5 19 32 - AIRROC · Mumford, Gallanis, and Schwab on Life and A&H Run-Off Moderator: Peter A. Scarpato Interviewers: Francine L. Semaya and James Veach 5 Chairman’s Message A View

Vol. 6 No. 2 www.airroc.org Summer / Fall 2010

Message from CEO and Executive Director

How May We Help You?

For a complete Index, see page 4

3211Feature Article

Mumford, Gallanis, and Schwab on Life and A&H Run-OffModerator: Peter A. ScarpatoInterviewers: Francine L. Semaya and James Veach

5Chairman’s MessageA View from Above (and Beyond) …

By Jonathan Rosen

19Legislative UpdateReinsurance According to SSAP No. 62R

By Norris Clark

Legalese

The Common Interest Doctrine

By Timothy W. Stalker & Darren L. Harrison

continued on page 15

By Trish Getty

Reading minds remains a difficult art; however, with the combined

experience and challenges facing the AIRROC Board of Directors on a regular basis plus considering their various

walks of life in this industry, we continually strive to meet your needs and provide the great value of AIRROC membership. We desire input concerning what daily challenges you face and how AIRROC might help. We are aware of current issues facing the industry, as exemplified through our education sessions during membership meetings. Thank you Karen Amos and Kathy Barker, Co-Chairs of the AIRROC Education Committee.

The AIRROC Dispute Resolution Procedure (DRP) has been used by the first parties who are pleased with our process and will use it again. By now all should have received the DRP booklets. Should you need more copies to pass on to other parties who wish to familiarize themselves with the process, simply let me know ([email protected]).

Breaking news: An AIRROC member company reports that they have successfully executed an agreement with an opposing party mandating use of the AIRROC DRP to resolve all future disputes. Awesome news and certainly something for others to consider.

Trish Getty

By Vivien Tyrell, James Phythian-Adams and Christian Taylor

The first thing to spring to mind when asked if you have a view on “Zombie Funds” may well not be the state of the UK life insurance market. However, this market has seen ever increasing activity over

the past four years. Zombie Funds, the nickname given to life funds that have been closed to new business but have liabilities extending many years into the future, have become targets for investment vehicles, resulting in consolidation in parts of the British life insurance industry. To date, two vehicles, Resolution and Horizon, have attracted the most attention in this arena as they have bought into (and sold out of in Horizon’s case) some high profile life run-offs.

The Return of the Zombie Fund? A Perspective on Life Insurance Run-Off

Think Tank

An expected 500 worldwide delegates will meet to resolve

issues, further commutation discussions, pursue reinsurance

recoveries and network with industry principals.

October 18 – 20, 2010 Hilton East Brunswick – New JerseyFor info and registration visit airroc.org

AIRROC/R&QCommutation &Networking Event

continued on page 8

Our global team consists of more than 100 attorneys providing

services to insurance and reinsurance clients in the world’s financial

and political capitals.

Leaders Who Know Transactional Work Regulatory

Dispute Resolution Tax M&A

Securities Offerings Insolvencies Run-offs

For more information, please contact:

Jeffrey H. Mace Jane Boisseau James R. Woods +1 212 424 8367 +1 212 259 8644 +1 415 951 1114 [email protected] [email protected] [email protected]

Leaders in Serving the Insurance and Reinsurance Industries

Dewey & LeBoeuf LLP Americas | Europe | Russia/CIS | Asia Pacific | Africa | Middle East dl.com

Association of Insurance and Reinsurance Run-off Companies

By Peter A. Scarpato

Be f o r e y o u r minds go lurk-ing off to who

knows where, this perfectly innocent comment was meant to highlight the length

of this latest edition – 44 pages – packed full of cogent articles and interviews cov-ering topical areas of interest. Indeed, most of this edition is dedicated to a subject of emerging importance: Life and A&H run-off. So let’s get to it!

Following Trish Getty’s, How May We Help You? a reminder of AIRROC’s

advances in educational and ADR offerings and call for your input, we have The Return of the Zombie Fund? A Perspective on Life Insurance Run-Off, in which Vivien Tyrell, James Phythian-Adams and Christian Taylor explore the current state of the UK life insurance activity, with an emphasis on successful marketers in run-off life portfolios and the legal requirements to acquire them. Next, our Chair Jonathan Rosen offers a congratulatory look back and prophetic vision of AIRROC in Chairman’s Message: A View from Above (and Beyond), highlighting the results of the Board’s recent two-day Strategic Planning retreat. Art Coleman briefly but effectively updates us on Highlights of AIRROC’s Training Session in Hartford, leading to our featured Roundtable: Mumford, Gallanis, and Schwab On Life and A&H Run-Off. In this insightful interview by our own Francine Semaya and James Veach, James Mumford, Peter Gallanis and Stephen Schwab leave no stone unturned in their comparison of P&C and Life/A&H receiverships, life insurers’ investments including derivatives contracts, the regulatory impact on life insolvencies, alternative life insurance run-off strategies, and potential lessons from the Ambac receivership.

To keep you abreast of AIRROC’s work through the year, we provide Education Session Summaries from our May 13, 2010 Meeting, including AIRROC Dispute Resolution Procedure by James Veach, Actuarial Committee Update by Keith

Sometimes Size DOES Matter

AIRROC®Publications Committee

ChairAli [email protected]

Editor and Vice ChairPeter A. [email protected]

Jonathan [email protected]

Nigel [email protected]

Bina T. [email protected]

William [email protected]

Joseph [email protected]

Nick [email protected]

Frederick J. [email protected]

Francine L. [email protected]

Teresa [email protected]

Vivien [email protected]

James [email protected]

Advance Planning CommitteeMichael T. Walsh, [email protected]

Maryann [email protected]

Lawrence [email protected]

Publicity and Marketing Consultant G. Pirozzi [email protected]

Design & Production Myers Creative [email protected]

The Editorial Board of AIRROC® Matters welcomes new and reprinted with permission articles from authors on current topics of interest to the AIRROC® membership and the run-off industry. The Board reserves the right to edit submissions for content and/or space requirements.

Notes from Editor and Vice Chair

3

Peter A. Scarpato

Mr. Scarpato is an arbitrator, mediator, run-off specialist, attorney-at-law and President of Conflict Resolved, LLC, based in Yardley, PA. He can be reached at [email protected].

Invitation from Publications Committee

We are looking for Special Editors

to work with the assistance of the

Publications Committee to put together an

entire edition of AIRROC Matters centered

around one theme related to runoff.

Special Editors:

(a) have direct input into selecting authors

and topics for the newsletter

(b) write the introductory “Notes from the

Editor” column introducing the edition,

making their photos and affiliations

highly visible to our membership and

(c) can obtain additional copies of the

edition for their own marketing

purposes. You can search for and review

past Special Editions on the AIRROC

website, using the Search function in

the AIRROC Matters section.

Interested persons please e-mail me at [email protected] or Maryann Taylor at [email protected].


AIRROC® Matters Summer / Fall 2010

4 AIRROC® Matters Summer / Fall 2010

AIRROC® Board of Directors

Jonathan Rosen (Chairman)The Home Insurance Company in Liquidation

Art Coleman (Co-Vice Chair)Citadel Re

Ali E. Rifai (Co-Vice Chair)Zurich

Joseph J. DeVito (Treasurer)DeVito Consulting

Edward J. Gibney (Secretary)CNA Global Resource Managers

Karen AmosResolute Mgmt. Services

Kathy BarkerExcalibur Re

Michael Fitzgerald Scan Re In Liquidation

Keith E. KaplanReliance Insurance Co. in Liquidation

Frank KehrwaldSwiss Re

Janet KloenhamerFireman’s Fund Insurance Company

Mike PalmerR&Q Re

John M. ParkerTIG Insurance Company

Marianne PetilloROM Reinsurance Management Company

Michael C. ZellerAIG Reinsurance Division

AIRROC® Matters is published to provide insights and commentary on run-off business in the U.S. for the purpose of educating members and the public, stimulating discussion and fostering innovation that will advance the interests of the run-off industry.

Publishing and editorial decisions are based on the editor’s judgment of the quality of the writing, its relevance to AIRROC® members’ interests and the timeliness of the article.

Certain articles may be controversial. Neither these nor any other article should be deemed to reflect the views of any member or AIRROC®, unless

expressly stated. No endorsement by AIRROC® of any views expressed in articles should be inferred, unless expressly stated.

The AIRROC® Matters newsletter is published by the Association of Insurance and Reinsurance Run-off Companies. ©2010. All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Requests for permission to reproduce or republish material from the AIRROC® Matters newsletter should be addressed to Peter A. Scarpato, Editor, 215-369-4329, or [email protected].

Copyright Notice

AIRROC® Matters – In this IssueVol. 6 No. 2 – Summer/Fall 2010

1

1

3

5

7

11

21

Message from CEO and Executive Director How May We Help You?By Trish Getty

The Return of the Zombie Fund? A Perspective on Life Insurance Run-Off By Vivien Tyrell, James Phythian-Adams

and Christian Taylor

Notes from Editor and Vice Chair Sometimes Size DOES Matter By Peter A. Scarpato

Chairman’s Message A View from Above (and Beyond) … By Jonathan Rosen

Highlights of AIRROC’s Training Session in Hartford By Art Coleman

Roundtable: Mumford, Gallanis, and Schwab on Life and A&H Run-OffModerator: Peter A. Scarpato;

Interviewers: Francine L. Semaya,

James Veach

Legislative Update Reinsurance According to SSAP No. 62RBy Norris Clark

Present ValueBy Nigel Curtis

Legalese The Common Interest Doctrine By Timothy W. Stalker &

Darren L. Harrison

Advertisers in this issue

Policyholder Support Update – Alert No. 34

2230

3442

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19

May 13, 2010 Education Session Summaries

AIRROC Dispute Resolution UpdateBy James Veach

Actuarial Committee UpdateBy Keith Kaplan

The Longest Journey Starts with a Single Step

By Julius Bannister

Identifying and Assessing Emerging Risks — in a complex and interconnected worldBy Martin Weymann and

Annette Kurtzweil

Education Section

16

1718

19


5AIRROC® Matters 5AIRROC® Matters Summer / Fall 2010

By Jonathan Rosen

The seed of AIRROC that germi-nated some six years ago took root and has flourished per-

haps beyond wildest expectations. Our October event enjoys international rec-ognition, indelible on the calendars of the many participants involved in the

worldwide legacy business arena. Our membership meet-ings attract scores of delegates, enticed by networking opportunities and the quality of AIRROC’s educational programs. These successes are testimony to the hard work of many individuals dedicated to maintaining the unique-ness and vitality of our organization, in keeping with a value proposition that constantly strives to deliver mem-bership benefits.

At present, AIRROC boasts a diverse membership of 59 entities, but that only tells part of the story. Because AIRROC presently incorporates member affiliates into the organization without the need to independently join, when affiliates are brought into the reckoning the true number of risk-bearing participants is substantially high-er, representing a huge share of the world’s legacy market. Add to that the many global service providers active in AIRROC endeavors, and AIRROC’s standing as a vibrant, dynamic association becomes readily established.

The seed of AIRROC that germinated some six years ago

took root and has flourished perhaps beyond wildest

expectations.

Of course the success of any trade organization is a function of its attraction to its constituents and, with that hallmark, the AIRROC Board of Directors has over the years charted the evolution of our organization, ever-conscious of the need for initiatives that add membership value and sustain membership interest. We are truly for-tunate to have the indefatigable Trish Getty at the helm, the legal acumen and unbridled generosity of Dewey & LeBoeuf, the financial expertise of Joe De Vito, the corpo-rate secretarial skills of Ed Gibney, the editing prowess of Peter Scarpato, the energetic involvement of the legal and accounting professions, and the invaluable infrastructural support of certain of our members.

Our gratitude further extends to those Board members who so graciously and conscientiously perform pivotal Committee roles. One can only marvel at Art Coleman’s stupendous effort, abundantly assisted by co-sponsor R&Q, in putting together the October event. And then there are the regional education sessions, an Art brain-child, done in conjunction with local law firms, which bring AIRROC to middle management through specially tailored seminars, allowing members to inwardly spread the AIRROC experience (and concomitant benefit).

With education our guiding light, Kathy Barker and Karen Amos have assumed a significant challenge in ensuring that membership meeting participants are treat-ed to robust and absorbing sessions. Their efforts too have yielded superlative results, with the efforts of Marianne Petillo in steering the Finance and Website Committees and those of Ali Rifai with respect to the Publications Committee equally sterling.

Through the stewardship of Frank Kehrwald and Janet Kloenhamer, the Legislative/Amicus Committee most recently and notably heralded AIRROC’s dispute reso-lution procedure, developed under the tutelage of Mike Zeller, which is designed to efficiently and cost-effectively resolve contention in relation to smaller reinsurance bal-ances or limited issue disputes that are often a balance sheet bane and a resource drain. There is beyond ques-tion a compelling industry need for procedures such as the AIRROC model and we await traction of this initiative with eager anticipation. Yes, we have a lot to be proud of, but we are by no means complacent.

