Jersey Unreported Judgments

Insurance - proposed scheme for business transfer from Teachers Provident to Liverpool Victoria.

[2016]JRC091A

Royal Court

(Samedi)

5 May 2016

Before     :

J. A. Clyde-Smith, Esq, Commissioner., and Jurats Liston and Thomas

IN THE MATTER OF THE REPRESENTATION OF TEACHERS PROVIDENT SOCIETY LIMITED AND LIVERPOOL VICTORIA FRIENDLY SOCIETY LIMITED

AND IN THE MATTER OF AN APPLICATION PURSUANT TO ARTICLE 27 AND SCHEDULE 2 TO THE INSURANCE BUSINESS (JERSEY) LAW 1996

Advocate L. A. Woolrich for the Representors.

judgment

the commissioner:

1.        Teachers Provident Society Limited ("Teachers") and Liverpool Victoria Friendly Society Limited ("Liverpool Victoria") seek the sanction of the Court under Article 27 of and Schedule 2 to the Insurance Business (Jersey) Law 1996 ("the Insurance Business Law") for the transfer of the whole of the long-term insurance business of Teachers carried on in Jersey to Liverpool Victoria.  The scheme is independent from but intrinsically linked to a larger transfer of the whole of Teachers long-term insurance business to Liverpool Victoria in the UK pursuant to Article 86 of the Friendly Societies Act 1992 and to the transfer of its long-term insurance business carried on in Guernsey. 

2.        Teachers was founded in 1877 by a teacher's organisation (which became the current National Union of Teachers "NUT") to provide benefits for those in the education profession.  It is an incorporated friendly society under the Friendly Societies Act 1992. 

3.        Teachers has been ranked the strongest with-profit life office in the UK, when measured by free asset ratio, for the last eighty years (Money Management Survey, August 2014).  As at December 2014, it had a free asset ratio of 63.3% and working capital (known as the "Estate") of £142 million. 

4.        Although financially very strong as an organisation, for the last three years, the income it has received from policy charges has been lower than its operating expenses.  This means it had made an operating loss which, in turn, means that it was relying on the Estate to subsidise the running of its business. 

5.        The money it receives from policy charges is lower than its expenditure because, firstly, it had a lower amount of new business coming in, driven partly by the recession and partly by changes in regulation.  Secondly, a high number of existing policies have matured (come to an end) in recent years, which means it has less income from existing policy charges.  By contrast it has not been proved possible to reduce its operating costs by a similar proportion without affecting its service capability. 

6.        If it were to continue in this pattern, its Estate would be eroded over time, which in turn would reduce the amount of excess capital available for distribution to its "With-Profits Policyholders". 

7.        In deciding on the best option for its members and policyholders, its Board considered three scenarios:

Scenario A: Remain open to new business

To remain open to new business as an independent entity it would need to substantially reduce its costs or better still, substantially increase its income.

As a mutual it was already extremely cost conscious so there was very little scope for it to reduce its costs without reducing the quality of the service it offered.  It had made some good progress in terms of sales between 2012 and 2014.  Realistically, however, the Board do not believe that it would be able to achieve the sales volumes needed in the future (when taking into account the continuing decline in its existing book of business as more and more policies mature), to enable it to operate without making a loss. 

The Board therefore concluded that to remain open to new business as an independent entity was not a viable option. 

Scenario B: Transfer of Engagements

In this scenario it would close new business and transfer its existing business interest to a larger organisation, to allow its members and policyholders to benefit from greater economies of scale and a wider range of products and services. 

After allowing for the costs of the transfer and the ongoing costs of running the closed With-Profits Fund, the remainder of the Estate would be distributed among its With-Profits policyholders over the remaining lifetime of their policies.  The Board unanimously agreed that this would be the best option for its members and policyholders, hence the proposal to transfer its engagements to Liverpool Victoria. 

