Rothesay Assurance Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 15 January 2016 |
| Neutral Citation | [2016] EWHC 44 (Ch) |
| Docket Number | Case No: CR-2015-008234 |
| Court | Chancery Division |
| Date | 15 January 2016 |
[2016] EWHC 44 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Rolls Building
Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
Mr Justice Henderson
Case No: CR-2015-008234
(Formerly 4548 of 2015)
and
and
Mr Martin Moore QC (instructed by Linklaters LLP) for the Claimants
Hearing date: 9 November 2015
Introduction and background
On 9 November 2015 I heard an application under section 107 of the Financial Services and Markets Act 2000 (" FSMA") seeking the approval of the court, pursuant to section 111 of FSMA, for an insurance business transfer scheme ("the Scheme") involving the transfer by Rothesay Assurance Limited ("RAL") of the whole of its long-term insurance business to another company in the same group, Rothesay Life Limited ("Rothesay Life"). The proposed transferor, RAL, has been a wholly-owned subsidiary of Rothesay Life since 16 May 2014, when (under its former name MetLife Assurance Limited) it was acquired by Rothesay Life from the US-based MetLife Insurance Group.
Both RAL and Rothesay Life carry on the same kind of long-term business. The purpose of the Scheme, shortly stated, is to simplify the corporate structure, reduce administrative and overhead management costs, and diversify risk by combining the two businesses within a single entity, thus achieving capital efficiency under both the current regulatory regime and the EU-wide Solvency II regime which was due to come into force on 1 January 2016.
Each company's business involves the issue of bulk purchase annuity contracts to trustees of defined benefit pension schemes domiciled in the United Kingdom or the Republic of Ireland (but not elsewhere in the EEA), by way of either a buy in or a buy out policy. Under each type of policy, the pension scheme trustees pay a premium comprising some or all of the assets of the scheme, and in return will receive an annuity or income stream to fund their obligations to pay some or all of the benefits payable to the scheme members. In that way, the insurance risk (mainly the longevity risk) and the market risk attached to the assets transferred to the insurer pass from the trustees to the insurer. The difference between the two types of policy is that, when the policy is a buy out policy, the arrangements will include an obligation upon the insurer to provide individual policies to the beneficiaries under the scheme, with the result that the trustees receive a statutory discharge in respect of their corresponding obligations.
It follows that the policyholders are either the pension scheme trustees, in the case of buy in policies, or the individuals to whom policies have been issued under buy out arrangements. Except where individual policies have been issued, the pension scheme members and beneficiaries are not policyholders because the relevant contracts provide that the payment obligation is to make payment to the trustees or at their direction. The rights of the members and other beneficiaries derive from the provisions of the scheme trust deed and rules, not from the policy. It is estimated that there are about 90,000 pension scheme beneficiaries whose benefits are covered by the bulk purchase annuity contracts issued by the two companies.
According to the written evidence of Antigone Loudiadis, who is the chief executive officer of each company, RAL has written 42 bulk purchase contracts and 16,000 individual policies. It has a single long-term fund, and a shareholder fund. As at 31 December 2014 it had assets of £3.125 billion, and insurance and other liabilities of £2.712 billion. Its capital resource requirement ("CRR") under the Pillar I test of the current prudential regulatory regime was £110 million, and its coverage of excess assets over the CRR (as at the same date) was 377%.
The Pillar I test is more onerous for RAL than the Pillar II test. The reason for this, in outline, is that the Pillar I requirements are based on objective criteria which apply to all businesses of the same type, whereas the capital that must be held under Pillar II is an amount set by the company's own assessment of its risk exposures and the amount and type of capital required to mitigate those risks. This assessment is called an individual capital assessment ("ICA"). According to the independent expert, Mr Oliver Gillespie, FIA, "Pillar II is intended to provide a more realistic and complete view of the risks to which the company is exposed and to provide a framework within which the company should be managed." The company is not required to make public the results, or any other details, of its Pillar II exercise, but it is of course subject to review and approval by the Prudential Regulation Authority ("the PRA").
Before its acquisition by Rothesay Life, RAL was not writing new business. Since then, its investment policy, risk profile and internal capital policy have been aligned with those of Rothesay Life. Rothesay Life, for its part, has written 32 bulk purchase annuity contracts and some 49,000 individual policies, around 20,000 of which are for members of the Merchant Navy Officers Pension Scheme. Like RAL, Rothesay Life has a single long-term fund and a shareholder fund. As at 31 December 2014, it had assets of £10.087 billion, and insurance and other liabilities of £9.116 billion. Its CRR under Pillar I was £477 million, and its coverage of excess assets over the CRR was 204%. The Pillar I test is again more onerous for Rothesay Life than the Pillar II test.
