Jersey Unreported Judgments

Insurance - reasons for sanctioning the Scheme

[2020]JRC203

Royal Court

(Samedi)

2 October 2020

Before     :

J. A. Clyde-Smith O.B.E., Commissioner, and Jurats Austin-Vautier and Averty

 

IN THE MATTER OF THE REPRESENTATION OF LEGAL AND GENERAL ASSURANCE SOCIETY LIMITED (FIRST REPRESENTOR)

AND REASSURE LIMITED (SECOND REPRESENTOR)

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

Advocate S. M. Gould for the Representors.

judgment

the COMMISSIONER:

1.        On 26^th August 2020, the Court sanctioned a scheme for the transfer of part of the long-term insurance business carried on in or from within Jersey by the First Representor ("LGAS") to the Second Representor ("ReAssure").  It formed part of a similar scheme sanctioned in the UK and subsequently in Guernsey ("the Scheme").

2.        LGAS is a proprietary composite insurance company founded in 1836, and is the principal operating subsidiary for the LGAS Group.  It is one of the largest providers of insurance products in the UK and as at 31^st December 2019, it had approximately £148.8 billion of assets.

3.        On 6^th December, 2017, the LGAS Group announced that it intended to sell part of its long-term insurance business to ReAssure.  The transferring business consisted of with-profits business, unit linked business and non-profit business.  The transferring business had largely been closed to new business and in a run-off since 2015 and consists of approximately 900,000 policies.  As at 31^st December, 2018, it had assets of approximately £30 billion.

4.        ReAssure is a proprietary insurance company now owned by the Phoenix group.  Its business is based on the acquisition of the closed blocks of in-force life insurance business of other life insurance companies either through re-insurance agreements or by means of legal transfers of business and this has led to ReAssure undertaking a large number of transfers of business since its first acquisitions in 1983.  As at 31^st December, 2018, it had approximately £40.9 billion of assets.

5.        The proposed transfer pursuant to the Jersey part of the Scheme will become effective simultaneously with the UK and Guernsey parts of the Scheme.

6.        The High Court of England and Wales gave a directions order in respect of the UK part of the Scheme on 11^th July, 2019, and directions were obtained from this Court on 15^th July 2019.  There are 285 policy holders affected by the Jersey part of the Scheme.  The unpublished judgment of the Court noted a concern raised by the Independent Actuary in respect of the migration plan to which we will refer later.

7.        There have been a number of adjournments attributable in part to Covid-19, but the UK part of the Scheme was sanctioned by the High Court of England and Wales on 20^th August 2020, following hearings on 10^th, 11^th and 12^th March and 13^th and 14^th August 2020, and this for the reasons set out in the detailed judgment of Zacaroli J. of the 20^th August 2020 (In the Matter of Legal and General Assurance Society Limited [2020] EWHC 2299 (Ch)).

8.        The transferring of insurance business in Jersey is governed by Article 27 of and Schedule 2 to the Insurance Business (Jersey) Law 1996 ("the Insurance Law").

Procedural requirements

9.        In accordance with Article 27 of and paragraph 1 of Schedule 2 to the Insurance Law, LGAS and ReAssure are both permit holders, namely persons to whom the Jersey Financial Services Commission has granted a permit under Article 7(1) of the Insurance Law to carry on long-term insurance business.

10.      Under paragraph 3 of Schedule 2 to the Insurance Law, the representation and the Jersey Scheme document were accompanied by a report from an Independent Actuary, Oliver Gillespie, a Fellow of the Institute and Faculty of Actuaries, dated 3^rd July, 2019, on the terms of the Scheme, including the Jersey part of the scheme.

11.      Paragraph 4 of Schedule 2 of the Insurance Law sets out certain procedural requirements in relation to an insurance transfer scheme, which the Court was satisfied had been met in this case and which we will not set out.

