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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Excess Insurance Company Ltd & Ors, Re [2015] EWHC 3572 (Ch) (08 December 2015) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2015/3572.html Cite as: [2015] EWHC 3572 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Rolls Building Royal Courts of Justice Fetter Lane, London, EC4A 1NL
		08/12/2015

Mr Justice Henderson:

Introduction

1. On 13 October 2015 I heard an application for an order under section 111(1) of the Financial Services and Markets Act 2000 ("FSMA") sanctioning an insurance business transfer scheme ("the Scheme") relating to the general UK insurance business in run-off carried on by two subsidiaries of The Hartford Financial Services Group, Inc ("HFSG") and, in respect of certain previously transferred business, by Aviva Insurance Limited ("AIL"). The proposed transferee is another English subsidiary in the Hartford Group, Hartford Financial Products International Limited ("HFPI" or the "Transferee"). In broad terms, the purpose of the Scheme is to reduce the number of entities with UK run-off liabilities for which the group is responsible from four to one, to simplify and consolidate the group's legal structure, and to reduce costs and increase capital efficiencies within the group in preparation for the new European regulatory regime for insurers, known as Solvency II, which is due to come into force on 1 January 2016.
2. The parent company of the Hartford Group, HFSG, is incorporated in the State of Delaware, USA. It carries on a worldwide insurance and mutual funds business, with recorded revenues in the year ended 31 December 2014 of approximately $19 billion. HFSG has a number of direct and indirect wholly-owned subsidiaries, incorporated in jurisdictions which include Connecticut, Delaware and England. One of the English subsidiaries is Excess Insurance Company Limited ("Excess"), which accounts for the bulk of the UK business to be transferred (consisting of some 98% of the total known non-commuted policies, and 77% of the relevant known case reserves). Excess was incorporated in 1894, and then wrote general insurance and reinsurance business in the London Market until it was placed into run-off in 1992. It had a portfolio of UK personal and commercial business, including employers' liability business.
3. The largest property and casualty insurance subsidiary in the group is Hartford Fire Insurance Company ("Hartford Fire"), which was incorporated in the State of Connecticut in 1810. From 1993 until 2001, Hartford Fire wrote non-US reinsurance business through its UK branch, which traded under the name Hart Re. This is the main business which is to be transferred by Hartford Fire, accounting for about 9% of the known case reserves included in the transfer. The transferring business of Hartford Fire constitutes only a tiny proportion of its total business: it has approximately 450,000 policyholders, and claims reserves of some £10 billion, of which the transferring claims reserves of £54 million are about 0.5%.
4. The remaining block of the business to be transferred was previously carried on by a former subsidiary of the Hartford Group, London and Edinburgh Insurance Company Limited ("L & E"). In 1998 L & E was sold to the Aviva (or, as it then was, the Norwich Union) Group, but the economic and management responsibility for the business now to be transferred ("the L & E business") was retained by HSFG, which provided an indemnity to the purchaser in respect of all liabilities arising from it. The sale and purchase agreement also included an understanding that the Aviva Group and the Hartford Group would use reasonable endeavours to transfer the L & E business back to the Hartford Group at a future date. Both the L & E business, and the benefit of the indemnity, were later transferred to AIL pursuant to a scheme under Part VII of FSMA sanctioned by the court in September 2011: see Re Aviva International Insurance Limited [2011] EWHC 1901 (Ch). It follows that AIL is the legal transferor of the L & E business, although AIL has had no economic or management responsibility for that business since 1998. The L & E business was, for the greater part, written between the 1940s and the 1970s by virtue of certain pooling arrangements. None was written after 1992.
5. As with the business of Hart Re, the transferring business of AIL is insignificant in comparison with its insurance business as a whole. AIL is one of the UK's largest general insurers, and as at 31 December 2014 it had approximately 12.5 million insurance contracts in force which are not being transferred by the Scheme. As at the same date, its claims reserves were £5.3 billion, of which those attributable to the L & E business were only £57 million (or about 1%).
6. The Transferee, HFPI, wrote directors and officers insurance, and errors and omissions insurance, of various kinds between 2007 and July 2012 when it ceased writing new business. It wrote 750 policies during that period, mainly in the UK and Europe, most of which were one-year claims made policies. It has gross claims reserves of about £20 million.
7. At the hearing on 13 October, the claimants (Excess, Hartford Fire, AIL and the Transferee) were represented by leading counsel, Mr Martin Moore QC. I had the benefit of comprehensive written and oral submissions from him. I also had the benefit of a lengthy report dated 29 June 2015, a supplementary report dated 6 October, and an additional note date 12 October, by the independent expert appointed pursuant to section 109 of FSMA, Mr Michael Barkham. He is a partner in the European Actuarial Services practice of Ernst & Young LLP, and a Fellow of the Institute and Faculty of Actuaries, as well as of the Society of Actuaries in Ireland. He has more than 25 years' experience in the field of general insurance. As required by the legislation, his appointment as independent expert has been approved by the Prudential Regulation Authority ("the PRA"), as has the form of his report.
8. Mr Barkham's overall conclusion, as set out in paragraph 3.1 of his main report, was as follows:

"I conclude that the security provided to policyholders would be equivalent or improved after the Transfer, that no group of policyholders would be adversely affected to a material extent by the Transfer, that the level of customer service provided to policyholders would be unaffected by the Transfer, and that therefore there is no reason that the Transfer should not go ahead."

