England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Rolls Building Royal Courts of Justice Fetter Lane, London, EC4A 1NL
		15/01/2016

Mr Justice Henderson:

Introduction and background

1. 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.
2. 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.
3. 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.
4. 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.
5. 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%.
6. 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").
7. 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.
8. 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".
9. 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.

10. 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.

11. 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.
12. 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 in letters to the court that further developments since the dates of their second reports had not caused them to alter their views in any material respect. I also heard one policyholder, Mr Higgins, and (as requested by Mr Higgins and a number of other policyholders) I permitted Mr Gatenby to address the court, although (unlike the policyholders) he had no statutory entitlement to do so. Both Mr Higgins and Mr Gatenby made their points clearly, courteously and concisely, for which I express my gratitude.
13. Having heard these submissions, I was satisfied that it would be appropriate for the court to approve the Scheme. I therefore announced my decision to that effect, but said I would give my reasons in writing later. In this judgment I set out those reasons.

The Scheme

14. The Scheme is relatively simple in form, and contains no provisions of an unusual nature. It effects the transfer of the whole undertaking and business of RAL to Rothesay Life, with the exception (as is conventional in schemes of this type) of certain residual categories of assets and liabilities which are introduced to deal with the possibility that there may be some legal or other impediment to the transfer. No such impediments were expected by the parties. In broad terms, the Scheme provides for the transferring policies, assets and liabilities previously allocated to RAL's long-term fund to be allocated after the transfer to the long-term fund of Rothesay Life, and for everything previously allocated to RAL's shareholder fund to be allocated to Rothesay Life's shareholder fund. The Scheme contains conventional provisions for the continuity of the business and other matters. It provided by clause 14 for the Scheme to become effective at 11.59 pm on 30 November 2015, so long as the relevant tax clearances and confirmations had by then been received from HMRC. In her second statement dated 4 November 2015, Ms Loudiadis confirms that the necessary tax clearances and confirmations were duly received. Clause 18 provided for modifications or additions to the Scheme, with the consent of the parties and the approval (or direction) of the court.

The role of the court

15. I have recently set out, and will not repeat, the well-known principles which should guide the court in exercise of its discretion to sanction an insurance business transfer scheme: see Re Excess Insurance Company Limited and Others [2015] EWHC 3572 (Ch) at [23] to [27]. The only point which needs to be added is that, since the present Scheme is one for the transfer of long-term business, no adaptation is needed of the principles laid down by Evans-Lombe J in Re Axa Equity & Life Assurance Society Plc and Axa Sun Life Plc [2001] 1 All ER (Comm) 1010. It is also worth re-emphasising that what the court is concerned to address "is the prospect of real, as opposed to fanciful, risks to the position of policyholders": see Re Royal Sun Alliance Insurance Plc [2008] EWHC 3436 (Ch) at [11].

The reports of the Independent Expert

16. I have already quoted Mr Gillespie's conclusion, in section 9 of his main report. I will now deal in more detail with his assessment of the effect of implementation of the Scheme on the policyholders of Rothesay Life and RAL respectively. Beginning with the policyholders in Rothesay Life, Mr Gillespie enumerates the factors which currently provide security for their guaranteed benefits:

(a) the assets in the Rothesay Life long-term fund which back the reserves held to meet the guaranteed benefits;

(b) the margins for prudence in the calculation of the Pillar I reserves held to meet those benefits;

(c) the assets backing the regulatory capital requirements of Rothesay Life;

(d) the excess capital resources in both the long-term fund and the shareholders' fund; and

(e) the commitment of the board to maintaining appropriate levels of capital through the internal capital policy.

17. Mr Gillespie's analysis continues as follows:

"6.6 After the implementation of the Scheme, the security of the guaranteed benefits of the policyholders in RLL [i.e. Rothesay Life] will continue to be provided by these elements. Taking them in turn:

The implementation of the Scheme will have no impact on the reserves held in relation to the current RLL policies.

The implementation of the Scheme will have no effect on the margins for prudence in the mathematical reserves held in respect of the current RLL policies.

The implementation of the Scheme will have no impact on the Pillar I or Pillar II capital requirements of RLL.