Independent Actuary's Conclusions

12.      In the Independent Actuary's report, he concluded that:

"I am satisfied that the implementation of the Scheme would not have a material adverse effect on:

·         The security of the benefits of the policies of LGAS and ReAssure;

·         The reasonable expectations of the policyholders of LGAS and ReAssure in respect of their benefits; or

·         The Standards of administration, service, management and governance that apply to the LGAS and ReAssure policies.

I am satisfied that the Scheme is equitable to all classes and generations of LGAS and ReAssure policyholders."

13.      The Independent Actuary prepared a first supplementary report to his report dated 24^th February, 2020 in order to provide an updated assessment of the likely effects of the proposed Scheme ahead of the sanctions hearing.

14.      The Independent Actuary's conclusions contained in the first supplementary report were:

"I am satisfied that the implementation of the Scheme would not have a material adverse effect on:

·         The security of the benefits of the policies of LGAS or ReAssure;

·         The reasonable expectations of the policyholders of LGAS and ReAssure in respect of their benefits; or

·         The standard of administration, service, management and governance that apply to the LGAS and ReAssure policies."

15.      He confirmed that he was "satisfied that the Scheme is equitable to all classes and generations of LGAS and ReAssure policyholders."

16.      Since the date of the first supplementary report, the Independent Actuary has provided an addendum dated 6^th March, 2020, and three additional letters, the first of which was dated 11^th March, 2020.  The addendum addressed the operational readiness of the transferee and concluded that the additional changes being made to the Scheme did not provide any reason to change the conclusions of the first supplementary report and that the correspondence with policyholders did not provide any reason to change the conclusions of the first supplementary report.  The letters provided further detail to the High Court of England and Wales and included an assessment of the effect of the Covid-19 pandemic.

17.      To provide an updated assessment of the likely effects of the proposed Scheme in the light of the Covid-19 pandemic and the impact of lockdown restrictions, the Independent Actuary provided a second supplementary report dated 29^th July 2020, in which he concluded:

"I am satisfied that nothing has happened since the finalisation of my main report or my supplementary report to provide any reason to change the conclusions in section 15 of the main report and section 10 of my supplementary report that:

·         I am satisfied that the implementation of the Scheme would not have a material adverse effect on:

·         The security of the benefits of the policies of LGAS or ReAssure;

·         The reasonable expectations of the policyholders of LGAS And ReAssure in respect of their benefits; or

·         The standards of administration, service, management and governance that apply to the LGAS and ReAssure policies."

He confirmed that he was "satisfied that the Scheme is equitable to all classes and generations of LGAS and ReAssure policyholders."

Migration plan

18.      As noted by the Court at the direction hearing, the Independent Actuary's report concluded that "There are some areas of material concern regarding the migration plan that are being monitored closely by the ReAssure Board and the LGAS Board.  The transfer will not be able to proceed until a decision is made by the ReAssure and LGAS Boards to seek an order from the High Court to implement the Scheme and the High Court is satisfied that the implementation of the Scheme would not have a material adverse effect on policyholders."

19.      In the first supplementary report the Independent Actuary noted that there was further work on the migration to be completed ahead of the then proposed legal effective date of 6^th April 2020.  As such, he noted that it was not possible to conclude that a successful migration would be completed on time, but that he was satisfied that it is unlikely that the migration will lead to a material adverse effect on policyholders going forward.

20.      In the first addendum the Independent Actuary concluded that the additional information provided to him did not provide any reason to change the conclusions in the first supplementary report.  This assessment also included consideration of the information then available on Covid-19.

21.      Further steps were taken by the parties who believe that the passage of time means that they are now in an even better position than they were at the time of the hearing in March 2020, even accounting for Covid-19.  There are a number of reasons for this, including that the parties' respective management actions to address Covid-19 had been successful in mitigating the issues they encountered and that ReAssure had done further development work since the hearing in March, which development work had further reduced the amount of manual workarounds on which reliance needs to be placed.  There were no areas of material concern following a migration dress rehearsal that took place on 24^th May 2020 and a further dress rehearsal was concluded successfully on 29^th July 2020.

