Insurance.
[2022]JRC001
Royal Court
(Samedi)
4 January 2022
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Before :
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J. A. Clyde-Smith, Esq., Commissioner, and
Jurats Crill and Austin-Vautier
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Between
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The Prudential Assurance Company Limited
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Representors
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And
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Rothesay Life PLC
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Respondents
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IN THE MATTER OF
THE REPRESENTATION OF THE PRUDENTIAL ASSURANCE COMPANY LIMITED AND ROTHESAY
LIFE PLC
AND
IN THE MATTER OF
AN APPLICATION PURSUANT TO ARTICLE 27 OF AND SCHEDULE 2 TO THE INSURANCE
BUSINESS (JERSEY) LAW 1996
Advocate S. M. Huelin
for the first Representors.
judgment
the commissioner:
1.
On 26th
November 2021, the Court sanctioned a scheme ("the Jersey Scheme")
for the transfer of certain long-term insurance business (annuities) carried in
or from within Jersey by The Prudential Assurance Company Limited
("PAC") to Rothesay Life PLC ("Rothesay"). The proposed transfer involved a similar
transfer in the United Kingdom ("the UK Scheme") and in Guernsey.
2.
In March
2018, Prudential plc announced its intention to demerge its UK and European
businesses. In support of that
plan, PAC and Rothesay entered into a Business Transfer Agreement to transfer
certain of PAC's non profit annuity business to
Rothesay. As an interim measure and
in order to transfer materially the whole of the economic risk of such business
to Rothesay pending full legal transfer, PAC and Rothesay also entered into a
Reinsurance Agreement.
3.
The
demerger took place in October 2019, so that Prudential plc has demerged to
form two separately listed companies, namely Prudential plc and M & G plc. PAC is part of the demerged M & G
corporate group, whose parent is M & G plc.
4.
Subject to
some limited exceptions, the purpose of the UK Scheme is to effect the legal
transfer to Rothesay of the policies whose benefits are currently covered by
the Reinsurance Agreement. Certain
of the non-profit annuity business to be transferred from PAC to Rothesay is
long-term insurance business carried on by PAC in or from within Jersey and the
purpose of the Jersey Scheme is to effect the transfer of such business to
Rothesay, on similar terms to the UK Scheme. There are some 67 policyholders subject
to the Jersey Scheme, and some 348,000 policyholders subject to the UK Scheme.
5.
The
application under the Jersey Scheme was first made by the Representors on 30th
January 2019, but ran into difficulty when Snowden J declined to sanction the
UK Scheme for the reasons set out in his judgment of 16th August
2019 (In Re the Prudential Assurance Company Limited and Another [2019] EWHC 2245 (Ch)). Despite the UK
Scheme having the approval of the independent actuary and the UK regulators,
namely the Prudential Regulation Authority ("PRA") and the
Financial Conduct Authority ("FCA"), Snowden J found a number of
factors weighed against the exercise of the English court's discretion to
sanction the UK Scheme:
"180. The
purchasers of annuity policies such as those in the instant case make a
significant investment of some or all of their pension pots, and have no option
to change the insurer upon which they will be dependent for life. In that context, it was entirely reasonable
for policyholders to have chosen PAC as the provider for their annuities based
upon its age, its established reputation and the financial support which it
would be likely to receive from the accumulated resources of the wider
Prudential group if the need were ever to arise. I also consider that in light of the way
in which their policies were described in the relevant documents, and in the
absence of any clear statement to the contrary, it was entirely reasonable for
policyholders to have assumed that PAC would not seek to transfer their
policies to another provider. These
factors mean that the choice of policyholders to take their lifetime annuities
from PAC itself carries significant weight.
181. In
contrast, in terms of the criteria that the opposing policyholders relied upon
to select their annuity provider, Rothesay is very different from PAC. It is a relatively new entrant without
an established reputation in the business.
Although it may currently have SCR metrics which are at least equal to
those of PAC, it does not have the same capital management policies or the
backing of a large group with the resources and a reputational imperative to
support a company that carries its business name if the need were to arise over
the lifetime of the annuity policies.
