Royal Sun U.S. Buyout Can Proceed Subject to Conditions

February 21, 2007

Delaware Insurance Commissioner Matthew Denn has conditionally approved a management buyout of Royal & Sun Alliance Insurance Group’s U.S. operations, even while chastising the company’s British parent for its practices.

Denn ruled that there is essentially no legal or financial basis upon which he could reject the buyout, although he stressed that he finds the British parent’s spinning off of its U.S. operations unfair.

Before it can proceed with the buyout, Royal UK must agree to certain conditions, according to Denn. He is insisting that the British parent company submit to the jurisdiction of his department and Delaware state courts for any policyholder disputes. He also wants the company to obtain state approval for certain payouts to management and to pay for an entity to monitor its reserves and claims practices.

Royal & Sun’s British parent has agreed to put $287.5 million into the buyout of its four U.S. subsidiaries by a group using the name Arrowpoint Capital. The British firm says it will not supply any additional funds for the U.S. operations in the future.

However, some policyholders, including World Trade Center lessees, opposed the buyout, contending that $287.5 million may not be sufficient to cover outstanding World Trade Center, asbestos and other potential claims.

But Denn upheld the previous findings of his hearing officer that the $287.5 million should be sufficient to pay unresolved claims and that there is no legal basis for disapproving the buyout.

He also dismissed objectors’ contention that the British parent would continue to fund the U.S. subsidiary if the buyout plan were blocked. In his 10-page order, Denn wrote that “there is no evidence” this would happen.

Royal & Sun Alliance Insurance Group acknowledged Denn’s conditional approval but did not immediately indicate if it was acceptable.

“This approval is subject to a number of conditions that affect both R&SA and Arrowpoint Capital, which require further consideration and may have a bearing on the completion of the transaction,” it said in a statement.

Denn said his conditions are intended to “ensure that every dime intended for policyholders actually reaches the policyholders.” These conditions include:

The company would be barred from paying any dividends or other distributions to the holding company until the Delaware department had determined that all reasonable claims have been covered.

No management personnel would be allowed to receive any compensation beyond a base salary until all claims are paid.

All management compensation would have to be approved by the Delaware Insurance Department.

The company will pay for a department-appointed claims monitor who will check reserve adequacy, litigation management, claims denials and all claims practices. The monitor would report to the department on a monthly basis.

Denn also took a swipe at the British parent: “Although I am approving this transaction with conditions because doing so is in the best interest of policyholders…. My approval should not be mistaken for an endorsement of the business practices of the British parent company. The actions of Royal UK, though legal, are unfortunate and not the actions of fair businesspeople.”

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