Scheme report for the transfer of policies pursuant to The ... · Tel: 0207 481 9617 Scheme report for the transfer of policies pursuant to The Financial Services and Markets Act

James, Brennan & Associates Actuarial and Management consultants

Roman Wall House 1–2 Crutched Friars

London EC3N 2HT

Tel: 0207 481 9617

Scheme report for the transfer of policies pursuant to The Financial Services and Markets Act 2000

From

Mitsui Sumitomo Insurance Co., Ltd.

To

Bosworth Run-off Limited

D James, Fellow of the Institute of Actuaries Date of report: March 2010


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Contents 1. Scope of the report 2. The party commissioning this report and bearing the reporting expert’s costs 3. Confirmation by the FSA of approval as an expert 4. Statement of professional qualifications 5. Statement of interest that may be deemed to influence independence 6. The scheme in context, its overall purpose and summary of the scheme 7. Information used in preparing this report 8. Reliance placed on the data provided and on the judgement of others 9. The analytical approach taken and the likely effect of the scheme on policyholders 10. Opinion

Appendices

1. Professional experience of Dewi James 2. Schedule of information provided 3. Schematic representation of corporate relationships 4. Explanation of balance sheet transfer values 5. Operation of the new Fitzwilliam Segregated Account 6. External legal advice with respect to Bermudian Segregated Account companies 7. External legal advice with respect to the enforceability of the Enstar Group financial

guarantee


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1. Scope of the report

1.1. This Report is provided in relation to the proposed transfer of certain direct insurance and inwards reinsurance contracts and assets of Mitsui Sumitomo Insurance Co., Ltd. (“MSI”) to Bosworth Run-off Limited (“Bosworth”). The companies are jointly referred to as “the Parties”.

1.2. The business to be transferred from MSI consists of direct insurance and inwards

reinsurance business underwritten by the Reinsurance Department (including predecessor departments) of MSI in Japan for 1993 and prior underwriting years (“the Transferred Business”). The Transferred Business was relocated to MSI’s UK branch in November 2008. The administration of the Transferred Business is performed by Enstar (EU) Ltd (“EEUL”) in England.

1.3. This transfer (“the Transfer”) is proposed to be carried out pursuant to an

insurance business transfer scheme between MSI and Bosworth (“the MSI Scheme”) as defined in Part VII of the Financial Services and Markets Act 2000 (“FSMA”).

1.4. I, Dewi James, have been appointed by the Parties to consider the proposed MSI

Scheme under section 109 of FSMA. This is a Scheme report as defined in section 109 of FSMA in respect of the Transfer. No use may be made of this report for any other purpose.

1.5. This Scheme report considers the effects of the Transfer on the two groups of

policyholders affected:

▪ the policyholders of MSI who will remain with MSI ▪ the policyholders of MSI who will be transferred to Bosworth

1.6. There are no existing policyholders of Bosworth.

1.7. I am aware that copies of this report may be made available to policyholders as

well as to all parties affected by the Transfer. In addition, I note that this report may be accessible to the public.

1.8. This report must be read in its entirety since individual sections of this report

could be misleading if considered in isolation from each other.

1.9. In producing this report on the MSI Scheme, I owe a duty to the Court to help the Court on matters within my expertise. This duty overrides any obligation to any person from whom I have received instructions or by whom I am paid. This report and the work undertaken in its production is not intended to be an audit, or form part of any due diligence and should not be relied upon as such. It has been produced solely for the purpose of enabling me to express my opinion on the impact of the Transfer upon the affected parties.

1.10. James, Brennan & Associates’ and my responsibilities and liabilities are limited to

Bosworth, MSI, affected parties and the Court and exist only in the context of the


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use of my report for the purpose set out above. Neither James, Brennan & Associates nor I will accept any liability or responsibility in relation to the use of this report for any other purpose.

2. The party commissioning this report and bearing the reporting expert’s costs

2.1. Bosworth and MSI commissioned this report jointly and are sharing the costs equally.

3. Confirmation by the FSA of approval as an expert

3.1. I confirm that I have been approved by the Financial Services Authority (“FSA”) as an Independent Expert for the purposes of this report.

4. Statement of professional qualifications

4.1. Details of my qualifications and experience are shown in Appendix 1. 5. Statement of interest that may be deemed to influence independence

5.1. Neither I, nor James, Brennan & Associates have any commercial connection with either of the Parties or their respective groups, nor any conflict of interest arising from the preparation of this report. I have in the past acted as an independent expert in connection with other Part VII transfers involving members of the Enstar group. I do not consider that this compromises my independence.

6. The MSI Scheme in context, its overall purpose and summary of the scheme

6.1. MSI was formed in October 2001 by the merger of Mitsui Marine & Fire Insurance Company Limited (formerly Taisho Marine & Fire Insurance Company Limited) and The Sumitomo Marine & Fire Insurance Company Limited.

6.2. On 1 April 2008 MSI became a subsidiary of Mitsui Sumitomo Insurance Group

Holdings, Inc. (“MSIGH”), as part of a shift for the MSI group to a holding company structure. Before then, MSI had been the ultimate parent company in the MSI group. As of 1 July 2008 the three major insurance subsidiaries of MSI had also been transferred to become directly owned subsidiaries of MSIGH.

