The Royal London Mutual Insurance Society Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden |
| Judgment Date | 05 February 2019 |
| Neutral Citation | [2019] EWHC 185 (Ch) |
| Docket Number | Case No: CR-2018-001858 |
| Court | Chancery Division |
| Date | 05 February 2019 |
[2019] EWHC 185 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT
Royal Courts of Justice
7 Rolls Building, Fetter Lane,
London, EC4A 1NL
Mr Justice Snowden
Case No: CR-2018-001858
Martin Moore QC (instructed by Pinsent Masons LLP) for The Royal London Mutual Insurance Society Limited and Royal London D.A.C.
Tom Weitzman QC for the Prudential Regulation Authority
Hearing date: 31 January 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.
This is an application under Part VII of the Financial Services and Markets Act 2000 (“ FSMA”) for the Court's sanction of a scheme (the “Scheme”) for the transfer of the EEA insurance business of The Royal London Mutual Insurance Society Limited (“Royal London”) to a newly formed Irish subsidiary, Royal London Insurance D.A.C. (“RLI”). The transfer of business is proposed in order to deal with the potential problems for Royal London and its EEA policyholders of a “no-deal” Brexit.
In common with many other financial institutions, Royal London is concerned that in the event of a “no-deal” Brexit it will lose the “passporting” rights which currently enable it to rely upon its authorisation in the UK to carry out regulated activities to service its policyholders in other EEA Member States. To address this possibility, Royal London wishes to transfer its long-term business with policyholders in the EEA to RLI, which is be authorised and regulated in the Republic of Ireland, and thus able to service the policies concerned after Brexit, whatever form that may take.
The board of Royal London has also taken the view, and told its policyholders, that even if an agreement was now reached between the UK and the EU which would permit it to continue to administer the policies from the UK after Brexit, it is now committed to the transfer, which will still take effect as planned.
Subject to receiving sanction from the Court, the effective date of the transfer is anticipated to be 7 February 2019. For accounting and reporting purposes only, the transfer will, however, be deemed to have taken effect on 1 January 2019.
Royal London and RLI
Royal London is the United Kingdom's largest mutual life and pensions company. It has about 8.8 million policies and funds under management of £114 billion. Royal London maintains five funds, the principal one of which is the Main Fund into which is allocated a variety of books of business. It is the only fund open to new business. All the other funds are closed to new business, save for increments and options derived from existing contracts.
Royal London has reached its current state through organic growth as well as a series of acquisitions. For present purposes, the most relevant one was the acquisition in 2011 of Royal Liver Assurance Limited, an incorporated friendly society, and its subsidiaries (“Royal Liver”). Royal Liver itself had earlier acquired portfolios of business written in Ireland by the Caledonian Insurance Company, GRE Life Ireland Limited and Irish Life Assurance plc. Royal Liver also wrote business through its Irish branch. Under the terms of the transfer to Royal London, a Royal Liver Sub-Fund was established, into which was allocated the business carried on by Royal Liver and its subsidiaries.
As indicated, Royal London is a mutual life insurance company owned by its members. As at 31 December 2017 there were approximately 1,232,950 members who were policyholders who had effected policies of insurance with the company. Policyholders who effected policies after 25 April 1995 are only members where the policy entitles the policyholder to participate in the profits of Royal London. Thus, policyholders of acquired businesses are not members of Royal London. Separate to membership, Royal London has a concept of a ProfitShare which is a mechanism by which eligible policyholders can share in its financial performance but at the sole discretion of the directors of Royal London.
RLI is a newly incorporated company which received the necessary authorisations to carry on business, including the business to be transferred to it under the Scheme, with effect from 1 January 2019. It has been capitalised by the injection of €40 million in cash from Royal London. Since 1 January 2019, RLI has written a relatively small number of protection policies in Ireland that would, in the absence of the proposed Scheme, have been written by Royal London through its Irish branch.
The Scheme in outline
The Scheme is a lengthy and complex document. I shall therefore simply attempt to summarise its more central features.
