RSA Announces Disposal of UK Legacy Liabilities

LONDON, Feb. 7 -- RSA Insurance Group issued the following news release:

RSA has signed contracts, to dispose GBP 834m of UK legacy insurance liabilities to Enstar Group Limited ('Enstar').

The transaction initially takes the form of a reinsurance agreement, to be effective at 31 December 2016, which substantially1 effects economic transfer, to be followed by completion of a subsequent legal transfer of the business.

The transaction is accretive to RSA's capital position, adding c.17-20 points of Solvency II coverage.

Stephen Hester, RSA Group Chief Executive said:

"We are pleased to have achieved this valuable risk clean-up transaction with Enstar. It allows us to focus even more on driving the outperformance of RSA's continuing businesses. Earnings accretion, risk reduction and capital improvement are a happy combination to report.

"As previously indicated, we expect to deploy the capital resources released to benefit earnings and capital quality through additional debt retirement in 2017"

Background

RSA's UK legacy insurance business is contained within Royal & Sun Alliance Insurance plc ("RSAI") and the Marine Insurance Company Limited ("MIC") (together, the "Business"). Each disposal is to be implemented as an insurance business transfer pursuant to Part VII of the Financial Services and Markets Act 2000 (the "Part VII Transfer"), with an interim reinsurance (the "Reinsurance") to transfer the economic risk of the Business pending completion of the Part VII Transfer.

The Reinsurance will be effected via a 100% quota share policy1 with a subsidiary of Enstar, and is subject to finalising and effecting certain security arrangements. It covers all claims payments, net of reinsurance, arising in respect of the Business on and after 31 December 2016. The Part VII Transfer is expected to be completed within 18-24 months.

The transaction covers GBP 834m of undiscounted liabilities, net of reinsurance (GBP 957m gross of reinsurance), relating to business written in 2005 & prior. Around 75% of these liabilities relate to asbestos, with the balance mainly comprising abuse, deafness, marine and aviation liabilities. In 2015 the Business accounted for a pre-tax loss of GBP 39m in RSA Group's financial statements. Around GBP 35m of net discounted post-2005 legacy liabilities will remain with RSA after the transaction.

The reinsurance premium paid by RSA to Enstar is GBP 799m2, settled through the transfer of a GBP 682m portfolio of investment grade assets with the balance in cash. No further consideration will be due in respect of the subsequent Part VII Transfer.

1 Interim Reinsurance has a limit of 175% of net undiscounted reserves

2 Subject to final adjustment

The transaction will add c.17-20 points to RSA's Solvency II coverage. It is expected to result in a net IFRS accounting charge of c.GBP 145m, with a non-cash charge of c.GBP 200m recognised in RSA's FY 2016 financial results and a gain of c.GBP 55m expected in 2017. Further details on this and other capital and financial impacts are set out below.

The Part VII Transfer will be subject to court, regulatory and other approvals.

RSA's results for 2016 will be announced on 23 February 2017.

Expected financial and capital impacts

Capital impacts:

* Solvency II coverage gain of c.17-20 points as follows:

* The majority of the gain comes through an increase in Core Tier 1 available capital. This is because that part of the Group's Solvency II balance sheet relating to Legacy risk comprises amounts to support the Legacy reserves as well as a risk margin and provision for 'events not in data'. Execution of this deal substantially removes the risk exposures from the Solvency II balance sheet, and with it the need for associated reserves.

* The boost to Core Tier 1 capital also allows more of RSA's Tier 3 capital to become eligible in the Solvency II coverage calculation. This impact represents c.3 points of the overall coverage gain.

* The Group's solvency capital requirement (SCR) is not expected to change materially on completion of the Part VII Transfer, as the risk reduction achieved is mostly offset by lost benefit of diversification versus RSA's other SCR risks. The Group's SCR at 31 December 2016 is below that reported at 30 June due to movements unassociated with this transaction.

* The significant majority of the overall coverage benefit is realised immediately.

Accounting impacts:

* An IFRS non-cash charge of c.GBP 145m booked partly in 2016 and partly in 2017 as follows:

* RSA's 2016 financial results will include a provision for a non-cash loss on sale of c.GBP 200m primarily due to the IFRS accounts holding the legacy liabilities using a 4% discount rate to face value (GBP 567m v GBP 834m undiscounted), whereas Solvency II discounts the same liabilities for capital purposes at a range of 1.0-1.5%. The buyer is taking on the liabilities at a discount rate in between these figures reflecting its own targeted return profile.

* RSA's 2017 financial results will include a realised gain of c.GBP 70m on the mark-tomarket of the bonds transferred to the buyer. The balance sheet unrealised gains reserve will reduce by the same amount. o Transaction costs of c.GBP 15m are also expected to be recognised in 2017.

* The IFRS loss is tax deductible in the UK, and will add to RSA's existing tax losses.

30FurigayJane-5769564 30FurigayJane