1. Lloyd's is a self-regulating organisation
operating under the provisions of Lloyd's Act 1982
(U.K.) (the "Lloyd's Act").
2. The governing body of Lloyd's Corporation
is the Council of Lloyd's (the "Council"). Section
6(1) of the Lloyd's Act provides that the Council shall have
responsibility for the management and superintendence of the
affairs of the Lloyd's Corporation and the power to regulate
and direct the business of insurance at Lloyd's (the "Lloyd's
Market"). The Council is ultimately responsible for regulating
the Lloyd's Market under the Lloyd's Act. Lloyd's Corporation
provides administrative, accounting and regulatory services
to the Lloyd's Market.
3. Lloyd's Corporation has also recently incorporated
Lloyd's Canada Inc. (the "Canadian Subsidiary"),
a wholly-owned subsidiary under the Canada Business Corporations
Act, to perform some of its functions in Canada.
4. Lloyd's Corporation is not registered as
an adviser under the Act or under the securities legislation
of any other Canadian jurisdiction.
5. None of Lloyd's Corporation, the Canadian
Subsidiary nor the Lloyd's Market is an "insurance company"
as referred to in the Act.
6. The Lloyd's Market is a brokered market
that focuses on, among other things, high risk, specialist
insurance for businesses. The Lloyd's Market is comprised
of a number of underwriting syndicates ("Syndicates")
that both compete and co-operate.
7. The capital supporting risks underwritten
by Syndicates at Lloyd's Market is provided by either individual
Members, who trade with unlimited liability, or corporate
Members, who trade with limited liability. Members must satisfy
financial requirements laid down by the Council. Individual
members are sometimes known as "Names".
8. There are currently 86 Syndicates underwriting
in the Lloyd's Market for the 2002 year of account, nearly
all of whom underwrite Canadian business. In 2001, there were
143 Members resident in Canada, of whom 73 were resident in
9. The Members of each Syndicate appoint a
Lloyd's Corporation underwriting agent (a "Managing Agent")
to act as agent of the Member for the purpose of accepting
risks on behalf of the Syndicate, including conducting that
part of the Canadian business carried on by the Member as
a member of that Syndicate. While Managing Agents are permitted
by Lloyd's Corporation to carry on business as underwriting
agents at Lloyd's Market and are regulated and supervised
by Lloyd's Corporation, Lloyd's Corporation does not own them.
The Managing Agents are resident in the U.K.
10. The investment management activities of
the Lloyd's Corporation and of each of the Managing Agents
are conducted in accordance with the Financial Services
and Markets Act 2000 (U.K.) (the "UK Financial Services
Act"). Under the UK Financial Services Act, a person
who carries on a "regulated activity" such as investment
management, needs to be either an "authorised person"
or an "exempt person" and, where authorised, needs
to have permission either expressly given to the person by
the Financial Services Authority (the " UK Financial
Services Authority") under Part IV of the UK Financial
Services Act or resulting from any other provision of the
UK Financial Services Act. The Lloyd's Corporation is an "authorised
person" under the UK Financial Services Act and has permission
under that Act to act as an investment manager under that
Act in connection with the carrying on by Members of the insurance
business. Each of the Managing Agents is also an "authorised
person" under the UK Financial Services Act and has been
given permission by the UK Financial Services Authority to
act as an investment manager in connection with managing the
insurance business of Syndicates.
11. Under the Federal Insurance Companies
Act, Lloyds Members, collectively, are authorised to insure
risks as a "foreign company". Under the Federal
Insurance Companies Act, "foreign company" is defined
to include an "association", within the meaning
of Part XIII of the Federal Insurance Companies Act, the insurance
of risks in Canada of which has been approved by order of
the Superintendent of Financial Institutions (the "Federal
Superintendent") under Part XIII of the Federal Insurance
Companies Act; and, an "association" is defined
to mean an association of persons formed in a foreign country
on the plan known as Lloyd's, whereby each member of the association
participating in a policy becomes liable for a stated, limited
or proportionate part of the whole amount payable under the
policy. In addition to being governed by the Federal Insurance
Companies Act, Members, collectively, are licensed as insurers
under applicable insurance legislation in all provinces and
territories to transact most classes of insurance, and the
relevant Canadian business of Members is subject to and governed
in accordance with the applicable requirements of such legislation
in the same manner as any other licensed insurer. Syndicates,
in turn, accept business from around 580 approved local broker
firms, or "correspondents", across Canada.
12. None of the mind or management of Lloyd's
Corporation or the Managing Agents is in Ontario.