6.3. In January 2009 Aioi Insurance Company, Limited (“AIOI”), Nissay Dowa

General Insurance Company, Limited (“NDGI”), MSIGH and MSI commenced discussions on a possible business combination . On 22 December 2009 approval was obtained in the companies' respective shareholder meetings regarding the business integration effective on 1 April 2010, with the combined entity trading under the name of MS&AD Insurance Group Holdings, Inc. This remains subject to formal approval by the relevant regulatory authorities.

6.4. The effect of this corporate restructuring has not had a material impact on my

consideration of the data which I have reviewed, or on my conclusions.

6.5. MSI has exposure to a portfolio of insurance and inwards reinsurance contracts underwritten by the Reinsurance Department (including predecessor departments)


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of MSI in Japan for 1993 and prior underwriting years. The business to be transferred relates to this component of MSI’s portfolio with certain exclusions1:

▪ Contracts of direct insurance where the risk is located in an EEA state other

than the UK ▪ Contracts with policyholders in liquidation, administration and where

contracts have been commuted ▪ Certain contracts where MSI acted in a fronting capacity for other Japanese

insurers

6.6. The Transferred Business’ claims liabilities arise predominantly from non-marine proportional and non-proportional reinsurance contracts accepted by MSI from brokers in the UK and the US; there is a relatively small exposure to marine and certain facultative risks. Approximately 95% of the notified case and IBNR reserves relate to US mass tort claims (asbestos, pollution and various health hazard claims). The profile of liabilities has similarities with several London based portfolios, including other portfolios for which the Enstar group is responsible.

6.7. The Transferred Business was relocated to MSI’s UK branch in November 2008

and is being administered by EEUL from its offices in England. At the time of the Transfer, the management agreement between EEUL and MSI ’s UK branch will cease to have effect and EEUL will administer the Transferred Business on behalf of Bosworth. No other change is envisaged to the administration and management of the liabilities in the immediate future.

6.8. MSI has deemed that the Transferred Business is not core to its future strategic

plans and the Parties have determined that a Part VII transfer scheme is the best approach for MSI to achieve finality for itself in respect of the Transferred Business with minimal impact on policyholders. I have not considered any alternative arrangement, nor has one been proposed to me.

6.9. Certain policyholders of MSI have been provided with letters of credit issued by

various banks of good standing. Under the terms of the agreement to effect the Transfer, Bosworth is obliged to implement a process to ensure the smooth transition for the responsibility of the provision of these letters of credit from MSI to Bosworth. The financial institutions providing the letters of credit may ultimately differ from those currently employed, but the intention of Bosworth’s management is that the level of security will not be reduced. In any event, my understanding is that a letter of credit can only be terminated with the agreement of the relevant policyholder. Until a replacement letter of credit is established the policyholder will continue to benefit from its existing letter of credit.

6.10. The transferee company, Bosworth, is a UK company which is seeking FSA

authorisation as a general insurer in order to accept the Transferred Business. Bosworth is ultimately owned 50.1% by Enstar Group Limited (“EGL”), a Bermudian domiciled company listed on the NASDAQ stock exchange in New

1 Excluded contracts represent approximately 1% of the total value of the outstanding claims liabilities arising under the business written by the Reinsurance Department (including predecessor departments) of MSI for 1993 and prior underwriting years.


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York, and 49.9% by Shinsei Bank, incorporated in Japan and listed on the Tokyo stock exchange (“Shinsei”) - see Appendix 3 structure chart. I do not consider that the ownership structure of Bosworth gives rise to any material concerns in relation to its suitability to accept the Transferred Business.

6.11. It is proposed that financial resources will be provided to Bosworth in the form

of share capital and by means of an extensive reinsurance contract. I understand that Bosworth is to have fully paid up share capital of $16.1 million.

6.12. A fundamental aspect of the security afforded transferring policyholders is a

whole account quota share reinsurance in favour of Bosworth to be provided by Fitzwilliam Insurance Limited (“Fitzwilliam”), which Fitzwilliam has acknowledged will not be capable of being cancelled or avoided by Fitzwilliam (“Fitzwilliam Reinsurance”). Fitzwilliam is a class 3 regulated reinsurer incorporated as a Segregated Accounts Company (“SAC”) under the laws of Bermuda. As a SAC, Fitzwilliam provides coverage to Bosworth through a segregated account so that any liabilities or assets which Fitzwilliam has in relation to other parties are independent of those it has in respect of Bosworth. Fitzwilliam’s ultimate parent is EGL.

6.13. The Fitzwilliam Reinsurance will have an initial limit of 200% of the transfer

premium payable at the time of the Transfer. This limit will be adjusted over time (not to exceed the initial limit) so that the reinsurance will cover 200% of the net technical provisions in respect of the Transferred Business. The adjustment to the limit may be upwards or downwards, and is limited upwards to the extent that the remaining limit together with recoveries to date under the reinsurance cannot exceed the initial limit. Fitzwilliam will meet all net claims and claim handling expenses of Bosworth up to the available limit of cover.