22.      In the second supplementary report, the Independent Actuary noted that there was further work on the migration to be completed ahead of the legal effective date of 7^th September 2020, but he concluded that:

"I am satisfied that, at the date of finalisation of this second supplementary report (29 July 2020), it is unlikely that the migration process will lead to a material adverse effect on policyholders going forward and that the successfully completed migration would not have a material adverse effect on policyholders."

23.      The Independent Actuary provided a letter dated 10^th August, 2020, to the High Court of England and Wales to include a further update on operational readiness.  This concluded that the updated information did not provide any reason to change the conclusions in the Independent Actuary's report, the first supplementary report or the second supplementary report.

Discretion of the Royal Court

24.      In determining whether or not there are any particular matters which the Court ought to have in mind in deciding whether or not to sanction the Jersey part of the Scheme, it is helpful to refer to the judgment of Hoffman J in Re London Life Assurance Limited 21^st February 1989 (unreported), where at pages 6-7 of the transcript he states:

"Although the statutory discretion is 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 policyholder, 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 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.  But the court does not have to be satisfied that no better Scheme could have been devised.  A board might have a choice of several possible Schemes, none of which, taken as a whole, could be regarded as unfair.  Some policyholders might prefer one such Scheme and some might think they would be better off with another.  But the choice is in my judgment a matter for the board.  Of course one could imagine an extreme case in which the choice made by the board was so irrational that a court could only conclude that it had been actuated by some improper motive and had therefore abused its fiduciary powers.  In such a case a member would be entitled to restrain the board from proceeding.  But that would be an exercise of the court's ordinary jurisdiction to restrain breaches of fiduciary duty; not an exercise of the statutory jurisdiction under section 49 of the Insurance Companies Act 1982.

What is true of choices as between different Schemes is also true of the details within a Scheme.  There are no doubt few Schemes which could not in some respect be improved.  But the terms of a Scheme are a matter of negotiation between a transferor and transferee companies and will to a greater or lesser extent depending upon their respective bargaining strengths, involve concessions on both sides.  Under the 1982 Act the court cannot, any more than under the Act of 1870, sanction the Scheme subject to the making of amendments.  It must be either confirmed or rejected, although no doubt the court in rejecting a Scheme could indicate that it thought the vice lay in some particular term and that a fresh Scheme without that term was likely to be acceptable.  I am therefore not concerned with whether, by further negotiation, the Scheme might be improved, but with whether, taken as a whole, the Scheme before the court is unfair to any person or class of persons affected.

In providing the court with material upon which to decide this question, the Act assigns important roles to the Independent Actuary and the Secretary of State.  A report from the former is expressly required and the latter is given a right to be heard on the petition.  The question of whether policyholders would be adversely affected by the Scheme is largely actuarial and involves a comparison of their security and reasonable expectations without the Scheme with what it would be if the Scheme were implemented.  I do not say that these are the only considerations but they are obviously very important.  The Secretary of State, by virtue of his regulatory powers, can also be expected to have the necessary material to express an informed opinion on whether policyholders are likely to be adversely affected."

25.      Sir Philip Bailhache, then Bailiff, applied the judgment in Re London Life Assurance Limited in deciding to grant an application for sanction of the transfer Scheme pursuant to Schedule 2 to the Insurance Law in Norwich Union Life Assurance Society v Norwich Union Annuity Limited & Others 1997/081.

26.      In the case of Re Prudential Assurance Company Limited and Rothesay Life Plc [2019] EWHC 2245 (Ch) sanction to a scheme was refused.  That case was concerned exclusively with the transfer of annuity policies and had been motivated by Prudential's desire to reduce its regulatory capital requirements in connection with a planned demerger of the Group.  The Independent Actuary had concluded that the Scheme would not materially affect the interests or reasonable expectations of policyholders, but a number of annuitants strongly opposed the transfer contending that they had selected Prudential as their annuity provider based on its long history as a leading UK insurance company, its established reputation for prudence, its size and the fact that it is an integral member of the larger Prudential group which could be relied upon to support it if the need ever arose.  Just as they were unable to transfer or encash their policies, Prudential should likewise be committed to make payments to them for the remainder of their lives and they trusted Prudential to honour that commitment. 

