The Court of Appeal has overturned last year’s judgment preventing the proposed transfer of c.£12.9bn in annuity liabilities from The Prudential Assurance Company Limited (PAC) to Rothesay Life (Rothesay).
Part VII of the Financial Services & Markets Act 2000 (FSMA) provides a court-sanctioned procedure for the legal transfer of insurance policies between insurers. The court is required to consider a report on the viability of the transfer by an independent expert, along with submissions from the FCA and PRA and any objections made by policyholders.
In the original High Court decision, the judge rejected the proposed transfer despite the independent expert being satisfied that it would not materially adversely affect policyholders and no objection being raised by the regulators. This was on the basis that:
- in the event of financial distress, PAC was more likely to receive support from its parent company than Rothesay was from its equity backers;
- policyholders had a reasonable expectation (based in part on the policy wording and PAC’s brand marketing), that they would receive their annuity from PAC, which was a “household name”, whereas Rothesay’s reputation, as a relatively new entrant, was not comparably longstanding; and
- the court should balance the applicant’s commercial aims with policyholder’s interests, and the existing reinsurance arrangement between the applicants largely satisfied their commercial aim of releasing regulatory capital without the transfer.
The judgement apparently signalled an intention of the courts to take a more interventionist approach to Part VII applications – giving more weight to the objections and expectations of policyholders, even where the view of the regulators and independent expert is that the transferee has sufficient financial standing to take on the transferred business and meet policyholder’s claims.
However, the Court of Appeal, in granting the appeal, agreed with PAC and Rothesay’s submissions that the judge:
- should not have concluded that the external support available to Rothesay (from its equity backers) was materially different from that available to PAC (from its parent) and should not in any event have regarded the availability of such non-contractual support as a material factor;
- had not given sufficient weight to the non-objection of the regulators and to the independent expert’s view (based on Rothesay’s capital position as calculated under Solvency II metrics) that the likelihood of Rothesay needing external support was remote; and
- should not have accorded any weight to policyholder’s expectations that their policy would remain with the same provider or their views of the age, venerability and established reputation of that provider. The relevant question, the court stated, was whether the transfer would have a material adverse effect on the policyholder and, given the experts’ view that policyholders’ prospect of being paid would be the same if the transfer was permitted, the court concluded that no material adverse effect could be founded on these grounds.
The judgement appears to confirm that, for the purposes of assessing a transferee under a Part VI scheme, meeting Solvency II requirements should be the principal measure of the applicant’s future financial resilience. While it acknowledged that the court’s approval does not act as a “rubber stamp”, it stressed that a judge must give “full weight” to the opinions of the regulators and independent expert and should not substitute its own expertise for theirs or depart from their view “without a proper and relevant reason”.
As the Association of British Insurers argued in intervening in the case, insurers rely on a clear and predictable Part VII process, given the cost and time commitment of making a submission. The judgement is therefore likely to be welcomed by insurers as return to greater clarity and orthodoxy.
PAC and Rothesay’s Part VII application will now be reheard by the High Court.