PROPOSAL IN RELATION TO A SCHEME OF ARRANGEMENT. (in compliance with Section 100 of the Companies Act 1981 of Bermuda) between

Transcription

1 PROPOSAL IN RELATION TO A SCHEME OF ARRANGEMENT (in compliance with Section 100 of the Companies Act 1981 of Bermuda) between AWCI INSURANCE COMPANY, LTD. (provisional liquidator appointed) and its ARRANGEMENT CREDITORS (as defined in the Scheme of Arrangement) 1

2 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this proposal or as to the action you should take, you should consult your insurance broker or other professional adviser without delay. Further copies of this document and the enclosed voting forms can be obtained from the address listed on page 4. They may also be downloaded and printed from the website PROPOSAL IN RELATION TO A SCHEME OF ARRANGEMENT (in compliance with Section 100 of the Companies Act 1981 of Bermuda) between AWCI INSURANCE COMPANY, LTD. (provisional liquidator appointed) and its ARRANGEMENT CREDITORS (as defined in the Scheme of Arrangement) The meetings of Arrangement Creditors (the Meetings ) to consider the Scheme of Arrangement (the Arrangement ) will be held on Tuesday December 3, 2013 at the offices of KPMG, Crown House, 4 Par-la-Ville Road, Hamilton, HM08, Bermuda. The first meeting will commence at 10am (Bermuda time). The second meeting will follow at 11am or as soon as the prior Meeting has been completed, whichever is the later. Notice of the Meetings is enclosed in the letter sent to you dated October 31, The action required to be taken by Arrangement Creditors is set out on page 19. Whether or not Arrangement Creditors intend to be present at the relevant Meeting, they are requested to complete and return the form of proxy and voting form enclosed with this document as soon as possible and no later than 5.00 pm (Bermuda time) on Monday December 2, Questions relating to the Arrangement should be referred to Grant Robshaw by or by telephone: Grant Robshaw ext 553 grantrobshaw@kpmg.bm Arrangement website: 2

3 IMPORTANT NOTICE TO CREDITORS This document has been prepared in connection with the Arrangement pursuant to section 99 of the Companies Act 1981 between AWCI Insurance Company, Ltd. (provisional liquidator appointed) (the "Company") and its Arrangement Creditors (as defined in the Arrangement). Capitalised terms used in this document have the same meaning as the defined terms listed at pages 3 to 6 of the Arrangement. The statements, opinions and information contained in this document are made, held or given respectively as at the date of this document unless another time is specified and such statements, opinions and information are made, held or given solely by or on behalf of the Company unless expressly attributed to another party. Nothing contained in this document constitutes an admission of any fact or liability on the part of the Company or any other person in respect of any asset to which they may be entitled or any claim against them. No estimate of the amount of any claim against the Company specified in the voting form, or otherwise provided for voting purposes, shall be admissible against the Company or any other party. Such estimates shall only be used for voting purposes at the Meetings of Arrangement Creditors to consider the Arrangement, and shall not be binding on any party for the purpose of calculating payments under the Arrangement. The summary of the principal provisions of the Arrangement and related matters contained herein is qualified in its entirety by reference to the Arrangement itself, the full text of which can be obtained from or can be requested by contacting Grant Robshaw at ext 553 or by at grantrobshaw@kpmg.bm. Arrangement Creditors are advised to read and to consider carefully the text of the Arrangement. The Company has not authorised any person to make any representation, whether oral, written, express or implied, concerning the Arrangement, which is inconsistent with the statements made in this document. Consequently, if such representations are made, they should not be relied upon. None of the contents of this document is intended to constitute legal, tax, financial or other professional advice. Each Arrangement Creditor should consult his own professional advisers as to the legal, tax, financial or other matters relevant to the action it should take in connection with the Arrangement. 3

4 CONTACT DETAILS All questions about the Arrangement and the completion and return of voting and proxy forms should be addressed to Grant Robshaw of KPMG Advisory Limited and the relevant contact details are set out below. All proxy and voting forms must also be returned to the same address: Grant Robshaw KPMG Advisory Limited Crown House 4 Par-la-Ville Road Hamilton HM 08 Bermuda Tel: ext grantrobshaw@kpmg.bm Claims against the Company should continue to be submitted to the appointed claims handlers in the same manner that claims have been notified in the past. ADVISORS TO THE COMPANY Arrangement Adviser KPMG Advisory Limited, Crown House, 4 Par-la-Ville Road, Hamilton HM 08, Bermuda Legal Advisors Conyers Dill & Pearman Limited, Clarendon House, 2 Church Street, Hamilton HM 12, Bermuda Chairman of Arrangement Meetings John C McKenna (the Provisional Liquidator), Finance & Risk Services Ltd., P.O. Box HM 321, Hamilton HM BX, Bermuda Arrangement Manager Kane (Bermuda) Limited, Cumberland House, 1 Victoria Street, Hamilton HM 11, Bermuda 4