The tables in Appendices 1 and 2 show that, if the Scheme had been effective as at 31 December 2014, the excess capital of RLL would have remained at £494 million and the capital coverage would have remained at 204%.

The internal capital policy will not change as a result of the implementation of the proposed Scheme.

6.7 The excess assets and capital coverage of RLL are unchanged by the implementation of the Scheme as RAL's excess assets are already treated as an asset of RLL, and therefore the transfer has no Pillar I impact on RLL.

6.8 For completeness it should be noted that because RLL's Pillar II calculations currently make full allowance for the value and risks associated with RAL, and treat RAL as if it were part of RLL, the capital resources, ICA and excess capital of RLL are unchanged as a result of the implementation of the Scheme on a Pillar II basis.

6.9 RLL's capital policy, which sets out a target level of capital buffer in excess of regulatory requirements, will not be changed by the implementation of the Scheme and cannot be subsequently changed without the approval of the RLL Board and the non-objection of the PRA.

6.10 Therefore, I am satisfied that, based on the projected financial results as at 31 December 2014, the implementation of the proposed Scheme would not have a material effect on the financial strength available to support the security of the benefits under RLL policies and that, after the transfer, RLL would remain in a strong capital position."

18. Mr Gillespie goes on to consider the financial strength of Rothesay Life when Solvency II is in force. Having said it is likely that "the financial strength will appear worse under the Solvency II regime than under the current regime due to the different rules that apply under Solvency II", he goes on to make the important point, in paragraph 6.14 of his main report, that:

"the introduction of a new solvency reporting regime does not of itself have any effect on the actual financial strength of an insurance company so the change would be rather to the reported financial strength or solvency ratio. Any such reduction to reported financial strengths would occur whether or not the Scheme is implemented and it is important to focus on the effects of the implementation of the Scheme on the financial strengths available to provide security of benefits rather than any changes in reported financial strengths due to the implementation of a new solvency regime. Attention should therefore be focused on any projected changes to the financial strength available to provide security before and after the Scheme is implemented."

19. Mr Gillespie also discusses what he terms the "walk away" option, that is to say the fact that Rothesay Life cannot be compelled by law to contribute any further capital to RAL and could, in theory, "walk away" and allow RAL to become insolvent and default on its liabilities. He describes various operational and regulatory constraints that in his view make it highly unlikely that this would ever happen, and concludes that "the "walk away" option can therefore be considered to be of negligible realistic value". I respectfully agree.
20. Finally, Mr Gillespie correctly notes that the Scheme will not change the governance and management of the Rothesay Life policies in any way.
21. Turning to the effect of the Scheme on the RAL policies, Mr Gillespie performs a similar comparison to that which he carried out for the Rothesay Life policies. He notes that implementation of the Scheme would lead to an increase in the absolute level of excess assets over regulatory capital requirements from £304 million to £494 million as at 31 December 2014, but to a decrease in the relative excess of assets over the required capital from 377% to 204%. Since this decrease is the focus of some of the main concerns expressed by policyholders, it is important to see what Mr Gillespie has to say about it:

"7.9 Therefore, on a Pillar I basis as at 31 December 2014, RAL is currently well capitalised before the implementation of the Scheme and RLL is projected to be well capitalised after the implementation of the Scheme, and although the transfer results in a decrease in the capital coverage ratio (from 377%), at 204% the capital coverage remains strong and the excess capital above the Pillar I capital requirements has increased (from £304 million to £494 million).

7.10 It should be noted that the current strong capital position of RAL is in excess of that required by the internal capital policy and by the regulators and that RLL (as the sole owner) could, subject to the requirements of the internal capital policy and the regulators, take actions which would reduce this excess capital. For example, a dividend could be paid to RLL (as in March 2015), new business levels could be increased or terms of new business made more capital intensive, or other RLL business could be reinsured into RAL. I understand that, in the event that the Scheme does not proceed, the Board of RAL is unlikely to maintain the current significant level of excess capital in RAL.

7.11 The proposed transfer will not lead to any change in the risk appetite or the internal capital policy in accordance with which RLL is managed.

7.12 After the transfer, as direct policies of RLL, the RAL policies will have strong capital support and therefore I am satisfied that the proposed Scheme will not have a material adverse effect on the financial strength available to support the security of the guaranteed benefits under the RAL policies."