These past six years have seen a dramatic change in the run-off landscape, with discontinued business having become very much a mainstream industry fixture. Indeed, because today’s catastrophe invariably transforms into tomorrow’s legacy business, the line differentiating live market considerations from those confronting traditional run-off operations becomes distinctly blurred, widening the door for AIRROC reach, opportunity and influence.

With that in mind, the AIRROC Board spent two days in retreat a few months ago for a period of reflection, introspection and projection, with the object of developing a Strategic Plan that keeps AIRROC dynamic, meaningful and at the industry forefront. While the Strategic Plan remains a work in progress, with an initial draft having been

A View from Above (and Beyond) …

Jonathan Rosen

continued on page 7

Chairman’s Message

From Katrina-related coverage disputes to the WorldTrade Center trials to asbestos-driven reinsurancedisputes to regulator-approved commutation pro-grams for insolvent reinsurers, MCWG continues todo what its founders intended—concentrate and

focus on the needs of the insurance and reinsurance

community, both in the U.S. and abroad.

In 1933 three attorneys opened a law office at 64 Williams Street in downtown Manhattan to servethe insurance and reinsurance community. Todayalmost 90 partners and associates continue to servethis community from offices in New York, NewJersey, Florida and California.

Our practice groups concentrate on:run-off and restructuringreinsurance arbitrationinsolvencyinsurance litigationcommercial property coveragethird-party liability and defenseerrors and omissions practicecontract wordinginsurance/reinsurance regulationgovernment relationsand other specialized insurance needs

MOUND COTTON WOLLAN & GREENGRASS

One Battery Park PlazaNew York, NY 10004(212) 804.4200

New York Long Island Newark Fort Lauderdale San Francisco

www.moundcotton.com

When Experience Counts


7

Highlights of AIRROC’s Training Session in HartfordBy Art Coleman

Feedback has been very positive regarding the regional training sessions, the latest of which was

held in Hartford on June 17, 2010. These sessions are targeted at mid level staff and managers and designed with the mission statement of AIRROC in

mind, namely improving professional and managerial standards and practices and enhancing knowledge and communications within and outside of the run-off industry. Some of the specific comments from participants in the Hartford session included the following:

difficult to deal with, but others found it interesting and thought they got a lot out of hearing different perspectives;

two days;

different perspectives;

to key issues;

not a “sit on your hands” experience and very much enjoyed the fact that it was highly interactive/participatory.

Overall, folks found it very useful, productive and worthwhile. We welcome your input for topics and ideas for future training sessions.

Art Coleman is the President of Citadel Risk Management, Inc. which is part of Citadel Re (Bermuda) and works with Insurers and Reinsurers regarding Exit strategies as well as Captive and Program underwriting and man-agement through their Segregated Cell Company. He can be reached at [email protected].

Jonathan Rosen is Chairman of AIRROC and is on the Board of Directors of ReMedi. An attorney by profession, Jonathan provides arbitration, mediation, expert witness and consulting services to the insurance and reinsurance industries. He is certified by ARIAS as both an arbitrator and umpire and can be reached at [email protected].

prepared by the able hand of Mike Fitzgerald and exposed to the Board for comment and further consideration, it became self-evident early on in the process that AIRROC’s Mission Statement needed expansion to embrace a far broader industry constituency that has emerged since AIRROC’s inception due to a substantial intervening change in market conditions. We thus (in more than nuanced fashion) amended the Mission Statement to provide:

The mission of the Association is to promote and represent the common interests of insurance and reinsurance companies with legacy business. The Association’s objectives will include improving professional and managerial standards and practices and enhancing knowledge and communications within and outside of the run-off industry.

These are, of course, lofty ideals, but we intend to fully rise to the challenge. Aside from concentrating on initia-tives dedicated to sustaining membership interest, which has as an attendant objective expanded participation in AIRROC offerings by a broader employee base, there is significant growth potential to harness. This extends from

new member attraction to the construction of alliances, both domestically and internationally, with other trade organizations on matters of mutual interest, and includes within its span defining how and where AIRROC can more assertively exert its imprint to advance common member-ship causes in the regulatory and legislative frameworks.

How we, as an association, execute and deliver on our business model is key to AIRROC’s future success. A chang-ing environment demands enlightened change management and we seek and encourage membership input and active support in our endeavors as we navigate towards maturity. After all, when everything is said and done, Solutions Matter and for that undeniable truth, AIRROC Matters.

Chairman’s Message: A View from Above (and Beyond) … continued from page 5

Art Coleman


Why consolidate?In recent years the UK life insurance market generally

has seen ever increasing pressure from shareholders on management to improve returns by instigating changes. Nearly all UK life insurers have significant cross holdings in the other UK life insurers. Resolution, for example, is 80% owned by other life insurers and banks. Prudential has shares held by Legal & General, which in turn has stakes held in it by Axa, Swiss Re and Schroders. All of these cross holdings affect the approach and market response to friendly and hostile takeovers and influence significantly board level policy.

Zombie Funds, the nickname given to life funds that

have been closed to new business but have liabilities

extending many years into the future, have become

targets for investment vehicles, resulting in consolidation

in parts of the British life insurance industry.

A need to diversify and capitalise on expansion into global growth markets has been a fundamental driver of consolidation. A group which relies too heavily on the UK market – a market widely regarded as mature market – is being seen increasingly as more vulnerable. The recent attempt by Prudential to acquire American International Assurance (AIA), AIG’s Hong Kong head-quartered Asian division, is testimony to the increasing desire of the major UK players to obtain a stronger pres-ence in the growth markets. We have, however, seen the impact of regulators questioning these types of move. The UK financial services regulator, the Financial Services Authority (FSA), signalled its intent to restrict large financial transactions that may overstretch any acquirer after hard learnt lessons with Royal Bank of Scotland and

ABN Amro in the banking fold. This forced Prudential to double its proposed surplus “rainy day fund” from £2.6bn to more than £5.2bn in order to appease the FSA. This was a major factor in causing the collapse of the AIA deal, which cost Prudential £450m – equivalent to its total dividend payments last year.

For many, enhanced capital requirements in the cur-rent environment of falls in equity values impacting portfolio investments, and an increasingly sustained outflow of funds, has been extremely challenging. The short to medium term prospects on this front in the UK (and indeed Europe) are not, therefore, positive. The implementation of the Solvency II Directive across the European Union (from late 2012) will also introduce much tougher requirements on life insurers in relation to solvency requirements and annual liabilities. Many in the insurance industry have recognised for some time that a key way to offset the impact of this capital hit is to diversify, with more diversified companies being seen as posing a lower risk under the Solvency II regime and thereby requiring less capital. What better incentive can there be for consolidation? Buy now or pay later.

UK banks, which have been hit hard by the financial crisis, are increasingly focused on improving their capital adequacy and also repaying funds injected by the tax-payer. This has made them ever more likely to seek to dispose of non-core assets.

Lloyds Banking Group, for example, appears to be considering selling off some of its insurance businesses. The most likely insurance business of Lloyds Banking Group to be sold is Clerical Medical, the smaller of the two life companies owned by Lloyds, especially given Lloyds’ failure thus far to integrate Clerical Medical with Scottish Widows. Clerical Medical was a picked up by Lloyds in its acquisition of the beleaguered HBOS. This is a trend that is more than likely to lead to further consolidation.

A resolution for change? One company looking to capitalise on these market

conditions is the investment vehicle that specialises in consolidation, Resolution, and its chairman, Clive Cowdrey. Resolution is working to build a £10bn company based on acquiring a large legacy portfolio of books of assets where the attraction is to slash back room costs to generate additional profits by exploiting the economies



The Return of the Zombie Fund? A Perspective on Life Insurance Run-Off continued from page 1

Vivien Tyrell James Phythian-Adams

Christian Taylor


11AIRROC® Matters Summer / Fall 2010

Roundtable: Mumford, Gallanis, and Schwab on Life and A&H Run-OffModerator: Peter A. Scarpato; Interviewers: Francine L. Semaya and James Veach

Scarpato: We’re honored to have the experienced panel of Peter Gallanis, Jim Mumford and Steve Schwab for our Roundtable on life, accident and heath and long-term care

run-off business. I am also delighted to have Fran Semaya and James Veach joining me to pose questions to our panel.

I’ll start off by asking a general question: how do life and health receiverships versus other types of receiverships differ?

Gallanis: There are many similarities between life and health company receiverships and other types of receiverships. You start out by asking the same questions: is this company insolvent and are there grounds on which a formal order of receivership can be entered? Although answers to these questions for life companies involve different elements of a balance sheet than for a

P&C company, the analysis conducted involves a similar process.

That process, however, also has some differences, especial-ly for life insurance and annuities. By the nature of the con-tracts, life insurance policies, annuities, and various hybrid products that combine a little of both, raise different sorts of issues. The model by which we’ve conducted the American insurance receivership process works on the assumption that, at least from a guaranty association coverage perspec-tive, life and annuity business continues in force.

Instead of canceling the business on entry of the liqui-dation order, as commonly done with P&C receiverships, every effort is made to continue the business on the same terms so that consumers get the benefit of the life coverage they bargained for when they bought their policies.

Feature Article

Peter A. ScarpatoPeter Gallanis Stephen W. Schwab Francine L. Semaya James VeachJames Mumford

James Mumford is Chair of the NAIC’s Receivership and Insolvency (E) Task Force for the State of Iowa. He can be reached at [email protected].

Peter Gallanis is President of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). He is generally responsible for financial, legal, strategic, educational, communications, and administrative services and is an active member of the insolvency response working groups for a number of major insolvencies. He can be reached at [email protected].

Stephen W. Schwab is a Partner in DLA Piper LLP (US), resident in the Chicago office. He represents (re)insurance companies, brokers, trade organizations (and formerly reg-ulators and receivers) in disputes, transactions, regulatory and receivership matters throughout the world. He can be reached at [email protected].

Peter A. Scarpato is President of Conflict Resolved, LLC, based in Yardley, PA. He can be reached at peter@conflict–resolved.com.

Francine L. Semaya is a lawyer who concentrates her prac-tice in insurance, reinsurance, insolvency, and national and global insurance regulatory matters in the areas of property, casualty, life, annuity, surety, and financial guaranty. She can be reached at [email protected].

James Veach, a Partner at Mound Cotton Wollan & Greengrass, is a “recovering litigator” and an ARIAS-U.S. certified arbitrator who has tried reinsurance cases to juries. Mr. Veach now focuses his practice on run-off. He can be reached at [email protected].



By the nature of the contracts, life insurance policies,

annuities, and various hybrid products that combine a

little of both, raise different sorts of issues.

On the health side of things it’s a little different. Health receiverships depend on a mix of business in the company. For example, association group health insurance tends to be canceled when a receivership order is entered. But there are other types of health business with characteristics more like life insurance. For example, long-term care, long-term disability, or Medicare supplement policies are often con-tinued in force after liquidation, as is done with life and annuity business.

Given the need to continue in force per the original terms, for virtually all GA-covered life and some health business, you end up with a model for receiverships that – at least in that respect – significantly differs from the model for most P&C and other types of receiverships; this holds true both for the administration of the receivership and the function of the guaranty associations.

Veach: In what other ways do life, health, and long-term care receiverships differ from P&C receiverships?

Gallanis: Well, many things about life and health receiv-erships are similar. The receivers’ core missions are essen-tially identical: to marshal the failed company’s assets, reduce those assets to cash or the equivalent of cash and then to distribute those marshaled cash-equivalent assets to those having valid claims against the receivership estate pursuant to the priority law of the domiciliary state.

But there are issues and concerns that differ on the life and health side that one seldom runs into on the P&C side. We’ve talked about one already — the need to continue business in force — but another is the historical difference in the model for a failed life and annuity writer versus a failed P&C company. The traditional consensus is that most troubled property/casualty companies fail because of adverse development on the liability side of the balance sheet. The company ends up owing more on claims or pay-ing more claims than anticipated when the business was initially underwritten and priced.

But there are issues and concerns that differ on the life

and health side that one seldom runs into on the P&C

side.

Historically, life companies have gone into receiver-ship for other reasons. A failed life insurer’s liabilities were generally predictable within workable tolerances, but the need for a dependable and reliable rate of return on invest-ed assets over a very long period (to cover very long-tail insurance liabilities) puts a company at significant risk for the performance of its valued assets.

So, when life companies fail, traditionally it’s been because significant components on the asset side of the balance sheet turned out to perform much less well than expected when the life business was sold. For example, some companies failed primarily because of bad real estate investments; others failed due to multiple defaults on junk bond holdings; and some had both types of problems.

So the challenges that you confront as a receiver – and indirectly as a guaranty association – for a life company lie primarily in the management and disposition of assets or dealing with a lack of assets, whereas on the P&C side you’re really focused on the run-off of claims that will turn out to cost much more than had originally been projected.