5 PART I EXPLANATORY STATEMENT CONTENTS A. Page 1. LETTER FROM AWCI INSURANCE COMPANY, LTD. 7 (PROVISIONAL LIQUIDATOR APPOINTED) 2. LETTER FROM THE PROVISIONAL LIQUIDATOR 10 B. HISTORY OF THE COMPANY AND FINANCIAL INFORMATION 1. History of the Company Current financial position Directors interests What is an Arrangement and how does it become binding? Who will be affected? What will happen if the Arrangement becomes effective? Advantages of the Arrangement Disadvantages of the Arrangement What are Creditors required to do? Further assistance 22 C. SUMMARY OF THE ARRANGEMENT 1. Introduction Application of the Arrangement Proceedings by Arrangement Creditors Arrangement correspondence Procedure for agreeing claims Set-off Setting the Payment Percentages 24 5

6 8. Review of the Payment Percentages Changes in the Payment Percentages Payment of Agreed Claims Termination The Arrangement Advisers The Board and the Arrangement Manager Other provisions Governing law and jurisdiction 30 D. APPENDICES TO THE EXPLANATORY STATEMENT 1. Company s Statutory Accounts as at 31 December

7 PART I EXPLANATORY STATEMENT SECTION A: 1. LETTER FROM AWCI INSURANCE COMPANY, LTD. (PROVISIONAL LIQUIDATOR APPOINTED) 1 TO: POLICYHOLDERS/BROKERS Dear Arrangement Creditor I am writing to you in connection with an Arrangement which AWCI Insurance Company, Ltd. (provisional liquidator appointed) ( AWCI or the Company ) is proposing to enter with its Arrangement Creditors in relation to certain insurance contracts. The Arrangement seeks to bind policyholders whose policies were written either (i) under the general account of the Company (i.e. policy years 2003 to 2007); or (ii) by AWCI Risk Retention Group, Inc. (the RRG ) and subsequently assigned and assumed by the GL SAC (i.e. policy years 2008 to 2009), plus those policies written by the GL SAC (i.e. policy years 2008 to 2009) (together Arrangement Creditors ). For the avoidance of doubt, policies underwritten by the HQS SAC in respect of reinsurance business written for the Hartford Fire Insurance Company and its affiliates and subsidiaries ( the Hartford ), are not affected and will not be bound by the Arrangement. You are receiving this letter because you are an Arrangement Creditor under either (i) or (ii) above. On the 29 August 2013, after having received a report from KPMG Advisory Limited ( KPMG Advisory ) on the viability of the various options available to the Company following deterioration of the Company s insurance reserves, the board of directors of AWCI (the Board ) resolved to implement an Arrangement between the Company and its Arrangement Creditors. At the same meeting, and in order to protect the Company during the planning and implementation stages of the Arrangement, the 1 Unless otherwise indicated, all capitalized terms in this document have the same meaning as the terms defined in the Arrangement Document. 7

8 Board resolved to file a winding up petition and obtain an order from the Supreme Court of Bermuda (the Bermuda Court ) to appoint a provisional liquidator to oversee the process and protect the rights of policyholders. Mr John McKenna was appointed as provisional liquidator on 24 September In the event of the successful implementation of the Arrangement, the winding up petition will be withdrawn and Mr. McKenna discharged from office. A full copy of the order appointing Mr McKenna is available on the website By letter dated 25 September 2013 from KPMG Advisory (the KPMG Letter ) you will have been informed that the Company has experienced adverse claims development, which resulted in uncertainty as to its ability to pay claims in full. The Board believes that the Arrangement will result in the highest return to Arrangement Creditors and is preferable to a full liquidation process as outlined in the KPMG Letter. For this reason the Board recommends that you vote in favour of the Arrangement at the Meetings to be held on Tuesday 3 December If the Arrangement is not successfully implemented then it is likely that the Company will enter into insolvent liquidation. Enclosed with this letter is a letter from Mr McKenna confirming he has no objection to the Arrangement. Also enclosed is a notice of the Meetings required to be held for you to vote on the Arrangement, and the forms you must complete to attend and/or vote. Copies of the Arrangement itself and the explanatory statement required by law to be provided (the Explanatory Statement ), together with additional copies of this letter, the letter from Mr McKenna and the notice and forms (the Arrangement Documents ) can be found on the website: 8

9 If you would rather receive a hard copy of the Arrangement Documents, or have any questions relating to this letter or any of the Arrangement Documents please contact Grant Robshaw at KPMG Advisory by to grantrobshaw@kpmg.bm or by telephone on ext 553. Yours sincerely, Mark E Nabity President 9

10 2. LETTER FROM THE PROVISIONAL LIQUIDATOR TO: POLICYHOLDERS AND BROKERS Finance & Risk Services Ltd 502 International Centre 26 Bermudiana Road Hamilton HM11 Bermuda P.O. Box HM 321 Hamilton HM BX Bermuda Telephone: (441) I am the Provisional Liquidator of AWCI Insurance Company, Ltd. having been so appointed by order of the Bermuda Court on 24 September 2013 (a copy of the Order is available on the website I have reviewed the Deloitte Actuarial Report, the feasibility study conducted by KPMG Advisory Limited and the history of the company leading up to the preparation of this Arrangement as described by one of the directors, Mr Robert Eastham. I have also read this explanatory statement and the Arrangement and spoken with KPMG Advisory. I confirm that I have no objection to the Arrangement as presented in the Arrangement Documents. Yours faithfully, John C McKenna Provisional Liquidator 10