I cannot dismiss as fanciful the possibility that such support may be
required over the very long duration of these policies, and I consider that the
reliance which policyholders would then have to place upon an uncertain capital
raising exercise from the investors in Rothesay or the markets more generally,
is a material disadvantage of the Scheme to Transferring Policyholders.
182. On the
other side of the balance, PAC's reasons for selecting the Transferring
Policyholders were entirely driven by a need to release regulatory capital to
support the proposed Demerger. PAC
has achieved that commercial objective by the Reinsurance Agreement, which will
continue even if the Scheme is not sanctioned. PAC and Rothesay could not presume that the
Scheme would be sanctioned, and I do not regard the additional costs which they
will incur, or the fact that Rothesay will not have the commercial opportunity
to use different techniques to exploit the assets which support the
Transferring Policies, are significant prejudice when set against the
fundamental change in status and material disadvantage that they seek to impose
on the Transferring Policyholders.
183. For
completeness I should also indicate that I do not accept Mr Moore QC's
submission that the effect of my refusing to sanction the Scheme would be to
make it very considerably more difficult for PAC ever to utilise Part VII in
relation to these annuity policies, or to make it very considerably more
difficult for Rothesay to acquire further annuity policies. I have held that such policies are
transferrable as a matter of law and contract, and that although policyholders
might reasonably have assumed that PAC would never transfer them, that is
simply a factor to be taken into account.
The result might be different if, for example, PAC's commercial
purpose for the transfer was different, if the transfer was proposed to
policyholders on different terms, or if there was less disparity between
transferor and transferee in the characteristics that policyholders reasonably
considered important when selecting PAC as their annuity provider. Likewise, there is no reason why
Rothesay should not be able to acquire portfolios of annuities from other
insurers with different characteristics or on different terms."
6.
That
decision was set aside by the English Court of Appeal on 2nd
December 2020 (In Re The Prudential Assurance Company Limited and Another
[2020] EWCA Civ 1626) and the matter remitted
back to the Chancery Division, so that the application for the sanction of the
UK Scheme could be re-heard.
7.
The
English Court of Appeal found that the High Court had erred in its
considerations for sanctioning the UK Scheme in a number of respects, namely:
"110. ...
(i) The
judge was wrong to find that there was a material disparity between the
non-contractual external financial support potentially available for each of
PAC and Rothesay;
(ii) The
judge ought not anyway to have regarded such a disparity as a material factor;
(iii) The
judge failed to accord adequate weight to the independent experts conclusion
that the risk of PAC or Rothesay needing external support in the future was
remote; and
(iv) The
judge failed to accord adequate weight to the Regulators' lack of
objection to the Scheme, and the continuing future regulation of Rothesay.
121. ...the
judge ought not have accorded any weight to the facts that the objecting
policyholders (a) chose PAC on the basis of its age, vulnerability and
established reputation, and (b) reasonably assumed that PAC would provide their
annuity throughout its lengthy term."
8.
In
determining whether there are any particular matters which this Court ought to
have in mind in deciding whether or not to sanction a scheme under Article 27
of and Schedule 2 to the Insurance Law, the Court has previously been referred
to:
(i)
the
judgment of Hoffman, J in Re London Life Association Limited 21 February
1989 (unreported) in relation to a scheme under Section 49 of the
Insurance Companies Act 1982 which was in similar terms to Schedule 2 to the
Insurance Law;
(ii) the judgment of Evans-Lombe,
J in Re Axa Equity and Law Life Assurance Society
plc and AXA Sun Life plc [2001] 2 BCLC 447 in relation to a scheme under
section 49 of the Insurance Companies Act 1982,
which both explored the discretion of the
High court and identified relevant considerations to be taken into account in
determining whether to sanction a scheme.
9.
Sir Philip
Bailhache, then Bailiff applied the judgment in Re London Life in
deciding to grant an application for sanction of a transfer scheme pursuant to
Schedule 2 to the Insurance Law in The Norwich Union Life Insurance Society
v Norwich Union Annuity Limited & ors. (25th
April 1997) (Jersey Unreported 81/97).
In Representation of Royal London 360 Limited and Royal London 360
Insurance Company Limited [2011] JRC 192, Sir Michael Birt, then Bailiff,
noted the helpful elaboration of the approach to be taken by the High Court in Re
Axa and took the opportunity to transpose what
Evans-Lombe J had said into the Jersey context and
identify the principles to be applied in considering whether a scheme is fair
and whether policyholders may be affected.