Schwab: On the health side – and we saw this with the Benecorp receivership in Indiana a couple of years ago – because the volume of claims is very high and the need for payment is so immediate, there’s a very quick and hard push to transfer management of the assumed book of busi-ness, the health insurance obligations, either to guaranty associations or to another owner or management company, with or without the receiver’s active cooperation, to ensure continuity of benefits. And it’s usually a more emergent set of circumstances than is presented with a life company.

Veach: Mr. Mumford, could you compare how you fared in your jurisdiction with respect to property and casualty receiverships as opposed to life/heath receiverships?

Mumford: In Iowa, we don’t have a lot of receiverships, but I think Mr. Gallanis hit the nail on the head when he observed that with P&C receiverships, a receiver is more involved in settling the claims than closing up the receiv-ership. On the life side, you’re concerned with long-term contractual obligations and making sure they continue to be satisfied, because in many cases the policyholder can’t go out and find someone to carry on those contractual obligations.

Veach: You used the term “long-term.” Where do you put the long-term care business? In a receivership context, is it on the life/health side? Is it the PC side or is it somewhere in between?

Roundtable: Mumford, Gallanis, and Schwab on Life and A&H Run-Off continued from page 11


the plurality reasoned that absent “clear and unmistak-able evidence to the contrary” in the arbitration clause, only in certain “gateway matters” will a court reverse the presumption of arbitrability and presume that the court – not the arbitrators – should decide a particular arbitration related matter.”8 It also emphasized that this “narrow exception” for certain “gateway” matters does not encompass matters concerning “neither the validity of the arbitration clause nor its applicability to under-lying dispute between the parties.”9 The plurality con-cluded that the question was “not whether the parties wanted a judge or an arbitrator to decide whether they agreed to arbitrate a matter,” but “what kind of arbitra-tion proceeding the parties agreed to.”10

Consolidation of reinsurance arbitrations generally do not raise questions concerning whether the parties agreed to arbitrate or what matters they agreed to arbi-trate. Thus, in light of Howsam and Bazzle, courts have concluded that the question of whether consolidation is appropriate is presumptively a procedural matter for the arbitrators to decide.11

While courts tend to be deferential to this newly sanc-tioned power of arbitration panels, it is not unlimited in scope. Like any other power derived from an agreement to arbitrate, the arbitrators cannot legitimately exercise it against a third party who is not bound by an arbitra-tion clause with the party seeking consolidation. It is not too difficult to imagine a scenario where an arbitra-tion panel might grant a request for consolidation that is so overly broad in terms of the different contracts or parties that it implicates that a court may determine that it exceeds the arbitrators’ powers under Section 10(a)(4) of the FAA.

B. Abitration Act 1996 Section 35 of the Act codifies the English Common

Law rule that arbitrators do not have the power to con-solidate arbitration proceedings unless the parties agree otherwise:

(1) The parties are free to agree:

(a) That the arbitral proceedings shall be consolidated with other arbitral proceedings; or

(b) That concurrent hearings shall be held on such terms as may be agreed.

(2) Unless the parties agree to confer such power on the tribunal, the tribunal has no power to order consoli-dation of proceedings or concurrent hearings.

The agreement can be in the parties’ arbitration clause or by incorporation by reference. For example, the par-ties may agree to authorize the arbitrators to order con-solidation by incorporating by reference or otherwise adopting arbitration rules that empower arbitrators to order consolidated or concurrent proceedings.

English law does not permit courts to order consoli-dation of arbitration proceedings.

The matter must be dealt with by the arbitrators and then only if the parties so agree. If, however, a question arises concerning whether the parties empowered the arbitrators to order consolidated arbitration, then a pre-liminary question would arise as to whether the Panel or a court should decide the question. Ordinarily, the Panel would decide that preliminary question because under the Act, the Panel has the power to determine its own jurisdiction unless otherwise agreed by the parties.

The main purpose of Section 35 of the 1996 Act is merely to draw to the attention of the parties to the option of consolidation or concurrent hearings, and arbitrators may discuss this matter at the outset of the proceedings so that it can be considered, and perhaps resolved by agreement of the parties.

Although a tribunal cannot compel the parties to an arbitration to consolidate arbitrations simply because it is expeditious to do so, it may refer the parties to their duty to do all things necessary for the proper and expeditious conduct of arbitral proceedings (as prescribed by s.41 of the 1996 Act) and recommend that the parties give serious consideration to agreeing

13AIRROC® Matters

continued on next page

Feature Article / Part II

Arbitration Practice and Procedure in U.S. and U.K. Reinsurance Disputes: Is the Grass any Greener on the Other Side of the Pond? These are some of key benefits of being a member:

Voice in addressing and gaining understanding of the run-off industry's

issues and concerns through AIRROC meetings, conferences, seminars, and

publications;

Forum to meet and network with parties managing live and discontinued

books of business, including regulators, solvent run-off practitioners, major

industry groups, and companies working towards claims finality and closure;

Establish or grow business relationships with other parties during AIRROC

meetings which have dedicated scheduled networking time built into the

program to foster meaningful discussions;

Membership meetings and regional meetings which provide valuable

educational sessions on the latest ideas or issues presented by top experts in

the run-off industry;

Cost savings for AIRROC members on registration fees for various industry

conferences including the annual AIRROC/R&Q Commutation and Networking

Event. Our negotiated agreements also include across-the-board discounts for

HB Litigation Conferences (with the exception of the April Roundtable in

Scottsdale), American Conference Institute, Bannister’s Insurance Run-Off

Newsletter and discounts on most RAA products;

AIRROC Matters Newsletter with articles submitted by well respected

industry leaders;

Access to AIRROC's Dispute Resolution Procedure which will help member

companies in finding cost efficient opportunities to resolve disputes;

Creation of active, focused committees to address run-off issues (visit

www.airroc.org for further information on the committee objectives);

Cutting edge website allows members to access AIRROC information

including bylaws, meeting and event schedules, meeting agendas and

registration, educational materials, and other information.

At AIRROC, members' differences are checked at the door. Our approach is to roll

up our sleeves and work with industry peers to research, identify and define

solutions to common problems. Most often, in the insurance/reinsurance

industry, solutions are found through the establishment of meaningful

communications and commercial relationships. AIRROC helps this process

happen more quickly and effectively.

If you are not a Member, we encourage you to become one and start to enjoy the many benefits of this fast growing organization.

All inquiries can be addressed to www.airroc.org.

AIRROC Membership’s ValueAIRROC (The Association of Insurance &

Reinsurance Run-Off Companies) is a

viable and growing organization of

Insurance and Reinsurance Companies

that share the common bond of having

run-off or legacy business in their

portfolio. AIRROC was established in

December 2004 and we currently have

59 member companies that are listed

on www.airroc.org.

The worldwide run-off industry

encompasses roughly $500+ billion in

liabilities, according to various

published estimates. AIRROC's

membership includes companies with

discontinued lines of business,

companies in solvent run-off, and

companies under a regulatory order or

receivership, all of which have common

issues and concerns.

Addressing these business issues and

interests is the primary objective of

AIRROC, and one tied closely to its

Mission Statement.

AIRROC’s Mission Statement

The mission of the Association is to

promote and represent the common

interests of insurance and reinsurance

companies with legacy business. The

Association's objectives will include

improving professional and managerial

standards and practices and enhancing

knowledge and communications within

and outside of the run-off industry.

Being a part of AIRROC provides

members with value added proposi-

tions and the ability to be part of an

organization that has been one of the

fastest growing in the insurance/

reinsurance industry.

Why Join AIRROC?

14 AIRROC® Matters 14 AIRROC® Matters Summer / Fall 2010


On the life side, you’re concerned with long-term

contractual obligations and making sure they

continue to be satisfied, because in many cases the

policyholder can’t go out and find someone to carry on

those contractual obligations.

Mumford: I think it’s on the life side. Certainly, the life and health guaranty associations cover long-term care. In some states, though, I think long-term care is on the P&C side also. Mr. Gallanis, maybe you have a better feel for this than I do.

Gallanis: I don’t know of any company that writes long term care under a P&C license.

Semaya: I’m not aware of any either.

Gallanis: Yes, thank you. As far as I know the business is all on the life and health side of the industry and is reported as health business. But as with some of the other types of health business that I mentioned before where coverage tends to be continued after liquidation, long-term care business has a long tail and it tends not to be canceled upon liquidation, at least within guaranty association coverage limits.

Schwab: I have recently noticed life insurers’ investments or participation in derivatives contracts. Some derivatives contract terms have appeared in a template format pur-suant to opinions and actions taken by the International Swaps and Derivatives Association, ISDA for short.

Many ISDA contracts have something called automatic early termination provisions designed to ensure that in the event of the insolvency of an insurance company counterparty, the other counterparties can deem their contract terminated. The parties then engage in netting, which in receivership circles is referred to as setoffs, and there is an immediate cessation of the contractual relationship between the ISDA counterparties and the insurer.

Given the number of derivatives transactions and what we’ve learned recently in New York, do these derivatives make life insurance company receiverships a bit different from an asset management perspective?

Many ISDA contracts have something called automatic

early termination provisions designed to ensure that in

the event of the insolvency of an insurance company

counterparty, the other counterparties can deem their

contract terminated.

Gallanis: I’ve heard that contention. An interesting thing is that at NOLHGA we are involved in every significant life insurance solvency. And so far we haven’t encountered one – at least in the past eleven years – where derivative exposure or performance was a material issue. I suspect that what Mr. Schwab is saying is absolutely true with respect to the profile of at least some larger life companies, although I suspect derivative usage is entirely limited to traditional hedging functions. We’ve been very fortunate, though, in that there have not been any recent major life company failures, so I haven’t seen that problem on the autopsy table, so to speak.

Again, in conversations I’ve had with CEOs and CFOs of large life companies, I’ve been advised that those com-panies tend not to be in the business of issuing deriva-tives contacts, though they do enter into them to hedge investment exposure in certain parts of their portfolio. But I imagine that the fact that such contracts tend to be used as conventional hedges wouldn’t make them any less com-plicated to address in a liquidation.

Semaya: Peter, why haven’t there been any major life insolvencies? With the type of investments life companies had when the economic crisis and market crash hit, we did expect to see some life insurance insolvencies, if not at least troubled companies. And it appears that that has not happened, at least on the surface. Can you, or maybe Jim, explain to us why you think that is the case?

Mumford: When the economic crisis hit we started to carefully watch the industry. There was a lot of discussion at the NAIC about accounting practices. Because some companies were able to get permitted practices to help them over the hump, we avoided more trouble than actually happened.

At the same time, there are so many regulators watching companies and there are investment laws regulating what they can invest in and what they must post in reserves, so there is more control in the insurance industry than on the banking side. I fully expected the effect to be felt but there would be a lag. And I think that’s been proven true.

Gallanis: One reason it didn’t happen is that the reac-tion of the regulatory community in the wake of the last wave of life insolvencies really had a very positive impact on developments within the life companies.

The development of risk-based capital standards in the 1990’s, to some extent the accreditation program, and the development of much more sophisticated tools to moni-tor exposure, both on the asset side and the liability side,



15

AIRROC/R&QCommutation &Networking Event

For more information and online registration, visit www.airroc.org (Association of Insurance

Meet with an expected 500 worldwide delegates to resolve issues, further commutation discussions, pursue reinsurance recoveries and network with industry principals mixed with entertainment.

AIRROC/R&Q Opening Dinner October 18

Education program October 18 presented by HB Litigation Conferences (CLE credits)

October 18 - 20, 2010 Hilton East Brunswick

Art Coleman of Citadel Re never stops! He has provided excellent regional education sessions, the most recent on June 17 in Hartford, CT. His article in this issue will explain its success.

Remember to visit our website on a regular basis to see what’s going on. As I mentioned in my last arti-cle, the AIRROC Board of Directors and Officers met in early May to set their strategy for AIRROC moving forward. This issue will include an article from our Chairman, Jonathan Rosen, setting forth the changes, mostly subtle, for AIRROC’s future. The board continuously considers where we are, what we should be and where we are going. We have been so successful but need to consider how to remain flying!

We hope that you enjoy our new, more usable website with better accessibility tabs.

So, how may we help you? AIRROC Matters.™

Ms. Getty has been active in the insurance/reinsurance industry for over forty years, her keen experience in reinsurance claims, both inwards and outwards, harking back to 1972 when she began her experience in that sector of the industry with Berkshire Hathaway/National Indemnity Re. Trish has been employed in most fashions of the reinsurance industry, the majority as reinsurance claims manager, which led her to AIRROC and understanding its members’ his-tories and today’s needs. Trish read-ily recognizes the great value that AIRROC brings to its members at such a crucial time in the worldwide run-off industry. She can be reached at [email protected].

