Jersey Unreported Judgments

Insurance.

[2022]JRC001

Royal Court

(Samedi)

4 January 2022

Before     :

J. A. Clyde-Smith, Esq., Commissioner, and Jurats Crill and Austin-Vautier

 

IN THE MATTER OF THE REPRESENTATION OF THE PRUDENTIAL ASSURANCE COMPANY LIMITED AND ROTHESAY LIFE PLC

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. Huelin for the first Representors.

judgment

the commissioner:

1.        On 26^th November 2021, the Court sanctioned a scheme ("the Jersey Scheme") for the transfer of certain long-term insurance business (annuities) carried in or from within Jersey by The Prudential Assurance Company Limited ("PAC") to Rothesay Life PLC ("Rothesay").  The proposed transfer involved a similar transfer in the United Kingdom ("the UK Scheme") and in Guernsey.

2.        In March 2018, Prudential plc announced its intention to demerge its UK and European businesses.  In support of that plan, PAC and Rothesay entered into a Business Transfer Agreement to transfer certain of PAC's non profit annuity business to Rothesay.  As an interim measure and in order to transfer materially the whole of the economic risk of such business to Rothesay pending full legal transfer, PAC and Rothesay also entered into a Reinsurance Agreement. 

3.        The demerger took place in October 2019, so that Prudential plc has demerged to form two separately listed companies, namely Prudential plc and M & G plc.  PAC is part of the demerged M & G corporate group, whose parent is M & G plc. 

4.        Subject to some limited exceptions, the purpose of the UK Scheme is to effect the legal transfer to Rothesay of the policies whose benefits are currently covered by the Reinsurance Agreement.  Certain of the non-profit annuity business to be transferred from PAC to Rothesay is long-term insurance business carried on by PAC in or from within Jersey and the purpose of the Jersey Scheme is to effect the transfer of such business to Rothesay, on similar terms to the UK Scheme.  There are some 67 policyholders subject to the Jersey Scheme, and some 348,000 policyholders subject to the UK Scheme. 

5.        The application under the Jersey Scheme was first made by the Representors on 30^th January 2019, but ran into difficulty when Snowden J declined to sanction the UK Scheme for the reasons set out in his judgment of 16^th August 2019 (In Re the Prudential Assurance Company Limited and Another [2019] EWHC 2245 (Ch)).  Despite the UK Scheme having the approval of the independent actuary and the UK regulators, namely the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA"), Snowden J found a number of factors weighed against the exercise of the English court's discretion to sanction the UK Scheme: 

"180.   The purchasers of annuity policies such as those in the instant case make a significant investment of some or all of their pension pots, and have no option to change the insurer upon which they will be dependent for life.  In that context, it was entirely reasonable for policyholders to have chosen PAC as the provider for their annuities based upon its age, its established reputation and the financial support which it would be likely to receive from the accumulated resources of the wider Prudential group if the need were ever to arise.  I also consider that in light of the way in which their policies were described in the relevant documents, and in the absence of any clear statement to the contrary, it was entirely reasonable for policyholders to have assumed that PAC would not seek to transfer their policies to another provider.  These factors mean that the choice of policyholders to take their lifetime annuities from PAC itself carries significant weight.

181.    In contrast, in terms of the criteria that the opposing policyholders relied upon to select their annuity provider, Rothesay is very different from PAC.  It is a relatively new entrant without an established reputation in the business.  Although it may currently have SCR metrics which are at least equal to those of PAC, it does not have the same capital management policies or the backing of a large group with the resources and a reputational imperative to support a company that carries its business name if the need were to arise over the lifetime of the annuity policies.  I cannot dismiss as fanciful the possibility that such support may be required over the very long duration of these policies, and I consider that the reliance which policyholders would then have to place upon an uncertain capital raising exercise from the investors in Rothesay or the markets more generally, is a material disadvantage of the Scheme to Transferring Policyholders.

182.    On the other side of the balance, PAC's reasons for selecting the Transferring Policyholders were entirely driven by a need to release regulatory capital to support the proposed Demerger.  PAC has achieved that commercial objective by the Reinsurance Agreement, which will continue even if the Scheme is not sanctioned.  PAC and Rothesay could not presume that the Scheme would be sanctioned, and I do not regard the additional costs which they will incur, or the fact that Rothesay will not have the commercial opportunity to use different techniques to exploit the assets which support the Transferring Policies, are significant prejudice when set against the fundamental change in status and material disadvantage that they seek to impose on the Transferring Policyholders.

