Legal and General Assurance Society Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 20 August 2020 |
| Neutral Citation | [2020] EWHC 2299 (Ch) |
| Court | Chancery Division |
| Date | 20 August 2020 |
| Docket Number | Case No: CR-2018-007713 |
[2020] EWHC 2299 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES LIST (ChD)
7 Rolls Building
London EC4A 1NL
THE HONOURABLE Mr Justice Zacaroli
Case No: CR-2018-007713
and
and
Martin Moore QC (instructed by Slaughter and May for Legal and General Assurance Society Limited (the Transferor), and instructed by Herbert Smith Freehills LLP for ReAssure Limited (the Transferee))
Theodor van Sante (instructed by the Financial Conduct Authority)
Tom Weitzman QC (instructed by the Prudential Regulation Authority)
The following policyholders appeared in person: Mr John Gorrod, Mrs Susan Mulholland, Dr Kerry Platman, Ms Tamara Schillinger, Mr Joseph Sebastian, Mr Eugene Nathan, Mr Martin Smith (speaking on behalf of Mrs Anne Smith), Mr James Mallon, Mr MK Tarling, Mr Howard Phillips, Mr Keith Saxby and Mr Kevin Francis
Hearing dates: 10, 11, 12 March and 13, 14 August 2020
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.
This is an application to sanction a scheme (the “Scheme”) under Part VII of the Financial Services and Markets Act 2000 (“ FSMA”) for the transfer of insurance business from Legal and General Assurance Society Limited (“LGAS”) to ReAssure Limited (“ReAssure”).
LGAS was founded in 1836. It is the main UK regulated insurance subsidiary of Legal & General Group Plc (“L&G”) and is part of the Legal & General group of companies (“L&G Group”). It is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”). As at 31 December 2019, LGAS had assets (net of current liabilities and deferred tax) of £148.8 billion, own funds of £10.7 billion and excess funds of £4.1 billion.
Following a strategic decision to transition its business away from “mature” savings products towards other areas including new non-profit annuities, insurance contracts and workplace investment products and services, LGAS decided, in 2017, to dispose of its traditional insurance-based savings, pensions, life and with-profits business (the “Transferring Business”). The Transferring Business has been closed to new business and in run-off since 2015.
After considering proposals from a number of bidders, ReAssure was identified as the company best placed to receive the Transferring Business, because of its specialism in acquiring and consolidating similar books of business.
On 6 December 2017 LGAS and ReAssure entered into a business transfer agreement (“BTA”), for the transfer of the Transferring Business. The BTA provides that the transfer will take effect, subject to the approval of the court, by way of the Scheme.
At the same time, LGAS and ReAssure entered into a risk transfer agreement (“RTA”), a reinsurance agreement which effected the transfer of the risk and reward associated with the Transferring Business to ReAssure with effect from 1 January 2018. An advance claim amount of £650 million was paid by ReAssure to LGAS under the RTA.
LGAS' essential commercial rationale for entering into the Scheme is, having made the strategic decision referred to above, to enable it to pursue its objective of concentrating its resources on its core businesses, taking into account in particular the following factors:
i) Administering the Transferring Business as a “closed book” presents certain risks, both to LGAS and its policyholders, such as diseconomies of scale and other inefficiencies that increase as the book reduces in size.
ii) In the case of the ring-fenced with-profits fund, whose asset pool and any profits generated thereon are segregated from the rest of LGAS' business, this results in the with-profits policyholders facing the particular risk that, as the business shrinks, the per-policy costs increase and it becomes increasingly difficult to distribute surplus fairly across generations of policyholders (known as the “tontine” effect).
iii) The demands on the firm's management and resources relative to the size of the with-profits fund are also at risk of becoming disproportionate. This would have a corresponding impact on LGAS' other policyholders, as the focus, investment and resources required cannot be channelled into other core business areas.
iv) The administration of the Transferring Business depends on a number of legacy IT systems which would become progressively less efficient and more expensive to maintain. The Scheme would enable the decommissioning of two of four major administration systems, two other core systems and a very significant number of more peripheral, smaller systems.
The Transferring Business, on the other hand, is compatible with ReAssure's own business model. ReAssure was incorporated in 1963, although it was then called Occidental Life Insurance Company Limited. Since then it has developed a business of acquiring and integrating closed life and pensions businesses, having to date completed 21 such acquisitions. It was acquired by the Swiss Re group in 2004.
As at 31 December 2019, ReAssure had assets (net of current liabilities and deferred tax) of £40.9 billion, restricted own funds of £4.9 billion, and excess own funds of £2 billion.
On 6 December 2019 Phoenix Group Holdings plc (“Phoenix”) announced its intention to acquire ReAssure Group plc (“RGP”). This was subsequently approved by the PRA, with a legal completion date of 22 July 2020. The Phoenix group, with £248 billion of funds under management, also specialises in the acquisition and management of closed life insurance and pension funds.
Accordingly, ReAssure is better placed than LGAS to devote its resources to managing the Transferring Business (as it is exactly aligned with its core business strategy) and is able to take advantage of economies of scale in the administration of that business.
While the Scheme is undoubtedly to the commercial advantage of both LGAS and ReAssure, the following significant benefits for policyholders of the Transferring Business have been identified. First, they will benefit by being administered by a company whose strategy is concentrated on administering closed books of business. Second, they will benefit from ReAssure's ability to take advantage of economies of scale. This is to be manifested, so far as the with-profits policyholders are concerned, in a fixed fees expenses agreement which will provide certainty and, over the life of the fund, is expected to result in significant costs savings. I refer to this agreement in more detail below. Third, whereas LGAS has only one with-profits fund, so there is no possibility of merger with another fund as the with-profits fund diminishes in size, the Scheme will permit merger with other ReAssure funds should it be no longer economically viable to run the LGAS with-profits fund on a stand-alone basis. This will enable the with-profits fund to avoid the “tontine” effect referred to above. Fourth, and reflecting the different priorities of LGAS and ReAssure, policyholders will benefit from the investment ReAssure is making, and will make in the future, in IT systems.
The hearing of the application to sanction the Scheme originally took place over three days on 10 to 12 March 2020 (the “March hearing”). A number of objectors (as I describe in detail below) appeared to make representations in opposition to the application. In the days following the hearing I received further submissions in writing from certain of the objectors, further update reports from the independent expert and submissions from counsel for the applicants. A particular focus of these was the potential impact on the Scheme of the Covid-19 pandemic which was then (in the UK at least) in its early stages.
In the evening of 23 March 2020 the government announced a lock-down across the whole of the UK. The following evening I received an application from the companies to adjourn the application on the grounds of the operational challenges that Covid-19 presented to the successful migration of the business. I granted an adjournment for reasons set out in a short judgment dated 30 March 2020: see [2020] EWHC 756 (Ch).
The resumed hearing of the application took place on 13 and 14 August 2020 (the “August hearing”). In view of the number of people that were likely to want to attend the hearing, the social distancing measures (and potential travel difficulties) still in place in light of the pandemic meant that it was impossible to hold the hearing in a courtroom. Accordingly, it was held remotely, by way of a Skype for Business video conference.
The legal framework
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); […]
(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.”
The principles which guide the court in the exercise of its discretion under section 111(3) have been explained in a series of previous decisions.
In ( London Life Association Limited unreported, 21st February 1989), a decision concerning the transfer of...
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