Message from CEO and Executive Director How May We Help You? continued from page 1



Education Session Summaries, May 13, 2010

Welcome and Opening Remarks

AIRROC Dispute Resolution Update By James Veach

Michael Zeller (Chief Reinsurance Compliance Officer, AIG, and Chair of the AIRROC Small Claims Task Force) led off the May 13th meet-

ing with an open-mike discussion of AIRROC’s new Dispute Resolution Procedures (DRP). Larry Schiffer (Dewey & LeBoeuf) reported that the DRP was dis-cussed at a C5 Claims Conference in London on April 27-28, 2010. See http://www.c5-online.com/reinsclaims.htm. The DRP was also covered on May 5, 2010 dur-ing the ARIAS Spring Conference then during an April American Conference Institute program on Reinsurance Agreements held in New York City. See http://www.americanconference.com/ReAgreements.htm.

But the best evidence of DRP effectiveness came from two satisfied users. Sue Grondine (R&Q) and Marianne Petillo (ROM) recently submitted a dispute to a single arbitrator using the DRP. Ms. Petillo could not join us on May 13th, but Ms. Grondine reported that R&Q and

ROM agreed to arbitrate a $200,000 dispute that turned

on a single issue.

The parties had been exchanging correspondence for some time before resorting to the DRP and had fleshed out the facts and issues. The parties appointed an AIRROC approved/ ARIAS-U.S. certified arbitrator who agreed on the DRP’s hourly rates and a $2,000 retainer. Having already exchanged materials relating to the dis-puted claim, the parties agreed to set out their positions in letter briefs, submitted agreed documents/exhibits, and waived additional discovery.

The DRP arbitrator provided his order/decision with-in two weeks after receiving the parties’ briefs and agreed documents. (The DRP arbitrator also returned some of the $2,000 retainer.) R&Q used in-house attorneys to set out its position. ROM hired outside counsel.

Ms. Grondine set out some of the reasons that the DRP worked so well in this case:

1. the issue in dispute “tended towards the black and white”;

2. the parties agreed that the arbitrator’s decision would be confidential and the parties further agreed that the arbitrator’s decision would not surface as precedent in any other proceeding (or in any of the parties’ other dealings); and

3. the parties saw the DRP as an opportunity for a “one-off ” solution that would allow them to continue work-ing together to resolve other matters.

Mr. Zeller concluded his discussion by pointing out that AIRROC had learned of other DRP “near-misses,” but that the smooth takeoff and landing on the DRP’s maiden flight should generate even more interest in the DRP. Anticipating such interest, AIRROC has printed an “Expedited Arbitration Dispute Resolution Procedures” pamphlet, copies of which were distributed during the May 13th session, and a copy of which may be found on the AIRROC.org website.

Left: Michael Zeller (AIG), Sue Grondine (R&Q) and Jeff Mace, AIRROC Legal Counsel (Dewey & LeBoeuf)

Left: Dewey & LeBoeuf ’s Larry Schiffer and AIRROC Chair Jonathan Rosen


17

Actuarial Committee UpdateBy Keith Kaplan

At the May 2010 AIRROC Membership meeting, Actuarial Committee Vice-Chair Steve Herman led a presentation

describing initiatives under consideration by this new committee, and sought audience feed-back in order that the committee may proceed in a manner consistent with providing the greatest benefit for AIRROC’s members.

The Actuarial Committee was sanctioned by AIRROC’s Board last July with the following mission statement: To develop and disseminate educational information on actuarial issues relevant to run-off and receivership. Its initial objectives include (1) identifying, sharing and cri-tiquing actuarial approaches appropriate for commuting run-off books of business; (2) developing and sharing actuarial information useful for expense management; and (3) developing and sharing actuarial information to assist in the management of financial results.

The committee held its first meeting at last year’s rendezvous in New Jersey where it identified two major initiatives: Data Collection/Analysis and Actuarial Workshops on Run-Off. Corresponding subcommittees were established to pursue each of these initiatives.

The Data Subcommittee is chaired by Tracie Pencak and includes Ernest Wilson, Steve Goldberg and Steve Herman. The subcommittee seeks to develop benchmarks useful for AIRROC members by collecting data on run-offs. Some of the metrics might include comparisons with

ongoing operations for impact of changes or differences in reinsurer relationships, case reserving philosophy, reserve improvement or deterioration, claim handling, investment strategies, expense categorization (i.e. general expense as ULAE), cost measurements, staffing requirements, and time horizons by line of business.

In seeking feedback, the audience response was over-whelmingly favorable to the general notion of the com-mittee conducting such research. However, when the audience was polled on whether they would be willing to support such research by sharing their own data (even on a limited, blind basis to a neutral data consolidator) the feedback was overwhelmingly negative. In particular, some commented that companies which acquire run-off companies will be hurt by supplying information for their business as it would only result in providing useful infor-mation for others which will make it more difficult to acquire companies. Ultimately, the Data Subcommittee was asked to rethink this a bit and perhaps attempt a very simple survey as a starting point. An example offered by the audience was discount rates on commutations. Accordingly, the subcommittee anticipates sending out a short Zoomerang survey concerning commutation prac-tices in early fall.

The Workshop Subcommittee is chaired by Jason Russ and includes Betty Barrow, Steve Herman, Jim Fletcher, Letitia Saylor and Steve Talley. They have identified several topics such as actuarial issues in commutations, run-off lifecycles, and actuarial considerations in run-off. The subcommittee plans to line up qualified speakers to present these and similar topics at future AIRROC meetings as well as to actuarial organizations. Through these presentations, the Actuarial Committee hopes to share relevant and interesting ideas and viewpoints that AIRROC’s members will find valuable.

Left: Keith Kaplan, AIRROC Board member (Reliance), Steve Herman, CNA

Left: Diane Myers (Reliance), Bob Sirois (CNA), participants



Education Session Summaries, May 13, 2010

The Longest Journey Starts with a Single StepBy Julius Bannister

If not Confucius, I believe it was the arch tyrant, Chairman Mao who, in one of his more philosophi-cal moments stated that “the longest journey starts

with a single step”.

So, in 1985, with the most rudimentary of PC’s on my desk, I started to collect data on insurers that had pre-viously been active underwriters who were now in run-off. That first day, globally, we identified more than 100 such property-casualty companies in run-off. The list was revisted over the years, adding an obscure insurer from Nigeria or Panama, or perhaps large billion dollar com-panies that had come to the end of the road.

An invitation to visit New York to address a meeting of AIRROC (13th May) was a welcome addition to my travel schedules and one at which I could draw some conclu-sions from my multi-decade research.

To quantify insurance run-off has always been diffi-cult as, with no surprises, many are reluctant to trumpet their corporate demise, their move into run-off. The lack of official government statistics is often breathtaking, so good old fashioned detective work has to come into play.

In the UK, the last quarter of the 20th Century saw a larger number of insurers move into run-off than ever before. This included many Lloyd’s Syndicates, and the establishment of Equitas to consolidate the old year lia-bilities of Lloyd’s, now passed into the hands of Berkshire Hathaway. The Company market in London was also in disarray (KWELM being a major example) and currently we compile an annual report on 239 UK property-casualty run-offs.

There is not room to encompass the full survey within these pages, but some of the global trends noted include:

Last 25 years Against a universe of around 15,000 property-casu-

alty active insurers worldwide

Reinsurers 1980s – 57 ceased 1990s – 120 ceased 2000-2009 – 73 went into run-off

Geographical analysis (last 25 years) location of companies 40% – North America 36% – Europe 19% – Caribbean & Bermuda 5% – Rest of World

Preliminary research into inactive property-casualty insurers in the United States found 1,161 companies that were

31.4% ~ Inactive – Merged or combined into another company

21.1% ~ Inactive – Voluntarily out of business 17.4% ~ Active – Being liquidated or has been

liquidated 14.3% ~ Inactive – Filing requirements have

been waived 6.1% ~ Inactive P&C Group 4.8% ~ Inactive – Charter is inactive 3.7% ~ Rehabilitation, permanent or temporarily

in receivership 0.7% ~ Inactive – Estate has closed 0.4% ~ Conservatorship

We are currently writing a new, unique, research report “The US Run-Off Yearbook 2010” for publica-tion this summer. Wish us luck!

Julius Bannister (Insurance Run-Offs Newsletter)

Jonathan Bank (Locke Lord Bissell & Liddell LLP)


19

Annette Kurtzweil (Swiss Re) and Martin Weymann (Swiss Re)

Identifying and Assessing Emerging Risks — in a complex and interconnected worldBy Martin Weymann and Annette Kurtzweil

On 13 May of this year, Martin Weymann and Annette Kurtzweil led a discussion in New York on emerging risks. While difficult to quantify,

these risks may nevertheless have a major impact on the insurance industry. How to identify, assess and manage such risks in an ever-more complex and interconnected world was the main theme of the presentation.

Key drivers of the changing risk landscape include new economic, technological, socio-political and envi-ronmental developments as well as the interdependencies between them. Taken together, these factors can generate an increasing accumulation of risk. In addition, there is the changing business environment to consider: liability and regulatory regimes continue to evolve, stakeholder expectations are strengthening and risk perception shift-ing. Reducing uncertainty, and thus helping to diminish the volatility of business results, is of the essence.

The presentation first addressed past events and unfolding risks, highlighting the common denominators of emerging risks such as high uncertainty and differ-ing risk perceptions among stakeholders. Secondly, there was discussion of some significant current emerging risks such as nanotechnology, composite materials and obe-sity. The topic of infrastructure or supply chain risks due to volcanic ash was also touched on. Thirdly, participants

were given an overview of Swiss Re’s structured SONAR approach to emerging risk (Systematic Observation of Notions Associated with Risks). Swiss Re has a long his-tory of focusing on these topics. The topic of climate change, for example, was identified as an emerging risk almost 20 years ago. Swiss Re’s strategic risk partnerships including the World Economic Forum, the Global Risk Network and the CRO Forum Emerging Risk Initiative were also outlined in the presentation.

With the vast experience in the room, Martin Weymann asked the audience to cast their minds back 20 years and think about what the hot topics were then. The audience was then challenged to ‘think the unthink-able’ and imagine scenarios of potential future claims. Discussion ranged from the non-issues around Y2K and debate of sunset clauses in agreements, to more current discussion on pandemics and the potentially injurious impact of excessive cell phone usage.

Overall, emerging risks are constantly evolving and it has to be recognized that at least some of these will likely be the run-off claims of tomorrow.

Left to right: Henry McGrier (Allstate), Karen Amos, AIRROC Board member & Education Co-Chair (Resolute Mgmt.) & Trish Getty (AIRROC CEO & Executive Director), Dan Drago (Brandywine), Jim Grajewski (Enstar)



Legislative Update

Norris Clark

21

By Norris Clark

A recent change in statutory accounting principles (“SAP”) treatment for certain books of

run-off property or casualty business may create new opportunities for run-off consolidators. The new account-ing treatment provides that the ceding

insurer may use prospective accounting for the reinsur-ance transfer of a run-off book provided that a number of criteria, as comprehensively outlined in new provisions contained in SSAP No. 62R on Property and Casualty Reinsurance, are met.

SAP prospective reinsurance accounting, for the bal-ance sheet, provides that amounts recoverable on losses from reinsurers are credited against loss reserves, thereby reducing reserves to a net of reinsurance amount (GAAP requires losses to be recorded gross with an offsetting asset for amounts recoverable from reinsurers), and increasing unassigned funds if the transaction results in a gain. On the income statement, SAP prospective rein-surance accounting provides that incurred losses may be reduced, thereby impacting current year income.

Before the recent amendment to the provisions of SSAP No. 62R (previously SSAP No. 62), if an insurer ceded incurred losses on a run-off book of business, SAP required that reinsurance be accounted for as retroactive reinsurance. SAP retroactive reinsurance

accounting provides that loss reserves are to remain recorded gross of reinsurance with an offsetting contra-liability for retroactive reinsurance recoverable, and that any surplus gain from the transaction be recorded as special segregated surplus, not unassigned funds. More importantly, no gains associated with the reinsurance may be recorded in income until the actual retroactive reinsurance recovered exceeds the consideration paid. Without an effect on income, an insurer in run-off was essentially precluded from making any dividends from the funds freed up by a retroactive reinsurance transaction, and hence, may have seen little benefit in selling off its run-off book through a reinsurance transaction.

A recent change in statutory accounting principles

(“SAP”) treatment for certain books of run-off property

or casualty business may create new opportunities for

run-off consolidators.

With the new prospective reinsurance SAP account-ing treatment, insurers in run-off, or with books of busi-ness in run-off, may now have more incentive to sell those books.

Norris W. Clark is a Financial and Regulatory Specialist in the LA office of Locke Lord Bissell & Liddell LLP and can be reached at [email protected].

