Summary of the independent expert's reports - Royal and Sun Alliance

SUMMARY OF THE INDEPENDENT EXPERT’S SCHEME REPORTSABOUT THE INDEPENDENT EXPERTI, Gary Wells, am a Principal of Milliman, Inc. one of the world’s largest independent actuarial andconsulting firms. I am a Fellow of the Institute and Faculty of Actuaries with more than 25 years’experience of working in the insurance industry.This document is a summary of the Independent Expert's Scheme Reports (the “Reports”) that I haveprepared following my appointment: by Royal & Sun Alliance Insurance plc (“RSAI”) in relation to RSAGroup companies; and by Phoenix Group in relation to one of its group companies, PA(GI) Limited(“PAGI”). Each appointment was approved by the Financial Services Authority.The Reports consider the three transfer schemes proposed by RSA Group to simplify its legal structure,as well as two transfer schemes proposed by RSA Group and Phoenix Group by which PAGI’s entiregeneral insurance business is to be transferred to RSA Group companies (together the “Schemes”).This summary is subject to the same limitations on its use as those set out in the Reports. This summaryof the Reports must be considered in conjunction with the full Reports and reliance must not be placedsolely on this summary. In the event of any conflict between the summary and the Reports, the Reportsshall prevail. Copies of the full Reports can be obtained at [website address to be confirmed] or bywriting to [contact details to be provided] at the address provided.INTRODUCTIONThe proposed Schemes involve transferring insurance business from 21 1 transferor companies to threetransferee companies and require the approval of the High Court of Justice in England (the “Court”). Thecompanies which will be party to the Schemes are shown in the table on page 3. The Reports and thissummary apply equally to the Schemes. The Schemes are as follows:• Sun Scheme: under this scheme, the Italian branch business of The Sea Insurance CompanyLimited (“Sea”) and National Vulcan Engineering Insurance Group Limited (“National Vulcan”) will betransferred to Sun Insurance Office Limited (“Sun”);• MIC Scheme: under this scheme the US Surplus Lines business, legacy marine and aviationbusiness (together with related portfolios) of each transferor company will be transferred to TheMarine Insurance Company Limited (“Marine”);• RSAI Scheme: under this scheme all non-marine and non-US business of each transferor companywill be transferred to RSAI, except for the Italian branch business of Sun, Sea and National Vulcan,which will be transferred to/or retained in Sun; and• PAGI Schemes: RSA Group has agreed to the transfer of the general insurance business of PAGI 2to RSAI and Marine under the PAGI Schemes. This agreement coincides with the RSA Group’s ownrestructuring to simplify its legal structure. Under two schemes, PAGI will transfer its US SurplusLines business, legacy marine and aviation business (together with related portfolios) to Marine (the“PAGI (marine business) Scheme”) and all other remaining general insurance business of PAGI willtransfer to RSAI (the “PAGI (non-marine business) Scheme”).1 Twenty of the transferor companies are wholly-owned subsidiaries of RSA Insurance Group plc. PAGI is a subsidiary of thePhoenix Group.2 PAGI’s general insurance liabilities are 100% reinsured by RSAI (a wholly-owned subsidiary of RSA Insurance Group plc) sincethe sale of the business by RSA Group in 2004.1

The RSAI Scheme and the MIC Scheme are inter-conditional, meaning that if either of these schemesdoes not take effect, the other scheme will not take effect. The two PAGI Schemes are similarly interconditionalon each other while the Sun Scheme is not conditional on any other scheme taking effect.An Independent Expert’s report is required under section 109 of the Financial Services and Markets Act2000 in order that the Court may properly assess the impact of the proposed Schemes. The Reportsdescribe the proposed transfers of business under the Schemes and consider the potential impact on allaffected policyholders, including the security of their policies and the levels of service that policyholderscould expect to receive after the transfer.RSA GROUPRSA Group is a multinational insurance group operating in 33 countries and covering risks in over 130countries, with the vast majority of its business being written in the UK, Scandinavia (including the BalticStates) and Canada. RSAI is the principal UK insurer and the largest insurance operation in the RSAGroup.As at 31 December 2010, the RSA Group had surplus economic capital of around £1.1billion. Theeconomic capital assessment is the RSA Group’s own assessment of the capital needed to meet itsobligations given the RSA Group’s risk profile.The RSA Group is rated ‘A’ (positive outlook) by Standard & Poor’s at the