In his supplemental report, Mr Barkham confirmed that his overall conclusion remained unchanged. In his additional note, produced on the eve of the hearing following the last minute objections to the Scheme which I mention below, he again confirmed that they gave him no reason to change his view.

9. Of the two UK regulatory authorities which have a statutory obligation to consider the application, and the right to be heard at the sanction hearing, the PRA submitted two reports dated 30 June and 9 October 2015 respectively. In its first report the PRA stated that it was not currently aware of any issue that would cause it to object to the Scheme, and in its second report the PRA confirmed that this was still the position. Furthermore, the PRA's position remained unchanged after consideration of the late objections to the Scheme, for the reasons set out in the skeleton argument and oral submissions of counsel whom the PRA instructed to appear at the sanction hearing, Mr Robert Purves.
10. The other regulatory authority with a role in the matter is the Financial Conduct Authority ("the FCA"), which provided two reports in the usual way, dated 1 July and 9 October 2015. In its first report, the FCA said it was continuing to evaluate the Scheme and had not yet reached a view as to whether or not it objected to the Scheme. In its second report, the FCA confirmed that it did not object to the Scheme, and did not propose to appear by counsel at the hearing. This remained the FCA's position, notwithstanding the objections to the Scheme of which it was duly informed.
11. The only objections to the Scheme were put forward by two US policyholders of Excess, Century Indemnity Company and ACE Property & Casualty Company (together, "the ACE policyholders"). The background to the interest of the ACE policyholders is that from the early 1960s to 1993 ACE ceded to Excess, and Excess as reinsurer participated in, hundreds of ACE reinsurance policies. Their concerns were set out in a letter dated 9 October 2015 from their solicitors, Holman Fenwick Willan LLP ("HFW"). The letter was not sent until 9.31 pm on 9 October, which was the Friday before the hearing fixed for Tuesday, 13 October. To their credit, the claimants' solicitors, Freshfields Bruckhaus Deringer LLP, were able to send a substantive response to it on Sunday 11 October. On any view, this was an objection which had been left to almost the last possible moment, even though details of the Scheme (including the date of the hearing) had been communicated to the ACE policyholders on 10 July 2015, and they had been provided with certain additional information which they requested on 8 September. Following that, nothing was heard until the letter of 9 October.
12. As I shall explain, the central point taken by the ACE policyholders relates to a so-called "Deed of Guarantee" dated 20 November 1991, provided by HFSG (under its former name ITT Hartford Group, Inc) for the benefit of certain policyholders of Excess ("the Guarantee"). Under the terms of the proposed transfer, the Guarantee was excluded with the consequence that the transferring policyholders would no longer have the benefit of it. On the other hand, they were to be provided with certain benefits which they did not previously enjoy, including the injection of fresh capital of £148 million and the provision of adverse development cover ("the ADC Reinsurance") by Hartford Fire. The concern of the ACE policyholders, at least ostensibly, was that the exclusion of the Guarantee from the Scheme would diminish their security, without any good reason, and that the ADC Reinsurance was in various respects unsatisfactory. In the letter of 9 October, HFW said that these concerns would be satisfied if the Guarantee were included in the transfer, and/or the ADC Reinsurance were strengthened in two ways. Meanwhile, HFW reserved their clients' position with regard to a formal objection to the transfer.
13. In the event, the claimants were unwilling to modify the Scheme in either of the ways suggested, and the ACE policyholders therefore decided to register a formal objection to the Scheme. For this purpose, HFW instructed counsel, Ms Nehali Shah, who provided a skeleton argument on 12 October, and appeared on behalf of the ACE policyholders at the hearing.
14. Having heard submissions from Mr Moore, Mr Purves and Ms Shah, I was satisfied that the Scheme was one which the court could properly approve in the exercise of its discretion, and that the exclusion of the Guarantee would not leave the transferring policyholders in a materially worse position, contrary to the submissions advanced by the ACE policyholders. I therefore indicated that I would make an order approving the Scheme with immediate effect, but would provide my reasons for doing so later. In this judgment I now set out the reasons which led me to approve the Scheme.

