Aviva Life and Pensions UK Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden |
| Judgment Date | 19 February 2019 |
| Neutral Citation | [2019] EWHC 312 (Ch) |
| Docket Number | Case No: CR-2018-007982 |
| Court | Chancery Division |
| Date | 19 February 2019 |
[2019] EWHC 312 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT
Royal Courts of Justice
Rolls Building, Fetter Lane
London, EC4A 1NL
Mr Justice Snowden
Case No: CR-2018-007982
Martin Moore QC (instructed by Slaughter and May) for the Applicants
David Simpson for the Prudential Regulation Authority and the Financial Conduct Authority
Liam Doyle (a policyholder) in person
Hearing date: 13 February 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Aviva Life and Pensions UK Limited (“Aviva”) seeks the sanction of the Court under Part VII of the Financial Services and Markets Act 2000 (“ FSMA”) to an insurance business transfer scheme (the “Scheme”). Under the Scheme, Aviva will transfer certain of its long-term business written in the EEA to Friends First Life Assurance Company Designated Activity Company, which is its wholly-owned subsidiary incorporated in the Republic of Ireland. After the Scheme becomes effective, that transferee company will be renamed Aviva Life & Pensions Ireland Designated Activity Company (“ALPI”).
The purpose of the Scheme is to ensure contract and service continuity for the EEA policyholders of Aviva who are being transferred to ALPI. The Scheme has been proposed to address the concern that Aviva might become unable to service its EEA policies as a result of losing the “passporting” rights under the Solvency II Directive (2009/138/EC, as amended) which currently enable Aviva to rely upon its authorisation in the UK to carry out regulated activities in other EEA Member States. The loss of passporting rights would occur as a result of the United Kingdom's withdrawal from the European Union on 29 March 2019 without any transitional or other arrangements being agreed in relation to the provision of financial services (a “no-deal Brexit”). Because ALPI is authorised and regulated in Ireland, it will have EU passporting rights and will be able to conduct the transferred business in Ireland and through branches which it will establish in France and Belgium.
Subject to sanction, the Scheme is designed to take effect at 22.59 (GMT) on 29 March 2019.
The Parties
Aviva is one of the United Kingdom's largest life insurance and pensions companies. As at 31 December 2017, it had roughly 14.5 million policies and best estimate liabilities (“BEL”) of £227 billion. Its long-term business fund, containing all assets and liabilities allocated to policyholders, currently consists of 16 sub-funds, 13 of which are with-profits funds. The business being transferred by the Scheme is held in a number of these sub-funds.
Aviva has reached its current state through a series of mergers, acquisitions and transfers. For present purposes, the most relevant of these was the transfer to Aviva of the business of Aviva Life & Pensions Ireland Ltd pursuant to a scheme sanctioned by the Irish High Court that became effective on 1 January 2015 (the “Irish Scheme”). Following the implementation of the Irish Scheme, the Irish branch of Aviva has been used to write business in Ireland.
ALPI was incorporated by Aviva in 1990 to acquire the Irish branch business of Friends Provident Life Office. It subsequently also acquired the Irish business of the National Mutual Life Assurance Company. ALPI's principal activity is the transaction of long-term insurance business. As at 31 December 2017, it had roughly 160,000 policies and BEL of €4.5 billion. It presently consists of a shareholder fund and 3 other funds (a Closed Fund, a Participating Fund and an Other Business Fund).
Following the implementation of the Scheme, Aviva will no longer sell policies to residents in any other EEA country (including Ireland), and Aviva's Irish, French and Belgian branches will be closed. ALPI will continue to sell business in Ireland and continue to accept increments on the policies transferred to it in the same way that Aviva currently does. ALPI will set up two branches in France and Belgium, which will not sell new business but will be set up to mirror the branch structure of Aviva prior to the transfer.
The Scheme in outline
The scheme is complex, and I shall therefore simply summarise its key effects.