6.14. Fitzwilliam's reinsurance obligations will be further supported by an irrevocable

evergreen letter of credit (“LOC”) in an amount of 200% of the net technical provisions on a discounted basis2, such figures being adjusted annually by an independent actuary and agreed between MSI and EGL. MSI and EGL have agreed that the letter of credit is to be procured from a bank with a Standard & Poor’s credit rating of not less than AA. The credit-worthiness of the bank will be monitored by the Parties and it will be replaced should its credit rating fall below an agreed threshold. The difference between the value of the letter of credit and the remaining nominal limit of coverage is “uncollateralized” and, given the annual adjustment of the LOC, reinsurance obligations will only be unsupported by the LOC if they dramatically increase beyond expectations within twelve months of an annual adjustment. The possibility of such a material short-term mismatch in expected cash outgoings is extremely remote and in my opinion is immaterial. I have discussed with EGL the issue of currency matching and have been advised that the independent actuary will consider the major currencies and discount rates consistent with the currency-mix of liabilities. I do not consider there to be a material risk of mismatching by currency given the dominance of US Dollars in the portfolio and the frequency with which the portfolio will be monitored.

2 Discounted basis here means a net present value calculation of expected future cash flows using an interest rate consistent with the yield on highly secure bonds of consistent duration.


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6.15. The performance of the Fitzwilliam Reinsurance is further underpinned by a

financial guarantee provided by EGL, which I have reviewed. The guarantee provides that such additional funds as may be required by the LOC issuing bank will be met by EGL. The guarantee has three elements.

• First, EGL undertakes to guarantee Fitzwilliam's payment obligations to the

issuing bank in connection with the LOC. • Second, EGL undertakes to guarantee Fitzwilliam's obligation to procure the

provision of an upwardly adjusted LOC pursuant to the terms of the Fitzwilliam Reinsurance.

• Third, EGL undertakes to guarantee Fitzwilliam's obligation to procure the provision of a replacement LOC pursuant to the Fitzwilliam Reinsurance in the event that the LOC becomes exhausted.

The guarantee is governed by Bermuda law. I have taken Bermuda law advice and am satisfied that the guarantee is enforceable in accordance with its terms and cannot be unilaterally revoked by EGL. A copy of the legal advice obtained is reproduced as Appendix 7. I have set out in Appendix 5 the mechanism under which a claim may be made under the guarantee together with an evaluation of the financial resources of EGL.

6.16. The MSI Scheme provides for the transfer of certain third party reinsurance

protections from MSI to Bosworth. Overall, third party reinsurance represents approximately 10% of the transferred technical provisions and consists principally of proportional reinsurance recoveries.

6.17. The premium payable by Bosworth in respect of the Fitzwilliam Reinsurance will

be the amount of cash transferred by MSI to Bosworth; third party reinsurance assets included with the Transferred Business will inure to the benefit of the Fitzwilliam Reinsurance. The Fitzwilliam Reinsurance will cover all of Bosworth's liabilities for claims made under the Transferred Business, together with claim handling expenses less amounts recoverable by Bosworth from third party reinsurers of the Transferred Business. The Fitzwilliam Reinsurance will absorb any failure of the inuring reinsurance assets.

6.18. In Appendix 5 I have set out an explanation of the operation of the Fitzwilliam

Segregated Account, including : § The procedure for adjusting the collateral and level of the LOC, § The operation of the financial guarantee provided by EGL, § General comments on the corporate governance of Fitzwilliam.

6.19. In Appendix 6 I have included a legal opinion provided by a Bermudian-based

legal practice which gives their specialist interpretation of the operation of SAC companies, underpinning my comments in paragraph 6.12.


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7. Information used in preparing this report 7.1. This is itemised in Appendix 2.

8. Reliance placed on the data provided and on the judgment of others

8.1. I have relied upon the data itemised in Appendix 2 being accurate. I have applied limited cross checks to certain items in the financial statements and analytical work provided to me and found the data provided to be consistent with these checks. I have relied in particular upon the audited accounts of MSI, Fitzwilliam, EGL and Shinsei. There were no qualifications to the opinions expressed by the auditors. The Individual Capital Assessment (“ICA”) in respect of the Transferred Business was also significant in forming my overall opinion.

8.2. I have had access to written information and verbal explanation from senior

personnel of MSI's UK branch, Bosworth, EGL and EEUL, and have been provided with further background information, as required.

8.3. My work has been conducted on the basis of information as at the end of 2009.

The summary balance sheet at paragraph 9.4 is based on financial statements as at December 2009. I have received the audited financial statements for MSIGH as at March 2009 and a summary of the consolidated accounts as at December 2009, together with the financial statements for the MSI UK branch as at December 2009.


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9. The analytical approach taken and the likely effect of the scheme on

policyholders

9.1. My analysis and observations fall under the following headings:

▪ Valuation basis of the transaction ▪ Administration ▪ Policyholder security

9.2. Valuation basis of the transaction

▪ The Transfer is a commercially negotiated transaction between the Parties. The agreed price has been determined following a process of due diligence and inspection of records.

▪ I have reviewed the independent reserve studies commissioned by MSI of

various firms of consulting actuaries and I understand that the reserve carried by MSI in respect of the Transferred Business is consistent with the independent best estimates. In addition, based on my wider experience of portfolios having broadly similar mixtures of 1993 and prior underwriting years’ exposures (i.e. US mass tort dominated by asbestos related reinsurance claims), I consider the reserves carried to be consistent with higher-end reserve levels of peer-group portfolios. I have not, however, performed a detailed analysis of the reserves and the underlying contractual exposures of MSI. The assets being transferred in consideration of the Transfer reflect the independent best estimate of reserves.