Scenario C: Stand-alone run-off

In this scenario it would close the new business and then carry on administering its members' existing With-Profits policies until they mature.  Other parts of its business would be sold. 

After allowing for the ongoing costs of running the closed With-Profits Fund, the remainder of the Estate would be distributed amongst its With-Profits policyholders over the remaining lifetime of their policies.  This would be substantially less than in Scenario B as it would have fixed running costs to balance against a diminishing income. 

The Board unanimously agreed that it would seek to do this only if it were unable to find a suitable partner to enable it to pursue Scenario B. 

8.        It has found a suitable partner in London Victoria which is also a mutual insurer and a friendly society.  With over 170 years of history it is now the largest friendly society in the UK with total group assets of £14 Billion, 5.7 million customers and 1.1 million members.  It offers a wide range of products and services including a financial advice service.  It employs more than 6,000 people and, like Teachers, has its head office in Bournemouth, which was an important consideration for the Board of Teachers as it is committed to reemploying as many of Teachers staff as it can, should the transfer go ahead. 

9.        The sanction hearing has been adjourned on a number of occasions as a result of continued negotiations between the Independent Actuary and the Prudential Regulation Authority in the UK ("the PRA") over the Independent Actuary's Supplemental Report upon which this Court will be relying.  That was signed on the 14^th April, 2016, with the Jersey Resident Policyholders being informed in due time of today's hearing. 

10.      Two versions of the Independent Actuary's Supplemental Report were ultimately produced.  One version was produced for the purpose of this Sanction Hearing (as well as the hearing before the Guernsey Royal Court for the sanction of the Guernsey Scheme).  The second version is a private version produced specifically for the PRA and the Financial Conduct Authority in the UK ("FCA").  The reason for the two separate reports is directly linked to the queries raised by the PRA and causative of the adjournments to this Sanction Hearing.  The difference between the two reports is the inclusion of sensitive confidential data in the private version relating to Liverpool Victoria and its compliance with the Solvency II requirements, which came into force on 1st January, 2016 in the UK, which is omitted from the public version.   Both versions have been approved by the PRA and the FCA and both versions have been provided to the Jersey Financial Services Commission.  Both versions set out the same conclusions based on the same considerations.  We agree to the Representors request that the content of the private report remains private. 

11.      On 20^th April, 2016, the PRA confirmed the UK Transfer.  The validity of the PRA's confirmation remains subject to the sanction of the Jersey Scheme by the Royal Court and the sanction of the Guernsey Scheme by the Guernsey Court. 

12.      The Guernsey Court sanctioned the Guernsey Scheme on Friday 29^th April, 2016. 

13.      The Court's approach to the transfer of insurance business of this kind is well settled.  In the Norwich Union Life insurance Society-v-Norwich Union Annuity Limited and Others 1997/81 ([Jersey Unreported 25^th April 1997]) the Court cited with approval the dicta of Hoffman J in Re London Life Association Limited (21^st February 1989), an unreported judgment of the High Court of England and Wales where the learned judge set out these principles:-

"Although the statutory discretion if unfettered, it must be exercised according to principles which give due recognition to the commercial judgment entrusted by the company's constitution to its Board.  The Court in my judgment is concerned in the first place with whether a policy holder, employee or other person would be "adversely affected" by the scheme in the sense that it appears likely to leave him worse off than if there had been no scheme.  It does not however follow that any scheme which leaves someone adversely affected must be rejected.  For example, as we shall see, one scheme which might have been adopted in this case would have adversely affected many of London Life's employees because they would have become redundant.  But such a scheme might nevertheless have been confirmed by the Court.  In the end the question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected."

14.      Schedule 2 to the Insurance Business Law requires that a Representation for sanction of the transfer of insurance business from one regulated entity to another must be supported by an Independent Actuary's Report dealing with, among other things, the consequences of the transfer for all affected policyholders. 

15.      The Representors instructed Mr John McKenzie of Milliman LLP to produce the Independent Actuary's Report and this was finalised on 3^rd November, 2015. 