time of writing this summary.PURPOSE OF THE SCHEMESThe primary purpose of the proposed Schemes is to simplify the legal structure of RSA's generalinsurance business in the UK. There will also be a reduction in the complexity of regulatory compliance(compared to that anticipated with the current structure of the RSA Group) following the implementationof the Solvency II regime in the UK 3 .WHO WILL BE AFFECTED BY THE SCHEMES?The movements of policyholder groups between the legal entities as a result of the Schemes aresummarised in the table on page 3. As a result of the proposed Schemes:A. Sun Scheme: the Italian branch policyholders of Sea and National Vulcan will become policyholdersof Sun;B. MIC Scheme and PAGI (marine business) Scheme: all US Surplus Lines policyholders and legacymarine and aviation policyholders of the transferor companies will become policyholders of Marine;andC. RSAI Scheme and PAGI (non-marine business) Scheme: other than the existing policyholders of theItalian branch businesses of Sun, Sea and National Vulcan and certain business being retained byRoyal & Sun Alliance Reinsurance Limited (“RSA Re”), all other policyholders of the active or legacybusiness of the transferor companies not transferred under (A) and (B) will become policyholders ofRSAI.Marine is a UK-based insurer whose liabilities will consist of marine and aviation business, including USSurplus Lines business, following the Schemes taking effect. Sun is a UK-based insurer whose businessfollowing the implementation of the Schemes will consist of Italian branch business. RSAI is a UK-basedinsurer that will remain the main operating company for the RSA Group’s UK general insurancebusiness.3 Certain aspects of the implementation of Solvency II may be delayed to 1 January 2014 pursuant to Omnibus II proposals issuedin June 2011.2

Various distinct policyholder groups are directly affected by the proposed Schemes, includingtransferring policyholders and those remaining in RSAI, Marine and Sun. These policyholder groupsinclude active policyholders in EU branches, reinsurance policyholders, policyholders with policies whoseinsured risks are short term in nature, as well as policyholders whose claims, if any, may not emerge formany years. I have assessed the change in circumstances, security and levels of service of each groupof policyholders separately.Movements of policyholder groups between legal entities as a result of the Schemes:After transferBefore transferSun Marine RSAIEntities to be de-authorised after the Schemesare implementedAlliance Assurance Company Limited B CBritish and Foreign Marine Insurance CompanyLimitedBCCentury Insurance Company Limited B CLiverpool Marine and General Insurance CompanyLimitedBCLondon Guarantee & Reinsurance CompanyLimitedBCNational Vulcan Engineering Insurance GroupLimitedACPA(GI) Limited B CRoyal & Sun Alliance Insurance (Global) Limited B CRoyal Insurance (U.K.) Limited B CRoyal International Insurance Holdings Limited B CSun Alliance and London Insurance plc B CSun Alliance Insurance International Limited B CSun Alliance Insurance UK Limited B CThe Globe Insurance Company Limited B CThe London Assurance B CThe Northern Maritime Insurance Company Limited B CThe Sea Insurance Company Limited A B CThe Union Marine and General InsuranceCompany LimitedBCSurviving insurance entitiesRoyal & Sun Alliance Insurance plcBSun Insurance Office Limited B CThe Marine Insurance Company Limited (not atransferor company)Royal & Sun Alliance Reinsurance Limited B CPolicyholders post transfer? Key:A The Italian branch business of the Sea and National Vulcan will be transferred to Sun;B The US Surplus Lines business and the legacy marine and aviation business (together with related portfolios) of eachtransferor company will be transferred to Marine; andC Other than Sun’s Italian branch business and business being retained by RSA Re, all other business of each transferorcompany not transferred under (A) and (B) will be transferred to RSAI.PA(GI) Limited is shaded yellow in table above simply to identify it as a non RSA Group company.3

EXISTING MUTUAL SUPPORT ARRANGEMENTS - DEED OF MUTUAL GUARANTEECurrently all companies party to the Schemes (except PAGI) are also party to a Deed of MutualGuarantee (“DMG”). The DMG has in practice been treated as a support of last resort under which, ineffect, each party agrees to provide financial support in the event another party is unable to pay itspolicyholders from its own resources. Upon the Schemes becoming effective, it is proposed that theDMG will be terminated.Separately, most of the insurance business of the transferor companies, together with certain noninsuranceassets, is currently treated as having been transferred to, and accounted for in, RSAI andRSAI has assumed responsibility, on an indemnity basis, for discharging