Reinsurance According to SSAP No. 62R


Kaplan, The Longest Journey Starts with a Single Step, Julian Bannister’s assessment of trends in the run-off market, and last but not least, Martin Weymann and Annette Kurtzweil’s Identifying and Assessing Emerging Risks in a Complex and Interconnected World, cites new economic, technological, socio-political and environmental developments as key drivers of emerging risks. And because “its all about the numbers,” Norris Clark’s “Reinsurance According to SSAP No. 62R” gives us a heads up on a recent change in the SAP treatment of P&C run-off business that may offer new opportunities. Not to leave out the

lawyers, Timothy Stalker and Darren Harrison grace the Legalese section with their piece The Common Interest Doctrine, offering those of us facing litigated disputes an overview of emerging case law in this critical area that affects the discoverability of certain legal documents.

Topped off with our Present Value page and KPMG’s Policyholder Support Update and you have one for the ages! Enjoy the breadth and scope of this edition and remember.

Let us hear from you.

Notes from Editor and Vice Chair Sometimes Size DOES Matter from page 3



22 AIRROC® Matters AIRROC® Matters 22 AIRROC® Matters Summer / Fall 2010

Run-Off News

Scottish Lion sold to Berkshire HathawayAudley Gilroy Capital Management (AGICM) has sold Scottish Lion to Berkshire Hathaway subsid-iary National Indemnity. Scottish Lion, whose sol-vent scheme was the subject of an appeal to the Scottish Court of Session earlier this year, was ac-quired by AGICM in 2008, and has been in run-off since 1994. A date for the second sanction hearing for the scheme has yet to be finalized.

Hogan Lovells merger completedThe merger of Washington, D.C.-based Hogan & Hartson and London-based Lovells came into effect on 1 May 2010. Two years in the making, Hogan Lovells forms one of the largest law firms in the United States. With about 2,500 attorneys in more than 40 offices around the world, Hogan Lovells will be led by former Hogan & Hartson chairman, Warren Gorrell, and former Lovells managing partner, David Harris.

DARAG buys majority share in HVAGBerlin-based specialised insurer DARAG has acquired the majority (70%) shareholding in HVAG (Hamburger Versicherungs-Aktiengesellschaft) from the principal shareholder Mitsuibussan Insurance Co. Ltd, a subsidiary of Mitsui & Co. Hamburg-based HVAG was active in the German market from 1999 to 2008 as a broker insurer in the industry and transport insurance business. At the end of 2008, the company ceased underwriting new business and has since been entirely in run-off.

Mark Peters has joined Edwards Angell Palmer & Dodge as a partner in the Insurance & Reinsurance DepartmentPeters most recently headed the New York Liquidation Bureau and was previously the chief of the New York Attorney General’s Public Integrity Unit. His practice will focus on insurer insolvency and runoff as well as regulatory and enforcement issues. Peters graduated from Brown University and the University of Michigan Law School.

KPMG appointed to FirstCityKPMG has been appointed administrator of Lloyd’s broker FirstCity Insur-ance Group Limited and its subsidiary company, FirstCity Partnership Ltd. David Costley-Wood and Michael Walker, restruc-turing partners at KPMG, were appointed joint ad-ministrators for the run-off of the inactive busi-ness on May 20, 2010 by the companies’ directors. FirstCity’s active insurance business was sold to Ar-thur J Gallagher (UK) Ltd in April 2010.

PeopleFrancis Mackie has joined law firm Edwards An-gell Palmer & Dodge LLP (EAPD) as a partner in the firm’s London office. He was previously a partner with Dewey & LeBoeuf in London.

If you are aware of any items that may qualify for inclusion in the next “Present Value”; upcoming events, comments or developments that have, or could impact our membership; please email potential items of interest to Nigel Curtis of the Publications Committee at [email protected].

October 11-14, 2010: National Association of Professional Surplus Lines Offices (NAPSLO) Annual Convention, Atlanta, GA. See www.napslo.org.

October 18-20, 2010: AIRROC / R&Q Commutation & Networking Event, East Brunswick, NJ. See www.airroc.org for details.

October 24-28, 2009: Baden-Baden Reinsurance Meeting, Germany. See www.badendirectory.com.

Present Value By Nigel Curtis

518 Township Line Rd. Suite 300 Blue Bell, PA 19422

Michael J. Kurtis

[email protected]

10 Fenchurch Avenue London EC3M 5BN

Tim O’Brien

+44 020 7663 [email protected]

120 Broadway Suite 955 New York, NY 10271

Francine L. Semaya

[email protected]

For more information on our firm and for a listing of our international clients, please visit our website at www.nldhlaw.com.



dramatically improved the early warning systems for com-panies, regulators, rating agencies, and counterparties. In addition, the institution of interstate solvency regulation peer review at the NAIC has made, in my opinion, an enormous positive difference in improving the oversight of, and the development of, remediation plans for troubled companies.

…the reaction of the regulatory community in the

wake of the last wave of life insolvencies really had a

very positive impact on developments within the life

companies.

All these changes also prompted regulators to intervene earlier than with other types of financial services companies – at a point when these potentially troubled companies still had enough assets and enterprise value to make a workout possible before receivership proceedings were required.

I don’t always agree with regulators on every point; nevertheless, I would say that the work done within the NAIC and in several prominent insurance departments on risk-based capital really helped, as did the growing sophistication of actuaries.

The insurance rating companies have done a pretty good job. Finally, though when we hear the word “deriva-tives” today it’s often in a negative light, by and large deriv-atives used for traditional hedging purposes have been more of a plus than a minus for life insurance companies. I suspect that a lot of companies that might have had bigger problems than those that actually did develop precisely because they employed intelligent hedging programs.

Mumford: The early 1990’s did give regulators a push to come up with the accreditation process for one thing, but I also think that the risk-based capital process has been very helpful in the early system. Let’s also not forget that solvency issues didn’t arise as quickly as they did for banks. That gave everybody some time to work through the solutions.

Scarpato: We mentioned a few times the early 1990’s and the lack of a major meltdown. But Executive Life of New York has been in rehab since the early 1990’s or maybe even earlier.

Gallanis: Nineteen ninety-one.

Scarpato: Thank you. Why hasn’t Executive Life’s reha-bilitator been able to close out that estate? Is there anything

that could have been done or should have been done dif-ferently? Is there some sort of alternative mechanism other than rehabilitation that might have worked better, or is this just the way it works?

Gallanis: Having worked on some successful rehabili-tations, some of them with Stephen, I’m not convinced that a lengthy rehabilitation is necessarily a bad thing. Properly designed and executed, it may in fact provide the best possible outcome for stakeholders. The plan that was put in place and approved by the New York courts for ELNY in 1992 is, by its terms, a judicially-supervised run-off. Executive Life’s regulators intended that it stay in a judicially-supervised run-off until all of its liabilities had matured, and they’re scheduled to continue for the bal-ance of this century. It’s a very, very long-term run-off.

…by and large derivatives used for traditional hedging

purposes have been more of a plus than a minus for

life insurance companies.

The fact that a rehabilitation is still going on after some years – in and of itself – isn’t reflective of any issues not contemplated when the plan was originally approved. Some people simply believe that rehabilitations should come to an end by some arbitrary deadline, whether or not the business of the rehabilitation is finished. I’ve never believed that a rehabilitation necessarily had to be com-pleted by an arbitrary deadline. The key should be, does it continue to do the job that was expected when the rehab plan was approved? If so, it should be continued. If not, it should be converted to a liquidation as soon as it’s clear that the rehabilitation has fallen irretrievably off the rails.

Because it’s a run-off, and unless you convert it to a liq-uidation and can establish a bar date to cut off the liabili-ties, you don’t close it until the liabilities have expired by their terms.

Veach: The NAIC recently published a White Paper on Alternative Mechanisms to address troubled companies, but limited the paper to property casualty insurers. Wouldn’t alternative mechanisms work for life/health entities, par-ticularly loss portfolio transfers?

Gallanis: Well, loss portfolio transfers are done all the time. Essentially two basic techniques are used in life receiverships by receivers and the guaranty fund system. One is what we call an “assumption reinsurance transac-tion,” where in-force business is moved from the troubled


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company to a healthy company that agrees to take it on per its original terms.

And in exchange for assuming that liability, the assum-ing entity takes some combination of assets from the estate of the failed company plus an additional payment from the guaranty fund system. That’s one way that we provide the continuing coverage that has been promised to consumers of failed life companies when they acquired their contracts.

The other method is to run off the business over a period of time, either within the receivership, by using a TPA, or in some sort of special purpose vehicle. Here again, the assets of the failed company, plus payments from the guaranty fund system, are provided – but only when needed over time – to make payments on life, annu-ity, or health contracts as they come due under the terms of the original contracts.

In response to your question about why that NAIC white paper didn’t address the life and health industry, I don’t know. I wasn’t involved in those conversations, but I would say a possibility is that the authors recognized that we already have a system now in place that permits liabil-ity transfers.

If the company is solvent and a subsidy from the

guaranty fund system is not necessary, you don’t need

either a receivership or a statutory runoff process.

When the company is insolvent, we handle those trans-fers through the liquidation process, with the guaranty sys-tem making whatever subsidizing payment is necessary to support the transfer. If the company is solvent and a subsidy from the guaranty fund system is not necessary, you don’t need either a receivership or a statutory runoff process.

Mumford: I think if you read the paper, one thing that comes out is the contractual obligation that a policyholder can’t be lessened by any alternate mechanism. Based on the nature of the long-term commitments, contractual obligation on the life side is the only way you could ever close an estate.

You can’t run it off and you must find somebody to take over those obligations and carry out those obliga-tions. Correct me if I’m wrong, but in the insolvencies the guaranty associations have handled, the blocks of business could always be sold to some other company, maybe with a subsidy from the guaranty associations. We’ve always

been able to find somebody to purchase those blocks of business.

Gallanis: By and large, for life and annuity writers, that is the standard preferred approach.

For health companies, it’s a little different for a lot of reasons, including the reason Mr. Schwab mentioned earlier, which is that you have this immediacy problem – pending health claims won’t wait, and the sheer number of such claims requires a heavy, front-end investment in claims administration and payment. In addition, for many troubled health companies, both the liabilities and the assets of the company are quite short-tailed, and there’s not a lot of time to think about how to develop a long-term plan.

Schwab: Going back to Mr. Veach’s question, I pulled the White Paper and sure enough right there at the top of the second page it says it’s mainly intended for P&C com-panies because of the “unique characteristics” of life and

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health and other kinds of business. And the point I wanted to make is that when you’re dealing with a life or a health insurer, most times the insured event hasn’t happened yet.

Semaya: Except maybe on the health side.

Schwab: Certainly on the health side you may be right. For example, there might have been an admission on day one before the receivership starts, but it’s an ongo-ing admission. And it continues sometimes for weeks or months after the receivership event occurs.

Or in the case of an annuity, there is a stream of income that is supposed to be paid out over time for example, on a fixed annuity and forming part of a retirement program or benefit. That’s a fundamental difference between the two kinds of receiverships. You can fix the liabilities of a P&C company. I’m not sure that that applies in the life and health context.

Gallanis: You can value it, but you really can’t fix it in a way that answers all the practical questions. And when I say value it, you can value it for purposes of, for example, estab-lishing a claims valuation at a gross company-wide level or a book-wide level. But in the end you know that if you’re really going to honor all the individual contracts that have been made – the contractual promises made to each indi-vidual contract owner – you’re going to have to respond to the demands of each owner as his circumstances develop.

There’s just no way to fix that arbitrarily as of the liqui-dation date. Someone who is owed annuity payments may live 1 year or may live 100 years. But that person’s annu-ity promises him whatever he or she is entitled to get, and within statutory limits of coverage, our system is set up to honor that promise.

Mumford: Yes, I agree with you, Peter. The valuation is going to help some and not help others. The whole idea is to look at the individual contractual obligation and make sure that individual policyholder gets what’s due him. And if you have some sort of valuation, it’s not going to be fair to everybody.

The valuation is going to help some and not help others.

The whole idea is to look at the individual contractual

obligation and make sure that individual policyholder

gets what’s due him. And if you have some sort of

valuation, it’s not going to be fair to everybody.

Schwab: In answer to your question, what’s referred to as the “unique characteristics” of life and health business is a fundamental difference in the nature of the obligation.

Veach: Do you think that the property and casualty receiv-ers should learn something from the life side in trying to find opportunities to sell off lines of business or books of business rather than simply run it out for 20 or 30 years?

Gallanis: At an intellectual level, it’s always struck me that there are opportunities of the type that you just described that could be pursued on the P&C side. In theory it should be possible for a well-advised and well-represented receiv-er to do what’s done routinely on the life side, which is to put together an offering package describing the liabilities to be moved, and then an auction could be conducted among prospective acquirers who would bid for the liabili-ties and any associated reinsurance recoveries on the basis of some sort of uniform (for that deal) fixed or contingent percentage return to the insureds that would facilitate bid comparisons. Receivers could set up a due diligence room, either physically or virtually, so that prospective acquirers could kick the tires and see what’s in the claims and rein-surance books.