▪ I have reviewed the ICA of the Transferred Business, which was prepared by

EGL. The ICA analysis is an estimation of the capital resources required so that under a wide range of scenarios (i.e. allowing for statistical variation in both liabilities and assets), the available capital is sufficient to settle all claims within a given statistical range, in this case 97.5% of modelled cases is used as a common reference point.

▪ I have discussed, in detail, the approach taken by EGL in calibrating the ICA

model and its construction. A particular focus was the modelled outcome at the 97.5% extreme outcome and in particular the consistency of EGL modelled extreme outcomes with the most recent independent full actuarial review of the reserves of MSI, which was commissioned by MSI and based on data as at 30 September 2007. I have satisfied myself that the model adopted by EGL closely matches the outcomes for broadly similar portfolios of business where recent extensive external actuarial advice was employed by EGL based on data as at September 2008. I am also satisfied that the current research performed by EGL of trends and developments of asbestos related claims support the calibration of the ICA model. In February 2010 the independent consulting actuaries disclosed estimates of the rate of payment and emergence of incurred claims implied by their September 2007 full review. EEUL and EGL have compared these forecasts with the actual loss development for the period from October 2007 to November 2009, and


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concluded that the loss experience of the Transferring Business over this period is well within the actuarial expectations3 as at September 2007. The ICA analysis indicates that the total cover provided under the Fitzwilliam Reinsurance exceeds the amount needed at the 97.5th percentile by approximately $36m.

9.3. Administration ▪ The Transferred Business is currently administered by EEUL and will

continue to be administered by EEUL following the Transfer. There will be no change to the internal administration of the policies, or in the relationship with policyholders.

9.4. Policyholder security ▪ In the table below I have summarised data from the December 20094

statutory returns (“before transfer”), and shown the Parties’ balance sheets before and after the Transfer. Beneath the table I set out various considerations in arriving at my opinion.

3 Actual claims development, both paid and incurred, is approximately 50% of the forecast values 4 The MSI balance sheet represents the consolidated businesses of the MSIGH. MSI is consolidated into this entity and represents approximately 80% of the total technical provisions. The consolidated accounts were used as a comparative because these are the most recently available financial statements and I do not consider them to be materially different in character from the MSI stand-alone financial statements.


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Summary balance sheets as at 31 December 2009 before and after Transfer

Values in USD million5 Before transfer After transfer MSI MSI Bosworth Balance sheet - assets Investments 67,284.2 67,284.2 0 Reinsurers' share of technical provisions 130.3 Cash 2,700.2 2,580.8 16.1 Other assets 4,389.8 4,389.8

Total assets 74,374.2 74,254.8 146.4

Balance sheet - liabilities - Called up Share capital 2,326.9 2,326.9 16.1 - Other reserves 4,732.5 4,732.5 - Profit and loss account 5,654.2 5,654.2 Shareholders' funds 12,713.6 12,713.6 16.1 Technical provisions 57,817.6 57,698.2 130.3 Creditors 949.7 949.7 Provision for other risks and charges 2,893.3 2,893.3 0.0

Total liabilities 74,374.2 74,254.8 146.4

Solvency measures: Ratio of shareholder funds to -- Net Insurance liabilities 22.0% 22.0% -- Gross insurance liabilities 22.0% 22.0% 12.4%

Appendix 4 explains the construction of the transfer values to Bosworth in greater detail. The technical provision figure shown as transferred to Bosworth is as at December 2009. This figure will be adjusted to reflect net claim settlements by MSI and movements in net notified claims until the effective date of the Transfer. I have noted that claims movements in the account have been relatively modest since the previous full actuarial review, in addition to which, the research provided to me in support of the ICA calibration further indicates that overall experience for asbestos related claims has been relatively benign. Given these factors, I do not consider that the adjustment for movements between December 2009 and the

5 For simplicity I have used an exchange rate of US$ 1 = Yen 100. The exchange rate in February 2010 is in the region of US$1 = Yen 90. Values in the summary balance sheet are expressed to the nearest $100k and may be subject to rounding errors.


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effective date of the transfer are likely to materially alter my opinion, however I intend performing a high-level examination of the account immediately prior to the sanction hearing in order to verify this. Considerations on comparative policyholder security pre- and post- Transfer

▪ The value of transferring liabilities, including a risk margin and net of third party reinsurance, is $119.4 million6. This is 0.2% of the MSI group's total technical provisions as summarised above, and as such, is immaterial to MSI and the transfer has no material relevance to the policyholders remaining within MSI.

▪ Bosworth has no policyholder liabilities prior to the Transfer ▪ In order to indicate the extent of the financial resources within MSI to meet

potential worsening of the Transferred Business’ claims I have calculated the ratio of balance sheet surplus to technical provisions. For MSI this is 22%7. MSI’s balance sheet surplus is required to meet risks across its entire portfolio and the set of risks which it encompasses is considerably broader than those affecting only the Transferred Business (for example adverse risks arising from new business, losses arising from natural catastrophes).

▪ The equivalent calculation of the level of security post – Transfer reflects the

contingent capital represented by the Fitzwilliam whole account reinsurance. This provides additional potential capital in the region of $137.5m8. Taking account of this, the surplus ratio attributable to transferring policyholders post-transfer is 117%.