183.    For completeness I should also indicate that I do not accept Mr Moore QC's submission that the effect of my refusing to sanction the Scheme would be to make it very considerably more difficult for PAC ever to utilise Part VII in relation to these annuity policies, or to make it very considerably more difficult for Rothesay to acquire further annuity policies.  I have held that such policies are transferrable as a matter of law and contract, and that although policyholders might reasonably have assumed that PAC would never transfer them, that is simply a factor to be taken into account.  The result might be different if, for example, PAC's commercial purpose for the transfer was different, if the transfer was proposed to policyholders on different terms, or if there was less disparity between transferor and transferee in the characteristics that policyholders reasonably considered important when selecting PAC as their annuity provider.  Likewise, there is no reason why Rothesay should not be able to acquire portfolios of annuities from other insurers with different characteristics or on different terms."

6.        That decision was set aside by the English Court of Appeal on 2^nd December 2020 (In Re The Prudential Assurance Company Limited and Another [2020] EWCA Civ 1626) and the matter remitted back to the Chancery Division, so that the application for the sanction of the UK Scheme could be re-heard.

7.        The English Court of Appeal found that the High Court had erred in its considerations for sanctioning the UK Scheme in a number of respects, namely:

"110.   ...

(i)         The judge was wrong to find that there was a material disparity between the non-contractual external financial support potentially available for each of PAC and Rothesay;

(ii)        The judge ought not anyway to have regarded such a disparity as a material factor;

(iii)       The judge failed to accord adequate weight to the independent experts conclusion that the risk of PAC or Rothesay needing external support in the future was remote; and

(iv)       The judge failed to accord adequate weight to the Regulators' lack of objection to the Scheme, and the continuing future regulation of Rothesay.

121.    ...the judge ought not have accorded any weight to the facts that the objecting policyholders (a) chose PAC on the basis of its age, vulnerability and established reputation, and (b) reasonably assumed that PAC would provide their annuity throughout its lengthy term."

8.        In determining whether there are any particular matters which this Court ought to have in mind in deciding whether or not to sanction a scheme under Article 27 of and Schedule 2 to the Insurance Law, the Court has previously been referred to:

(i)        the judgment of Hoffman, J in Re London Life Association Limited 21 February 1989 (unreported) in relation to a scheme under Section 49 of the Insurance Companies Act 1982 which was in similar terms to Schedule 2 to the Insurance Law;

(ii)       the judgment of Evans-Lombe, J in Re Axa Equity and Law Life Assurance Society plc and AXA Sun Life plc [2001] 2 BCLC 447 in relation to a scheme under section 49 of the Insurance Companies Act 1982,

which both explored the discretion of the High court and identified relevant considerations to be taken into account in determining whether to sanction a scheme. 

9.        Sir Philip Bailhache, then Bailiff applied the judgment in Re London Life in deciding to grant an application for sanction of a transfer scheme pursuant to Schedule 2 to the Insurance Law in The Norwich Union Life Insurance Society v Norwich Union Annuity Limited & ors. (25th April 1997) (Jersey Unreported 81/97).  In Representation of Royal London 360 Limited and Royal London 360 Insurance Company Limited [2011] JRC 192, Sir Michael Birt, then Bailiff, noted the helpful elaboration of the approach to be taken by the High Court in Re Axa and took the opportunity to transpose what Evans-Lombe J had said into the Jersey context and identify the principles to be applied in considering whether a scheme is fair and whether policyholders may be affected.  

10.      In determining whether or not to uphold the Appeal against the judgment of Snowden J, the English Court of Appeal did not wholly repudiate the approach taken to considering the sanction of schemes by the High Court in previous cases, including in Re London Life and Re Axa.  Indeed, the overarching assessment as to whether the scheme has any material adverse effect remains.  The English Court of Appeal did, however, re-examine the approach to be taken and emphasised that in the exercise of the court's broad discretion, the factors for the court to take into account and the interests of affected parties, depend very much upon the nature of the business being transferred and the circumstances of the scheme.  In particular, the English Court of Appeal indicated that the correct identification of matters that ought to be considered and matters that ought not properly to be taken into account has caused some confusion.  Further, that the matters identified in Re London life and Re Axa should not be treated as a comprehensive statement of factors that must always be applied in every case.  At paragraphs 75 - 86 the English Court of Appeal set out the approach that the High Court should take to the sanction of insurance transfer schemes, as follows:

"75.    The judge hearing an application for the sanction of an insurance business transfer scheme under Part VII should first, we think, identify the nature of the business being transferred and the underlying circumstances giving rise to the scheme.