The Transferring Business
There are three blocks of business which are proposed to be transferred under the Scheme:
i) about 446,000 largely with-profits policies written in Ireland at various times by Royal Liver, Irish Life, Caledonian Insurance Company and GRE Life Ireland. These are currently allocated to the Royal Liver Sub-Fund (“the Royal Liver Transferring Policies”). As at 30 June 2018 gross best estimate of liabilities (“BEL”) for these with-profits policies was £737 million. That positive figure means that the anticipated future claims and expenses will exceed the anticipated future inflows from premiums;
ii) about 55,000 non-profit protection policies sold after June 2011 through Royal London's Irish branch and which are allocated to the Royal London Main Fund (“the Post-2011 Protection Policies”). As at 30 June 2018 the gross BEL for these policies was negative £65 million (i.e. that anticipated future inflows from premiums will exceed anticipated future claims and expenses); and
iii) about 1,300 bonds sold in Germany under the Scottish Life International brand which are also allocated to the Royal London Main Fund (“the German Bonds”). These bonds are composed of with-profits and unit-linked policies. The holders of the with-profits policies are members of Royal London and are also the only policyholders involved in the transfer who are eligible to participate in the ProfitShare. As at 30 June 2018 the gross BEL for such German Bonds was £105 million (i.e. that the anticipated future claims and expenses will exceed the anticipated future inflows from premiums).
Under the Scheme the transferring policies will be transferred from Royal London to RLI, where the blocks of business described above will be allocated to an appropriate sub fund to be established by RLI. Thus, the Royal Liver Transferring Policies will be allocated to the Liver Ireland Sub-Fund, the Post-2011 Protection Policies will be allocated to the Open Fund, and the German Bonds will be allocated to the German Bond Sub-Fund.
As well as the transfer of liabilities, under the Scheme Royal London will have an obligation to transfer assets in respect of the Royal Liver Transferring Policies and the German Bonds sufficient to match the gross BEL, Risk Margin and Solvency Capital Requirement (“SCR”) required by the recast Directive on the taking up and pursuit of the business of insurance and reinsurance (2009/138/EC) (“Solvency II”), and the Capital Buffer required to capitalise the Liver Ireland Sub-Fund and the German Bond Sub-Fund at 164% in accordance with the RLI capital management framework. No assets will be required to be transferred in respect of the Post-2011 Protection Policies since the BEL for this business is negative.
The New Reinsurance Agreements
As only a proportion of the policies currently in the Royal Liver Sub-Fund at Royal London are to be transferred, it would ordinarily be necessary to identify and transfer a fair split of the assets in respect of these policies and thereby to split the Royal Liver Sub-Fund. That would involve taking account of the transferring policyholders' interest in the Royal Liver Sub-Fund's inherited estate (the part of the with-profits fund not allocated to policyholders' liabilities). That is a complex process, and the evidence is that it could not be achieved before Brexit on 29 March 2019. Further, the size of the German Bond business currently allocated to Royal London's Main Fund is so small that it is thought that it could not operate economically as a stand-alone with-profits fund.
To address these issues, the Scheme provides that RLI's liabilities in relation to the Royal Liver Transferring Policies and the German Bonds will be immediately reinsured back to Royal London under two new reinsurance agreements (together the “New Reinsurance Agreements”). The premiums for that reinsurance will be offset against Royal London's obligation to transfer assets to RLI under the Scheme, with the consequence that RLI will be left with very few cash assets in the respective new funds, and its regulatory capital in that regard will largely comprise its rights against Royal London under the New Reinsurance Agreements. These rights will also be the subject of a security package that is designed to ensure that, in the event of insolvency of Royal London, the transferring policyholders would be in no worse a position than if they had remained at Royal London.
The New Reinsurance Agreements also deal with the maintenance of benefits for the transferring policyholders. While at Royal London, with-profits policies in the Royal Liver Sub-Fund are required to be managed in accordance with certain principles in the instrument of transfer from which the relevant policies were acquired, and more generally Royal London is required to follow specified Principles and Practices...
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