▪ Within the ICA study prepared by EGL for the Transferred Business, I have

isolated the 97.5% extreme scenario, and compared this with the available limit of cover. At this extreme modelled outcome, the total assets exceed the modelled liabilities by $36 million. There is, in my opinion a sufficient degree of “headroom” available within the financial structure so as to create no material disadvantage to transferring policyholders.

▪ I have considered the impact of the Transfer on any rights of set-off that may

currently exist in favour of MSI's creditors. As there are no material amounts capable of set-off, I am satisfied that there are no set-off issues that affect my conclusions.

▪ I have considered the potential impact on the security of the Transferred

Business of an impairment of the third party reinsurance asset arising as a

6 This is based on 31 December 2009 values and the final value will be adjusted to reflect net claim settlements by MSI from January 2010 to the effective date of the Transfer. Based on claims developments since that date, it is likely that the final value will be approximately $117m. 7 The level of reinsurance in MSI's balance sheet is small and the 22% ratio is the same to the nearest percentile both net and gross of reinsurance 8 The precise limit of the reinsurance will be determined at the effective date of the Transfer and may differ from this value due to intervening claim settlements


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direct result of the Transfer. Whilst such a scenario would put additional financial demands upon the Fitzwilliam Reinsurance under a highly adverse outcome, this scenario does not change my overall opinion.

▪ I have considered the additional security afforded certain transferring

policyholders who benefit from letters of credit provided by certain banks. I have noted the arrangements which the Parties have established in order to transfer responsibility for the procurement of the letter of credit facilities. I consider these arrangements to be adequate and the arrangements do not disadvantage the affected policyholders.

▪ I have also considered the financial resources of Fitzwilliam and the

implications of the financial guarantee provided by EGL. I am satisfied that adequate control measures and financial resources exist within EGL to fulfil these obligations. My consideration of these matters is set out in detail in Appendix 5.

▪ The position of transferring policyholders pre- and post- Transfer may be

characterised as follows:

i) Pre-Transfer − The Transferred Business is an insignificant part of MSI’s overall

portfolio and, in absolute terms, the amount of surplus capital potentially available dwarfs that provided under the Bosworth / Fitzwilliam structure

− Expressed relative to technical liabilities, the surplus capital ratio of 22%, is modest

− MSI’s overall capital is substantial but it is exposed to risks arising from other policyholders and business risks, including those arising from new business

− The Transferred Business is not a core activity for MSI going forwards and MSI is committed to a major reorganisation from 1 April 2010 as referred to in para 6.3

ii) Post-Transfer

− Transferring policyholders are independent of MSI and are funded on a stand-alone basis.

− In proportionate terms the surplus capital ratio attributable to the Transferred Business increases to 117% from 22%

− The contingent capital available through the whole account quota share reinsurance provides a level of security higher than the benchmark level (2.5% adverse outcome) level estimated by the ICA

− A key risk to the security of the Transferred Business is the credit-worthiness of the bank providing the letter of credit facility. The Parties have agreed a mechanism to ensure that this risk is managed effectively.

− The Fitzwilliam Reinsurance is backed by EGL; EGL has surplus capital of $700 million at September 2009.

− EEUL specialises in managing portfolios with a mix of liabilities similar to that of the Transferred Business and, I am advised, that few, if any of


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the claims arising in the MSI portfolio are not already known to EEUL through its management of other portfolios

− I am not aware of any proposal for Bosworth subsequently to underwrite or acquire any business other than the Transferred Business, or subsequently to transfer the Transferred Business to another entity.


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10. Opinion

10.1. Based on:

▪ The fact that there will be no material operational or administrative impact to the transferring or remaining policyholders

▪ The level of protection provided under the whole account reinsurance of Bosworth by Fitzwilliam

▪ The letter of credit which will support Fitzwilliam's reinsurance obligations together with the financial guarantee provided by EGL

I have reached the opinion that the transferring MSI policyholders will not be materially adversely affected by the Transfer and in my opinion this Transfer to Bosworth has no impact on any other connected parties.

10.2. The Transfer has no material impact on the assets and liabilities of MSI and so in

my opinion will not affect the remaining MSI policyholders. 10.3. Bosworth has no existing policyholders.

Dewi James FIA James, Brennan & Associates 3 March 2010


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Appendix 1 - Professional Experience Dewi James Fellow of the Institute of Actuaries, qualified 1988. Certified Lloyd’s actuary. Work experience 1980 – 1983

Government Actuary’s Department – Insurance supervision

1983 – 1984 Anglo American Life – 1 year running a small pensions unit in Johannesburg 1983 – 1985 Mercer life and pensions 1985 – 1988 Sturge Lloyd’s Agencies – various roles, reserving, planning, setting up new syndicates, syndicate

evaluation and reinsurance security assessment 1988 – 1992

Ernst & Young wide range of consulting assignments. In depth experience of Lloyd’s and London market reserving. Various pricing exercises including the use of generalised linear modelling techniques.