76.      As we have already indicated, different considerations affect different types of business.  For example, the court considering the transfer of a book of annuities in payment will be primarily concerned with the interests of the transferring policyholders, whereas a transfer of with-profits business may raise directly the question of fairness between the policyholders remaining with the transferor, the transferring policyholders, and the companies themselves and their shareholders.  Transfers of some types of business may engage the interests of employees or other stakeholders in the transferor or transferee companies.

77.      The circumstances giving rise to the scheme proposed will also affect the approach of the court.  For example, many schemes will reflect commercial transactions between transferor and transferee companies for the benefit of those companies.  Other schemes will be occasioned by external events (such as the departure of the UK from the European Union) or the financial or other commercial circumstances of the transferor.  Some may take the form of a rescue of the business retained or transferred.

78.      The discretion of the court has frequently been said to be unfettered and genuine and not to be exercised by way of a rubber stamp.  That is true but, as in the exercise of all discretions, the court must take into account and give proper weight to matters that ought to be considered, and ignore matters that ought not properly to be taken into account.  The correct identification of which matters fall on which side of the line in particular transfer situations has caused some confusion in this, and perhaps other, cases. ...

79.      From our reading of the decided cases, we have detected a tendency on the part of those presenting these applications, in many cases accepted by the judges hearing them, to treat the judgments of Hoffmann J in London Life and Evans-Lombe J in Axa as if they were a comprehensive in all insurance business transfers.  Indeed, counsel for the appellants urged us to accept them as applicable in their entirety to the transfer scheme in the present case which, as we have earlier noted, is both very different from and a good simpler than those in London Life and Axa.  We consider that this misunderstands those judgments, which were addressed to the particular circumstances of those cases and to the types of business being transferred.  We would accept them as containing in many respects the factors likely to be applicable to the transfer of with-profits business, but they involve several factors that have no obvious application to a case such as the present. This was a point made in Royal Sun Alliance and by Snowden J in the present case at [39]-[40].   We very much doubt whether anything is to be gained by setting out and seeking to apply the factors listed in those cases, for example by Evans-Lombe J in Axa at [6], to transfer schemes involving every type of insurance business.

80       In a case such as the present, the paramount concern of the court will be to assess whether the transfer will have any material adverse effect on the receipt by the annuitants of their annuities, and on whether the transfer may have any such effect on payments that are or may become due to the other annuitants, policyholders and creditors of the transferor and transferee companies.  The court will also be concerned to assess whether there may be any material adverse effect on the service standards provided to the transferring annuitants or policyholders.  Whether any other factors require consideration will depend on the circumstances of the case.

81.      The first duty of the court is carefully to scrutinise the reports of the independent expert and the Regulators, and the evidence of any person required to be heard under section 110 including those that allege that they would be adversely affected by the carrying out of the scheme.  The court must understand the opinions presented and is entitled to ask questions about them as necessary.  It will do so, in particular, with a view to identifying any errors, omissions, or instances of inadequate or defective reasoning.

82.      In the absence of such defects, however, the court will always, in exercising its discretion, accord full weight to the opinions of the independent expert and the Regulators.  That does not mean that the court can never depart from the recommendations of the expert or the non-objections of the Regulators, but it does mean that full weight must be accorded to them, so that a court would not depart from such recommendations and non-objections without significant and appropriate reasons for doing so.  This is particularly so in relation to the financial and actuarial assessments required as regards the security of financial benefits.  Whilst the judges hearing Part VII applications have considerable experience of the actuarial and specialist issues reported on by both the expert and the Regulators, the court is not itself an expert and should not substitute its own expertise for that of the entities required or entitled by statute to proffer those opinions.