11 PART I EXPLANATORY STATEMENT SECTION B: HISTORY OF THE COMPANY AND FINANCIAL INFORMATION The Company is an insurance company incorporated and resident in Bermuda. 1. HISTORY OF THE COMPANY 1.1 The Company was incorporated on 17 October 2003 as an exempted insurance company under the Companies Act It was formed to act as a captive insurer for the Association of Wall and Ceiling Industries International ( the Association ). 1.2 The Association owns approximately 27% of the shares of the Company with the remainder held by four manufacturers of products used by the members of the Association. AWCI was registered to carry on insurance business as a Class 2 Insurer under the Insurance Act 1978 with effect from October 21, The Company is managed in Bermuda by Kane (Bermuda) Limited which also acts as principal representative and segregated accounts representative. 1.3 The Company provided general liability insurance to wall and ceiling industry contractors who were members of the Association. The insurance cover was provided on an occurrence basis with a limit of liability of $1,000,000 per occurrence and a $2,000,000 aggregate. All policies issued by the Company are subject to a ten year sunset clause 2, which requires any claims to be reported within a ten year period following expiry of the policy. 1.4 On October 12, 2007, the Company, in order to underwrite quota share reinsurance of business fronted by the Hartford, was registered under the Segregated Accounts Companies Act 2000 (the "SAC Act"). Hartford required that the quota share reinsurance was segregated from the other business of the captive. The business was written by the HQS SAC. 2 A Sunset Clause is a contractual term that states when the contract will end, or the conditions under which it will end. The sunset clause expiration date in the Company s contracts is 10 years from the expiry date of each policy. The actual date applicable to each individual contract is stipulated in the sunset clause endorsement on each policy. 11

12 1.5 Following the Company s registration under the SAC Act the original captive entity became the General Account and the policies written up to December 31, 2007 remain within the General Account. The GL SAC wrote general liability insurance (both Exterior Insulation and Finishing System ( EIFS ) and non-eifs) on a direct basis between January 1, 2008 and November 1, 2009 and assumed general liability reinsurance from a U.S. domiciled AWCI Risk Retention Group, Inc. ( RRG ) sponsored by the Company between January 1, 2008 and December 29, Effective December 31, 2009 the RRG assigned its policies and the Company, through the GL SAC, assumed all of its direct policies to the Company and subsequently liquidated. The GL SAC is no longer writing business and is in run-off. Reinsurance was provided to the GL SAC by the Company's existing reinsurers. 1.6 The diagram below shows the current corporate structure of the Company and the applicable policies and policy periods written by each of the accounts: GL SAC (RRG) policy effective dates: Feb 1, 2008 to Nov 1, 2009 General Account policy effective dates: Oct 3, 2003 to Dec 31, 2007 GL SAC (Direct) policy effective dates: Jan 1, 2008 to Dec 29, = transfer of policies from RRG to GL SAC 1.7 The HQS SAC is not affected by the Arrangement. 1.8 Following a review of the results of the actuarial study 3 performed by Deloitte in June 2013 (as at December 31, 2012) it became clear that the Company s financial position has deteriorated. 3 The Deloitte actuarial report is available on request. Please contact Grant Robshaw at KPMG Advisory by to grantrobshaw@kpmg.bm or by telephone on ext

13 1.9 The Deloitte report recommended a reserve range of $4.4m to $5.8m (gross of reinsurance), which was materially higher than the $3.2m carried as at December 31, Using the range from the Deloitte report, the Company is non-compliant with its regulatory solvency requirements in accordance with The Insurance Act Following the Deloitte actuarial study the Company booked to Deloitte s low estimate in the year end 2012 management accounts, $4.4m (gross of reinsurance). As a result, on a consolidated basis the General Account and the GL SAC are balance sheet insolvent and do not meet the minimum margin of solvency It should be noted that the majority of current reserves are for IBNR (incurred but not yet reported) claims. This is an estimate of the Company s liabilities arising on claims relating to events which have occurred but have not yet been notified to the Company, in part due to the latent nature of the exposure. The estimate is based on actuarial methodology for this type of insurance cover, however, the ultimate liability may vary significantly from the estimates and as such there could be significant changes, either positive or negative, as further clarity on claim levels becomes apparent over time. 2. CURRENT FINANCIAL POSITION A summary of the Company s 2012 Statutory Financial Return as at December 31, 2012 (the Ascertainment Date) is attached at Appendix 1. The summary shows the Company to be insolvent with assets totalling $3.9 million and liabilities totalling approximately $4.6 million, resulting in a negative shareholders equity of $0.7 million. The Board was of the opinion that the Company was insolvent on a balance sheet basis, and possibly would not be able to meet its liabilities as and when they fell due. However, the Company s financial position will only be fully ascertained after the termination of the last sunset clause and once all of the Arrangement Claims have been received and resolved. 4 The Bermuda Monetary Authority requires insurers to maintain strict minimum solvency margins; AWCI is a Class 2 company and is required to have a minimum solvency margin of the greater of $250,000, 10% of net loss reserves and a sliding scale of percentage of net premiums. 13