27.      In his judgment, Snowden J, whilst accepting that there were no contractual rights which would prevent Prudential from seeking to transfer these policies to Rothesay, concluded that the particular nature of an annuity policy represented an important factor in the exercise of his discretion. Quoting from paragraphs 121 and 122 of his judgment:

"121    The purchase of an annuity is, for many people, one of the most important decisions that they will every make.  An annuity policy is often purchased on retirement with a large single premium payment derived from a person's pension Scheme.  In return for that lump sum, the annuity provider promises to make regular periodic payments to the policyholder (and in some cases their spouse or partner) for the remainder of their life (or lives).  For many people, the annuity policy will provide the only, or the main, source of regular income for the rest of their life in retirement.  In most cases, and certainly in relation to the contracts in issue in this case, once an annuity contract is purchased, the policyholder cannot encash the policy and take a lump sum out again.  Nor can they change annuity provider. 

122     The consequence of these characteristics of an annuity policy is that when purchasing such a contract - especially with the proceeds of a pension Scheme - policyholders will be particularly concerned to select a company with a good reputation and financial standing who they trust, because once selected, they will have no choice but to rely upon that company to provide them with essential income over a potentially very long period which could run into several decades."

28.      A further issue of real relevance was that through a Reinsurance Agreement by which the economic risk and reward had already passed to Rothesay, Prudential had achieved its main business purpose, namely to reduce the solvency capital requirement of its shareholder-backed business, so as to facilitate the demerger.  Quoting from paragraph 170 of his judgment:

"In those circumstances, it seems to me that in striking the balance to which Warren J referred in Scottish Equitable between the interests of policyholders and the interests of the commercial parties, I can take into account that [Prudential] has already achieved its substantial business purpose, and if the Scheme was not to be sanctioned, those capital benefits to [Prudential] would not be lost."

29.      The reference to the Scottish Equitable case is to the case of Re Scottish Equitable Plc and Rothesay Life Plc [2017] EWHC 1439 (Ch) in which Warren J said this at paragraph 56:

"Any Scheme of this nature is instigated by the commercial parties concerned, not by the policyholders.  Parliament has seen fit to introduce legislation providing for business transfers, one statutory result of which is that the contractual obligations of the transferor are extinguished, with corresponding obligations being imposed on the transferee. Sometimes different policyholders are treated in different ways in which case a balance has to be struck between their interests, and in all cases the policyholders must be treated properly.  The four layers of protection which I have mentioned are there to ensure that policyholders are treated properly.  But policyholders are not given a veto over what the commercial parties wish to do.  Instead the appropriate balance has to be struck between the interests of the policyholders on the one hand and the commercial parties on the other hand, just as it has to be struck between different groups of policyholders amongst themselves."

30.      The four layers of protection were explained in paragraphs 29-32 of his judgment:

"29.    There are four layers of protection for policyholders in relation to business transfers.  First, there are the regulators who have general supervisory functions.  They have involvement in the Part VII process through the appointment of the independent expert and the structure of his report.  They have involvement in the production of their own reports.  They have the entitlement to appear in this court ... And the Financial Conduct Authority has an involvement in the communications exercise and the objectives of the Scheme.

30.      The second layer is the independent expert who is charged with assessing the application ...

31.      The third level of protection is the communication programme, including a directions hearing and appropriate waivers which can be obtained for good reason ...

32.      the final layer of protection is the approval of the court, taking account of all the objections which are raised following the communication exercise."

31.      LGAS received approximately 1,159 objections to the Scheme, which is equivalent to less than 0.1% of the total number of transferring policyholders and approximately 3.2% of the total number of communications received in response to publicity of the Scheme.  The most substantial of the policyholders' objections echoed those made in the Prudential and Rothesay case.