1992 – 1995 Alexander Howden – took over Clay & Partners (actuarial consultancy). Various reserving and pricing assignments in addition to managing the existing client base, leading to its integration with the wider technical department of the broking side of the business

1995 – 2001 Zurich Insurance - corporate / chief actuary Zurich Re (UK), chief actuary Turegum, chief actuary CMGL, pricing actuary and chief actuary for Zurich Global Energy (London / Europe). Activities included due diligence in acquisition of Eagle Star by ZFS, subsequent sale and negotiation of Eagle Star Re to GE, various corporate reporting roles in Switzerland and UK regulatory reporting. Range of experience in pricing, audit, reserving and financial modelling.

2001 – Set up James, Brennan & Associates. Assignments include : • A project intended to offer a solution to the LMX property CAT spiral claims • Various reserve reviews and investigations of Lloyd’s syndicates for managing agencies

and certain members’ agents • US Statements of Actuarial opinion for London companies • Various London market and mass market pricing analyses • Solvent scheme adjudicator • Acting as Independent Expert on various Part VII transfers • Development of financial models for capital evaluation and reinsurance optimisation • Estimation of technical provisions using stochastic reserving techniques • Technical reserves analysis of UK companies’ FSA returns

Various publications and presentations – most relevant are Book - “Modern Actuarial Theory and Practice” published 2000, 2004 (2nd edition) Other research etc on :

• US Savings and Loans, • US legal system working party, • member of ABI commutations working party (2001), • contributor to 2 asbestos/latent claims papers under the GIRO conference, • contributor to LASER initiative and other London market mass tort initiatives. • mitigation of reinsurance credit risk using debt assignment and set-off • financial structures for commutation deals • dependencies in insurance and reinsurance • the application of epidemiological models to insurance and reinsurance markets • Development of disease-spread models in Scandinavian fish farms


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Appendix 2 - Schedule of information provided in consideration of this report Annual report and accounts of the following entities

• Shinsei interim report 2008, information memorandum as at 31 December 2009, financial statement as at 31 December 2009

• Fitzwilliam December 2007 and 2008 auditors report & statutory return and draft December 2009 financial statements

• Enstar Group US statutory filings as at September 2008, December 2008 and September 2009

• MSI Group 2008 and 2009 Financial Statements • MSI UK Branch December 2009 FSA statutory returns

Other ancillary documentation

• Independent stock analysts’ reports on Enstar Group • MSI and the MSI Group balance sheets on a consolidated and non-consolidated basis

from March 2001 to December 2009. In addition summary of quarterly financial statements from March 2008 to December 2009.

• December 2009 and December 2008 management accounts for Mitsui Sumitomo Insurance Company Ltd – UK Branch

• Reserve studies performed by external consulting actuaries as at December 2005, December 2006, September 2007 and high-level addendum to the September 2007 study as at November 2009

• Individual Capital Assessment report in respect of the Transferred Business as at September 2008

• Research and analysis performed by Enstar of specific asbestos claims and on wider trends in the US market. Enstar's comparative analysis of actuarial forecast claims movements with actual loss experience from October 2007 to November 2009 together with the consulting actuaries' observations on Enstar's review

• Description of planned business combination and business alliance of MSI with other Japanese companies. September 2009 outline of the business integration plans of Aioi Insurance Company, Nissay Dowa General Insurance Company and Mitsui Sumitomo Insurance Group

• Diagrammatic representation of chain of security afforded the transferring policyholders

• Balance sheet for Bosworth • List of MSI policyholders having the benefit of collateralised Letters of Credit

secured against banks of good standing • The agreed form of the reinsurance contract to be issued by Fitzwilliam to Bosworth • Signed copy of the financial guarantee issued by Enstar Group Limited to Fitzwilliam

and Bosworth


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Appendix 3 – Schematic representation of corporate relationships Ultimate holding companies of Bosworth Notes:

1. Bosworth is a wholly-owned subsidiary of Hilcot Holdings, which is jointly owned by Enstar Group (50.1%) and Shinsei Bank (49.9%)

Bosworth Run-off Limited

(UK)

Brampton Insurance

Company Limited (UK)

Hillcot Holdings Limited

(Bermuda)

Enstar Group Ltd

(Bermuda)

Shinsei Bank (Japan)

50.1% 49.9%

100% 100%


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Appendix 4 – Explanation of balance sheet transfer values to Bosworth

1. The basis of the transfer price was agreed between the Parties based on March 2008 estimates of the notified case and IBNR reserves, together with a risk margin.

2. The basis of the final transfer price in respect of the Transfer is a “roll-forward”,

namely that the final value will be adjusted to reflect net claim settlements by MSI from April 2008 to the effective date of the Transfer. This is an acceptable basis on the grounds that actual movements in the intervening period have been well within expectations and there have been no other factors in the wider claims environment to cause either party to materially alter their estimates of the ultimate level of claims in respect of the Transferred Business.

3. The technical provisions at December 2009 in the pro-forma balance sheet are as

follows : a. Booked gross notified case and IBNR reserves as at December 2009 are:

i. $130.3m b. The booked external reinsurance asset associated with these gross provisions

is: i. $12.9m

c. The total reinsurance in the Bosworth account reflects the 100% reinsurance with Fitzwilliam using the December 2009 technical provision together with external reinsurance recoveries.

4. Based on claims developments since March 2008, it is likely that the final value, at the

effective date of the Transfer, will be approximately $117m.


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Appendix 5 – Operations of the new Fitzwilliam Bosworth Segregated Account

In section 6.12 I note that a fundamental aspect of the security afforded transferring policyholders is a whole account quota share reinsurance in favour of Bosworth to be provided by Fitzwilliam.