In theory it ought to work. In practice, I’m not aware of many U.S. deals where it has worked that way. One reason may be the size of the information processing and evalu-ation investment that a potential acquirer would have to make to take on a block of P&C business. There might be room for some sort of intermediary to play the role of pre-gathering the liability and reinsurance data, so that due diligence costs might be lowered for prospective bidders.

Even with that, though, it would be a challenge to con-duct for P&C insolvencies the type of auction process routinely done on the life side, where the liabilities being transferred are relatively homogenous and underwriting can be evaluated on a gross basis, rather than claim expo-sure (and reinsurance recoveries) needing to be evaluated on a claim-by-claim basis. But I would think that at least some types of P&C business have enough homogeneity and standardization to make certain books susceptible to this type of an approach.

Semaya: Mr. Schwab, I know you wish to talk about the Ambac receivership of the segregated accounts, and relate that back to a life and health receivership or runoff. What makes the Ambac rehabilitation so unique? And do you think that this type of a rehabilitation will change the direc-tion of how a life insurance company runoff or receivership may be handled?

Schwab: The Wisconsin Insurance Code provides that there are two types of mandatory segregated (aka “sepa-rate”) accounts: One for mortgage guaranty insurance and


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29


the other for life insurance, including fixed and variable annuities. That same provision, Section 611.24, has a delinquency proceedings subsection which says that each segregated account shall be deemed an insurer within the meaning of that definition in Wisconsin’s rehabilitation and liquidation section of the Insurance Code.

The notes to section 611.24 carefully point out that in respect of the delinquency proceedings – while it is not normally the case that asset value might lag developing liabilities – it would be more likely that you would need to put a segregated account into receivership if there were some fraud or pilfering of the segregated account.

…it would be a challenge to conduct for P&C

insolvencies the type of auction process routinely done

on the life side, where the liabilities being transferred

are relatively homogenous and underwriting can be

evaluated on a gross basis, rather than claim exposure

(and reinsurance recoveries) needing to be evaluated

on a claim-by-claim basis

What you see in Ambac is a 2010 reiteration, if you will, of something that was tried in Wisconsin back in October of 2006 with Northwestern National Insurance Company, where a segregated account was deemed an insurer and placed into receivership.

The interesting thing about Ambac is that it’s not a life or health insurer; it’s a municipal bond insurer that also had a mortgage guaranty division. A segregated account of many billions of dollars has been put into receivership and deemed to be an insurer for purposes of the Insurance Code receivership provisions in Wisconsin.

That was all done – pursuant to action of the board taken at the Ambac level working with the receiver – on March 24, 2010. So this is not a longstanding segregated account, but rather a segregated account that was cre-ated by the regulator in anticipation of a rehabilitation receivership proceeding. This is unique for at least three reasons.

First, not only was all of this action taken quickly, and for a lot of very good public safety and protection rea-sons, but it involved an injunction order entered on the filing date of the petition for rehabilitation. That injunc-tion order prohibits the exercise of any of those automatic early termination and netting provisions that I referred to earlier in respect of derivatives transactions. There are a lot of bank counterparties involved in the Ambac receiv-

ership. This step caused a lot of consternation within the derivates marketplace.

Second, a brief filed in support of the injunction motion declared, one, that “counterparties’ contracts are executory and therefore cannot be terminated due to a commencement of a reorganization proceeding,” and, two, that the Rehabilitator’s power to assume executory obligations “revers[es] acceleration and reinstat[es] the maturity of the claims as they existed before this filing.” These declarations raise the issue whether the automatic early termination provisions inserted into derivatives con-tracts are enforceable and regulatory compliant. That’s a very important issue that is just in its early stages.

Third, to try to get his arms around the receivership, the Wisconsin Commissioner, Dilweg, acting as receiver told the court that he’ll give everybody 90 days up until about June 22 or 24 to file objections to the proposed rehabilitation plan. Further, he made clear in a memo-randum submitted to the court that he doesn’t believe that any third party can make any argument or objection at any time. Indeed, if any party wants to try to exercise their contract rights and respective automatic early ter-mination or netting, the Commissioner wants them held in civil and/or criminal contempt of the injunction order. This is very strong action taken by a receiver.

To bring this discussion full circle, remember that Wisconsin Insurance Code section 611.24 not only applies to mortgage and, in this case, municipal bond insurers, but also to life insurers. I wonder, therefore, whether a regulator working with a troubled life company might someday use the segregated account to develop a rehabilitation runoff of assets and liabilities, like you see in Ambac.

Up until now, segregated accounts have typically been created long before receivership in order to protect credi-tors in the unanticipated event of insolvency. It’s not diffi-cult to envision the Ambac approach being taken in either a life or a health insurance company context, where you have a portfolio of troubled life or health insurance related obligations that are put into a segregated account rather than taking the entire company into receivership.

Up until now, segregated accounts have typically been

created long before receivership in order to protect

creditors in the unanticipated event of insolvency.

Semaya: Steve, I want to step back to one thought that you expressed. You said that there was very strict enforcement,




The Common Interest Doctrine

Timothy W. Stalker is a founding partner of Stalker, Vogrin, Bracken & Frimet. His expertise focuses on complex coverage issues, bad faith, reinsurance arrangements, contractual wordings, claim presentations, and dispute resolution through mediation, arbitration and litigation. Tim is a frequent lecturer and has published numerous articles for the insurance and reinsurance industry. He is an ARIAS certified arbitrator and a member of the Federation of Defense and Corporate Counsel and can be reached at [email protected].

Darren L. Harrison is an attorney in the Pennsylvania office of Stalker, Vogrin, Bracken & Frimet. He has extensive litigation experience and has represented clients through all phases of litigation in both first and third party cases, including trial and appellate practice. He has handled insurance coverage issues in various jurisdictions before both federal and state courts. Mr. Harrison previously served as National Coordinating Counsel for a major insurance company, litigating class actions and complex litigation around the country. He can be reached at [email protected].



legalese

By Timothy W. Stalker & Darren L. Harrison

Introduction

To some extent, the designation that an insurance company, reinsurance company or book

of business is in “run-off ” is a misno-mer, especially from a claim and legal point of view. These so-called “run-off ” companies face the same complex issues as “active” companies. This is particularly true with the contin-ued litigation of long tail or progres-sive claims by policyholders against cedents that are both “active” and in

“run-off.”1 Issues concerning trigger of coverage, allo-cation of loss, number of occurrences and known loss continue to dominate the litigation landscape, especially for “run-off ” books of business.

As such, disputes often arise between the policyholder

and the cedent regarding the production of documents and reports that the cedent has provided to its reinsurer regarding the matter in dispute. Moreover, in the event that the underlying matter is eventually presented to reinsurers, there has been a recent trend toward addi-tional disputes over the reinsurer’s access to underlying coverage counsel’s documents and reports.

This paper provides a broad overview of the evolv-ing case law regarding the common interest doctrine, a doctrine that plays a critical role in determining whether certain documents from counsel are subject to produc-tion or not.2

A General Overview of the Common Interest Doctrine

The common interest doctrine, sometimes referred to as the common interest privilege or joint defense privi-lege, permits parties with a common interest to exchange legal advice or privileged information without waiving the attorney-client privilege. The common interest doc-trine is firmly rooted in the attorney-client privilege. See Katherine Traylor Schaffzin, An Uncertain Privilege: Why the Common Interest Doctrine Does Not Work and How Uniformity Can Fix It, 15 B.U. Pub. Int. L.J., 49, 54-55 (2005). The purpose of the common interest doctrine is to encourage the free flow of information, as well as to enhance the quality of legal advice. Id. Not all jurisdic-tions have accepted the common interest doctrine, and those courts that have recognized it have not applied it uniformly. Id.

The common interest doctrine, sometimes referred

to as the common interest privilege or joint defense

privilege, permits parties with a common interest

to exchange legal advice or privileged information

without waiving the attorney-client privilege.

The common interest doctrine is an exception to the general rule that voluntary disclosure of confidential, privileged material to a third party waives any applicable privilege. See Sokol v. Wyeth, 2008 U.S. Dist. LEXIS 60976 at *15-16 (S.D.N.Y. 2008); In re Commercial Money Ctr.

Timothy W. Stalker

Darren L. Harrison


Inc. v. Equipment Lease Litig., 248 F.R.D. 532, 536 (N.D. Ohio 2008). The common interest doctrine precludes a waiver of the underlying privilege concerning confiden-tial communications between the parties “made in the course of an ongoing common enterprise and intended to further the enterprise,” irrespective of whether actual litigation is in progress. Wyeth, 2008 U.S. Dist. LEXIS 60976 at *15-16. Thus, the common interest doctrine permits the disclosure of a privileged communication without waiver of the privilege, provided that the party claiming an exception to waiver demonstrates that (1) the parties communicating have a common legal, rather than commercial, interest; and (2) the disclosures are made in the course of formulating a common legal strat-egy. Id.; see Bank Brussels Lambert v. Credit Lyonnais, 160 F.R.D. 437, 447 (S.D.N.Y. 1995); Haines v. Liggett Group Inc., 975 F.2d 81, 94 (3d Cir. 1992).

“The need to protect the free flow of information from client to attorney logically exists whenever multiple clients share a common interest about a legal matter.” Wyeth, 2008 U.S. Dist. LEXIS 60976 at *16 (quoting United States v. Schwimmer, 892 F.2d 237, 243-244 (2d. Cir. 1989) cert. denied, 502 U.S. 810 (1991)). The common interest doctrine “is not an independent source of privilege or confidentiality.” Id. (quoting In re Commercial Money Ctr. Inc., 248 F.R.D. at 536). If a communication is not protected by the attorney-client privilege or the attorney work-product doctrine, the common interest doctrine does not apply. Id.

Similarly, the common interest doctrine may be asserted with respect to communications among coun-sel for different parties if the disclosure is (1) made due to actual or anticipated litigation or other adversarial proceedings; (2) for the purposes of furthering a com-mon interest; and (3) in a manner not inconsistent with maintaining confidentiality against adverse parties. See Holland v. Island Creek Corn., 885 F. Supp. 4, 6 (D.D.C. 1995); see also United States. v. Bav State Ambulance, 874 F.2d 20, 28 (lst Cir. 1989); In re Bevill, Bresler & Schulman, 805 F.2d 120, 126 (3d Cir. 1986). It is not necessary for actual litigation to have commenced at the time of the meeting for the privilege to be applicable. See Schwimmer, 892 F.2d at 244; Arkema, Inc. v. Asarco, Inc., 2006 U.S. Dist. LEXIS 44106 (D. Wash. 2006).

Further, it is not necessary for every party’s interest to be identical for the common interest privilege to apply, rather, the parties must have a “common purpose.” See U.S. v. McPartlin, 595 F.2d 1321, 1336-37 (7th Cir. 1979), cert.

denied, 444 U.S. 833 (1979). The question of whether the parties share a “common interest” “must be evaluated as of the time that the confidential information is disclosed.” Holland, 885 F. Supp. at 6. While it is conceivable that the interest could diverge – indeed, that is one reason for separate counsel – the possibility of a future divergence in no respect undermines the privilege. See McPartlin, 595 F.2d at 1336-37.

…it is not necessary for every party’s interest to be

identical for the common interest privilege to apply,

rather, the parties must have a ‘common purpose.’

In Net2Phone, Inc. v. eBay, Inc., 2008 U.S. Dist. LEXIS 50451 at *22 -23 (D.N.J. 2008), the United States District Court in New Jersey affirmed that the common interest doctrine is an application of the joint attorney doctrine. Under the common interest doctrine, although an attor-ney actually represents only one party, there is no waiver of the attorney-client privilege by disclosure of privileged communications to third parties with a “community of interest.” Id. at *23.

The Common Interest Doctrine and the Cedent–Reinsurer Relationship

The common interest doctrine arises in two scenarios vis-à-vis the cedent–reinsurer relationship.

1. Protecting the Cedent’s Reports to Reinsurers from Discovery by Third PartiesSometimes, during coverage or bad faith litigation

between the cedent and its policyholder, the policyhold-er will attempt to obtain documents and reports that the cedent has sent to its reinsurers. The policyholder argues that the cedent breached the attorney-client privilege by sending those documents to third parties, i.e. reinsurers and/or the broker. Cedents often invoke the common interest doctrine to shield the production of these docu-ments. Relatively few courts have addressed this issue, and as the illustrative cases below indicate, the results are mixed.

In Minnesota School Boards Association Insurance Trust v. Employers Insurance Company of Wausau, 183 F.R.D. 627, 630-31, 1999 U.S. Dist. LEXIS 81 (N.D. Ill. 1999), the Northern District of Illinois quashed sub-


31AIRROC® Matters Summer / Fall 2010



legalesepoenas served on a reinsurer and reinsurance broker in a coverage action under an excess insurance policy. MSBAIT argued that Wausau waived the work product privilege by communicating the documents to its rein-surer and its broker. Id. at 631. Wausau argued that it did not waive the work product privilege because the docu-ments from counsel were provided pursuant to a request by interested and concerned reinsurers due to their com-mon interest in evaluating and minimizing the exposure arising from the MSBAIT litigation. Id. Further, Wausau asserted that it produced the privileged documents with the expectation of confidentiality. Id.

