8.1 I have further considered the effect of the proposed Schemes on policyholders of RSAI, RSA Re, Marine, Sun and the
Transferors. I confirm that my overall opinion and conclusions as set out in Section 11 of the Reports are unchanged.
DUTY TO THE COURT
8.2 As required by Part 35 of the Civil Procedure Rules, I hereby confirm that I understand my duty to the Court and have
complied with that duty.
STATEMENT OF TRUTH
8.3 I confirm that insofar as the facts stated in this Supplemental Report are within my own knowledge, I have made clear
which they are and I believe them to be true, and that the opinions I have expressed represent my true and complete
professional opinion.
Gary G Wells
Fellow of the Institute and Faculty
of Actuaries
Fellow of the Society of Actuaries in Ireland
Independent Expert
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APPENDIX A.
KEY DATA AND INFORMATION RECEIVED
In writing this Supplemental Report, I relied upon the accuracy of certain documents and spreadsheets provided by RSAI (and,
where appropriate, its UK insurance subsidiaries). These included, but were not limited to the following:-
• “RSA Insurance Group plc 2011 Individual Capital Assessment”, dated 26 September 2011.
• Presentations and spread-sheets detailing the internal analysis of the risks associated with the reinsurance asset
to be transferred under the Schemes and PAGI Schemes.
• An internal actuarial report covering all parts of the RSA Group’s UK personal and commercial lines business,
entitled “UK Reserve Assessment for 30 September 2011 (Based on 30 June 2011 Data)”.
• A spreadsheet detailing the roll forward of the results of the actuarial review of the UK business as at 30 June
2011 to 30 September 2011.
• Presentations to the Reserve Committee dated 18 October 2011 detailing the results of the RSA Group’s UK
personal and commercial lines business based on 30 June 2011 data and the roll forward to 30 September 2011.
• An actual versus expected analysis for UK asbestos claims for the 9 month period to 30 September 2011.
• A spreadsheet showing the development of reserves for Marine over the 6 month period to 30 June 2011.
• Presentation slides for the Italy Reserve Committee meeting on 6 September 2011.
• Additional presentations dealing with the developments on the third party motor book of Sun since the year-end
and changes made to the pricing of the motor business.
• A spreadsheet showing the reserves for PAGI as at 30 September 2011 and the incurred development since 31
December 2010.
• Balance sheets for RSAI, Sun, Marine, RSA Re and all the Transferors as at 30 June 2011, pre-transfers, posttransfers
excluding the post-transfers (re)insurance arrangements, and post-transfers including the post-transfers
(re)insurance arrangements.
• A spreadsheet giving details of the capital resources and MCR calculation for RSAI, Sun, Marine, RSA Re and
the Transferors as at 30 September 2011.
• A document entitled “ECA and ICA Surplus Update, October 2011”, giving details of the ECA and ICA surpluses
as at 30 September 2011.
• A spreadsheet providing forecasted Solvency I and QIS5 positions for Sun, Marine and RSA Re at 1 January
2011, 31 December 2011 and 31 December 2012.
• An estimate of the solvency requirement and surplus capital for RSAI based on QIS5, as at 31 December 2010.
• Final drafts of the post-transfers Aggregate Excess of Loss and Quota Share reinsurance agreements, Credit
Risk Insurance Agreement and Deeds of Indemnity.
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APPENDIX B.
The letter of representation from RSAI follows.
LETTER OF REPRESENTATION
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