In this appendix I have expanded upon the description of Fitzwilliam set out in paragraph 6.12, providing details of its financial resources and the procedures to be adopted should the financial guarantee be called upon.

My comments are set out under the following section headings: • Fitzwilliam as a Segregated Accounts Company (“SAC”) • Financial guarantee provided by EGL • The operation of the Letter of Credit (“LOC”) • Procedures to claim under the EGL financial guarantee • Comparative security of bank deposits and LOCs • Fitzwilliam corporate governance and dividend policy

Fitzwilliam as a Segregated Accounts Company (“SAC”)

1. I have sought and obtained advice from a Bermudian legal practice9 setting out the purpose and operation of SAC companies. The advice is reproduced as Appendix 6. The legal advice confirms that the legislation under which SAC accounts are established is designed to ensure their financial independence as an alternative to their being established as legally separate companies.

2. Fitzwilliam currently consists of 16 segregated accounts which operate as

independent insurance entities, each producing separate financial statements and its own set of management information.

9 Conyers Dill & Pearman – are retained by Enstar and were instructed to provide me with advice upon which I might rely in the context of my role as Independent Expert. See Appendix 6


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3. Based on the current financial information, the opening balance sheet of the

Fitzwilliam Bosworth Segregated Account reinsuring the Transferred Business will be made up as follows:

Fitzwilliam Bosworth Segregated Account as at 31 December 2009 (US$ millions)

Fitzwilliam /

Bosworth SAC

Assets Cash & short term liquid assets 160.5 Other assets 0.4 Total Assets 160.9 Liabilities Technical provisions 119.4 Shareholder funds 41.5 Total Liabilities 160.9

4. As noted in paragraph 9.2, I am satisfied that the total limit of cover under the Fitzwilliam Reinsurance provides a reasonable margin over and above the modelled adverse 97.5% outcome.

5. The cash and short term liquid assets of $160.5m is to be held as collateral by the

bank providing the LOC. The funds earn investment income which is credited to Fitzwilliam at a rate broadly consistent with short term deposits.

6. The LOC facility incurs a fee payable by Fitzwilliam to the bank. It is anticipated

that the LOC fee will be adequately covered by investment earnings on the invested funds, but, should a funding gap arise then this is within the scope of the EGL financial guarantee.

7. The investment of collateral or other assets with respect to duration, timing,

currency or other considerations relating to the matching of investment returns to claims outgo is subject to a quarterly review panel. Adjustments are implemented to the investment mix as required in order to optimise the liquidity and matching position.


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8. The overall financial exposure of the Fitzwilliam Bosworth Segregated Account and its potential reliance on the EGL financial guarantee is set out below10:

Analysis of coverage limits, LOC funding and items not directly funded (US$ millions) Financial component as at December 2009

Total Quota share limit (200% of Premium) 238.8 Letter of credit (Discounted basis of the above)11 160.5 LOC collateral 160.5 Components which are not directly funded Unfunded 78.3

9. The amount of $78.3 m above is the maximum reliance upon EGL to meet its guarantee obligations assuming no failure of the LOC providing bank and that investment income on the collateral matches the LOC fee.

10 As discussed in paragraph 9.4 and Appendix 4, the commercial basis of the Transfer was agreed at March 2008 and subsequent movements in claims have led to a reduction in the liabilities to be transferred. 11 The amount of LoC will be adjusted in future years in accordance with para 6.14


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Financial guarantee provided by EGL

1. I have been provided with a copy of the EGL financial guarantee. The terms of the guarantee were described in paragraph 6.15 and I am satisfied that the scope of the guarantee matches all the conditions under which the guarantee may be required.

2. I have been provided with EGL’s interim financial statements as at September 2009,

as filed under the Securities and Exchange Commission regulations. The financial statements indicate that the EGL's total shareholder surplus (excluding minority interests) increased from $615m to $701m in the 9 months since December 2008.

3. I have sought confirmation from EGL on the extent to which EGL has issued

financial guarantees separately from that relating to the Fitzwilliam Reinsurance. I have been advised that guarantees amounting to $31.0 million were issued, in respect of LOC funding.

4. Based on the information provided to me, EGL is likely to have a maximum

guarantee commitment of $109.3m (being $31.0m+ $78.3 m). Given the level of shareholder funds relative to the size of the guarantee obligations, the likelihood of its being called upon and the formal written commitment provided by EGL, I am satisfied that EGL is fully aware of its obligations under the guarantee obligations and that EGL has adequate financial resources to meet this financial contingency.


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The operation of the LOC The LOC facility is a contract between Fitzwilliam and the issuing bank. The issuing bank provides a LOC in favour of Bosworth under which it may draw cash as required, under the terms of the Fitzwilliam Reinsurance. The LOC will be maintained at 200% of the net discounted technical provisions throughout the duration of the run-off of the business, subject to the conditions set out below, and the technical provisions are to be estimated annually by independent actuarial review. It is expected that, as the account matures, the future liabilities will reduce, however the LOC may be increased up to the initial value, subject to the restriction that the LOC is less than or equal to the financial limits remaining under the whole account quota share contract. I have been provided with a draft of the Fitzwilliam Reinsurance. I have been advised that the contract wording is standard for this type of arrangement and has been used extensively. The contract requires Fitzwilliam to follow, unconditionally, claims settlements by Bosworth. The procedures for making reinsurance collections and for adjusting the level of the LOC are summarised below:

Day to day operation of the LOC 1. Bosworth will adjust and pay claims or effect commutation settlements and collect,

where possible, the associated third party reinsurance recoveries. 2. Bosworth’s transactions will be collated in a quarterly bordereau and submitted to

Fitzwilliam for settlement. The bordereau is prepared in Enstar’s UK office which is the administrative centre for Bosworth. The process of preparing and submitting the bordereau is well established and is already undertaken in respect of other Enstar businesses.