MSBAIT countered by arguing that by transmitting the documents to its the broker, Aon, Wausau breached the attorney-client privilege and waived any work prod-uct immunity that might have otherwise protected such documents from disclosure. Id.; see also United States Fire Insurance Company v. General Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280 (S.D.N.Y. 1989). Since the broker/intermediary is merely a conduit for the relay of correspondence to the reinsurer, disclosure of privi-leged information to the broker/intermediary “is consis-tent ‘with the purpose of maintaining secrecy of [privi-leged] information from current or potential adversar-ies.’” MSBAIT, 183 F.R.D. at 631 (quoting Western Fuels Association, Inc. v. Burlington Northern R.R. Co., 102 F.R.D. 201, 203 (D.Wy. 1984)).

Accordingly, the MSBAIT court quashed the subpoe-nas and found the documents were protected by work-product doctrine as they contained mental impressions and opinions on the status of the litigation. The court concluded that the “privilege” was not waived when the documents were provided to the reinsurer and broker because such disclosures were not “inconsistent with the maintenance of secrecy from the disclosing party’s adversary.” Id. (citing American Telephone and Telegraph Company, et al., 642 F.2d 1285, 1299 (D.C. Cir. 1980)).

…whether a third party is successful or not in

obtaining documents from reinsurers and/or cedents

that are otherwise protected by the attorney-client

privilege and/or work product doctrine largely

depends on the specific documents and facts at issue.

However, courts have declined to extend blanket pro-tection. In Bondex International, Inc., et al. v. Hartford Accident and Indemnity Company, 2006 U.S. Dist. LEXIS

6044 at * 6-7 (N.D. Ohio 2006), the court held that a magistrate’s supposition that information about reinsur-ance “may well constitute proprietary information” is not sufficient to establish that information about reinsur-ance is privileged per se. Specifically, in Bondex, Plaintiff requested “[a]ll reinsurance agreements pertaining to the policies Defendants issued to Plaintiffs, and all docu-ments pertaining to any reinsurers’ reserve settings and levels for those policies, and Defendants’ communica-tions with reinsurers relating to the [sic] their respec-tive policies.” Id. The court recognized that such reinsur-ance documents may be privileged, but a privilege log is required before protection would be granted. Id. Further, any claim of privilege could, of course, be disputed and litigated through motion practice.

In summary, whether a third party is successful or not in obtaining documents from reinsurers and/or cedents that are otherwise protected by the attorney-client privi-lege and/or work product doctrine largely depends on the specific documents and facts at issue.

2. The Attorney-Client Privilege and Work Product Doctrine in an Arbitration Context Between Cedents and Reinsurers

A second area in which disputes sometimes arise over documents is where reinsurers seek access to the reports of cedent’s counsel in the underlying coverage actions either pursuant to the access to records provision con-tained in reinsurance agreements or during discovery in an arbitration.

In the arbitration context, arbitration panels have significant latitude in deciding discovery issues. What records are to be produced is a matter within the panel’s discretion since arbitrators have the authority to decide discovery issues. See International Surplus Lines Insurance Company, et al. v. Peoples Insurance Company of China, 1994 U.S. Dist. LEXIS 12929, *10 (N.D. Ill. 1994); Lashco, Inc. v. Erickson, 700 F.Supp. 960, 963 (N.D. Ill. 1988).

Often files of underlying counsel are fought over in reinsurance disputes. Litigants argue for and against pro-duction of documents based upon attorney-client privi-lege issues, as well as the access to records clause con-tained in most reinsurance agreements. Parties seeking documents [alleged by the other side to be privileged] often argue that the privilege has been waived because the documents to be protected were placed at issue in

The Common Interest Doctrine continued from page 31



33

the underlying litigation, not in the current controversy between the cedent and the reinsurer. For example, if a cedent and reinsurer are disputing the reasonableness of the payment or allocation of the loss at issue, and the loss or allocation is based on advice of counsel, then the priv-ilege would arguably be waived. See Constance O’Mara, Dealing with Attorney-Client Privileged or Work Product Documents in Arbitration, 17 ARIAS U.S., No. 1, at 6 (2010); Hearn v. Rhay, 68 F.D.R. 574 (E.D. Wash. 1975) (establishing a three-factor test for the “at issue” doc-trine); North River Ins. Co. v. Philadelphia Reinsurance Corp., 797 F.Supp. 363 (D.N.J. 1992).

In the arbitration context, arbitration panels have

significant latitude in deciding discovery issues. What

records are to be produced is a matter within the

panel’s discretion since arbitrators have the authority

to decide discovery issues.

In AIU Insurance Company v. TIG Insurance Company, 2008 U.S. Dist. LEXIS 96693 (S.D.N.Y. 2008), TIG Insurance Company (“TIG”) moved to compel the pro-duction of various documents by arguing that any privi-lege was waived (1) implicitly because AIU Insurance Company (“AIU”) put these documents “at issue” by bringing its breach of contract claim against TIG; or (2) expressly by AIU’s act of sharing these documents with TIG during an audit conducted pursuant to the reinsur-ance treaties. Id. at *9.

Regarding the “implicit waiver” argument, the court concluded that AIU did not place the privileged docu-ments at issue. Id. at *13. Further, as AIU did not intend to rely upon the contents of the privileged communica-tions in order to prove its breach of contract claim, AIU did not place the protected communications at issue. Id.

TIG’s argument that AIU expressly waived the attor-ney-client and work-product privileges was based upon AIU’s production of certain documents drafted by its coverage counsel. AIU argued that such documents were covered by a Confidentiality Agreement and AIU and TIG’s interests were aligned when production was made and the parties are now adverse. Id. at *21-22. The court held that inasmuch as the Confidentiality Agreement was executed after AIU produced the privileged documents, the Confidentiality Agreement did not cover said docu-ments. Id. Further, the court noted that AIU provided TIG with its counsel’s memorandum well after AIU and

TIG’s interests ceased to be aligned and the production was in response to TIG’s concerns regarding prompt notice. Id. at * 22.

Accordingly, the court held that the common inter-est doctrine did not apply. Id. The court further held that documents produced for the audit were protected by virtue of a Confidentiality Agreement. Id. at *23. Importantly, the court relied upon the specific language of the Confidentiality Agreement governing the docu-ments produced for the audit. Id. Thus, depending on the language of the Confidentiality Agreements at issue, litigants in reinsurance disputes may have arguments for the production of documents produced for audits. The court further ordered AIU to produce documents from counsel in the underlying litigation as such documents would likely shed light on AIU’s past interpretation of its prompt-notice obligations under the reinsurance con-tracts. Id. at *24.

In American Re-Insurance Company v. United States Fidelity & Guaranty Company, et al., 40 A.D.3d 486 (N.Y. App. Div. 2007), the court also addressed the common interest doctrine. The court concluded that the common interest doctrine usually arises in situations between insurers and insureds. Id. at 491. However, the relation-ship between an insured and insurer is in stark contrast to the relationship between an insurer and reinsurer. Id. The court stated that a reinsurer has no duty to defend the insurer, and that reinsurers and insurers have adverse interests. Thus, the court found the common interest inapplicable. Id.

… depending on the language of the Confidentiality

Agreements at issue, litigants in reinsurance disputes

may have arguments for the production of documents

produced for audits.

The court also held the insurer did not waive privilege based on the “at issue” doctrine. Id. at 492. The court con-cluded the insurer did not waive any privilege because merely pleading that the settlement was reasonable and in good faith does not place the bona fides of a settlement at issue. Id. at 492. However, the court further found that since a witness testified regarding the advice he received in allocating all claims to a single treaty, he placed this matter at issue and the reinsurers were entitled to such documents to the extent the discovery related to the dis-closures made during the testimony. Id. at 493.




legaleseIn Gulf Insurance Company v. Transatlantic Reinsurance

Company, et al., 13 A.D.3d 278, 279-80, (N.Y. App. Div. 2004), Gulf Insurance Company entered into a quota reinsurance agreement with the reinsurer, Transatlantic Re, that included an access to records clause that gave the reinsurers the right to inspect all records of the insurer pertaining in any way to the agreement. Id. at 29. After the insurer settled a matter with the insured, it requested payment from the reinsurers for their respec-tive share of the settlement. Id. The reinsurers invoked the access to records clause and demanded inspection of various records, including files of both in-house and outside counsel. Id. The insurer asserted that these doc-uments were privileged. Id. Based upon Gulf Insurance Company’s refusal to produce the files of its counsel, the reinsurers refused to pay their share of the settlement and Gulf Insurance Company sued the reinsurers. Id.

On appeal, the court ruled that the standard access to records clause in the reinsurance agreement did not cre-ate an automatic waiver of the attorney-client privilege. Id. at 280. However, the court also held that the reinsur-ers are not precluded from challenging a claim of privi-lege made with respect to any documents withheld, and

the party asserting the privilege has the burden of prov-ing each element of the privilege claimed. Id.

ConclusionCompanies managing a book of business in “run-off ”

continue to play an active role in resolving legal and busi-ness issues for our industry. On the claim and legal side, issues have only minimally decreased for these “run-off ” managers due to ongoing disputes between cedents and policyholders, and/or cedents and their reinsurers, par-ticularly for long tail and progressive injury type cases. As such, while the law is unsettled the common interest doctrine will, without question, receive a full airing in these disputes.

Notes1. Claims such as asbestos, environmental, lead exposure and construction

defect, to name a few.2. This paper is intended to provide the reader with broad themes; it has not

captured every case on the subject.

The Common Interest Doctrine continued from page 33

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2 Dewey & LeBoeuf LLP

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26 Engle Martin & Associates

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35 Locke Lord Bissell & Liddell LLP

6 Mound Cotton Wollan & Greengrass

9 Navigant Consulting

23 Nelson Levine de Luca & Horst

44 R&Q

41 Sidley Austin LLP

10 Stalker Vogrin Bracken & Frimet

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36 AIRROC® Matters


of scale that are brought about by managing a number of similar portfolios together.

UK banks, which have been hit hard by the financial

crisis, are increasingly focused on improving their

capital adequacy and also repaying funds injected by

the taxpayer.

Last year Resolution acquired Friends Provident for £1.86bn despite the Friends Provident board’s initial reluc-tance to engage in talks. Resolution has now turned its attention to the acquisition of the UK business of French life insurer, Axa. The aim is to merge the Axa divisions with Friends Provident. Resolution plans to fund this ambitious acquisition, priced at £2.75bn, by way of a pre-emptive £2bn rights issue, £500m deferred notes and the rest in bank debt. The size of the transaction will effec-tively make it a reverse takeover, given that Resolution’s market capitalisation is nearer £1.8bn. To make the deal viable it is estimated that Resolution will have to extract around £500m in economies of scale, although this target is regarded by most as being achievable.

Who is king of the Zombies?Clive Cowdrey and Hugh Osmond were two of the

main entrepreneurs that spotted the opportunities avail-able in the Zombie Fund environment. Their success at turning these funds into profitable holdings led them to control over £90bn in assets at one point, along with acquiring considerable personal fortunes. The opportu-nity both Cowdrey and Osmond hit upon was buying up portfolio funds at a discount to their embedded value – namely the price that the insurance companies placed on their assets. By implementing cost-saving measures in areas such as administration and investment costs, and capitalising on tax benefits, the two players quickly grew their respective companies of Resolution and Pearl Group into the behemoths of the Zombie Fund world.

Cowdrey sold his first incarnation of Resolution to Osmond’s Pearl Group for £5bn and, after a brief spell on the sidelines, started Resolution (“mark II”) which carried on to acquire Friends Provident. Osmond sold out of the Pearl Group and started his own investment vehicle in Horizon, which, whilst not currently involved in Zombie Funds, has led most people to believe it is only a matter of time before he returns.

So, what are some of the key legal requirements that apply to the acquisition of life insurance portfolios?

There are two main approaches to the acquisition of life insurance portfolios: (1) acquisition of the company by share purchase or (2) business purchase by portfolio transfer. Each brings with it its own specific legal wrinkles.

Share PurchaseA key headache relating to the first, more traditional

route, comes from the legislative requirements for approval of such transactions by the regulator. Under the Financial Services and Markets Act (FSMA), as practically imple-mented by the FSA through its rules, if a person decides to acquire control or increase control over a UK authorised firm it must obtain the FSA’s approval before doing so.

The acquisition of control includes, in broad terms, the acquisition of 10% or more of the shares, 10% or more of the voting power, or any acquisition of shares or vot-ing power that would allow the acquirer to exercise sig-nificant influence over the management of the target. A breach of the requirement to gain approval is an offence and could result in the FSA imposing unlimited fines on the guilty party and, upon ignoring any prohibition by the FSA of the acquisition, can result in an additional prison sentence of up to two years.