10. In determining whether or not to uphold the
Appeal against the judgment of Snowden J, the English Court of Appeal did not
wholly repudiate the approach taken to considering the sanction of schemes by
the High Court in previous cases, including in Re London Life and Re Axa.
Indeed, the overarching assessment as to whether the scheme has any
material adverse effect remains.
The English Court of Appeal did, however, re-examine the approach to be
taken and emphasised that in the exercise of the court's broad
discretion, the factors for the court to take into account and the interests of
affected parties, depend very much upon the nature of the business being
transferred and the circumstances of the scheme. In particular, the English Court of
Appeal indicated that the correct identification of matters that ought to be
considered and matters that ought not properly to be taken into account has
caused some confusion. Further,
that the matters identified in Re London life and Re Axa should not be treated as a comprehensive statement
of factors that must always be applied in every case. At paragraphs 75 - 86 the English
Court of Appeal set out the approach that the High Court should take to the
sanction of insurance transfer schemes, as follows:
"75. The
judge hearing an application for the sanction of an insurance business transfer
scheme under Part VII should first, we think, identify the nature of the
business being transferred and the underlying circumstances giving rise to the
scheme.
76. As
we have already indicated, different considerations affect different types of
business. For example, the court
considering the transfer of a book of annuities in payment will be primarily
concerned with the interests of the transferring policyholders, whereas a
transfer of with-profits business may raise directly the question of fairness
between the policyholders remaining with the transferor, the transferring
policyholders, and the companies themselves and their shareholders. Transfers of some types of business may
engage the interests of employees or other stakeholders in the transferor or
transferee companies.
77. The
circumstances giving rise to the scheme proposed will also affect the approach
of the court. For example, many
schemes will reflect commercial transactions between transferor and transferee
companies for the benefit of those companies. Other schemes will be occasioned by
external events (such as the departure of the UK from the European Union) or
the financial or other commercial circumstances of the transferor. Some may take the form of a rescue of
the business retained or transferred.
78. The
discretion of the court has frequently been said to be unfettered and genuine
and not to be exercised by way of a rubber stamp. That is true but, as in the exercise of
all discretions, the court must take into account and give proper weight to
matters that ought to be considered, and ignore matters that ought not properly
to be taken into account. The
correct identification of which matters fall on which side of the line in
particular transfer situations has caused some confusion in this, and perhaps
other, cases. ...
79. From
our reading of the decided cases, we have detected a tendency on the part of
those presenting these applications, in many cases accepted by the judges
hearing them, to treat the judgments of Hoffmann J in London Life and Evans-Lombe J in Axa as if they were a
comprehensive in all insurance business transfers. Indeed, counsel for the appellants urged
us to accept them as applicable in their entirety to the transfer scheme in the
present case which, as we have earlier noted, is both very different from and a
good simpler than those in London Life and Axa. We consider that this misunderstands
those judgments, which were addressed to the particular circumstances of those
cases and to the types of business being transferred. We would accept them as containing in
many respects the factors likely to be applicable to the transfer of
with-profits business, but they involve several factors that have no obvious
application to a case such as the present. This was a point made in Royal
Sun Alliance and by Snowden J in the present case at [39]-[40]. We very much doubt whether
anything is to be gained by setting out and seeking to apply the factors listed
in those cases, for example by Evans-Lombe J in Axa at [6], to transfer schemes involving every type
of insurance business.
80 In
a case such as the present, the paramount concern of the court will be to
assess whether the transfer will have any material adverse effect on the
receipt by the annuitants of their annuities, and on whether the transfer may
have any such effect on payments that are or may become due to the other
annuitants, policyholders and creditors of the transferor and transferee
companies. The court will also be
concerned to assess whether there may be any material adverse effect on the
service standards provided to the transferring annuitants or
policyholders. Whether any other
factors require consideration will depend on the circumstances of the case.