3. In exceptional cases, such as the settlement of large claims, Bosworth may submit a one-off bordereau statement and request an early cash settlement.

4. Fitzwilliam reviews and confirms that the bordereau is correct. 5. Bosworth draws cash under the LOC .

Adjustment of the collateral required under the LOC 1. Independent actuarial advice is used annually (or more frequently if required), to

determine the net present value of the subject liabilities. 2. The LOC value is 200% of the independent actuarial assessment, but capped at the

limit remaining under the whole account quota share reinsurance. 3. The LOC issuing bank is advised of the results of the independent actuarial review. 4. In the event that the bank requires additional collateral and Fitzwilliam has

insufficient suitable assets to meet the requirement, then Fitzwilliam will call upon the EGL financial guarantee.

5. I have considered the scenario whereby the LOC is not maintained. This extreme scenario will invoke the legal process outlined as point 3 in the section below.


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Procedures to claim under the EGL financial guarantee and legal enforceability 1. The circumstances under which EGL may be called to provide funding are:

a. If claims under the Fitzwilliam Reinsurance exceed the available limit of the LOC

b. Where the collateral required by the bank to fund the LOC must be increased

2. Fitzwilliam and Bosworth are addressed jointly in the guarantee document; the managements of both companies are in close and regular contact and monitor cash and funding requirements. The precise communication mechanism will depend on the circumstances of the guarantee requirement but the most likely scenario is that formal notice of a call under the guarantee will be through Fitzwilliam to EGL

3. The proposed guarantee is in the form of a commitment letter made by deed and

addressed to Fitzwilliam and Bosworth. In executed form, it is legally enforceable by Fitzwilliam and Bosworth, such that each of them could secure performance of the guarantee by EGL by way of legal action directly against EGL. The proposed guarantee has been considered and signed by a director of EGL and approved by the full board of EGL. The legal jurisdiction of the proceedings would be Bermuda.

Comparative security of bank deposits and LOCs

1. I have carried out a high level and approximate investigation of the ratings of the major banks currently used by MSI to hold cash deposits in order to compare the security ratings of the current banking institutions with the AA security of the LOC providing bank. My conclusion from this investigation was that there is no material difference between the security rating of the existing banking counterparties and the rating of the LOC issuing bank.

2. The advice which I have obtained with respect to the priority of recovery of bank

deposits compared with the collateral supplied in support of a LOC, is that recovery of collateral ranks equally with cash deposits in the event of a banking default. Bank deposits and LOC collateral form part of the bank’s general estate and will be distributed with equal priority as a liquidation dividend since each is an unsecured creditor of the bank.

3. Based on this analysis, my opinion is that, provided that the security of the LOC

issuing bank is at least as good as that of the current banking relationships, then there is no material worsening of policyholder security under the LOC arrangement.

4. I have considered the possibility of the LOC issuing bank, being in deficit in respect

of collateral commitments by Fitzwilliam, exercising set-off in respect of funds which it may hold on behalf of other EGL companies. My understanding is that such set-off cannot in any circumstances be implemented across separate legal entities without an assignment of rights entered into by the parties.


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Fitzwilliam corporate governance and dividend policy 1. Each Fitzwilliam Segregated account operates as, in effect, a stand-alone insurance

company, preparing financial statements in accordance with prevailing accounting practices in Bermuda. Whilst each Segregated Account prepares independent financial statements, the statutory annual audit is performed on Fitzwilliam as a whole, not on individual Segregated Accounts.

2. Profits within Fitzwilliam are determined independently for each Segregated Account

in accordance with local accounting practice; the accounting practice is well established.

3. Fitzwilliam has a board of directors but there are not separate boards of directors for

the individual Segregated Accounts. The governance of the Segregated Account applicable to the Fitzwilliam Bosworth account is subject to the same regulatory framework and professional standards as all other Segregated Accounts within Fitzwilliam.

4. An independent actuarial review of the reserves of Bosworth is to be undertaken

annually and based on this review adjustments may be made to the level of the LOC and to its collateralization.

5. With respect to more general regulatory restrictions on the distribution of profits in

Bermuda, as they apply to Segregated Account companies, I understand that Bermudian insurance regulations stipulate that a reduction in capital of more than 15% requires regulatory approval but lesser amounts may be distributed without regulatory permissions.


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Appendix 6 – External legal advice with respect to Bermudian Segregated Account companies


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Appendix 7 - External legal advice with respect to the enforceability of the Enstar Group financial guarantee


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Documents

Scheme report for the transfer of policies pursuant to The ... · Tel: 0207 481 9617 Scheme report for the transfer of policies pursuant to The Financial Services and Markets Act