14 The full Arrangement document is available at Its main provisions are explained below. Defined terms are the same as those used in the Arrangement. This Explanatory Statement should not be relied upon as a substitute for reading the Arrangement provisions themselves. 3. DIRECTORS INTERESTS AWCI has 13 directors in total; their respective interests in the Company are disclosed below: Michael Frith (director) and Gemma Carreiro (alternate director to Michael Frith) are director and associate of Conyers Dill & Pearman Limited respectively. Codan Services Limited is an affiliate of Conyers Dill & Pearman Limited, which provides corporate administration services to the Company for which it charges a fee. Conyers Dill & Pearman Limited also provides legal advice to AWCI for which it charges an hourly rate on a time spent basis. Robert Eastham (director) and Emma Atherton (an alternate director to Robert Eastham) are managing director and deputy managing director of Kane (Bermuda) Limited respectively. Kane acts as the Company s captive manager, a service for which it charges fees. In the event that the Arrangement is successfully implemented, each of the directors of the Company highlighted above will not receive any benefit beyond their current agreements with the Company as these are intended to continue unchanged during the course of the run-off of the Company under the Arrangement. The following directors represent corporate shareholders on the Board; Christopher Thomas (representative of Sto Corp), Jeffrey Wellen and Peter Balint (representatives of Dryvit Systems, Inc.), Buck Buchanan (representative of Parexlahabra, Inc.) and William Kasik (representative of BASF Construction Chemicals, LLC). In the event that the Arrangement is successfully implemented, these directors will not benefit directly or indirectly. 14

15 The following directors serve on the Board of Directors of the Association of Wall and Ceiling Industries International, a shareholder of the Company: Steve Etkin (Executive Vice President / CEO), Scott Casabona (Vice President) and Ken Navratil (Past President). In the event that the Arrangement is successfully implemented, these directors will not benefit directly or indirectly. The remaining directors: Mark Nabity, Michael Heering and Mikel Poellinger each represent lifetime members of the Association of Wall and Ceiling Industries - International, on the Board. In the event that the Arrangement is successfully implemented, these directors will not benefit directly or indirectly. 4. WHAT IS AN ARRANGEMENT AND HOW DOES IT BECOME BINDING? 4.1 The Arrangement is a compromise or arrangement between a company and its creditors (or any class of them) entered into pursuant to section 99 of the Bermuda Companies Act The Arrangement will become legally binding on the company and its Arrangement Creditors if: (i) (ii) (iii) a majority in number representing 75% in value of each class of Arrangement Creditors, present and voting in person or by proxy, votes in favour of the Arrangement at each of the Meetings which have been convened with the permission of the Court; and the Court subsequently sanctions the Arrangement; and a copy of the order of the Court to that effect is delivered to the Registrar of Companies in Bermuda. 4.3 An arrangement cannot be proposed and implemented unless it can be shown that the Court has the power to sanction it. As the Company is a Bermuda registered entity, the Company believes the Court has the powers to sanction the Arrangement. 15

16 5. WHO WILL BE AFFECTED? 5.1 The Arrangement is between the Company and its Arrangement Creditors. The term Arrangement Creditor is defined in the Arrangement itself but, in summary, means any person or organisation that has a claim arising from a policy written through either the General Account or the GL SAC (including those policies that were written through the RRG and assigned/assumed by the GL SAC). 5.2 There are two classes of Arrangement Creditors: General Account Arrangement Creditors and GL SAC Arrangement Creditors ( the Arrangement Classes ). These different classes are described below. General Account Creditors 5.3 Those with policies written by or on behalf of the Company through its General Account and with respect to which there is a Liability are Arrangement Creditors of the General Account. This would include policies written by the Company for Members of the Association between October 2003 and December GL SAC Creditors 5.4 This class is made up of (a) policies originally written by the RRG and assigned to and assumed by the GL SAC with effect from 31 December 2009, and (b) those who hold policies which were underwritten by the GL SAC from January 1, 2008 to October 23, NB: For the avoidance of doubt the Arrangement does not affect the quota share reinsurance agreement with the Hartford Fire Insurance Company written though the HQS SAC. 6. WHAT WILL HAPPEN IF THE ARRANGEMENT BECOMES EFFECTIVE? 6.1 If the Arrangement becomes effective, it will bind the Company and all its Arrangement Creditors. Thereafter Arrangement Creditors will be required to 16