The Scheme

15. I have already outlined the basic features of the Scheme. As the independent expert says in the introductory section of his main report, the proposed transfer could be thought of as three separate transfers occurring together, i.e. from each of Excess, Hart Re and AIL to the Transferee. The Scheme document is in fairly standard form, and of no particular complexity. The operative part of it deals with the transfer of the business and assets, and contains consequential provisions of a usual nature. Wide indemnities are given by the Transferee in clause 9, covering any losses attributable to the transferred policies. On a precautionary basis, there are also provisions relating to Residual Assets and Residual Liabilities in case it emerges (contrary to the expectation of the parties) that there are any assets and liabilities which are not otherwise capable of transfer, or the transfer of which the parties agree to delay. The effective date of the Scheme was proposed to be 15 October 2015, or later by agreement. Clause 12 provided for modifications or additions to the Scheme, with the consent of the parties and the approval (or direction) of the court.

Protections for policyholders

16. There are a number of existing (i.e. pre-transfer) protections for policyholders provided by members of the Hartford Group. They are helpfully summarised by Mr Moore in his skeleton argument, and have been reviewed by the independent expert in his report. Apart from the Guarantee (and a similar guarantee given by HFSG in 1992 to L & E policyholders), which I will discuss later in this judgment, it is unnecessary for me to deal with these protections in any detail. Differing arrangements have been made in relation to them, as part of the general streamlining and reorganisation which the Scheme is designed to achieve. Some of the protections will remain in place, and will continue to apply to the transferred policies. Others will be transferred under the Scheme, but will then be immediately commuted or cancelled. In at least one case (a US surplus lines trust), the existing trust assets will not transfer under the Scheme, but equivalent arrangements will be made to benefit the relevant policyholders with trust assets of a slightly higher value. I am satisfied that all of these matters have been taken into account, and properly considered, by the independent expert.
17. Importantly, the Scheme provides for two significant new forms of protection which will be available for policyholders in the enlarged Transferee. First, on the effective date, HFSG will procure the injection of £138 million in cash into HFPI by its immediate parent company, Nutmeg Insurance Company ("Nutmeg"). In return, HFPI will issue an equivalent number of £1 ordinary shares to Nutmeg, which, taken in conjunction with a promissory note for the principal amount of £9 million issued by Nutmeg, and a previous capital injection of £10 million already made into HFPI, will bring HFPI's capital up to the required regulatory amount under the Solvency II standard formula. Secondly, HFPI will use £27 million of the capital injection to pay the premium to Hartford Fire for the ADC Reinsurance. This will provide cover for the transferred business from the current level of the net of reinsurance reserves upwards, and will be unlimited in value. It follows that any deterioration in HFPI's net claims reserves, caused for example by an adverse claims development or the failure of a third party reinsurer, will be met by Hartford Fire, which is one of the largest subsidiaries in the Hartford Group and subject to regulation in the State of Connecticut.
18. In the section of his main report headed "Key reasons for reaching my conclusion", Mr Barkham summarised his assessment of these two new forms of protection as follows:

"3.3 The work I have carried out shows that all of the policyholders of HFPI will have a good level of security after the Transfer. There will be a capital injection into HFPI which will increase the level of capital in HFPI. Furthermore, there will be additional reinsurance protection for HFPI (i.e. the ADC Reinsurance) which will provide full cover with Hartford Fire (as described in paragraph 2.51 any deterioration in the net claims reserves for the transferring business will be met by Hartford Fire). Hartford Fire is a very large and diversified reinsurer, with an A credit rating provided by Standard and Poor's ("S & P"). I believe that the post-Transfer policyholders of HFPI will have a good level of security through a combination of the increased capital in HFPI and the ADC Reinsurance in place."

19. In a later section of his report, Mr Barkham added this in relation to the ADC Reinsurance:

"4.85 I have reviewed the proposed wording of the ADC Reinsurance contract and am satisfied that this will provide the level of insurance cover as described to me by The Hartford, and as valued in the Hartford Capital Model …

4.86 The premium for the ADC Reinsurance has been calculated on a consistent basis with the Hartford Capital Model and I am satisfied that this is an appropriate arm's length premium for the contract."

