Milliman Report Report of the Independent Expert on the proposed transfer of certain legacy business from Royal & Sun Alliance Insurance PLC and from The Marine Insurance Company Limited to Mercantile Indemnity Company Limited Prepared by: Derek Newton FIA Milliman LLP 11 Old Jewry London, EC2R 8DU United Kingdom Tel +44 (0)20 7847 1500 Fax +44 (0)20 7847 1501 uk.milliman.com 16 January 2019 Milliman Report TABLE OF CONTENTS 1. PURPOSE AND SCOPE 3 2. EXECUTIVE SUMMARY 10 3. BACKGROUND REGARDING THE REGULATORY ENVIRONMENTS 14 4. BACKGROUND REGARDING THE ENTITIES CONCERNED IN THE SCHEME 22 5. THE PROPOSED SCHEME 45 6. THE IMPACT OF THE SCHEME ON THE TRANSFERRING POLICYHOLDERS 58 7. THE IMPACT OF THE SCHEME ON THE POLICYHOLDERS OF THE TRANSFERORS WHO WILL NOT TRANSFER UNDER THE SCHEME 88 8. OTHER CONSIDERATIONS 90 9. CONCLUSIONS 96 APPENDIX A DEFINITIONS 97 APPENDIX B CORPORATE STRUCTURE OF THE RSA GROUP 104 APPENDIX C CORPORATE STRUCTURE OF THOSE PARTS OF THE ENSTAR GROUP THAT ARE RELEVANT TO THE SCHEME 105 APPENDIX D CV FOR DEREK NEWTON 106 APPENDIX E SCOPE OF THE WORK OF THE INDEPENDENT EXPERT IN RELATION TO THE SCHEME 108 APPENDIX F GENERAL CONSIDERATIONS OF THE INDEPENDENT EXPERT 109 APPENDIX G KEY SOURCES OF DATA 111 APPENDIX H SOLVENCY II BALANCE SHEET 114 2 Report of the Independent Expert on the proposed transfer of certain legacy business from Royal & Sun Alliance Insurance PLC and from The Marine Insurance Company Limited to Mercantile Indemnity Company Limited 16 January 2019 Milliman Report 1. PURPOSE AND SCOPE PURPOSE OF THIS REPORT 1.1 It is proposed that particular blocks of business of Royal & Sun Alliance Insurance plc (“RSAI”) and of The Marine Insurance Company Limited (“MIC”) be transferred to Mercantile Indemnity Company Limited (“Mercantile”) by an insurance business transfer scheme (“the Scheme”), as defined in Section 105 of the Financial Services and Markets Act 2000 (“FSMA”). Together, RSAI and MIC are the “Transferors” and Mercantile is the “Transferee”. 1.2 Section 109 of FSMA requires that an application to the High Court of Justice in England and Wales (“the Court”) for an order sanctioning an insurance business transfer scheme must be accompanied by a report on the terms of the transfer (“the FSMA Report”) by an independent person (“the Independent Expert”) having the skills necessary to make the report and who is nominated or approved by the Prudential Regulation Authority (“PRA”), having consulted with the Financial Conduct Authority (“FCA”). The FSMA Report is required in order that the Court may properly assess the impact of the proposed transfer, including the effect on the policyholders of the insurance companies in question. 1.3 RSAI, MIC and Mercantile have collectively nominated me to act as Independent Expert to provide the FSMA Report in respect of the Scheme, and the PRA has approved my appointment in consultation with the FCA (see paragraph 1.20 below). 1.4 This report (the “Report”) describes the proposed transfer and discusses its possible effects on the policyholders of Mercantile, MIC and RSAI (in respect of all business of Mercantile, MIC and RSAI), including its effects on the security of policyholder benefits and levels of service. As such, this Report fulfils the requirements of the FSMA Report. 1.5 RSAI, MIC and Mercantile are domiciled, authorised and regulated in the UK. 1.6 RSAI is an indirect subsidiary of RSA Insurance Group plc (“RSAIG”) and MIC is a subsidiary of RSAI. Mercantile is an indirect subsidiary of Enstar Group Limited (“EGL”). In this Report, I refer to EGL and its direct and indirect subsidiaries collectively as “the Enstar Group” and to RSAIG and its direct and indirect subsidiaries collectively as “the RSA Group”. 1.7 A list of terms defined in this Report is shown in Appendix A. Otherwise I use the same defined terms (which are capitalised in this Report) as are in the document that sets out the terms of the Scheme (the “Transfer Document”). THE PROPOSED SCHEME 1.8 The business to be transferred under the Scheme (“the Transferring Business”) comprises defined portfolios of business underwritten by RSAI and by MIC (or by other entities, the business being subsequently transferred to RSAI or MIC) mostly prior to 2006. The Transferring Business comprises most of the managed portfolio within RSAI and MIC of legacy insurance business, i.e. lines of business that are no longer considered core to RSAI or to MIC, or that have been in run-off for a protracted period. I discuss the Transferring Business in more detail in paragraphs 4.133 - 4.143 below. 