17 continue to lodge claims with the Company as they have previously, but shall in the first instance be responsible for the payment of any claims settlements or awards and associated expenses, including legal defence costs. Once claims become Agreed Claims, they will be paid on a percentage basis using the percentage assigned to each class of the Arrangement Creditors ( the Payment Percentages ). The initial Payment Percentages and the formula used to arrive at these Payment Percentages is described in further detail at clause 9.1 of the Arrangement. The initial Payment Percentages are 47% for General Account Arrangement Creditors, and 10% for GL SAC Arrangement Creditors. The Payment Percentages will be periodically reviewed by the Board and may be raised or lowered depending on the financial position of the Company. 6.2 Claims lodged with the Company s appointed claims handlers will continue to be processed by the claims handlers, and the Arrangement Manager, and other service providers, as required. As stated above the main change to the current process will be that policyholders will have to pay claims (including legal expenses) themselves in the first instance and seek reimbursement from the Company based on the Payment Percentages assigned. 7. ADVANTAGES OF THE ARRANGEMENT 7.1 Based on the Company s financial situation the Board believes that the two options available to the Company are either an insolvent liquidation or the Arrangement. The main advantages of the Arrangement are described below. Faster payment of claims 7.2 In an insolvent liquidation the liquidator would make distributions to policyholders only when the liquidator has satisfied himself that the percentage he declares can be paid to all policyholders. This would likely mean that it would take a significant period of time before any payments are made to creditors given the uncertainty surrounding future claims. 7.3 By contrast the Arrangement would enable the Company to immediately start paying claims based on a reduced Payment Percentage, calculated in accordance with the Payment Percentage formula outlined in clause 9.1 of the 17

18 Arrangement. Subject to policyholder support and approval from the Bermuda Court, the Arrangement could become effective within 3-4 months, therefore policyholders claim payments on Agreed Claims could commence in as little as 3-4 months (albeit at a reduced level). Higher initial Payment Percentages 7.4 In an insolvent liquidation payments are generally made by the liquidator on a ground up basis, i.e. payment percentages are set at conservative levels and gradually increase as the financial position becomes more certain. This will mean that any initial payment percentage in an insolvent liquidation would likely be significantly lower than that calculated under the Arrangement, and would only increase as claims develop over time. 7.5 This Arrangement would set Payment Percentages based on the Company s financial statements. The Board expects this to be higher than would be initially expected in an insolvent liquidation. Potential for faster Payment Percentage increases 7.6 A liquidator would only increase a Payment Percentage once he is sure that the percentage could be paid to all policyholders equally. As such there is likely to be a significant delay before any changes to the ground up percentage is made. 7.7 Under the Arrangement the Payment Percentages would be reviewed periodically taking into account claims development and the Company s position reported in its financial statements. If future claims estimates are lower than currently estimated it may be possible to increase one or other, or both, of the Payment Percentages which would allow for a potentially quicker overall claims payment in comparison to a liquidation. Conversely, if claim levels continue to increase, either or both of the Payment Percentages may be reduced; however, this will not affect payments already made under the Arrangement at higher levels i.e. there will be no claw back of payments made in respect of Agreed Claims. 18

19 Cost savings 7.8 An insolvent liquidation would likely be a more expensive process. This is because the liquidator and his staff would need to take control of the Company, which represents a high learning curve and the attendant expense. 7.9 By contrast the Arrangement would involve upfront costs during the proposal and implementation stage, but running costs going forward are likely to be similar to historic running costs. There will be periodic additional costs incurred to review the Payment Percentages, but overall the Arrangement is likely to be cheaper, thereby preserving more value to meet creditor claims. 8. DISADVANTAGES OF THE ARRANGEMENT 8.1 In order for the Arrangement to work, it is a necessary term that upon the Effective Date, the GL SAC will be credited with the entire amount of a loan appearing in the Company s accounts as at December 31, 2012 as between the General Account and the GL SAC. The loan, in the amount of $660,640, is shown in the Company s accounts as being owed to the GL SAC and relates to a transfer of funds from the GL SAC to the General Account to reduce the Company s overall investment management costs. 8.2 The result of the loan repayment is that the GL SAC will have the full benefit of that loan amount credited back to its account. This provides a benefit to the GL SAC Arrangement Creditors and a potential disadvantage to the General Account Creditors. If the Company was to go into insolvent liquidation, there is some question as to whether the loan would be repayable. 9. WHAT ARE CREDITORS REQUIRED TO DO? 9.1 If you are an Arrangement Creditor of the Company, you are entitled to attend and vote at the relevant Meeting. 9.2 The Meetings will be held on Tuesday December 3, The Meeting of General Account Arrangement Creditors will commence at 10 am (Bermuda time) at the offices of KPMG, Crown House, 4 Par-la-Ville Road, Hamilton, 19