20. Mr Barkham discusses the new Solvency II regime in paragraphs 4.63 to 4.77 of his main report. He explains that, as at the date of the report (29 June 2015), HFPI intended to use the standard formula as the basis for its regulatory capital amount under Solvency II. Following discussion and review of the calculations, Mr Barkham was satisfied that the amount had been calculated in an appropriate way, and the amount of the capital injection from the Hartford Group on the effective date would be calculated accordingly. He expressed the belief (in paragraph 4.70) that HFPI was "well advanced in its Solvency II preparations", and that it was "making appropriate progress for Solvency II compliance".
21. In his supplementary report of 6 October 2015, Mr Barkham explained that, as a result of various adjustments, the amount of the proposed capital injection had increased from £134 million to £148 million, which after taking into account the £10 million paid on account to HFPI in March 2015, left £138 million to be paid on the transfer date. He also explained that there was one remaining aspect of the Solvency II calculations which had not yet been agreed with the PRA, relating to a volatility adjustment. The capital injection was calculated on the basis that the volatility adjustment would be approved by the PRA. If, however, it were not approved, a further capital contribution of £9 million would be needed. In order to cover this eventuality, Nutmeg had agreed to issue a promissory note for £9 million, to be paid in cash on 1 January 2016 if HFPI did not meet the Solvency II requirement on that date. Accordingly, HFPI now has the benefit of this promissory note in addition to the £148 million paid in March and October 2015 and the ADC Reinsurance.
22. In its second report, the PRA says it has "no reason to disagree" with the conclusion of the independent expert that he expects the regulatory capital requirements of Solvency II to be met by the Transferee. Similarly, the PRA said it had no reason to disagree with his conclusion in relation to the wording of the ADC Reinsurance cover.

The role of the court

23. Section 111 of FSMA provides as follows:

"(1) This section sets out the conditions which must be satisfied before the court may make an order under this section sanctioning an insurance business transfer scheme …

(2) The court must be satisfied that –

(a) …the appropriate certificates have been obtained (as to which see Parts I and II of Schedule 12);

(aa) …

(b) the transferee has the authorisation required (if any) to enable the business, or part, which is to be transferred to be carried on in the place to which it is to be transferred (or will have it before the scheme takes effect).

(3) The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme."

24. In addition, there are various other technical requirements which have to be satisfied before an insurance business transfer can be sanctioned. It is unnecessary for me to deal with these. Mr Moore was able to satisfy me that they had all been complied with, and the necessary certificates and authorisations had been duly obtained.
25. The principles which should guide the court in exercise of its discretion to sanction the Scheme under section 111(3) of FSMA are, by now, well settled. The citation of relevant authority normally begins with Re London Life Association Limited (21 February 1989, unreported), a decision under Schedule 2C to the Insurance Companies Act 1982 relating to the transfer of long-term insurance business, where Hoffmann J said (at pages 6 and 7 of the transcript):

"In the end the question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected. But the court does not have to be satisfied that no better scheme could have been devised … I am therefore not concerned with whether, by further negotiation, the scheme might be improved, but with whether, taken as a whole, the scheme before the court is unfair to any person or class of persons affected.

In providing the court with material upon which to decide this question, the Act assigns important roles to the independent actuary and the Secretary of State. A report from the former is expressly required and the latter is given a right to be heard on the petition."

26. In Re Axa Equity & Life Assurance Society Plc and Axa Sun Life Plc [2001] 1 All ER (Comm) 1010 ("Axa Life"), Evans-Lombe J applied Hoffmann J's decision, and derived from it eight principles which should govern the approach of the court to applications for the sanction of transfers of long-term business. The eight principles (set out at pp 1011 and 1012) were as follows:

"(1) The 1982 Act confers an absolute discretion on the court whether or not to sanction a scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the company's constitution to its directors.

(2) The court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.

(3) This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme with what would be the result if the scheme were implemented. For the purpose of this comparison the 1982 Act assigns an important role to the independent actuary to whose report the court will give close attention.

(4) The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the court will pay close attention to any views expressed by the FSA.

(5) That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.

(6) It is not the function of the court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the court may deem fair, it is the company's directors' choice which to pursue.

(7) Under the same principle the details of the scheme are not a matter for the court provided that the scheme as a whole is found to be fair. Thus the court will not amend the scheme because it thinks that individual provisions could be improved upon.

(8) It seems to me to follow from the above and in particular paras (2), (3) and (5) that the court, in arriving at its conclusion, should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect."

27. The only point which needs to be added is that, in cases (such as the present) which involve transfers of general insurance business, some adaptation is needed of the principles laid down in Axa Life in relation to transfers of long-term business: see the judgment of David Richards J in Re Royal Sun Alliance Insurance Plc [2008] EWHC 3436 (Ch) at [7] and [9] to [10]. David Richards J added, at [11]:

"Accordingly, in approaching this application I shall be concerned to see whether there is any material adverse effect on the position of policyholders in any of the three groups to which I have referred. The word "material" is important. The court is not concerned to address theoretical risks … What the court is concerned to address is the prospect of real, as opposed to fanciful, risks to the position of policyholders."

The objections of the ACE policyholders

28. The objections of the ACE policyholders are focused, as I have already said, on the exclusion of the Guarantee from the Scheme.
29. The Guarantee was in the following terms:

"DEED OF GUARANTEE

TO: All persons, firms and companies for whose benefit this Agreement is entered into.

WHEREAS:

I. [HFSG] of [address] has at the request of its United Kingdom subsidiary, EXCESS INSURANCE COMPANY LIMITED ("Excess"), agreed to guarantee liabilities of Excess as described in this Agreement.