83.      This approach to the exercise of the court's discretion applies to the crucial question of whether the proposed scheme will have any material adverse effect on policyholders, employees or other stakeholders.  An adverse effect will only be material to the court's consideration if it is: (i) a possibility that cannot sensibly be ignored, having regard to the nature and gravity of the feared harm in the particular case, (ii) a consequence of the scheme, and (iii) material in the sense that there is the prospect of real or significant, as opposed to fanciful or insignificant, risk to the position of the stakeholder concerned.  In some cases, it may also be relevant for the court to consider whether there would be such material adverse effects in the event that the scheme was not sanctioned.

84.      Even if the court finds that the proposed scheme will have a material adverse effect on some group or groups of policyholders, it may still sanction the scheme in the exercise of its discretion.  For example, this might occur if the scheme is in the nature of a rescue of the business. If there are differential effects on the interests of different classes of person affected, the court will need to consider whether the proposed scheme as a whole is fair as between those interests.

85.      The Court should adopt the same approach to the exercise of its discretion (described at [82] above) when making the more general comparison between the positions that would exist with or without the proposed scheme in respect of (a) the security of the policyholders' benefits and (b) the standards of service and corporate governance that the policyholders can expect.  In many cases, this comparison will entail the court's consideration of the contractual rights and reasonable expectations of policyholders, including the standards of service and governance that can be expected if the scheme is implemented.

86.      Once the court has undertaken the evaluations we have mentioned, the court will decide whether or not to sanction the proposed scheme, if, under section 111(3) it is, in all the circumstances of the case, appropriate to do so. It cannot require the applicants to vary or alter the scheme, even though that may sometimes be the effect of the court expressing its concerns. The choices of both the scheme itself and its detailed terms are for the directors of the transferor and transferee concerned.  The primary duty of those directors is, of course, to promote the success of their companies."

11.      In summary, whilst the assessment to be carried out in determining whether or not to sanction a scheme should remain familiar, the particular factors to be considered in each case and the weight afforded to those factors should be determined by reference to the nature of the transferring business and the underlying circumstances of the scheme.  

12.      The approach taken by the English Court in Re London Life and Re Axa has now evolved in the manner set out by the English Court of Appeal and it is appropriate for this Court to take that into account in its own approach to such transfers, so that it should in the context of this case:

(i)        first, identify the nature of the business being transferred and the underlying circumstances giving rise to the Jersey Scheme. 

(ii)       second, taking the nature of the transferring business and underlying circumstances into account, assess whether: 

(a)       the transfer will have a material adverse effect on receipt of payments due by relevant parties;

(b)       the transfer will have a material adverse effect on service standards; and

(c)       any other factors that require further consideration.

(iii)      In making its assessment as to material adverse effect, consider:

(a)       the Independent Actuary's Report;

(b)       the confirmation of no objection from the Jersey Financial Services Commission ("the JFSC");

(c)       evidence of any person permitted to be heard in relation to the application to sanction the Jersey Scheme, including any objecting policyholders,

and in making such assessment, the Court should accord full weight to the Independent Actuary's report and non-objection from the JFSC, so that the Court would not depart from them without significant and appropriate reasons for doing so; and

(iv)      finally, having undertaken its evaluation of the above, decide whether or not to sanction the Jersey Scheme.

13.      The UK Scheme was sanctioned by the High Court on 24^th November 2021, for the reasons set out in the judgment of Trower J (In the matter of the Prudential Assurance Company Limited [2021] EWHC 31 52 (Ch)).  He considered the report of the Independent Actuary (referred to as the Independent Expert) Mr Nick Dumbreck, a Fellow of the Institute and Faculty of Actuaries and a partner of Milliman LLP, who explained that he was required by the regulatory guidance to consider the effect of the implementation of the UK Scheme (including the Jersey Scheme) on:

(i)        The security of policyholders' contractual rights, including the likelihood and potential effects of the insolvency of the insurers; and

(ii)       Matters such as investment management, new business strategy, administration, expense levels, valuation bases and the cost and tax effects of the UK Scheme (including the Jersey Scheme) in so far as they may affect the security of the policyholders' contractual rights, levels of service and their reasonable expectations.

14.      The Independent Actuary reached these conclusions at paragraphs 14.1 and 14.2 of his report:

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

·              the security of benefits of the policyholders of PAC and Rothesay, including the Transferring Policyholders;

·              the reasonable expectations of the policyholders of PAC and Rothesay including the Transferring Policyholders, including:

the reasonable benefit expectations of the policyholders of PAC and Rothesay, including the Transferring Policyholders; and

the standards of service, management and governance applicable to the PAC and Rothesay policies, including the Transferring Policies.