22. Mr Gillespie goes on to make the significant point that, if the Scheme is implemented, the policyholders of RAL will lose their first call on the surplus assets of RAL, because those assets will be transferred to Rothesay Life and will thenceforth be available to meet the claims of all the policyholders of the augmented Rothesay Life. Mr Gillespie accepts that this is "a potential worsening of the security for the RAL policies". However, on both a Pillar I and Pillar II basis, Rothesay Life is projected to comfortably exceed its capital requirements, and to have a strong capital coverage ratio of 204%. The governance and management of the RAL policies will continue as before, particularly as the boards of the two companies have several members in common and the existing RAL board has managed and governed the RAL policies with a high level of oversight from the Rothesay Life board. Overall, Mr Gillespie was satisfied that "the Scheme will not have a material effect on the reasonable benefit expectations of the RAL policyholders" (paragraph 7.34 of his main report).
23. Although in no sense binding on the court, the views of an independent expert, whose appointment and the form of whose report must be approved by the PRA, are entitled to great respect, and the court will normally be slow to differ from them. The complete independence of the expert from the parties is a central feature of the protection which the statutory code affords to policyholders. Mr Gillespie's reports show that he fully understood the nature of his role, and it is clear to me that he discharged his duty carefully and conscientiously, not least in the consideration which he gave to the concerns raised by certain policyholders, to which I now turn.

The concerns raised by policyholders

24. The concerns raised by Mr Higgins may to a large extent be taken as representative. Together with a number of other RAL policyholders, he retained Mr Gatenby to advise them on the detail of the Scheme in early August 2015. Mr Gatenby provided them with an initial report, and then entered into communication with Rothesay Life on their behalf. He suggested modifications to the Scheme which would enhance the security of the RAL policyholder group, and also attended a meeting with the independent expert and the actuarial function holder of the Rothesay Group on their behalf. He must also have drafted, or at least advised on, a standard form of statement of case which was submitted by Mr Higgins and several of his colleagues.
25. Mr Gatenby is himself a Fellow of the Institute of Actuaries, and has more than 25 years' relevant experience.
26. In his statement of case, Mr Higgins objects to the Scheme on the grounds that the security of his policy and that of all RAL policyholders considered together as a group would be materially adversely affected were the Scheme to be approved. He identifies the basis of this adverse impact as the loss of the existing first call on the excess assets in RAL, which acts to reduce RAL's exposure to the risk that Rothesay Life will fail to meet its obligations. He relies on Mr Gillespie's acceptance that this is a potential worsening in the security for the RAL policies. In addition, he relies on the reduction in the percentage level of excess assets after the transfer. Further grounds for concern were said to be uncertainty whether Rothesay Life would meet the main requirements of the Solvency II regime, and the risk that an increase in longevity could materially reduce the level of policyholder security below that which currently exists. In conclusion, Mr Higgins sought an order from the court that would require Rothesay Life to modify the Scheme so as to avoid a material adverse effect on the RAL group of policies "by retaining a first call on the excess assets transferred in from RAL at a level no lower than the capital cover ratio of 210% of the existing … Pillar I capital requirement".
27. In his oral submissions to me, Mr Higgins stressed the importance to members of his group of their pensions, which in many cases were their main source of income. He submitted that the skills and experience of Mr Gatenby were similar to those of Mr Gillespie, and invited the court to prefer the views of Mr Gatenby. Mr Higgins accepted that the policyholders of RAL had no right to any particular level of excess assets, but the critical point, he submitted, was that as matters then stood they had first call on the excess capital, whatever its level might be. That right would be lost as a result of the transfer. Furthermore, the RAL policyholders would then rank equally with the far more numerous existing policyholders of Rothesay Life, and the level of excess assets per policyholder would be greatly reduced. The RAL policyholders would therefore be better off remaining where they were, with the benefit of their first call on the surplus assets in RAL, and without the dilution of membership which the transfer would entail.
28. Mr Gatenby first set out his detailed concerns in a letter dated 8 September 2015 to Mr William Gillions, the Assistant General Counsel to Rothesay Life. He contrasted the higher level of excess capital in RAL with the lower level in Rothesay Life, both at 31 December 2014 and in previous years. He argued that this fact alone demonstrated a material adverse change in security for RAL policyholders following the transfer. He said that moving from a group of 20,000 policyholders to a group of 155,000 or more would, in his view, represent a further material adverse change in their security. He also questioned whether it was reasonable to rely on the Pillar I position as at 31 December 2014, particularly in the light of two substantial forthcoming transactions involving the Lehman Brothers Pension Scheme and Zurich UK Life. He accepted that he was not privy to the projected Solvency II figures, but stated his belief that the post-transfer Solvency II capital coverage would be well below 204%, for both existing Rothesay Life and RAL policyholders. As to the way forward, he proposed that amendments should be made to the Scheme which would give the former RAL policyholders a first call on the first £114.4 million of any excess capital over the CRR, after which they would rank equally with all Rothesay Life policyholders for the remaining excess capital. The amount subject to the priority call would then reduce in line with the number of ex-RAL policyholders, falling to £28.6 million when their number was below 5,000. The initial figure of £114.4 million was calculated on the footing that it represented the difference between the projected post-transfer capital cover of 204% for the RAL policyholders and the required capital of £110 million. From Mr Gatenby's point of view, this was itself something of a compromise, because he did not propose that the amount of the priority fund should be calculated by reference to the higher pre-transfer level of excess cover in RAL.
29. Mr Gatenby then refined and amplified his views, both in further correspondence and at a meeting held on 21 September 2015. Following the meeting, Rothesay Life wrote to Mr Gatenby on 6 October 2015, declining to provide the additional financial security requested for the RAL policyholders. Mr Gillions attached to the letter a draft letter of comfort which was intended to allay the concerns of the RAL policyholders. The comfort letter dealt in some detail with those concerns, and included the following passage under the heading "Risk Management":