II. It is intended that all persons, firms or companies entitled under policies of insurance or reinsurance underwritten by Excess, as described in this Agreement, ("Beneficiaries") be entitled to the benefit of this Agreement.

III. [HFSG] is empowered to give the Guarantee contained in this Agreement.

NOW IT IS AGREED AS FOLLOWS:

In consideration of the Beneficiaries entering into and/or maintaining policies of insurance or reinsurance with Excess, it is agreed and declared by [HFSG]:

(a) If and so often as Excess shall make default in payment of its due proportion of any sum or sums properly due and payable by Excess under any policy of insurance or reinsurance underwritten by Excess (i) prior to the date hereof, or (ii) while this Guarantee remains in effect, [HFSG] shall pay and make good such sum or sums to the person, firm or companies properly entitled to such payment.

(b) This Guarantee shall not be effective with respect to any policy of insurance or reinsurance underwritten by Excess after the earlier of (i) the date Excess ceases to be a subsidiary or affiliated company within the ITT Hartford Group of Companies, or (ii) eighteen months after delivery of written notice to the Board of Directors of Excess that [HFSG] intends to terminate this Guarantee. Notwithstanding the foregoing, [HFSG] shall remain obligated with respect to any policy of insurance or reinsurance underwritten by Excess prior to such earlier date.

(c) This Guarantee shall be governed and construed in accordance with English law.

Dated: November 20, 1991

ITT HARTFORD GROUP, INC.

By [signature]"

30. At a general level, it appears that the intention of the Guarantee was for the parent company of the Hartford Group, HFSG, to benefit all the policyholders of Excess by the provision of a guarantee in the event of default by Excess. However, the document gives rise to some obvious potential difficulties. Although described as a "Deed of Guarantee" in its heading, the word "deed" occurs nowhere in the body of the document, nor is there any indication that it was executed as a deed in accordance with the requirements of English law. The document appears to have been signed by an authorised signatory of HFSG, without any further formality, and in particular without being sealed. It should be noted in this connection that, although the formalities for execution of deeds by companies formed and registered under the Companies Acts were relaxed in 1990, with the coming into force of section 36A of the Companies Act 1985, these provisions did not apply to foreign companies (such as HFSG), which continued to be bound by the requirements of English common law, including the need for a deed to be sealed. Furthermore, the operative part of the Guarantee is framed in the language of contract, with references to an agreement made by HFSG in consideration of the Beneficiaries entering into and/or maintaining their policies with Excess, and not in the language which one would expect to find if HFSG were undertaking a unilateral obligation by a deed poll.
31. In view of these (and other) uncertainties, it is not surprising that HFSG sought legal advice, in the context of the proposed transfer, on a number of questions concerning the validity, construction and effect of the Guarantee (and its materially identical counterpart, given to the policyholders of L & E in 1992). Advice was obtained from William Trower QC, on the express understanding that a copy of his opinion would be provided to (among others) Mr Barkham, in his capacity as independent expert, and the PRA, which as regulator would be considering the proposed transfer.
32. In his report, Mr Barkham referred to Mr Trower's advice, but did not attach or exhibit it to his report, presumably on the basis that it was thought to be confidential and/or privileged in his hands. Whatever the reason, this was in my view an unsatisfactory stance to adopt. In the interests of transparency, and subject to what I say in [34] below, it is important that all significant material upon which an independent expert relies in evaluating a scheme and reaching his conclusions should (where reasonably possible) be available for review by the court and interested parties. This point was made by David Richards J in Royal & Sun Alliance v British Engine [2006] EWHC 2947, at [38]:

"The independent expert referred, in his report, to the FSA's letter of 27 January 2005 as a document on which he had relied, although I do not think he stated its date. He did not annex the letter to his report because, as appears to be the case, the FSA wished it to be treated as confidential. It is not, in my judgment, acceptable that material on which the expert has relied, particularly material of this significance to an important aspect of the expert's consideration of the scheme, should not be put before the court and be readily available to interested parties. Different considerations may apply to legal advice and I say nothing as to that. In saying this, I am not criticising anyone concerned in this case, particularly not the expert, but I think the principle of disclosure should be well established."