The Transferring business
There are three groups of policyholders that will be transferred from Aviva to ALPI under the Scheme (the “Transferring Business”):
i) the with-profits business that was transferred to Aviva under the Irish Scheme and all the with-profits business written out of the Irish branch of Aviva (excluding certain business written in Ireland by CGNU Life Assurance Limited (“CGNU”)) (the “With Profits Irish Business”). This business is currently held in Aviva's Irish With-Profits Sub-Fund. As at 30 June 2018, there were 8,462 policies in this category. The BEL as at that date was £703 million;
ii) the non-profits business transferred to Aviva under the Irish Scheme and all non-profit business written out of Aviva's Irish branch (excluding CGNU business written in Ireland) (the “Non-Profits Irish Business”). This business is currently held in Aviva's Non-Profit Sub-Fund. As at 30 June 2018, there were 248,016 policies in this category. The BEL as at that date was £5,140 million; and
iii) certain business written in France, Belgium, Germany, Iceland, Sweden and the CGNU business written in Ireland under freedom of services or freedom of establishment rules (the overseas life assurance business, abbreviated to “OLAB”). This business is currently allocated amongst six of Aviva's sub-funds. As at 30 June 2018, there were 183,118 policies in this category. The BEL was £956 million.
Under the Scheme the Transferring Business will be allocated as follows:
i) the With-Profits Irish Business will be allocated to a new fund of ALPI called the Irish WPF;
ii) the Non-Profits Irish Business and the OLAB policies that are not with-profits (both currently allocated to Aviva's Non-Profit Sub-Fund) will be allocated to the existing Other Business Fund; and
iii) the other policies comprising OLAB will be allocated to newly created funds in ALPI which mirror the funds to which they are currently allocated at Aviva.
The Other Business Fund and the ALPI Irish WPF will be open to new business but all other funds to which policies are allocated under the Scheme will be closed, except for increments and options.
Transfer of assets and SCR Ratio
As well as a transfer of policies and associated liabilities, a Part VII transfer usually includes a transfer of assets. These assets reflect an agreed part of the fund with which the corresponding liabilities are associated. For non-profit and unit-linked businesses, it is a relatively straightforward process for the transferee and the transferor to agree which assets to transfer.
In this case the Scheme contains a provision requiring Aviva to transfer assets of a sufficient value to ensure that after the Scheme becomes effective, ALPI will have an SCR Ratio (i.e. the ratio of own funds to its Solvency Capital Requirement (“SCR”) under Solvency II) of 150%. This will include Aviva making an estimated capital injection of £136 million into ALPI.
Brexit reinsurance
For with-profits business, if, as is the case for the with-profits OLAB policies being transferred under the Scheme, only a proportion of a fund is being transferred, the process of identifying and transferring assets is not straightforward. It would need to take account of the transferring policyholders' interest in the estate (the difference between the assets of the with-profits fund and its policyholder (and other) liabilities) and the value of any support arrangements, as well as the policy liabilities. Furthermore, the process would need to ensure that the split of the assets of the with-profits fund was fair to both the remaining policyholders and the transferring policyholders. The process to determine how to split the assets of a with-profits fund is complex. The evidence is that it may take more than 18 months to complete and certainly could not be achieved before Brexit.
To address these issues, the Scheme provides that all of the OLAB policies which are to be transferred will be immediately 100% reinsured back (on a quota share basis) into the funds of Aviva from which they were transferred (the “Brexit Reinsurance”). Any premiums that ALPI receives which relate to OLAB must be paid to Aviva and allocated to the funds in which that OLAB policy was invested prior to the transfer. Similarly, any claims payments relating to OLAB policies must be transferred from the Aviva fund in which the policy is reinsured to ALPI. This mechanism ensures that the funds of Aviva from which OLAB policies are transferred will continue to operate as they do now.
In essence, the Brexit Reinsurance is designed to ensure that the transferring OLAB policyholders can continue to enjoy precisely the same benefits that they enjoyed at Aviva. As such, the Brexit Reinsurance forms an important part of the Scheme for these transferring policyholders. The terms upon which the Brexit Reinsurance can be terminated are therefore also of critical significance.
There are limited circumstances in which the Brexit Reinsurance can be terminated voluntarily. Importantly, this process would require the prior approval of an independent actuary, consultation with the With Profits Committee of Aviva, and notification to the Central Bank of Ireland and a period of 60 days being allowed for any...
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