Scottish Widows Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden |
| Judgment Date | 18 March 2019 |
| Neutral Citation | [2019] EWHC 642 (Ch) |
| Docket Number | Case No: CR-2018-003310 |
| Court | Chancery Division |
| Date | 18 March 2019 |
[2019] EWHC 642 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Royal Courts of Justice
7 Rolls Building, Fetter Lane,
London EC4A 1NL
Mr Justice Snowden
Case No: CR-2018-003310
and
and
Martin Moore QC (instructed by Herbert Smith Freehills LLP) for the Applicants
Tom Weitzman QC for the Prudential Regulation Authority and the Financial Conduct Authority
Hearing date: 14 March 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.
Scottish Widows Limited (“SWL”) and Scottish Widows Europe SA (“SWE”) seek the Court's sanction and ancillary orders pursuant to Part VII of the Financial Services and Markets Act 2000 (“ FSMA”) to give effect to an insurance business transfer scheme (“the Scheme”). The Scheme provides for the transfer from SWL to SWE of all of the insurance business written by SWL (or its predecessors) on a freedom of establishment basis or on a freedom of services basis for policyholders having their permanent residence in Germany, Austria, Italy and Belgium. SWL also seeks the amendment of an earlier Part VII transfer scheme which was sanctioned on 26 November 2015 (“the 2015 Scheme”) in order to permit the operation of the new Scheme.
In common with a growing number of Part VII transfer schemes that have been sanctioned in recent months by this Court, the purpose of the Scheme is to ensure contract and service continuity for the relevant EEA policyholders of SWL after the United Kingdom leaves the European Union. The Scheme has been proposed to address the concern that SWL might become unable to service such policies as a result of losing its “passporting” rights under the Solvency II Directive (2009/138/EC, as amended) which currently enable SWL to rely upon its authorisation in the UK to carry out regulated activities in other EEA Member States. Such loss of passporting rights would occur if the UK were to withdraw from the EU without any arrangements being agreed in relation to the provision of financial services (a “no-deal Brexit”).
The solution that is proposed is that the relevant policies will be transferred from SWL to SWE, which is a newly-formed Luxembourg company which will be authorised and regulated by the Commisariat aux Assurances of Luxembourg (the “CAA”). SWE will then be able to rely upon its passporting rights to continue to service the transferring policies in the other EEA Member States.
The Scheme is intended to take effect at 22.59 GMT on 29 March 2019, but there are provisions for that date to be extended by agreement between SWL and SWE until 30 June 2019, and thereafter with the approval of the Court, subject to the proviso that if the Scheme has not become effective by a long-stop date of 30 September 2019, it shall lapse.
SWL
SWL is one of the United Kingdom's larger life and pensions companies. It is part of the group of companies whose ultimate parent is Lloyds Banking Group plc (“LBG”). It has evolved through a series of mergers, acquisitions and transfers. In particular, under the 2015 Scheme all of the UK life insurance and pension business of LBG was consolidated into SWL. In relation to some of its acquired business, SWL trades under the name Clerical Medical, a name which originates from the Medical, Clerical and General Life Assurance Society which was set up in 1824. SWL is authorised by the PRA and regulated by the PRA and FCA.
SWL's business is comprised of three funds: (i) the Scottish Widows With-Profits Fund (“SW WPF”); (ii) the Clerical Medical With-Profits Fund (“CM WPF”); and the Combined Fund. As their names suggest, the first two are with-profits funds. As at 31 December 2017 SWL had about 6 million policyholders and Best Estimate Liabilities (“BEL”) of £112 billion. Of this figure, about £10 billion is attributable to the SW WPF, £5 billion is attributable to the CM WPF, and £97 billion is attributable to the Combined Fund.
SWL's Solvency Capital Requirement (“SCR”) under Solvency II as at 30 June 2018 was £6 billion and its Total Own Funds available to meet the SCR were £8.4 billion, giving an SCR ratio of 140%.
SWE
SWE is a subsidiary of SWL and was incorporated in Luxembourg on 19 October 2018 as the entity to take on the business to be transferred under the Scheme. On 1 February 2019 it was authorised by the CAA to carry on insurance business of the classes necessary to enable it to carry on the business to be transferred to it. Had the proposed transfer taken place as at 31 December 2017 (which is the date of the last set of publicly available audited accounts for SWL), the SCR for SWE would have been £125 million and its Total Own Funds available to meet the SCR would have been £175 million giving an SCR ratio of 140%, which would have been the same as that of SWL at the time.