33. With regard to legal advice, I can well understand that if, for example, the expert were himself to seek legal advice in relation to some aspect of his task, such advice might well be privileged unless he chose to disclose it. But that is not the position in the present case. The advice was obtained by HSFG in contemplation of the Scheme, and was provided to the independent expert in order to assist him in his work. In view of the principle of disclosure identified by David Richards J, and the fact that the Scheme would have to be approved by the court at a public hearing, when the court would be concerned to review the independent expert's reports, it seems to me that any privilege or confidentiality which originally attached to Mr Trower's advice in the hands of HFSG must have been waived when the advice was provided to Mr Barkham, at least for the purposes of the Scheme and the sanction proceedings. That being so, the simple and straightforward course would have been for Mr Barkham to annex the advice to his report. Apart from anything else, the failure to do so ran the risk of engendering an unfounded suspicion that his understanding of the advice might have been inaccurate or selective; and it is only by seeing the advice in full that the court, or an interested party, can properly decide whether it agrees with the independent expert's assessment of it.
34. When I raised this matter during the hearing, Mr Moore took instructions and agreement was swiftly obtained for Mr Trower's advice to be disclosed, and copies were provided for the court and for the ACE policyholders. Like David Richards J, I do not wish to criticise anyone for the previous non-disclosure of the advice, but in view of the importance which the ACE policyholders attach to the Guarantee it would clearly have been most unsatisfactory if the court had been obliged to proceed in ignorance of the full terms of Mr Trower's advice. For the avoidance of doubt, I should also make clear that I accept that different considerations may well apply to the disclosure of material which is commercially sensitive, including regulatory information of a sensitive nature whether provided to, or produced by, the regulators.
35. Mr Barkham's assessment of the two guarantees in his main report includes the following passage:

"4.80 There are a number of uncertainties in the application of these guarantees which mean that not all policyholders of [Excess] and L & E will be covered by the guarantees, and that it would be difficult for a policyholder to make a claim under the guarantees. The uncertainties arise from the wording and form of the guarantees. I have discussed the applicability of the guarantees with the Hartford Group and their advisors. The Hartford Group have also commissioned an independent review, performed by William Trower QC, of the wording of the guarantees. I have received and reviewed a copy of that legal advice.

4.81 From my review of the legal advice I understand that neither of the HFSG Guarantees satisfies the necessary statutory requirements to be classified as a deed. The documents could be viewed as being a contract between HFSG and various policyholders of [Excess] and L & E. A policyholder may be able to make a claim under one of the guarantees, but they may need to show that they knew of the terms of the guarantee when they entered into or renewed their insurance policy, and that they knew that they were beneficiaries of the guarantee when doing so.

4.82 My conclusions on the applicability of the HFSG Guarantees are as follows:

It is not possible to determine how many and which policyholders would be able to make a claim under each of the guarantees because this will depend on the individual circumstances of the policyholder (e.g. when they purchased or renewed their policy, whether they knew of the existence of the guarantee, and whether they can prove that they knew of its existence).

The vast majority of policyholders would have purchased their policy before the issue of the HFSG Guarantees in 1991 and 1992. Therefore I believe that it is likely that relatively few, if any, policyholders will be able to show that they knew of the existence of the guarantees and took this into account when they purchased or renewed their insurance policy.

Even where a policyholder did know of the existence of the HFSG Guarantees and believed that they could make a valid claim under a guarantee, it may be difficult to produce evidence of this. There is therefore some uncertainty over whether their claim under the guarantee would be successful.

4.83 As part of my assessment of the Transfer I have considered the policyholders who may benefit from either of the HFSG Guarantees as a separate sub-group of policyholder."

36. In a later section of his report, Mr Barkham considered the security of transferring Excess policyholders. In relation to those who were not beneficiaries of the Guarantee, he said this:

"4.100 The level of capital in [Excess] is currently relatively low. Although there are currently sufficient funds in the company to pay future expected claim payments, there would only need to be a relatively small deterioration in the claims reserves to make the company insolvent. In those circumstances the policyholders would need to rely on discretionary additional capital from the Hartford Group.

4.101 After the Transfer this group of policyholders would be insured by the enlarged HFPI. This company would have much more capital relative to its size and would meet the Solvency II regulatory capital requirement. More importantly, there would be complete reinsurance of any adverse claim development with Hartford Fire (achieved through the new ADC Reinsurance which will be put in place). Hartford Fire is a very large and well diversified insurer, and this reinsurance protection provides significant additional security to the [Excess] policyholders.

4.102 I believe that this sub-group of [Excess] policyholders would have significantly improved security after the Transfer."

37. Turning to the Excess policyholders who were beneficiaries of the Guarantee, Mr Barkham continued:

"4.103 This sub-group of policyholders has better security prior to the Transfer than the [Excess] policyholders without the benefit of the … Guarantee. They are able to make a claim against HSFG under the Guarantee in circumstances where [Excess] does not pay.

4.104 After the Transfer the … Guarantee would be cancelled, but the new ADC Reinsurance will be in place. I believe that the ADC Reinsurance will provide slightly better protection for the policyholders than the … Guarantee. This is because:

The ADC Reinsurance protects the solvency of the insurer (i.e. HFPI), while the Guarantee provides recourse to certain policyholders in the event of default of an insurer. This is significantly less convenient and less certain for the policyholder. I discuss this in more detail in paragraphs 4.78 to 4.83.