20 HM08, Bermuda. The Meeting of GL SAC Arrangement Creditors will commence at 11 am or as soon as the prior Meeting has been completed, whichever is the later. 9.3 Arrangement Creditors may attend the relevant Meeting in person (or, if a corporation or unincorporated association, by a duly authorised representative) or by proxy. Voting Forms can also be completed and returned to the Arrangement Advisers via or post before the Meetings. 9.4 The Company, in consultation with the Arrangement Advisers and their actuary, has calculated indicative claim values for voting purposes for all policyholders. The indicative values for voting purposes are based on a formula which values claims based on premiums paid to the Company by policyholders, reported claims and claims which may have occurred but have not yet been reported ( IBNR ). This formula is described in more detail below. 9.5 The IBNR reserve allocation has been calibrated to agree to the high end of Deloitte s reasonable range of IBNR, both in total and by accident year, which reflects the age of the policies and the 10 year sunset clause, as per Deloitte s report as of December 31, The allocation methodology applies a 70:30 split between two methods, 1 and 2, outlined below: 1. IBNR allocated based on premium paid by each policyholder, using the ultimate claims to earned premium ratio (by accident year), as indicated by the Deloitte study. This is a proxy for the assumption that all IBNR relates to unreported claims (the Pure IBNR method). 2. IBNR allocated based on Outstanding Loss Reserve ( OSLR ) held on notified open claims relating to each policy holder, using the OSLR to IBNR ratio (by accident year), as indicated by the Deloitte study. This is a proxy for the assumption that all IBNR relates to development on known open claims (the Incurred but not enough reported or IBNER method). 20

21 9.7 The 70:30 split is consistent with a review of benchmark portfolios identified as being broadly reflective of AWCI s book of business, both in nature and maturity. There was no split between pure IBNR and IBNER detailed in the actuarial report prepared by Deloitte for AWCI as at December 31, Outstanding Loss Reserve ( OSLR ) has been added to the balance calculated by the IBNR reserve allocation formula method on an individual policyholder basis. The OSLR balances used are as at December 31, It should be noted that these reserves may have changed either due to settlement or claim development since December 31, These indicative values for IBNR, referred to in sections 9.5 to 9.8 above, have been included in the individualised Voting Forms that have been sent to you. Please note that these are indicative values and they will be used for voting purposes only. These values are not binding on either the Company or the Arrangement Creditor with respect to any final agreement with regard to Arrangement Claims or in the event that the Arrangement is terminated in accordance with its terms Forms of proxy and Voting Forms have been dispatched to Arrangement Creditors for whom the Company has contact details together with letters from the Chairman of the Board and the Provisional Liquidator, and a notice convening the Meetings. Voting Forms are available on request from the Company or may be downloaded from and printed The chairman of the Meetings has reviewed the formula used to calculate the indicative values recommended by the Board and the Arrangement Advisers included in the Voting Forms sent to policyholders and has confirmed that the methodology is an appropriate one for calculating indicative values Guidance notes for completion of Voting Forms and an explanation of certain provisions and requirements governing attendance at and conduct of the Meetings, including how votes will be valued, are included with the enclosed Voting Forms. You should read these guidance notes carefully. 21

22 9.13 Whether you do or do not intend to be present in person at the relevant meeting, you are requested to complete, sign and return the form of proxy and Voting Form in accordance with the instructions and notes printed on them and the guidance notes enclosed with these documents The Company would like as many votes as possible to be cast at both of the meetings (whether in person or by proxy). Each creditor entitled to vote is therefore encouraged to sign and return the form of proxy and voting form as soon as possible. 10. FURTHER ASSISTANCE 10.1 If you have any questions in relation to your policy, the Arrangement or any actions you are required to take with respect to the Meetings or the Arrangement, please contact Grant Robshaw of KPMG Advisory: Tel: ext Creditors are also encouraged to contact Grant Robshaw with any questions they may have with regard to the indicative Voting Form valuations prior to the Meetings.. 22

23 PART I EXPLANATORY STATEMENT SECTION C: SUMMARY OF THE ARRANGEMENT 1. INTRODUCTION The Arrangement is available for download at or can be requested by contacting Grant Robshaw at ext 553 or by at grantrobshaw@kpmg.bm. Its main provisions are summarised below, but this summary should not be relied upon as a substitute for reading the Arrangement itself in its entirety. 2. APPLICATION OF THE ARRANGEMENT The Arrangement will apply to Arrangement Claims against the Company arising under the Policies, i.e. all policies written by or on behalf of the Company other than by the HQS SAC. 3. PROCEEDINGS BY ARRANGEMENT CREDITORS 3.1 Save as specifically provided for in the Arrangement, Arrangement Creditors will be prohibited from commencing or continuing any Proceedings against the Company or its Property for the purpose of establishing the quantum or obtaining payment of any Arrangement Claim. 3.2 Any Arrangement Creditor who contravenes this prohibition will be treated as having received an advance distribution on account of his Agreed Claim (if any) equal to the value of any money, Property, benefit or advantage obtained as a result. If that value exceeds the amount of the Arrangement Creditor's Agreed Claim, he will be obliged to pay the excess to the Company. 23