32.      In his judgment, Zacaroli J distinguished this Scheme from that of the Prudential and Rothesay case, on the basis that, in summary:

(i)        In the vast majority of LGAS transferring policies, the policyholder has the choice of changing provider.  Annuities within the LGAS business comprise less than 1% of the transferring policies. (paragraph 126)

(ii)       80% of the annuities are with-profits annuities, and therefore stand to gain some benefit from the Scheme (unlike the Prudential and Rothesay case) because of the Fixed Expense Agreement and the fund merger and "sunset" provisions designed to address problems arising in a diminishing closed fund. (paragraph 127)

(iii)      LGAS's business objective is very different from that of Prudential, and absent the Scheme, LGAS would have to seek to outsource administration of policies to ReAssure, probably at a higher cost, and would be unable to decommission the IT infrastructure necessary to administer the business or to divert employee resources and management time towards its strategic objectives.  In addition, the benefits of the Scheme to with-profits policyholders would not be available.  The business objective of Prudential had been achieved without the Scheme, whereas LGAS required implementation of the Scheme to achieve its business objective. (paragraphs 130-131)

(iv)      One of the main reasons cited for opposing the Scheme is the difference in relative financial strength, longevity and reputation of the LGAS Group and the parent Group of ReAssure.  However, ReAssure, unlike Rothesay, is part of a substantial and well capitalised group, even following the sale to Phoenix, such that the ability to obtain parental support pre and post transfer is materially the same. (paragraphs 132-134)

(v)       Each case requires the commercial interests of the parties to be balanced against the interests of the policyholders.  In contrast to the position in Prudential and Rothesay, while the Scheme undoubtedly promotes the commercial self interest of the parties, achieving LGAS's objective of focusing its resources on its core business will benefit the policyholders.  Zacaroli J did not accept this kind of strategic reorganisation was outside the proper purpose of the legislation, and the Scheme was designed to provide a better outcome for the policyholders than remaining with a company whose strategic focus is elsewhere. (paragraph 137) 

33.      The judgment of Zacaroli J deals in detail with the Solvency Capital Requirements, the support from the Phoenix Group, the standards of administration and service levels, the involvement of the Prudential Regulation Authority and the Financial Conduct Authority, who had no objections to the Scheme, the impact of Covid-19 on financial performance, the impact on service levels and objections based on the Scheme process, concluding that notwithstanding the powerfully expressed objections by the policyholders who spoke at the two hearings and those expressed in writing by others, he was satisfied that the Scheme is in all the circumstances fair (paragraph 175).  He said at paragraph 176:

"176.   An important factor in reaching my decision is the conclusions of the independent expert.  Having tested various of his conclusions as I have noted in the course of this judgment above, I am satisfied that his conclusion that the Scheme will not materially adversely affect any of the relevant groups of policyholders is based on a full and comprehensive review of all the relevant factors and circumstances and is based in sound reasoning."

34.      One objection was received to the Jersey part of the Scheme from Mr Nicholas Crocker, who attended the hearing, but as it transpired, his concerns had been addressed, in particular through the judgment of Zacaroli J. and he no longer objected to the Jersey part of the Scheme being sanctioned.

35.      With the benefit of the detailed consideration of the Scheme by Zacaroli J and consistent with his finding, the Court was also satisfied that the Jersey part of the Scheme was in all the circumstances fair and sanctioned it.

Authorities

In the Matter of Legal and General Assurance Society Limited [2020] EWHC 2299 (Ch). 

Insurance Business (Jersey) Law 1996. 

Re London Life Assurance Limited 21^st February 1989 (unreported)

Norwich Union Life Assurance Society v Norwich Union Annuity Limited & Others 1997/081. 

Re Prudential Assurance Company Limited and Rothesay Life Plc [2019] EWHC 2245 (Ch). 

Re Scottish Equitable Plc and Rothesay Life Plc [2017] EWHC 1439 (Ch).