Hartford Fire's solvency is supervised by its insurance regulator in Connecticut. Hartford Fire holds claims reserves and capital margins against its reinsurance obligations. In contrast, HFSG is a parent holding company whose results, and ability to make guarantee payments, rely on the performance of its key insurance subsidiary, Hartford Fire.

If Hartford Fire becomes impaired, dividends from Hartford Fire to HFSG will be curtailed by the Connecticut regulator. The Guarantee will then cease to provide security, while the ADC Reinsurance will continue to respond.

4.105 After the Transfer this group of policyholders would be insured by the enlarged HFPI. This company would have much more capital relative to its size and would meet the Solvency II regulatory capital requirement."

38. On a point of detail, I believe it to be common ground that Mr Barkham exaggerated somewhat when he said, in the third bullet point of paragraph 4.104, that if the payment of dividends from Hartford Fire to HFSG were curtailed, the Guarantee "will then cease to provide security". The legal obligation on HFSG to honour the Guarantee would remain, for those policyholders entitled to rely upon it, and even if Hartford Fire were impaired, it is far from obvious that HFSG would itself lack the necessary resources (including dividends from its other subsidiaries) to enable it to discharge its obligations. Mr Barkham should therefore have said that the Guarantee "may" then cease to provide security.
39. Returning to Mr Trower's advice, the five specific issues which he was asked to consider were these (as set out in paragraph 4 of his Opinion):

(1) Which law would an English court regard as the governing law of each Guarantee?

(2) Each of the Guarantees is entitled "Deed of Guarantee". Does it satisfy the legal requirements in force at the time it was created to be validly categorised as a deed?

(3) If a Guarantee is not categorised as a deed, how is its legal form to be categorised?

(4) Could it be said that each Guarantee applies to all policyholders of the relevant Insurer, some sub-set of them or none of them?

(5) If only some of an Insurer's policyholders are entitled to the benefit of the relevant Guarantee, what would such a policyholder have to demonstrate in order to prove that he is a member of the class of policyholders who might be able to make a claim on that Guarantee?

40. After discussing these questions, Mr Trower stated his conclusions as follows:

"49. In conclusion, the form and drafting of both of these Guarantees gives rise to difficult questions of categorisation and construction. I can, however, summarise my views as follows:

49.1 An English court would conclude that each of the Guarantees is governed by English law.

49.2 Neither of the Guarantees fulfils the necessary statutory requirements to be a deed.

49.3 Each of the Guarantees operates as an offer capable of acceptance by persons described as Beneficiaries, who will be entitled to enforce the Guarantees, if but only if they accept the offer and provide consideration.

49.4 The categories of person who qualify as Beneficiaries under one or other of the Guarantees do not extend to all policyholders of L & E or [Excess] as the case may be.

49.5 In order to enforce a claim under one or other of the Guarantees, the only policyholders whose enforcement rights appear to be relatively straightforward are those who entered into or renewed policies of insurance or reinsurance after the date of the relevant Guarantee, who know of its terms and who knew that they were Beneficiaries under it.

49.6 Policyholders who have only maintained existing policies since the date of the Guarantees will have particular difficulties in establishing either that they accepted the offer made [by] Hartford or that any sufficient consideration passed so as to enable them to enforce against Hartford any promises made by the Guarantees."

41. In view of these conclusions, and the detailed discussion contained in the body of Mr Trower's Opinion, I consider that Mr Barkham's summary of Mr Trowers's advice in paragraphs 4.80 to 4.82 of his report was both fair and adequate. There may, of course, be room for differences of view on at least some of the questions which Mr Trower discussed, and on behalf of the ACE policyholders Ms Shah sought to take issue with some of his conclusions. But that is not the relevant point. On any view, the Guarantee gives rise to considerable difficult questions of interpretation and formal validity, and the protection which it afforded to Excess policyholders was correspondingly uncertain. It also needs to be remembered that the only scenario in which policyholders would need to rely on the Guarantee is one where Excess had defaulted on its obligations. In such a situation, it is likely that HFSG would itself be in serious financial difficulties, and would have every incentive to seek to minimise its liabilities under the Guarantee. Against this background, it seems to me fairly obvious that Mr Barkham was right to conclude that the Excess policyholders would be better protected under the Scheme than they were under the status quo. Not only is this the view of the independent expert, with whom I agree, but it is also the view of the PRA and (by inference) the FCA. As Mr Purves put it in his skeleton argument on behalf of the PRA:

"In short, guarantees of this type are generally contingent obligations drawn on an un-regulated entity, triggered only at a level well below that at which regulatory capital must be maintained and benefitting at best a sub-set of the insurer's policyholders."