liabilities of those transferorcompanies. These arrangements are referred to collectively as “hive-up” arrangements. The “hive-up”arrangements were not formal statutory transfers and accordingly, the liabilities associated with theinsurance policies remain with the relevant transferor companies. The purpose of these “hive-up”arrangements was to simplify the statutory accounting of the RSA Group following various mergers andinternal reorganisations. It is intended that the “hive-up” arrangements be terminated immediately prior tothe Schemes taking effect.To provide continued security to policyholders, it is proposed that, from the time when the Schemes takeeffect, RSAI will wholly reinsure the surviving UK insurance subsidiaries remaining after the Schemes(Marine, Sun and RSA Re) under a series of reinsurance agreements (net of reinsurance that thesesubsidiaries have in place). These reinsurance arrangements will involve an aggregate excess of lossagreement relating to reinsurance of past liabilities and there will also be a quota share agreement forliabilities going forward which will be in effect for 2012 and thereafter will be subject to annual renewal.Prior to the Schemes taking effect, all transferor and/or transferee companies (except PAGI) are party tothe DMG and this provides some additional security to the policyholders of these companies. In practice,these companies have not placed any reliance on the DMG for their security. After the Schemes takeeffect, it is proposed that Marine, Sun and RSA Re have the benefit of the reinsurance agreements withRSAI referred to above. I am satisfied that no group of policyholders will be materially adverselyimpacted by the termination of the DMG and its replacement with the Schemes and the series of RSAIreinsurance agreements.I have considered the impact of the Schemes on the security of each affected policyholder group,including the change in the nature of the security afforded to each policyholder group within each of thetransferor and transferee companies and the consequent change in the likelihood that policyholders willbe paid in full. I have considered the impact of the termination of the DMG, and the effects thereinsurance agreements with RSAI referred to above will have.IS THERE AN IMPACT ON SECURITY OF POLICYHOLDERS TRANSFERRING TO OR REMAININGIN SUN?Two distinct policyholder groups (namely the policyholders of the Italian branches of Sea and NationalVulcan) are transferring into Sun and the existing Italian branch policyholders of Sun will remain in Sun.As a result of the Schemes, in conjunction with the proposed RSAI reinsurance agreements referred toabove, the security of the policyholders transferring into Sun and that of the policyholders remaining inSun will not be materially adversely affected, i.e. the likelihood that the claims of these policyholders willbe paid in full will for practical purposes be the same before and after the Schemes come into effect.4

IS THERE AN IMPACT ON SECURITY OF POLICYHOLDERS TRANSFERRING TO OR REMAININGIN MARINE?Twenty distinct policyholder groups are transferring into Marine and all the existing policyholders ofMarine will remain in Marine. As a result of the Schemes, all policyholder groups impacted by the MICScheme will experience some change in the security of their policies. Policyholders of RSAI transferringto Marine will experience some reduction in their security although this will not have a material impact;“hived-up” policyholders in RSAI transferring to Marine will experience largely no change in their security;and policyholders of PAGI transferring to Marine will experience some improvement in their securityalthough this will not have a material impact. Overall therefore, allowing for the effect of the proposedreinsurance agreements with RSAI, the likelihood that the claims of these policyholders will be paid in fullwill for practical purposes be the same before and after the Schemes come into effect.IS THERE AN IMPACT ON SECURITY OF POLICYHOLDERS TRANSFERRING TO OR REMAININGIN RSAI?Twenty distinct policyholder groups are transferring into RSAI and the majority of existing policyholderswill remain in RSAI. As a result of the Schemes, the security of the policyholders transferring into RSAIand that of the policyholders remaining in RSAI will not be materially adversely affected, i.e. thelikelihood that the claims of these policyholders will be paid in full will for practical purposes be the samebefore and after the Schemes come into effect.IS THERE AN IMPACT ON SECURITY OF POLICYHOLDERS TRANSFERRING FROM PAGI?Under the PAGI Schemes policyholders will transfer either to Marine or to RSAI. The security of thepolicyholders transferring from PAGI to Marine or to RSAI under the Schemes will not be materiallyadversely affected as described in one or other of the preceding