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Policyholder report estimates RSA unit has $1.83 billion in claims, $834 million surplus


Royal Indemnity Co., a major part of Royal & SunAlliance USA Inc.'s operations, which are now in runoff, has a potential reserve shortfall of nearly $1 billion, according to a special policyholder report.

Policyholders are protesting an agreement under which Charlotte, N.C.-based Arrowpoint Capital Corp., a vehicle established by RSA USA's management team, will acquire Royal Indemnity Co. and other members of RSA USA's insurance pool from their London-based parent, Royal & Sun Alliance Insurance Group P.L.C. The $300 million deal is a deferred compensation arrangement that will be funded by the U.S. operation's future performance.

While RSA said it will contribute $287.5 million of additional capital to the U.S. operation upon completion of the transaction, a group of major policyholders says the funding is inadequate. The group is expected to protest the deal at a Delaware Insurance Department hearing on Jan. 19.

Royal Indemnity has total estimated claims of $1.83 billion, but only $834 million in surplus as of Dec. 31, 2005, which would leave it with a $999 million shortfall, according to a Dec. 11, 2006, report by David F. Babbel--a professor at the Wharton School of the University of Pennsylvania in Philadelphia--and former Utah Insurance Commissioner Robert E. Wilcox. Royal Indemnity is the largest member of the RSA USA insurance pool.

The report was prepared on behalf of policyholders World Trade Center Properties L.L.C. and its affiliates, and the Port Authority of New York and New Jersey. It was intended to support an ultimately unsuccessful motion for policyholders to conduct discovery in connection with the proposed Arrowpoint transaction. Policyholders are now appealing that decision in state court.

Reinsurance may be a factor in the operation's ability to pay claims. According to a separate November 2006 special report by Jonathan Terrell, president of Washington-based Kenesis Corporate & Information Consulting L.L.C., RSA USA's operation "appears to be 30% reinsured," although "reinsurance is notoriously difficult to collect and is significantly more difficult to collect for a company in runoff." The report was prepared at the request of the Student Loan Corp., a Stamford, Conn.-based RSA USA policyholder.

Royal Indemnity's largest single potential claim, according to the Babbel-Wilcox report, is $1 billion asbestos claim from Detroit-based General Motors Corp. In a lawsuit filed two years ago against RSA and its U.S. affiliates, GM is seeking payment for claims it says are covered under primary, umbrella and excess comprehensive general liability and comprehensive products liability policies issued from 1954 though 1971 (BI, Jan. 31, 2005). A trial on the issue is expected to begin within the next few months in state court in Pontiac, Mich.

According to the lawsuit, which does not specify the amount GM seeks to recover, "As a result of Royal & Sun Alliance's actions, General Motors has lost, or will lose, the very insurance protection for long-tail liabilities such as asbestos-related and environment-related liabilities for which it paid the Royal defendants millions of dollars in premiums over a seventy-year relationship." RSA began providing coverage to GM as early as 1921, according to the lawsuit.

The Babbel-Wilcox report says Royal Indemnity has put only $1 in reserve to pay potential claims. The report notes that the GM claim alone "is sufficient to eliminate the surplus."

A spokesman for RSA USA said GM's case is "completely without foundation."

Among other claims listed are $125 million from New York-based World Trade Center Properties L.L.C. According to the report, Royal Indemnity is obligated to pay World Trade Center Properties $255.6 million in connection with the Sept. 11, 2001, attacks, but has paid only $2.8 million. The report assumes about half of this has already been reserved.

Last year, a jury ruled that Royal Indemnity, along with other insurers, was liable for two occurrences in connection with the attacks (BI, March 13, 2006). According to Royal Indemnity's statutory filing for the quarter ended Sept. 26, 2006, the federal appellate court in New York issued a decision affirming the jury's occurrence findings and last November, Royal Indemnity moved for a reconsideration of its ruling.

New York City Mayor Michael Bloomberg wrote a Dec. 20, 2006, letter to Delaware Insurance Commissioner Matthew Denn saying he is concerned that the transaction's approval will leave Royal Indemnity with "insufficient assets to meet its obligations.