1.9 The business to be transferred from MIC (“the MIC Transferring Business”) is currently wholly reinsured by RSAI. 1.10 As a precursor to the Scheme, on 7 February 2017, RSAI, MIC and Mercantile1 entered into a Business Transfer Agreement (”the BTA”) whereby RSAI and MIC agreed to transfer to Mercantile, and Mercantile agreed to accept from RSAI and MIC, the Transferring Business, and to effect this by means of an insurance business transfer scheme pursuant to Part VII of FSMA (a “Part VII Transfer”). _______________________________________________________________________________ 1 The BTA was initially between RSAI, MIC and Belmont Run-off Limited (“Belmont”), another member of the Enstar Group, The Enstar Group subsequently decided that the Transferee should be Mercantile and the BTA was then novated, by an agreement dated 27 April 2017, from Belmont to Mercantile. In this Report, I have ignored the original involvement of Belmont as I do not consider it relevant to my analysis of the Scheme and its effects, and I do not discuss Belmont any further. 3 Report of the Independent Expert on the proposed transfer of certain legacy business from Royal & Sun Alliance Insurance PLC and from The Marine Insurance Company Limited to Mercantile Indemnity Company Limited 16 January 2019 Milliman Report 1.11 Moreover, it was agreed that the economic risk and reward associated with the Transferring Business should be transferred to a reinsurer within the Enstar Group. Accordingly, RSAI and Fitzwilliam Insurance Limited (“Fitzwilliam”), a member of the Enstar Group, acting in respect of its segregated account Number 38, entered into a reinsurance agreement (“the Reinsurance Agreement”) whereby, with effect from 23:59 hours on 31 December 2016, the business to be transferred from RSAI (“the RSAI Transferring Business”), plus RSAI’s 100% reinsurance of the MIC Transferring Business, was wholly reinsured by Fitzwilliam. This was intended to be a temporary arrangement until Cavello Bay Reinsurance Limited (“Cavello Bay”), another member of the Enstar Group, received approval from the Bermuda Monetary Authority to enter into the Reinsurance Agreement, which would then be novated from Fitzwilliam to Cavello Bay. That approval has been granted, the novation has occurred and the RSAI Transferring Business, together with RSAI’s 100% reinsurance of the MIC Transferring Business, is currently 100% reinsured by Cavello Bay. 1.12 No part of the insurance liabilities of RSAI or MIC other than that relating to the Transferring Business will be transferred under the Scheme. 1.13 Together, the RSAI Transferring Business and the MIC Transferring Business comprise the entire Transferring Business. 1.14 The assets to be transferred to Mercantile under the Scheme (“the Transferring Assets”) include all outwards reinsurance contracts that relate to the Transferring Business (or, in respect of any reinsurance contract that covers both policies within the Transferring Business and policies that will remain with the Transferor(s) post the Effective Date, such rights and obligations under that contract that relate to the Transferring Business), including the Reinsurance Agreement. However, by a Deed of Amendment, the terms of the Reinsurance Agreement will be amended on and with effect from the Effective Date such that, post-Scheme, Mercantile will be 75% reinsured by Cavello Bay in respect of the Transferring Business. 1.15 The reinsurance agreements currently in place between RSAI and MIC will be amended if so needed to reflect the Scheme, but will not be terminated completely or transferred as part of the Scheme, as they also cover other business written by, or transferred to, MIC that will remain in MIC post-Scheme. 1.16 The operational management of the Transferring Business, including all policy administration, claims handling, etc., is currently conducted by RSAI; in respect of the MIC Transferring Business, this is in accordance with an outsourcing agreement between MIC and RSAI. The BTA includes a list of RSAI employees who are wholly or mainly engaged in claims handling and management of the Transferring Business (the “Assumed Employees”). The Assumed Employees will be transferred to the Enstar Group entity that, post-Scheme, will be assuming, on behalf of Mercantile and under an outsourcing agreement, the management and claims handling of the Transferring Business with effect from the Effective Date. The Assumed Employees include staff drawn from claims operations, actuarial and finance. The list of Assumed Employees will be updated closer to the Effective Date. I discuss this further in Section 4 below. 1.17 The Effective Date of the Scheme is expected to be 1 July 2019. 1.18 Pre-Scheme, Mercantile has no policyholders. 1.19 The business involved in the Scheme, the arrangements for the Scheme and the effect of the Scheme are discussed in more detail in Sections 4 to 8 of this Report. THE INDEPENDENT EXPERT 1.20 I, Derek Newton, have been appointed by RSAI, MIC and Mercantile as the Independent Expert to consider the Scheme under Section 109 of FSMA. My appointment has been approved by the PRA in consultation with the FCA; this was confirmed in a letter dated 6 June 2017. 4 Report of the Independent Expert on the proposed transfer of certain legacy business from Royal & Sun Alliance Insurance PLC and from The Marine Insurance Company Limited to Mercantile Indemnity Company Limited 16 January 2019 Milliman Report 1.21 I am a Principal of Milliman LLP (“Milliman”) and I am based in its UK General Insurance practice in London.