two paragraphs, as applicable.IS THERE AN IMPACT ON SECURITY OF POLICYHOLDERS REMAINING IN RSA RE?The principal business of RSA Re is the reinsurance of other RSA Group companies; however, a groupof external policyholders of RSA Re will transfer to either RSAI or Marine under the Schemes. As a resultof the Schemes, in conjunction with the proposed RSAI reinsurance agreements referred to above, thesecurity of the policyholders transferring into RSAI or Marine (as applicable) and that of the policyholdersremaining in RSA Re will not be materially adversely affected, i.e. the likelihood that the claims of thesepolicyholders will be paid in full will for practical purposes be the same before and after the Schemescome into effect.I HAVE CONCLUDED THAT THE SCHEMES DO NOT IMPACT TO ANY MATERIALLY ADVERSEEXTENT THE SECURITY OF AFFECTED POLICYHOLDERS.TRANSFER OF REINSURANCEWhile the Schemes provide for the transfer of existing reinsurance assets and all existing arrangementswith reinsurers in respect of the policies transferring under the Schemes (other than the whole accountreinsurance of PAGI by RSAI which will terminate when the PAGI Schemes take effect) there is a riskthat some overseas reinsurers may not recognise, or may seek not to recognise, the Schemes.I HAVE CONSIDERED THE IMPACT OF THE PROPOSED TRANSFERS ON THE REINSURANCEASSETS AND ARRANGEMENTS TO BE TRANSFERRED UNDER THE SCHEMES AND CONSIDERTHAT POLICYHOLDERS WILL NOT BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OFTHE SCHEMES TAKING EFFECT IN THIS REGARD, NOTWITHSTANDING THAT THERE IS A RISKTHAT SOME OVERSEAS REINSURERS MAY NOT RECOGNISE, OR MAY SEEK NOT TORECOGNISE, THE SCHEMES.5

WILL THE SCHEMES AFFECT LEVELS OF SERVICE?I have considered the effect of the Schemes on service levels experienced by policyholders. There willbe no change to the administration of claims and policies as a result of any of the proposed Schemesand the service standards will continue following the implementation of the Schemes.AS A RESULT, NO GROUP OF POLICYHOLDERS AFFECTED BY THE SCHEMES WILL SUFFERANY REDUCTION IN SERVICE STANDARDS AS A RESULT OF THE SCHEMES.CONCLUSIONI have been provided with access to all material facts that I consider relevant in order to assess theproposals under the Schemes. I have had many discussions with senior members of staff at RSA toevaluate the potential impact of the proposals on all policyholders under the Schemes.All Schemes Take EffectIn the preceding commentary I have considered the impact on policyholder security and servicing levelsof the proposed Schemes on the basis that the Schemes are all sanctioned by the Court, and myconclusions are set out above. In summary, I am satisfied that the proposed Schemes do not affect in amaterially adverse way either the security or the policy servicing levels of the policyholders of RSAI,Marine, Sun, RSA Re and the transferor companies (including PAGI), notwithstanding the termination ofthe DMG.No Schemes Take EffectIf the Schemes were not implemented, the policyholders of RSAI, Marine, Sun, RSA Re and thetransferor companies would remain with their present companies, each of which has a satisfactorysolvency position. Further, as the DMG would continue to operate the RSA Group companies wouldcontinue to benefit from the mutual support in relation to their respective general insurance businessliabilities provided by each of the parties to the DMG.Only Sun Scheme Takes EffectIf the Schemes were partially implemented because only the Sun Scheme was sanctioned, thepolicyholders of RSAI, Marine, RSA Re and the transferor companies (excluding the policyholders of Seaand National Vulcan transferring under the Sun Scheme) would remain with their present companieseach of which has a satisfactory solvency position. Further, since the DMG would continue to operate,the policyholders of Sun (including those transferring from Sea and National Vulcan) would continue toenjoy a satisfactory solvency position, with Sun having the benefit of the DMG, and unchanged servicelevels. The policyholders of PAGI would continue to be reinsured by RSAI under PAGI’s existingreinsurance arrangements and would continue to enjoy a satisfactory solvency position with unchangedservice levels. I therefore conclude that the security position and policy servicing levels enjoyed by thepolicyholders of Sun, RSAI, Marine, RSA Re and the transferor companies would not be materiallyadversely affected under this scenario.Only Sun Scheme Fails To Take EffectIf the Schemes were partially implemented because only the Sun Scheme was not sanctioned, thereinsurance agreements with RSAI referred to above would be put in place (and would be extended toinclude Sea and National Vulcan as cedants). Therefore, the policyholders of RSAI, Marine, RSA Re,Sun and the transferor companies would still benefit from the protection provided by RSAI (either asdirect policyholders or as policyholders of reinsured transferee companies). They would therefore have astrong level of security for their policies and unchanged service levels. I therefore conclude that thesecurity position and policy servicing levels enjoyed by the policyholders of RSAI, Marine, Sun, RSA Reand the transferor companies would not be materially adversely affected under this scenarionotwithstanding the termination of the DMG.6