81. The
first duty of the court is carefully to scrutinise the reports of the
independent expert and the Regulators, and the evidence of any person required
to be heard under section 110 including those that allege that they would be
adversely affected by the carrying out of the scheme. The court must understand the opinions
presented and is entitled to ask questions about them as necessary. It will do so, in particular, with a
view to identifying any errors, omissions, or instances of inadequate or
defective reasoning.
82. In
the absence of such defects, however, the court will always, in exercising its
discretion, accord full weight to the opinions of the independent expert and
the Regulators. That does not mean
that the court can never depart from the recommendations of the expert or the
non-objections of the Regulators, but it does mean that full weight must be
accorded to them, so that a court would not depart from such recommendations
and non-objections without significant and appropriate reasons for doing
so. This is particularly so in
relation to the financial and actuarial assessments required as regards the
security of financial benefits.
Whilst the judges hearing Part VII applications have considerable
experience of the actuarial and specialist issues reported on by both the
expert and the Regulators, the court is not itself an expert and should not
substitute its own expertise for that of the entities required or entitled by
statute to proffer those opinions.
83. This
approach to the exercise of the court's discretion applies to the crucial
question of whether the proposed scheme will have any material adverse effect
on policyholders, employees or other stakeholders. An adverse effect will only be material
to the court's consideration if it is: (i) a
possibility that cannot sensibly be ignored, having regard to the nature and
gravity of the feared harm in the particular case, (ii) a consequence of the
scheme, and (iii) material in the sense that there is the prospect of real or
significant, as opposed to fanciful or insignificant, risk to the position of
the stakeholder concerned. In some
cases, it may also be relevant for the court to consider whether there would be
such material adverse effects in the event that the scheme was not sanctioned.
84. Even
if the court finds that the proposed scheme will have a material adverse effect
on some group or groups of policyholders, it may still sanction the scheme in
the exercise of its discretion. For
example, this might occur if the scheme is in the nature of a rescue of the
business. If there are differential effects on the interests of different
classes of person affected, the court will need to consider whether the
proposed scheme as a whole is fair as between those interests.
85. The
Court should adopt the same approach to the exercise of its discretion
(described at [82] above) when making the more general comparison between the positions
that would exist with or without the proposed scheme in respect of (a) the
security of the policyholders' benefits and (b) the standards of service
and corporate governance that the policyholders can expect. In many cases, this comparison will entail
the court's consideration of the contractual rights and reasonable
expectations of policyholders, including the standards of service and
governance that can be expected if the scheme is implemented.
86. Once
the court has undertaken the evaluations we have mentioned, the court will
decide whether or not to sanction the proposed scheme, if, under section 111(3)
it is, in all the circumstances of the case, appropriate to do so. It cannot
require the applicants to vary or alter the scheme, even though that may
sometimes be the effect of the court expressing its concerns. The choices of
both the scheme itself and its detailed terms are for the directors of the
transferor and transferee concerned.
The primary duty of those directors is, of course, to promote the
success of their companies."
11. In summary, whilst the assessment to be carried
out in determining whether or not to sanction a scheme should remain familiar,
the particular factors to be considered in each case and the weight afforded to
those factors should be determined by reference to the nature of the
transferring business and the underlying circumstances of the scheme.
12. The approach taken by the English Court in Re
London Life and Re Axa has now evolved in
the manner set out by the English Court of Appeal and it is appropriate for
this Court to take that into account in its own approach to such transfers, so
that it should in the context of this case:
(i)
first,
identify the nature of the business being transferred and the underlying
circumstances giving rise to the Jersey Scheme.
(ii) second, taking the nature of the transferring
business and underlying circumstances into account, assess whether:
(a) the transfer will have a material adverse
effect on receipt of payments due by relevant parties;
(b) the transfer will have a material adverse
effect on service standards; and
(c) any other factors that require further
consideration.
(iii) In making its assessment as to material adverse
effect, consider:
(a) the Independent Actuary's Report;
(b) the confirmation of no objection from the
Jersey Financial Services Commission ("the JFSC");
(c) evidence of any person permitted to be heard in
relation to the application to sanction the Jersey Scheme, including any
objecting policyholders,
and in making such assessment, the Court
should accord full weight to the Independent Actuary's report and
non-objection from the JFSC, so that the Court would not depart from them
without significant and appropriate reasons for doing so; and
(iv) finally, having undertaken its evaluation of
the above, decide whether or not to sanction the Jersey Scheme.