24 4. ARRANGEMENT CORRESPONDENCE Any communications required under the Arrangement may be given or sent by the Company, the Arrangement Advisers, the Arrangement Manager or the Arrangement Creditor concerned in electronic form. However, the electronic mail and any attachments must be less than 5 megabytes in size and a hard copy of any electronic mail must also be sent by Post if requested. Receipt of an acknowledgement will constitute conclusive proof that the electronic mail was sent, but it must be capable of being opened and printed. Where any communication to the Company in electronic form exceeds 5 megabytes in size, the electronic mail should be split into multiple electronic mails, each of which must be less than 5 megabytes in size, including any attachments. 5. PROCEDURE FOR AGREEING CLAIMS If the Arrangement becomes effective, claims will be agreed in the same manner as the Company has used historically. Claims must be submitted with sufficient supporting documentation to support the policyholders claim to the claims handlers. Any disputes arising in respect of polices which cannot be resolved will be subject to the exclusive jurisdiction of the Bermuda Court. 6. SET-OFF To the extent that there are mutual balances due between parties, it is appropriate for those balances to be set-off against each other, leaving a net balance due from one party. Hence the Arrangement provides in clause 8.4 that amounts due from the Company to an Arrangement Creditor under the Arrangement in respect of Agreed Claims can, by agreement between the Company and Arrangement Creditor, be set off against all amounts owed by that Arrangement Creditor to the Company. 7. SETTING THE PAYMENT PERCENTAGES 7.1 During the Arrangement the payments made from time to time in respect of Agreed Claims will be paid based on the current Payment Percentages applicable at the time to each Agreed Claim. The Payment 24

25 Percentages for each class of Arrangement Creditors will be set by the Board after consultation with the Arrangement Advisers; taking into account what the Company is able to pay having regard, amongst other things, to its assets and liabilities and claims activity. Accordingly, the Board and the Arrangement Advisers are required to estimate on a prudent basis (after taking actuarial advice) the amount of the Company's potential liabilities, including claims which have been reported but not yet agreed and claims which may be made in the future as a result of events which would be covered by the Policies underwritten by the Company. The formula used to determine the Payment Percentages for each Arrangement Class is included at clause 9.1 of the Arrangement. 7.2 As stated above the initial Payment Percentages are 47% for General Account Arrangement Creditors, and 10% for GL SAC Arrangement Creditors. 8. REVIEW OF THE PAYMENT PERCENTAGES 8.1 During the term of the Arrangement the Payment Percentages will be reviewed at least every year and may be altered by the Board based on advice from the Arrangement Advisers, Arrangement Manager and actuarial advice. The review will normally take place as soon as practicable following the annual actuarial review and finalisation of the year-end financial statements which would be necessary to produce the figures on which the review will be made. 8.2 The Board has the power to set a revised Payment Percentage whenever they believe that a Payment Percentage is at a level which is not in the best interests of Arrangement Creditors of that Arrangement Class as a whole. If circumstances come to the attention of the Board which indicate that either or both of the Payment Percentages should be reduced then the Board will take immediate steps to consult with the Arrangement Advisers, Arrangement Manager and seek actuarial advice (as required). In the meantime, the Arrangement Manager can 25

26 suspend payments to Arrangement Creditors to allow a reassessment of the Company's financial position and the level of the Payment Percentages. 9. CHANGES IN THE PAYMENT PERCENTAGES 9.1 If, as a result of a review of the Payment Percentages, a Payment Percentage is increased, those Arrangement Creditors who have already received payments in respect of their Agreed Claims at the lower Payment Percentage will receive an additional payment, plus a compensatory payment calculated based on the applicable 5 year US Treasury yield set out in clause 9.5 of the Arrangement on the difference (together an "Adjusting Payment" as defined in the Arrangement). This provision is designed to put Arrangement Creditors in the position they would have been in had they originally received payments at the higher Payment Percentage on their Agreed Claims. 9.2 In order to keep administrative costs to a minimum Adjusting Payments will be subject to a de-minimis amount of $250. Should an Arrangement Creditor s Adjusting Payment fall below $250 this amount will be held back until either (i) a subsequent Payment Percentage increase results in an additional Adjusting Payment which brings the total Adjusting Payment due to the policyholder to over $250 in total, or (ii) the Arrangement is terminated. Please see clause 15 of the Arrangement for more details on the termination of the Arrangement. 9.3 In the event that a Payment Percentage is reduced, Arrangement Creditors whose claims have been paid at the higher level will not be required to make any repayment of sums received in respect of their Agreed Claims. The Board believes that repayment would be impractical and would create uncertainty; in addition Arrangement Creditors' obligations to repay would be difficult to enforce. Nevertheless, Arrangement Creditors will have to wait until a Payment 26

27 Percentage is increased to a level beyond that at which they have already been paid (or until further Agreed Claims have been determined in their favour) before they receive any further payments. 10. PAYMENT OF AGREED CLAIMS 10.1 The Payment of Agreed Claims (subject to the relevant Payment Percentage) will be processed in the same manner as historically done by the Company (i.e. via the claims handlers). 11. TERMINATION 11.1 The Arrangement will terminate at the earliest of the following three events: Agreed Claims have been paid at a Payment Percentage of 100% and all interest arising pursuant to an Adjusting Payment has been paid. The basis for terminating in this way is set out below under the heading Termination at completion of the insurance run-off period ); Upon dissolution of the Company; or The Board, in consultation with the Arrangement Advisors and the Arrangement Manager, no longer believes that it is in the best interests of the Arrangement Creditors, or the Company as a whole, to continue with the Arrangement. Termination at completion of insurance run-off period 11.2 The last policy written for the General Account and the GL SAC was written on 1 November 2009 (expiring 1 November 2010). All policies have a 10 year sunset clause and as such claims can be filed up to 1 November, Once all Arrangement Creditors final claims have been agreed and settled subject to the Payment Percentages in place at that time, steps will then be taken to terminate the Arrangement In circumstances where all Agreed Claims have been paid at a 27