"Rothesay endeavours to reduce its risks to stabilise its balance sheet which in turn provides security for its policyholders. Rothesay's capital policy reflects the merits of its investment and risk policies:

(i) Rothesay's investment strategy is to invest in low-risk assets that benefit from collateral, hedging arrangements or other explicit structural security in order to minimise the impact of market movements or credit defaults.

(ii) Rothersay's risk policy looks to reduce its longevity risk (the risk that the annuity liabilities are greater as a result of policyholders living longer lives on average) by entering into longevity reinsurance transactions which help to mitigate the risk of life expectancy extending beyond current projections.

The effect of the implementation by RAL of Rothesay's investment and risk policies is that RAL's exposure to longevity and market risks has significantly reduced. The Pillar II capital requirement as a result is lower than would be the case for a more conventional (less de-risked) annuity writer. Although materially less capital is required by the Pillar II capital requirement as a result of the reduction in risk, the Pillar I capital requirement has not reduced by an equivalent proportion due to the simplified nature of the CRR metric. Accordingly, we believe that a comparison of the pre- and post-Acquisition capital coverage ratios above RAL's Pillar I capital requirement (its CRR) is misleading as the reduction in real risk levels is not taken into account in the calculation. Conversely RAL now holds a greater amount of capital in excess of the risk based Pillar II capital requirement than it did at the time of the Acquisition."

Mr Gillions also pointed out that the increased number of policyholders in Rothesay Life would serve to diversify the longevity risk, and that as RAL was now closed to new business, its costs per policyholder would increase as the business wound down if no transfer took place.