16.      At paragraph 6.2 of the Independent Actuary's Report, Mr McKenzie concluded:-

"In light of the conclusions summarised above, and subject to the requested approvals being obtained from the PRA, in my opinion, the proposed transfer of the engagements of [Teachers] to [Liverpool Victoria] is in the interests of the members and long-term policyholders of both [Teachers] and [Liverpool Victoria]."

17.      In addition, at paragraph 1.10 of the Independent Actuary's Report, Mr McKenzie notes (under the heading "Scope"):-

"The Scheme Report applies equally to the long term insurance business carried out in or from within Guernsey and Jersey and to business comprising policies issued to residents of Guernsey or governed by Guernsey law as it does to the long term business written in the UK, and may therefore be used to satisfy the requirement for a report by an independent actuary on the terms of the local schemes in Guernsey (the Guernsey Scheme) and Jersey (the Jersey Scheme)."

18.      Since then, Mr McKenzie has produced his supplemental report to take account of developments between the date of his first report and April 2016.  In particular the supplemental report takes into account:-

(a)       the status of the applications made by Teachers and Liverpool Victoria to use the transitional measures or the volatility adjustment under the Solvency II regime (which came into force on 1 January 2016);

(b)       the status of management actions being considered by Liverpool Victoria in 2015 to support its proposed interim capital policy under Solvency II;

(c)       the initial financial positions of Teachers and Liverpool Victoria under Solvency II as at 1 January 2016;

(d)       updated information on the financial positions of Teachers and Liverpool Victoria in the light of changes in economic conditions and volatility in equity markets in 2016, and management actions being considered or taken in light of this in 2016;

(e)       the approvals given to Liverpool Victoria to use a matching adjustment and the consequential recalculation of transitional measures;

(f)        policyholder responses regarding the Scheme; and

(g)       any other developments that have occurred since the date of the Independent Actuary's Report (3 November 2015) which would require Mr McKenzie to reconsider his conclusions set out therein. 

19.      Mr McKenzie concludes, at paragraph 3.2:-

"In light of the conclusions summarised above, in my opinion, the proposed transfer of the engagements of [Teachers] to [Liverpool Victoria] is in the interests of the members and long-term policyholders of both [Teachers] and [Liverpool Victoria]."

20.      In terms of the requirements generally under the Insurance Business Law and of the earlier directions of the Court, we can deal with those by way of summary in this way:-

(i)        the Representors have complied with the Court's directions consequent on the various adjournments of the Sanction Hearing;

(ii)       the PRA confirmed the UK Transfer on 20 April 2016;

(iii)      the Royal Court of Guernsey has sanctioned the Guernsey Scheme on 29 April 2016;

(iv)      the Representors have supported this application with the opinion of an independent actuary who has concluded policyholders will not be adversely affected by the Jersey Scheme;

(v)       the Representors have complied with the procedural requirements set out in Paragraphs 4(a), (c) and (d) of Schedule 2 to the Insurance Business Law;

(vi)      the Representors have complied with the directions of this Court to send an "Explanatory Booklet" to each of the Jersey Resident Policyholders for Teachers for whom a current address is held;

(vii)     no objections have been raised by policyholders to the Jersey Scheme;

(viii)    the JFSC has confirmed it has no objection to the Jersey Scheme; and indeed today representatives of the Commission have attended to confirm that;

(ix)      the Comptroller of Taxes has confirmed that there are no Jersey Tax consequences for the Jersey policyholders as a result of the Jersey Scheme. 

21.      So in the circumstances we therefore sanction the Scheme and give the orders as set out in the revised draft that you have handed to us. 

Authorities

Insurance Business (Jersey) Law 1996.

Friendly Societies Act 1992.

Norwich Union Life insurance Society-v-Norwich Union Annuity Limited and Others 1997/081.

Re London Life Association Limited (21st February 1989).