The Transferring Business
The business that is proposed to be transferred (the “Transferring Business”) covers policies which were sold between 1995 and 2015 through the branches or former branches of SWL or its predecessors in the EEA or on a freedom of services basis to persons with permanent addresses in Germany, Austria, Italy and Belgium. That business comprises two parts:
i) the unitised with-profits business, which is allocated to the CM WPF in general and invested in Guaranteed Growth funds (“GGFs”) (the “Transferring UWP Business”). As at 31 December 2018 there were 56,807 relevant policies, with gross BEL of £1.6 billion;
ii) the unit-linked non-profit business, which is currently allocated to SWL's Combined Fund (“the Transferring UL Business”). As at 31 December 2018 there were 23,922 relevant policies, with gross BEL of £342 million.
No new business of the types being transferred is being written, except contractual increments and existing options.
As a proportion of SWL's business, the Transferring Business is small in terms of policyholders and reserves – being in each case about 2%. Had the Scheme taken effect on 31 December 2017, the SCR ratio of SWL would have been reduced from 140% to 136%.
Under the Scheme, on the effective date, SWL will transfer to SWE the assets required to back the Transferring UWP Business, the Transferring UL Business and 10% of the provision made by SWL in respect of the “German Claims” (to which I shall refer below).
The assets associated with the Transferring UL Business will be transferred from SWL's Combined Fund into unit-linked funds that will be set up and retained within SWE. SWL will transfer assets from the CM WPF associated with the Transferring UWP Business, but will exclude assets backing the relevant part of the “inherited estate” (the difference between the assets of the with-profits fund and its policyholder (and other) liabilities) in which the transferring policyholders would be entitled to participate. The assets transferred will be subject to the “Tied Assets” regime and the “Funds Withheld” arrangements to which I shall refer shortly, and the issue of transferring policyholders' entitlement to part of the CM WPF inherited estate will be the subject of the reinsurance arrangements to which I shall also refer below. SWE will also set up notional funds to mirror the GGFs that are currently in the CM WPF.
If the effective date of the Scheme had been on 31 December 2017, the value of the transferred assets would have been £2.337 billion. In addition, and to ensure the necessary SCR ratio of SWE, in January and February 2019 SWL provided a capital injection to SWE totalling €81 million.
As indicated, there are a number of associated arrangements in relation to the Scheme. The New Reinsurance
A “reassurance agreement” (the “New Reinsurance”) was entered into between SWL and SWE on 5 March 2019. Its material terms are conditional upon the Scheme becoming effective. Under the New Reinsurance (among other things) the Transferring UWP Business and the with-profit annuities will be 100% reinsured back to SWL's CM WPF.
The reason for this is that such transferring policyholders have an entitlement to participate in the inherited estate of the CM WPF. However, it is not practical in the limited time available before 29 March 2019 for SWL to conduct the complex process needed to calculate and apportion to the Transferring UWP Business the relevant part of the inherited estate, and to transfer to SWE the assets representing that part. The reinsurance back to the CM WPF seeks to avoid the need to perform that process. The New Reinsurance also seeks to ensure that the investment experience of the relevant transferring policyholders, as new policyholders of SWE, will replicate the experience that they hitherto enjoyed in the CM WPF.
A particular feature of the New Reinsurance is that the premium payable by SWE to SWL for the reinsurance will not, in fact, be paid over to SWL but will be withheld by SWE (the “Funds Withheld Assets” or “FWA”). The retention of these funds will assist SWE in meeting its Luxembourg regulatory requirements. The amount of the FWA will be equal to the greater of (i) SWE's gross of reinsurance Solvency II BEL and (ii) the gross of reinsurance reserves required under Luxembourg GAAP in respect of the relevant policies. The FWA will be “rebalanced” quarterly so that if the amount withheld is less than required, SWL will transfer more assets to SWE, and if the amount withheld is more than required, SWE will release the excess to SWL. Under the New Reinsurance, SWE must invest the FWA in accordance with SWL's CM WPF investment strategy.
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