A key headache relating to the first, more traditional

route, comes from the legislative requirements for

approval of such transactions by the regulator.

The FSA has increasingly begun to step up its moni-toring and action in relation to change of control approv-als. In February this year, an investment firm, Semperian PPP Investment Partners Limited Partnership, which had notified the FSA of its intention to acquire an authorised firm, but subsequently decided to acquire the firm before FSA approval had been received, was found guilty of an offence under FSMA and fined. At the time of the case, the maximum fine available for the offence was £5,000 (fines are now unlimited). However, comments from Margaret Cole (Director of the FSA’s Enforcement and Financial Crime division) following the case, highlight the regulator’s position for the future:

The Return of the Zombie Fund? continued from page 8


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38 AIRROC® Matters 38

The Return of the Zombie Fund? continued from page 36

This is an example of a controller putting its commercial interests before its regulatory responsibilities and the FSA is taking a much tougher line with those that seek to avoid or ride roughshod over the change in control regime… This is a serious offence and the change in law means that future violations could result in an unlimited fine. Today’s result is a clear warning to other potential controllers that the FSA will prosecute change in control offences in appropriate cases.

Following the provision of notice to the FSA by a per-son wishing to acquire control, the FSA has 60 working days within which to either approve, approve with con-ditions, or object to the acquisition. When considering whether to approve an acquisition, the FSA will make its decision as to the approval of the transaction based on the assessment criteria set out in sections 185 to 191 of FSMA (as amended by the EU Acquisitions Directive), including reputation, experience, financial soundness, ability to comply with prudential requirements and vari-ous additional factors where the acquired company is becoming part of a group.

Business TransfersThe option in the UK of acquiring just the business

or portfolio itself of a life insurer involves the Part VII transfer process. This mechanism is a development of the previous transfer mechanism available to life companies, namely Schedule 2C of the former Insurance Companies Act 1982. The Part VII mechanism was created under the FSMA and allows insurance business transfers (“IBT”), potentially involving many customer contracts, to take place by operation of law. This Part VII mechanism is only concerned with the transfer of portfolios of assets and lia-bilities (i.e. investments, reinsurance and policies). It is not concerned with the acquisition or disposal of shares.

The Part VII mechanism will apply to IBTs where the transferor’s insurance business is transferred to another body in whole or in part and will be carried on from an establishment of the transferee in a European Economic Area state. The IBT must fall within the conditions and categories specified under section 105 of FSMA in order to be eligible for a Part VII transfer. Such conditions identify in a precise manner the sort of policies which are subject to the Part VII procedure and the way in which they are connected to the UK. If a proposed IBT scheme satisfies the conditions, it must follow the procedure set out in Part VII and it cannot take effect until it has been sanctioned by a court order.

The transferee must be authorised, by the transfer date, to carry on the business to be transferred in the place to which it is to be transferred. The FSA must be notified of any proposed IBT as soon as possible. The procedures for achieving this are precisely laid out in the FSMA (Control of Business Transfers) (Requirements on Applicants) Regulations 2001.

The Part VII mechanism will apply to IBTs where

the transferor’s insurance business is transferred to

another body in whole or in part and will be carried on

from an establishment of the transferee in a European

Economic Area state.

One of the important aspects of the mechanism is the requirement for a report from an independent expert (“IE”) approved by the FSA in which he/she assesses the effects on the transferring policy holders and on any existing policy holders in the transferee company. Most often the IE is an actuary. He must give the court and the FSA reasonable grounds for the belief that the financial position of the transferee company is sufficiently robust to have no adverse effects on the obligations owed to such policyholders by the transferor or the transferee as the case may be.

The UK insurance industry is sometimes seen as inconstant by those in other jurisdictions; witness the opposition from a number of quarters in the US to gen-eral (P&C) reinsurers using schemes of arrangement to exit from certain lines of business. Like many things, what suits some situations does not suit others. In the field of life Zombie Funds the flexibility of the legal mechanisms in the UK has provided the opportunity to innovate and provide some focus on those funds. The hope is that policy holders will see some tangible ben-efits as a result of that focus.

Vivien Tyrell, Partner and Head of Restructuring and Insolvency, Reynolds Porter Chamberlain LLP ([email protected])

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AIRROC® Matters




let’s just say, a moratorium or inability of someone with a contractual right to enforce it. Why is that different than any other traditional receivership?

Schwab: The banking and financial services commu-nities a number of years ago did a very good job work-ing with the NAIC to develop provisions that have since found their way into IRMA and a few state receivership codes. These provisions make automatic early termina-tion and netting provisions enforceable against insurer counterparties. These provisions were meant to provide some calm to the financial services marketplace against the disruption that otherwise would follow from the entry of a receivership order against an insurer that was a counterparty in a swap or a derivative transaction.

That’s what’s different. In the bankruptcy context, pro-tections of these kinds of contractual rights are already established. It’s only on the insurance side of financial ser-vices that you don’t have those same protections across all states.

Gallanis: I wonder about the scope of this problem, because when you talk about life insurers, to my knowl-edge there was only one company group that really engaged in large-scale issuance of derivative obligations, and even those were done outside the insurance compa-nies and elsewhere in the corporate structure. The mono-line restructurings will work – if they work – because of a societal conclusion that walling off derivatives exposure into a “bad bank” is socially worthwhile for the sake of a “good bank” – traditional municipal bond guaranties. The social policy justification is harder when you’re talk-ing about what are normally viewed as competing sets of general account liabilities of a life or health insurer. I could see some possibilities for mischief in that sort of restructuring effort.

Semaya: There were a fair number of investments by life insurance companies, but issuing the products themselves really came out of the financial guaranty community, which financial guaranty, by the way, does not have any guaranty fund coverage. So a receivership run-off is really from the assets that exist. I guess I see what you’re saying about the segregated account. There are only a small number of states that have a statute similar to Wisconsin’s delinquency provision.

But all states, to my knowledge, have the segregated accounts for variable annuities and variable life products as part of their statutes to protect those assets for the annui-tants. Pursuant to the Wisconsin statute, the creation of

a segregated account for mortgage guaranty and financial guaranty insurers is supposed to happen initially, not right before placing it in receivership.

But all states…have the segregated accounts for

variable annuities and variable life products as

part of their statutes to protect those assets for the

annuitants.

Ambac was forced to concur with board approval to establish the segregated account and then immediately put it into rehabilitation. I don’t know if you’re going to see more of this down the road. But I think it’s interesting to watch and I think the analogy is quite good and quite cre-ative, so my compliments to you.

Semaya: Looking down the road 10 years, what do you see in your crystal balls? Jim Mumford, do you want to take a shot?

Mumford: Sure. I actually don’t think we’ll see too much difference from what we have today. We may see difficul-ties at selling off some of blocks of business. So maybe the normal course won’t quite be as normal as it is now, but I don’t see a lot of changes in the receivership side in how the problems are solved at least on the life side.

Semaya: Jim, do you think there will be some move to either change or tighten the receivership statutes or any statutes that allow for runoffs or commutations as we have in the New York Regulation 141, for example, because of federal action under the Financial Reform Federal Act cur-rently pending and probably to be adopted by Congress in the near future? With large insurance companies that pose systemic risk to the economy, do you think states will want to tighten up the statutes to provide better relief over life insurance investments?

Mumford: I was involved in some of that resolution authority discussion and I don’t think that’s going to drive states to do much. Maybe Peter thinks otherwise, but I just can’t see it happening.

Gallanis: Well, I’m going to go back to the original question. Again, I agree with Jim. I don’t at this point anticipate huge changes in the market on the life side, but I think the Health Reform Act may change a lot of things on the health side of the business.

On the life side, however, I think life companies are looking much healthier now than they did 2 or 3 years



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ago, and even then they were a lot stronger in general than the big banks. There have been good equity returns on certain financial services companies, where before the crisis there may have been a perception in some quarters that the life industry was a relatively staid, not very excit-ing place to invest capital.

…life companies are looking much healthier now than

they did 2 or 3 years ago, and even then they were a

lot stronger in general than the big banks.

As people who had both traditional life policies and somewhat more innovative annuity products look at what’s happened to those contracts, and then compare them to what’s happened to their 401(k)s, invested in equities, the life industry begins to look like a good place to put some money.

And insurance regulators have a pretty good story to tell. As Terri Vaughan says: While it may be argued that

the insurance regulatory system in the United States is not as efficient as it might be, it’s nonetheless a pretty effective system when it comes to spotting and dealing with potential solvency problems and major frauds.

Semaya: Steve, do you want to add something new and different to this?

Schwab: The ongoing solvency framework initiative at the NAIC – which is focused not only on changing things here in the US, but also trying to harmonize regulatory regimes around the world – could well affect runoff and receivership on a global basis.

When I look at Ambac, I wonder if we won’t see other things like it in terms of segregated accounts.

Finally, I wonder if this will be the decade of the pro-fessional manager for receiverships as well as runoffs.

Semaya: On behalf of AIRROC, we appreciate everyone’s participation. Thank you.

42 AIRROC® Matters

Alert No. 34

Policyholder Support Update


Solvent Schemes – Upcoming Key Dates

MINSTER INSURANCE COMPANY LIMITED, MALVERN INSURANCE COMPANY LIMITED, THE CONTINGENCY INSURANCE COMPANY LIMITED, PROGRESS INSURANCE COMPANY LIMITED, GAN ASSURANCES FORMERLY GAN ASSURANCES IARD, QBE INSURANCE EUROPE LIMITED AND THE RELIANCE FIRE AND ACCIDENT INSURANCE CORPORATION LIMITED

Schemes for the above companies were approved at Meetings of Creditors on 18 January 2010. The Schemes became effective on 25 March 2010 and the bar date has been set as 21 September 2010. Further information is available on www.minsterins.co.uk.

ALLIANZ GLOBAL CORPORATE & SPECIALTY FRANCE; AGF MARINE AVIATION TRANSPORT AND COMPAGNIE D’ASSURANCES MARITIMES AERIENNES ET TERRESTRES “CAMAT”; ALLIANZ IARD; DELVAG LUFTFARHT VERSICHERUNGS AG; NÜRNBERGER ALLGEMEINE VERSICHERUNGS AG IN RESPECT OF THE CAMOMILE UNDERWRITING AGENCIES LIMITED BUSINESS

Schemes for the above companies were approved at Meetings of Creditors on 10 June 2010. The Schemes became effective on 26 July 2010 and the bar date has been set as 21 February 2011. Further information is available on www.CUAL-scheme.co.uk.

Other Recent Developments

ENGLISH & AMERICAN UNDERWRITING AGENCY ‘EAUA’ POOLS Meetings of Creditors for 16 companies which

participated in the EAUA Pools were convened for the purpose of considering and, if thought fit, approving a Scheme of Arrangement on 30 April 2010. The outcome of these Meetings is not yet known. The sanction hearing is scheduled to take place in October 2010. Further information is available on www.englishandamericanpools.com.

THE SCOTTISH LION INSURANCE COMPANY LIMITED The Scottish Court of Appeal upheld the Company’s

appeal against the dismissal of the petition to sanction the proposed Scheme on 29 January 2010. The press reported that Scottish Lion was sold to Berkshire Hathaway in April 2010. Following the sale, there has been no further update on the Company’s website as to the status of the proposed scheme. Further information may become available on www.scottishlionsolventscheme.com.

TOKIO MARINE EUROPE INSURANCE LIMITED “TOKIO MARINE” A Practice Statement Letter was sent to all known

brokers and policyholders on 28 August 2009 indicating the above company’s intention to propose a Scheme of Arrangement. No specific date for the application to the High Court of Justice of England and Wales for permission to convene Meetings of Creditors has been announced. Further information is available on www.TMEISCHEME.com .

Insolvent Estates

ENGLISH & AMERICAN UNDERWRITING AGENCY ‘EAUA’ POOLS ENGLISH & AMERICAN INSURANCE COMPANY LIMITED, THE INSURANCE CORPORATION OF SINGAPORE UK LIMITED AND THE HOME INSURANCE COMPANY IN LIQUIDATION INSOLVENT PARTICIPANTS

See Other Recent Developments above.

Please contact Mike Walker, Head of KPMG’s Restructuring Insurance Solutions practice in the U.K. at [email protected] should you require any further information or guidance in relation to insur-ance company schemes and insolvencies.

KPMG’s Restructuring Insurance Solutions practice has been providing Policyholder Support Alerts to the insurance industry regarding Schemes of Arrangement for a number of years. These alerts act as a reminder of forthcoming bar dates and Scheme creditor meetings. To subscribe to these alerts or access

KPMG’s online database of solvent and insolvent Schemes of Arrangement, please visit their website at www.kpmg.co.uk/insurancesolutions.