After implementation of the Scheme, Rothesay Life's CRR would remain the same as before. That is because Rothesay Life is already required to act on a consolidated basis when assessing its capital requirements for regulatory purposes. The evidence establishes that, after the transfer, Rothesay Life would comfortably meet its Pillar II requirements with a material increase in the excess assets available after coverage of its ICA. According to the independent expert, under both Pillar I and Pillar II Rothesay Life would remain "in a strong capital position".
In relation to Solvency II, it is likely that the position of Rothesay Life after the transfer would be less strong than its current position, but the difference is small. It is also worthy of note that the board of Rothesay Life has approved a voluntary capital policy which requires it to:
i) retain capital in excess of 150% of the Pillar I CRR;
ii) retain sufficient capital to remain solvent on a one year time horizon with a probability of 99.8% (whereas the Pillar II ICA requires 99.5%); and
iii) construct a capital policy to give equivalent protection under Solvency II.
Another way of expressing the difference between the probabilities of 99.5% and 99.8% is that, whereas the former contemplates the possibility of insolvency (within one year) once every 200 years, the latter increases that period to once every 500 years. In his main report, Mr Gillespie comments that this capital policy remains under regular review by the board, and any changes to it would require appropriate consultation with the PRA and approval by the boards of both Rothesay Life and RAL.
Mr Gillespie's conclusion, in section 9 of his main report dated 1 July 2015, was expressed as follows:
"9.2 I am satisfied that the implementation of the Scheme will not have a material adverse affect on:
• The security of benefits of the policyholders of RAL and [ Rothesay Life];
• The reasonable benefit expectations of the policyholders of RAL and [ Rothesay Life]; or
• The service standards and governance applicable to the RAL and [ Rothesay Life] policies.
9.3 I am satisfied that the Scheme is equitable to all classes and generations of [ Rothesay Life] and RAL policyholders."
Mr Gillespie also filed a supplementary report on 29 October 2015, in which he reviewed the updated financial position as at 30 June 2015 and the impact of three large transactions which had been undertaken since the date of his first report. He also discussed concerns which had been raised by a number of policyholders in correspondence. Having taken all this material into account, his conclusions remained unchanged.
Both the PRA and the Financial Conduct Authority ("the FCA") are entitled under section 110 of FSMA to be heard on an application to the court for approval of an insurance business transfer scheme. In accordance with their usual practice, each Regulator has submitted two reports. In its second report, dated 4 November 2015, the PRA said it was not currently aware of any issue that would cause it to object to the Scheme. The PRA reached this conclusion after giving detailed consideration to what it termed "two substantive representations" made by a policyholder, Mr Nicholas Higgins, and the actuary by whom Mr Higgins had said he wished to be represented at the hearing, Mr Peter Gatenby. To similar effect, the FCA said in its second report, dated 5 November 2015, that it was satisfied that the Scheme was "within the range of reasonable and fair schemes available to the Transferor and Transferee", and accordingly the FCA did not object to it. In the annex to its second report, the FCA recorded, and commented upon, eight issues which had been raised by or on behalf of certain policyholders, including Mr Higgins.
At the hearing on 9 November, I heard submissions in support of the application to approve the Scheme from Mr Martin Moore QC. Neither the FCA nor the PRA considered it necessary to be represented, having confirmed...
To continue reading
Request your trial
-
The Equitable Life Assurance Society
...(b) there is no principled basis upon which to determine what is an appropriate amount of excess (see Re Rothesay Assurance Limited [2016] EWHC 44 (Ch) at [33]–[39]). 74 In his supplementary report, the Transfer Independent Expert identifies the SCR Ratios as: i) For Equitable, 120% prior ......
-
Legal and General Assurance Society Ltd
...company is in general free to dispose of its surplus funds above the regulatory requirement) and Re Rothesay Assurance Limited [2016] EWHC 44 (Ch) at [33]–[39] (where Henderson J noted the lack of any principled basis for assessing what is the “right” level of excess capital for a firm to ......
-
Phoenix Life Ltd v Financial Services and Markets Act 2000
... [2015] EWHC 2664 (Ch) and paragraphs [33] to [39] of the judgment of Henderson J (as he then was) in Re Rothesay Assurance Limited [2016] EWHC 44 (Ch)). Dr Buckner's and Mr McAteer's criticisms of the Independent Expert's conclusion on security of benefits 51 In his written submissions, D......
-
Rothesay Life Plc v Monument Life Insurance Dac
...pursuant to a Part VII transfer scheme which was approved by Henderson J on 30 November 2015: see re Rothesay Assurance Limited [2016] EWHC 44 (Ch). 3 The vast majority of the Transferring Policies are annuities now in payment: the remainder are deferred annuity policies. Some of the polic......