Only PAGI Schemes Take EffectIf the Schemes were partially implemented because only the PAGI Schemes were sanctioned, thepolicyholders of Sun, Marine, RSAI, RSA Re and the transferor companies (except PAGI) would remainwith their present companies each of which has a satisfactory solvency position, and unchanged servicelevels. Further, the DMG would continue to operate. The policyholders of PAGI would continue to enjoy asatisfactory solvency position, with RSAI and Marine having the benefit of the DMG (to which PAGI wasnot party), and unchanged service levels. I therefore conclude that the security position and policyservicing levels enjoyed by the affected policyholders of Sun, Marine, RSAI, RSA Re, PAGI and thetransferor companies would not be materially adversely affected under this scenario.Only RSAI Scheme and MIC Scheme Take EffectIf the Schemes were partially implemented because only the RSAI Scheme and the MIC Scheme weresanctioned, the reinsurance agreements with RSAI referred to above would be put in place (and wouldbe extended to include Sea and National Vulcan as cedants). Therefore, the policyholders of RSAI,Marine, RSA Re, Sun and the transferor companies would benefit from the protection provided by thelarger entity, RSAI (either as direct policyholders or as policyholders of reinsured transferee companies).This would include the policyholders of PAGI, as they would continue to be reinsured by RSAI underPAGI’s existing reinsurance arrangements with RSAI. The policyholders would have a strong level ofsecurity for their policies and unchanged service levels. I therefore conclude that the security positionand policy servicing levels enjoyed by the policyholders of RSAI, Marine, Sun, RSA Re and thetransferor companies would not be materially adversely affected under this scenario notwithstanding thetermination of the DMG.Only RSAI Scheme and MIC Scheme Fail To Take EffectIf the Schemes were partially implemented because only the RSAI Scheme and the MIC Scheme werenot sanctioned, the policyholders of RSAI, Marine, RSA Re and the transferor companies (excludingpolicyholders transferring under the PAGI Schemes and policyholders Sea and National Vulcantransferring under the Sun Scheme) would remain with their present companies each of which has asatisfactory solvency position. Further, as the DMG would continue to operate, the policyholders of Sun(including those transferring from Sea and National Vulcan) would continue to enjoy a satisfactorysolvency position, with Sun having the benefit of the DMG, and unchanged service levels. Thepolicyholders of PAGI will become policyholders of RSAI or Marine (as applicable) and continue to enjoya satisfactory solvency position, with RSAI and Marine having the benefit of the DMG (to which PAGI isnot party), and unchanged service levels. I therefore conclude that the security position and policyservicing levels enjoyed by the policyholders of Sun, Marine, RSAI, RSA Re, PAGI and the transferorcompanies would not be materially adversely affected under this scenario.Only PAGI Schemes Fail To Take EffectIf the Schemes were partially implemented because only the PAGI Schemes were not sanctioned, thepolicyholders of PAGI would continue to be reinsured by RSAI under PAGI’s existing reinsurancearrangements with RSAI and would continue to enjoy a satisfactory security position with unchangedservice levels. I therefore conclude that the security position and policy servicing levels enjoyed by thepolicyholders of Sun, Marine, RSAI, RSA Re, PAGI and the transferor companies would not be materiallyadversely affected under this scenario, notwithstanding the termination of the DMG.7

UPDATE REPORTMy analysis has been based upon the material supplied to me, including balance sheets and otherinformation, based on accounting positions as at 31 December 2010 (and in some cases earlier dates).Since the proposed Effective Date for the Schemes is 1 January 2012, I will need to revisit theseassumptions closer to the time to confirm that there have been no material changes to the arrangementsthat I have reviewed that would affect my overall opinion. I will prepare and issue an update report to bemade available to the Court prior to the Final Court Hearing.Gary WellsFellow of the Institute and Faculty of ActuariesPrincipal, Milliman, Consultants and Actuaries4 July 20118