13. Under the Federal Insurance Companies
Act, all insurers that are foreign companies are required
to maintain a trust fund for solvency purposes. Lloyd's Corporation
Members comply with this requirement in the form of the Lloyd's
Canadian Trust Fund (the "Canadian Trust Fund")
and the Lloyd's Canadian margin fund (the "Canadian Margin
Fund"). The Canadian Trust Fund and Canadian Margin Fund
have been established to comply with the regulatory capital
requirements under the Federal Insurance Companies Act. The
Federal Superintendent has approved, and is a party to, trust
agreements (each, a "Trust Deed") for each of the
Canadian Trust Fund and the Canadian Margin Fund.
14. The Federal Insurance Companies Act requires
each Member to maintain a trust fund in relation to its insurance
risks in Canada. The Canadian Trust Fund is a collective term
for a number of distinct and separate funds of individual
trusts which have been established for each Member (each,
a "Member's Canadian Trust Fund"). Each Member's
Canadian Trust Fund receives all Canadian situs risk net insurance
premiums, and is used to pay all claims and expenses related
to the Canadian situs risk insurance underwriting business
of the Member.
15. The Canadian Margin Fund is a joint trust
fund which is available to satisfy "matured claims"
against any Member, the beneficiaries of which are policyholders,
third-party claimants and, ultimately, certain Members that
are current contributors. The Council has discretionary investment
powers under the Canadian Margin Fund.
16. At December 31, 2001, the Canadian Trust
Fund was valued at approximately $1,138,000,000 and the Canadian
Margin Fund was valued at approximately $176,000,000.
17. Royal Trust Corporation of Canada, at
its Toronto offices, acts as trustee (the "Trustee")
for each of the Canadian Trust Fund and the Canadian Margin
Fund, and each Fund is governed by a Trust Deed between Lloyd's
Corporation, the Trustee and the Federal Superintendent.
18. Pursuant to the Trust Deed for the Canadian
Trust Fund, each Managing Agent has investment discretion
with respect to that portion of the Canadian Trust Fund attributable
to the Canadian business of Members carried on by the Managing
19. In order to enhance returns and reduce
costs, Lloyd's Corporation is proposing to invite Managing
Agents to invest the assets of the Canadian Trust Fund, in
respect of which they have investment discretion, in a commingled
investment account (the "Commingled Account") established
for the assets of the Canadian Margin Fund, by way of an undivided
pro rata share of each investment in the Commingled
20. The Council has appointed the Lloyd's
Treasury Services ("Treasury Services") department,
which comprises officers and employees of Lloyd's Corporation,
as investment manager of the Canadian Margin Fund, which investment
management functions are over-seen by an employee of Lloyd's
Treasury Services department who is a person approved by the
UK Financial Services Authority. Because the Canadian Margin
Fund will provide a substantial portion of the assets for
the Commingled Account, the Treasury Services department will
also act as investment manager for the Commingled Account
and as such will have the exclusive authority to make all
investment decisions with respect to funds available for investment.
21. The investment activities of the Managing
Agents and the Treasury Services department are functionally
the same as the investment activities of any other insurance
company in respect of its regulatory and working capital.
22. Although an "association" (as
defined in the Federal Insurance Companies Act) is a "foreign
company" for purposes of the Federal Insurance Companies
Act, neither the Act nor the Insurance Act (Ontario)
contains a similar definition. Neither the Act nor the Insurance
Act (Ontario) defines the term "insurance company".
The word "company" is defined in the Act, but it
requires an entity to be incorporated. The term "insurance
company" is used in the Insurance Act (Ontario),
but specific references are also made to licensing syndicates,
suggesting that Syndicates are not insurance companies within
the meaning of the Insurance Act (Ontario). Section
42(1) of the Insurance Act (Ontario) enumerates classes
of insurers to whom licences may be issued, including "underwriters
or syndicates of underwriters operating under the plan known
23. Each of the Canadian Trust Fund and the
Canadian Margin Fund is constituted to provide regulatory
capital or "assets in Canada" as required under
the Federal Insurance Companies Act for the protection of
the interests of policyholders and not primarily as an investment
fund for Members.
24. To the extent Lloyd's Corporation is considered
to be acting as an adviser in Ontario in connection with its
Treasury Services acting as investment manager for the Commingled
Account, it cannot rely on the exemption from clause 25(1)(c)
of the Act that is made available in clause 34(a) of the Act
to an "insurance company licensed under the Insurance
Act". Nor can Lloyd's Corporation rely on the exemption
from clause 25(1)(c) that is made available to such insurance
companies that are regulated by the federal Office of the
Superintendent of Financial Institutions in accordance with
clause 209(10)(b) of Regulation 1015 made under the Act.