42. Furthermore, even if it be assumed in favour of the ACE policyholders that the Guarantee is enforceable as a deed, and applies to all liabilities of Excess to its existing policyholders, whether incurred before or after 20 November 1991, it still would not follow that exclusion of the Guarantee from the Scheme would have any material adverse affect on the policyholders' security. The position of the transferring Excess policyholders would then be that considered by Mr Barkham in paragraphs 4.103 to 4.105 of his main report, quoted above. Even allowing for the element of exaggeration in the third bullet point of paragraph 4.104, I see no reason to differ from his conclusion that the ADC Reinsurance would provide "slightly better protection for the policyholders" than the Guarantee. To suggest that they would be left materially worse off appears to me fanciful.
43. I find further support for this conclusion in Mr Barkham's additional note dated 12 October 2015, which he helpfully provided (at very short notice) in response to the objections of the ACE policyholders. He reiterated that there were three main components to his conclusion:

"(i) There will be more capital in post-Transfer HFPI relative to its size, compared with [Excess] before the Transfer. The level of capital in [Excess] is currently relatively low. Although there are currently sufficient funds in the company to pay future expected claim payments, there would only need to be a relatively small deterioration in the claims reserves to make the company insolvent. HFPI post-Transfer would have a large amount of additional capital. I believe that this will provide for greater security for policyholders.

(ii) I believe that the ADC Reinsurance will provide for slightly better protection than the HFSG Guarantee (assuming that the latter is enforceable – see point (iii) below). This is because the ADC Reinsurance is held with Hartford Fire, which is the largest entity within The Hartford Group in terms of available capital. HFSG is a parent holding company whose results, and ability to make guarantee payments, rely on the performance of its key insurance subsidiary, Hartford Fire. In contrast, Hartford Fire holds claims reserves and capital margins against its insurance and reinsurance obligations.

(iii) I obtained legal advice on the HFSG Guarantee. The advice I received was that there are some uncertainties in its enforceability … I believe that there is therefore some uncertainty in the way in which the HFSG Guarantee would operate, and which, if any, policyholders of [Excess] would be able to make a claim on the HFSG Guarantee in circumstances where [Excess] is unable to pay their claim. In contrast, after the Transfer there is no uncertainty in the way in which the ADC Reinsurance operates. I believe that this is an additional advantage to policyholders."

44. This analysis provides the answer, in my judgment, to another point upon which Ms Shah relied, namely the fact that the Guarantee provides policyholders with a direct right of action against HFSG, whereas the ADC Reinsurance would have to be enforced on their behalf by HFPI against Hartford Fire. As a matter of procedure, that is no doubt true; but what matters is the prospect of recovery following a default, rather than the route by which it may be obtained. From that perspective, the prospects of recovery from Hartford Fire, which is a regulated entity, via HFPI, which is another regulated entity, are in my judgment appreciably higher than they would be from a direct right of recourse against the unregulated parent holding company, which is under no obligation to carry regulatory capital and claims reserves.
45. I should also deal briefly with the concerns of the ACE policyholders about the terms of the ADC Reinsurance. Without having seen those terms, HFW argued in their letter of 9 October 2015 that there were no commitments to retain the ADC Reinsurance in place on its current terms or for a defined period of time, nor did there appear to be any restrictions on its commutation or novation. They said that their clients' concerns would be met if the ADC Reinsurance were to be put in place on terms that:

"(i) ensure that it will remain in place ad infinitum in favour of HFPI (and any subsequent insurer of the Policyholders) unless a replacement is obtained, with the ACE Policyholders' consent, from an insurer of equivalent or better financial standing to Hartford Fire; and

(ii) include "cut-through" rights in favour of the ACE Policyholders."

46. In their reply on 11 October, Freshfields stated (at paragraph 16) that the ADC Reinsurance contains no provision for automatic termination, and any amendment or termination of it would also require the non-objection of the appropriate regulators, both under the terms of the ADC Reinsurance itself and under normal Prudential regulatory principles to which HFPI is subject. In my view this response dealt adequately with the objection, and there are no grounds for requiring the ADC Reinsurance to include the terms proposed by HFW. In particular, the requirement of regulatory approval (or at least non-objection) is not a mere formality, and should suffice to ensure that no amendment or termination of the ADC Reinsurance will take place unless the interests of the policyholders are properly protected.
47. There is also a more general point. As the authorities make clear, it is not the function of the court to ensure that the Scheme is in every respect the best which could have been devised. The parties are entitled to design the scheme which suits their commercial objectives, and the task of the court is then to consider whether the scheme before it is fair. One of the central features of the present Scheme is to replace the disparate protections currently available to policyholders with the ADC Reinsurance and the capital injections into HFPI. The claimants have put forward the terms on which they seek to achieve this objective, and provided they are fair to all concerned, there is no reason for the court to withhold its approval. I am satisfied that the proposals are indeed fair, and that far from being materially worsened, the position of the ACE policyholders will in fact be significantly improved under the Scheme.

Conclusion

48. For all these reasons, I was satisfied that the court should give its approval to the Scheme.