13. The UK Scheme was sanctioned by the High Court
on 24th November 2021, for the reasons set out in the judgment of
Trower J (In the matter of the Prudential Assurance Company Limited
[2021] EWHC 31 52 (Ch)). He considered
the report of the Independent Actuary (referred to as the Independent Expert)
Mr Nick Dumbreck, a Fellow of the Institute and Faculty of Actuaries and a
partner of Milliman LLP, who explained that he was required by the regulatory
guidance to consider the effect of the implementation of the UK Scheme
(including the Jersey Scheme) on:
(i)
The
security of policyholders' contractual rights, including the likelihood
and potential effects of the insolvency of the insurers; and
(ii) Matters such as investment management, new
business strategy, administration, expense levels, valuation bases and the cost
and tax effects of the UK Scheme (including the Jersey Scheme) in so far as
they may affect the security of the policyholders' contractual rights,
levels of service and their reasonable expectations.
14. The Independent Actuary reached these
conclusions at paragraphs 14.1 and 14.2 of his report:
"I am satisfied that the
implementation of the Scheme will not have a material adverse effect on:
·
the
security of benefits of the policyholders of PAC and Rothesay, including the
Transferring Policyholders;
·
the
reasonable expectations of the policyholders of PAC and Rothesay including the
Transferring Policyholders, including:
the reasonable benefit expectations of the
policyholders of PAC and Rothesay, including the Transferring Policyholders;
and
the standards of service, management and
governance applicable to the PAC and Rothesay policies, including the
Transferring Policies.
I am satisfied that the Scheme
is equitable to all classes and generations of PAC and Rothesay
policyholders."
15. As Trower J said at paragraph 43 of his
judgment:
"43 It
follows from the Court of Appeal's judgment that Mr Dumbreck's
conclusions are ones to which full weight must be given. This is a strong
pointer to a conclusion that the applicants have indeed established that the
Scheme will not have a material adverse effect on the security of benefits
under the transferring policies, the reasonable benefit expectations of the
transferring policyholders or the standards of governance and management
applicable to the transferring policies.
16. Because the English Court of Appeal had made it
clear that the Court is not a rubber stamp (paragraph 78) and that it remained
the first duty of the Court to carefully scrutinise the Independent
Expert's Report, Trower J then went into a further, more detailed
analysis of it which we will not summarise here.
17. Turning to objections to the UK Scheme, there
had been 1,374 objections from policyholders to the UK Scheme, which although a
substantial number, represented less than 0.5% of the total number of annuities
to be transferred. Trower J broke
these objections down into themes. He
recognised that the objectors had genuine, strong and heartfelt feelings about
the UK Scheme expressed in a manner which understandably respected their
subjective views, but the English Court of Appeal had made it clear that those
kinds of considerations were legally irrelevant:
"99. These
concerns were often expressed in a manner which reflected the subjective views
of individuals as to their own personal likes, dislikes and preferences. That is very understandable, but I am
not able to take them into account for that reason. The Court of Appeal has
made clear that these kinds of consideration are legally irrelevant. So long as the transfer of the
annuitants' policies to Rothesay through the Scheme does not lead to them
suffering an adverse effect which is material, in the sense that there is a
possibility that cannot sensibly be ignored of real and significant risk to
their position as annuitants, the legally relevant circumstances of the case
will point towards the court making an order to sanction it."
18. To the extent that the objections posed more
objective questions, Trower J found that these had been addressed by the
Independent Actuary in his report.
By way of illustration of one of the themes raised by objectors:
"104. The passage from what Mrs Howell had to say also pointed
up another theme which was raised by a large number of policyholders. This was a comparison exercise between
the position of PAC and the position of Rothesay. Like many of the concerns expressed by
the annuitants, it is one that is understandable at first blush, but it
ultimately focuses on the wrong point.
The reason for this is that any adverse effect must be material in the
sense explained by the Court of Appeal.