28 Payment Percentage of 100%, together with any interest that has accumulated pursuant to an Adjusting Payment, the Arrangement will terminate In circumstances where there can no longer be any claims and all Agreed Claims have not been paid at a Payment Percentage of 100% the Company will need to be liquidated in order to release any retained capital (e.g. regulatory capital), which will then be available for payment to pay Agreed Arrangement Claims by way of an increased Payment Percentage. As an initial step the Board will reserve necessary funds to formally liquidate and close the Company No Arrangement Creditor will receive payment in excess of 100% of their Agreed Claim together with any interest that has accumulated pursuant to an Adjusting Payment. 12. THE ARRANGEMENT ADVISERS 12.1 The Arrangement Advisers are KPMG, with the powers, rights, duties and functions conferred upon them by the Arrangement under Clauses 11.1 and All managerial powers, rights, duties and functions will remain with the Company The Arrangement Advisers will provide advice to the Company to facilitate the carrying out of the Arrangement. In carrying out their duties and functions under the Arrangement, the Arrangement Advisers will act impartially, in good faith and with reasonable skill and care If requested to do so in writing by an Arrangement Creditor, the Arrangement Advisers may in their absolute discretion investigate any aspect of the implementation of the Arrangement. The Arrangement Advisers will report to the Company and the Arrangement Creditor on whether the Arrangement is being implemented in accordance with its terms. 28

29 12.5 An Arrangement Adviser may be removed from office for good cause by the Company giving 28 days notice in writing or he may resign his office by giving 60 days notice in writing to the Company. In the event that the Company seeks to remove an Arrangement Adviser from office or an Arrangement Adviser resigns from office, the Arrangement Adviser shall be entitled to deposit with the Company a statement of circumstances that he considers should be brought to the attention of Arrangement Creditors The Arrangement Adviser will be paid out of the property of the Company and will be entitled to an indemnity for costs properly incurred in relation to the Arrangement and for defending any action brought against the Arrangement Adviser in relation to the Arrangement. With the exception of any fees or expenses which might be outstanding at the date of this document (which amounts will be payable by the Company), neither KPMG Advisory, the prospective initial Arrangement Adviser under the Arrangement, are Arrangement Creditors, shareholders or directors of the Company. 13. THE BOARD AND THE ARRANGEMENT MANAGER 13.1 Throughout the Arrangement all managerial powers, rights, duties and functions will remain with the Board As mentioned above, the Company has appointed the Arrangement Manager to provide advice to the Company and to assist the Company with certain aspects of the Arrangement. The Arrangement Manager are Kane (Bermuda) Limited who have provided insurance management services to the Company since 2005, and also act as the Company s Principal Representative in Bermuda Arrangement Creditors are not entitled to challenge any action either undertaken or omitted by the Arrangement Manager or any of its associated companies, directors, officers or employees in assisting the Company to implement the Arrangement. The Arrangement Manager and its associated companies, and the directors, officers and employees 29

30 of the Arrangement Manager and its associated companies, also have the benefit of an indemnity from the Company, the terms of which are set out at clause 12.3 of the Arrangement respectively. 14. OTHER PROVISIONS Some general provisions dealing with the discretion to extend deadlines laid down by the Arrangement, the service of notices under the Arrangement and the calculation of time periods under the Arrangement are set out at clauses 20 and 22 respectively of the Arrangement. 15. GOVERNING LAW AND JURISDICTION The Arrangement and the Policies will be governed by and construed in accordance with the laws of Bermuda, and the Supreme Court of Bermuda shall have exclusive jurisdiction in connection with the Arrangement or any Arrangement Liability or any dispute arising there from. 30

31 PART I EXPLANATORY STATEMENT SECTION D: APPENDICES TO THE EXPLANATORY STATEMENT APPENDIX 1 Company s Statutory Financial Return as at 31 December 2012 The figures below were extracted from the balance sheet included within the Company s audited statutory financial return as at 31 December Assets US $ Cash and time deposits 719,437 Quoted investments 2,341,111 Accounts and premiums receivable 289,424 Investment income due and accrued 18,720 Reinsurance balances receivable 505,717 Funds withheld 10,000 Total 3,884,409 General business insurance reserves and other liabilities US $ Loss and loss expenses provisions 4,169,913 Losses payable 207,450 Letters of credit 177,817 Accounts payable and accrued expenses 75,394 Commissions, expenses, fees and taxes payable 2,376 Total general business insurance reserves and other liabilities 4,632,950 Statutory capital and surplus (deficit) US $ Statutory capital 1,850,000 Statutory surplus (deficit) (2,598,541) Total Statutory capital and surplus (deficit) (748,541) Total 3,884,409 31

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