30. Mr Gatenby returned to the fray in a further letter dated 2 November 2015. He updated his analysis in the light of the independent expert's supplementary report, and added some further comments on the topics of longevity risk and regulatory risk. He maintained the position that his clients should oppose the Scheme unless amendments were made along the lines which he had previously advocated.
31. In his oral submissions to me, Mr Gatenby placed particular emphasis on the longevity risk, and submitted that the enhanced safety margin in RAL meant that it would probably be better able to withstand major shocks than the post-transfer Rothesay Life, even though (as he accepted) the RAL policyholders had no legal right to the maintenance of any particular level of excess cover once its regulatory capital requirements were met.
32. In response to these concerns, the parties and the Regulators make a number of points which may be summarised as follows.
33. First, the regulatory capital requirements themselves have inbuilt margins of prudence and represent a practical level of security to ensure that policyholders are paid. Under both Pillar II and Solvency II they are set to produce a 99.5% level of confidence that the company will be able to pay its liabilities over a one year time frame. Furthermore, if an insurance company is in breach of its capital requirements, that does not mean it is insolvent in the sense that its liabilities exceed its assets. The position is, rather, that the company would then be subject to intensive regulatory intervention in order to protect the interests of the policyholders.
34. Secondly, the internal capital policy of Rothesay Life requires it to hold levels of capital considerably in excess of the already significant buffer represented by the regulatory capital requirement. Mr Moore characterised this as a self-denying ordinance designed to ensure that management intervenes well before the company comes anywhere near having recourse to its regulatory capital. It is "self-denying" because an insurance company is under no obligation to keep any level of capital in excess of regulatory requirements.
35. Thirdly, Rothesay Life comfortably exceeds its existing Pillar I requirements, which are in any event higher than its more realistic (because more bespoke) Pillar II and, in due course, Solvency II requirements. The difference is explained in the letter of comfort sent to Mr Gatenby's clients, in the passage which I have quoted in paragraph [29] above.
36. Fourthly, as noted by Mr Gillespie in his supplementary report, Rothesay Life has recently issued a further £250 million of new Tier 2 capital, thereby raising its Pillar I surplus ratio to 232%.
37. Fifthly, the court has often had to consider transfers where the excess capital in the transferee is less than that of the transferor, but has rejected objections on that ground. As Lindsay J said in Re Norwich Union Linked Life Assurance Limited [2004] EWHC 2802 (Ch) at [15]:

"… an insurance company is in general free in the course of its business to annihilate or diminish the excess over the RMM [i.e. the "required minimum margin" of solvency], to the extent there is no entitlement of a policyholder to cover beyond the RMM itself or to the maintenance of an existing RMM. Secondly, the RMM, determined according to EU rules and based on calculations of assets and liabilities following FSA Regulations, is intended to represent a practical level of policyholder safety. One can thus reduce the excess over the RMM without materially endangering security."

38. It follows, therefore, that there is nothing sacrosanct about any particular level of excess of capital over regulatory requirements, and a company is (for example) free to declare a dividend out of its shareholders' fund, as RAL did when it paid a dividend of £180 million to Rothesay Life in March 2015. In the passage of its second report dealing with Mr Gatenby's concerns, the PRA expressly stated that the payment of a further dividend by RAL to Rothesay Life, in the absence of a transfer, would be unlikely to concern the PRA "provided that the capital remaining met the Transferor's regulatory capital requirement and was at least at the level required by its capital management policy".
39. More generally, Mr Moore submits, and I agree, that the basic flaw in the arguments advanced by Mr Higgins and Mr Gatenby is that there is no principled basis for assessing what is the "right" level of excess capital for RAL (or Rothesay Life after the transfer) to hold. The level of any excess is liable to fluctuate as a result of changes in financial and other relevant conditions, and it is not set at any specific amount precisely because it exceeds the mandatory regulatory requirements, which themselves incorporate a substantial margin of safety. The critical question is whether the Scheme poses a material risk to the solvency of Rothesay Life, and thus to the security of the transferring RAL policyholders. The conclusion of the independent expert, supported by the two Regulators, is that Rothesay Life will remain in a strong capital position, both before and after the introduction of Solvency II. I can see no good reason to challenge the correctness of that conclusion, and it follows that I am unable to see any prospect of real, as opposed to fanciful, risks to the position of the transferring RAL policyholders.
40. As to the alleged longevity risk, this is of course a matter which will need to be kept under regular review, but I am satisfied that there is no immediate cause for alarm. Mr Gatenby's submissions on this score make no allowance for the fact that Rothesay Life has put in place reinsurance cover for RAL which mitigates the severity of the impact of assumed improvements in mortality by 70%. This is just one example of the ways in which prudent management can reduce the risks caused by changes in demographic assumptions. The transferring policies will for all practical purposes continue to be managed in the same way, and by the same team, as before. The policies will also continue to be subject to the same regulatory regime. In the circumstances, I consider Mr Gatenby's concerns on this point to be misplaced, and I regret that they may have caused some unnecessary alarm to his clients.

Conclusion

41. For all these reasons, I was satisfied that the court should give its approval to the transfer.