This is well-illustrated in an oft-cited passage from the judgment of
David Richards J in Re Royal and Sun Alliance Insurance Plc [2008] EWHC 3436 (Ch), itself approved by the Court of Appeal in the present case ([2020]
EWCA Civ 1626 at para 49):
'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. It might be said that a transfer of
business from a very large company to a large company involved a reduction in
the cover available to the transferring policyholders, but assuming that the
transferee is in a financially strong position it matters not that the level of
cover in the transferee is less than that in the transferor. What the court is concerned to address
is the prospect of real, as opposed to fanciful, risks to the position of
policyholders.'"
19. Another theme was that policyholders had
entrusted their savings to PAC to secure something that they thought was
inalienable, in the sense that it would always be PAC which was the entity with
which they would have a relationship.
Snowden J had acknowledged that there was no contractual bar to the
transfer, which was permitted by legislation in any event, but he had found
that full weight needed to be given to a policyholder's reasonable
assumptions that PAC would not transfer its obligations. However, as Trower J pointed out at
paragraph 110 of his judgment:
"110. However, the Court of Appeal reached a very different
conclusion on this point. As I have
already explained earlier on in this judgment it said ([2020] EWCA Civ 1626 at para 121):
'...we conclude on this
issue that the judge ought not to have accorded any weight to the facts that
the objecting policyholders (a) chose PAC on the basis of its age, vulnerability
and established reputation, and (b) reasonably assumed that PAC would provide
their annuity throughout its lengthy term'.
This could not be a clearer
statement of principle. The law,
therefore, requires the court to conclude that the types of consideration on
which Mrs Howell, amongst others, placed so much weight is legally irrelevant
to a determination of whether or not the court should sanction the Scheme. In other words, I am required by law to
leave it out of account."
20. Noting that the PRA and the FCA had no
objection to the transfers under the UK Scheme, Trower J concluded at paragraph
127:
"127. While the Court of Appeal contemplated that there will
be cases in which other circumstances may have a material impact on the
exercise by the court of its discretion under section 111(3), it also made
clear that the paramount concern of the court in a case such as the present
will be to assess whether the transfer will have any material adverse effect on
the receipt by the annuitants of their annuities (and indeed on the receipt of
payments by other annuitants, policyholders and creditors of the transferor and
the transferee). Service standards
to be provided to the annuitants are also important, but I have not been
persuaded that there are any other circumstances, the consideration of which
calls into question the conclusions I have reached based on the security of
policyholder benefits."
21. There were no objections to the Jersey
Scheme. One policyholder had
written but it transpired that his policy was not one of those being
transferred under the Jersey Scheme.
We have already set out the conclusions of Mr Dumbreck, which applied
equally to the Jersey policies and the Jersey Financial Services Commission had
confirmed that it had no objections to the Jersey Scheme. No tax implications arose and all of the
procedural requirements had been met.
22. The task of this Court was made very much
simpler by the very detailed consideration and analysis that has been
undertaken for the UK Scheme, to which the Jersey Scheme was very closely
connected, both by the home regulators, the PRA and the FCA, and by the English
Court. Applying the approach set
out in paragraph 12 above and having identified the nature of the business
being transferred and the underlying circumstances giving rise to the Jersey
Scheme, the Court concluded that the transfers would not have any material
adverse effect on receipt of payments due by relevant parties and would not
have a material adverse effect on service standards. In carrying out that assessment, the
Court took into account the Independent Actuary's Report and the
non-objection from the Jersey Financial services Commission, together with the
judgment of Trower J and having done so, decided to sanction the Jersey Scheme.
Authorities
The Insurance Business (Jersey) Law
1996
Re the Prudential
Assurance Company Limited and Another [2019] EWHC 2245 (Ch).
Re The
Prudential Assurance Company Limited and Another [2020] EWCA Civ 1626.
Re London Life Association Limited 21
February 1989 (unreported).
Re Axa Equity and Law Life Assurance Society plc and AXA Sun
Life plc [2001] 2 BCLC 447.
The Norwich Union Life Insurance
Society v Norwich Union Annuity Limited & ors.
(25th April 1997) (Jersey Unreported 81/97).
In
Representation of Royal London 360 Limited and Royal London 360 Insurance
Company Limited [2011] JRC 192.
Prudential
Assurance Company Limited [2021] EWHC 31 52 (Ch).