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

15.      As Trower J said at paragraph 43 of his judgment:

"43     It follows from the Court of Appeal's judgment that Mr Dumbreck's conclusions are ones to which full weight must be given. This is a strong pointer to a conclusion that the applicants have indeed established that the Scheme will not have a material adverse effect on the security of benefits under the transferring policies, the reasonable benefit expectations of the transferring policyholders or the standards of governance and management applicable to the transferring policies.

16.      Because the English Court of Appeal had made it clear that the Court is not a rubber stamp (paragraph 78) and that it remained the first duty of the Court to carefully scrutinise the Independent Expert's Report, Trower J then went into a further, more detailed analysis of it which we will not summarise here.

17.      Turning to objections to the UK Scheme, there had been 1,374 objections from policyholders to the UK Scheme, which although a substantial number, represented less than 0.5% of the total number of annuities to be transferred.  Trower J broke these objections down into themes.  He recognised that the objectors had genuine, strong and heartfelt feelings about the UK Scheme expressed in a manner which understandably respected their subjective views, but the English Court of Appeal had made it clear that those kinds of considerations were legally irrelevant: 

"99.    These concerns were often expressed in a manner which reflected the subjective views of individuals as to their own personal likes, dislikes and preferences.  That is very understandable, but I am not able to take them into account for that reason. The Court of Appeal has made clear that these kinds of consideration are legally irrelevant.  So long as the transfer of the annuitants' policies to Rothesay through the Scheme does not lead to them suffering an adverse effect which is material, in the sense that there is a possibility that cannot sensibly be ignored of real and significant risk to their position as annuitants, the legally relevant circumstances of the case will point towards the court making an order to sanction it."

18.      To the extent that the objections posed more objective questions, Trower J found that these had been addressed by the Independent Actuary in his report.  By way of illustration of one of the themes raised by objectors:

"104.   The passage from what Mrs Howell had to say also pointed up another theme which was raised by a large number of policyholders.  This was a comparison exercise between the position of PAC and the position of Rothesay.  Like many of the concerns expressed by the annuitants, it is one that is understandable at first blush, but it ultimately focuses on the wrong point.  The reason for this is that any adverse effect must be material in the sense explained by the Court of Appeal.  This is well-illustrated in an oft-cited passage from the judgment of David Richards J in Re Royal and Sun Alliance Insurance Plc [2008] EWHC 3436 (Ch), itself approved by the Court of Appeal in the present case ([2020] EWCA Civ 1626 at para 49):

'Accordingly, in approaching this application I shall be concerned to see whether there is any material adverse effect on the position of policyholders in any of the three groups to which I have referred.  The word 'material' is important.  The court is not concerned to address theoretical risks.  It might be said that a transfer of business from a very large company to a large company involved a reduction in the cover available to the transferring policyholders, but assuming that the transferee is in a financially strong position it matters not that the level of cover in the transferee is less than that in the transferor.  What the court is concerned to address is the prospect of real, as opposed to fanciful, risks to the position of policyholders.'"

19.      Another theme was that policyholders had entrusted their savings to PAC to secure something that they thought was inalienable, in the sense that it would always be PAC which was the entity with which they would have a relationship.  Snowden J had acknowledged that there was no contractual bar to the transfer, which was permitted by legislation in any event, but he had found that full weight needed to be given to a policyholder's reasonable assumptions that PAC would not transfer its obligations.  However, as Trower J pointed out at paragraph 110 of his judgment:

"110.   However, the Court of Appeal reached a very different conclusion on this point.  As I have already explained earlier on in this judgment it said ([2020] EWCA Civ 1626 at para 121):

'...we conclude on this issue that the judge ought not to have accorded any weight to the facts that the objecting policyholders (a) chose PAC on the basis of its age, vulnerability and established reputation, and (b) reasonably assumed that PAC would provide their annuity throughout its lengthy term'.

This could not be a clearer statement of principle.  The law, therefore, requires the court to conclude that the types of consideration on which Mrs Howell, amongst others, placed so much weight is legally irrelevant to a determination of whether or not the court should sanction the Scheme.  In other words, I am required by law to leave it out of account."

20.      Noting that the PRA and the FCA had no objection to the transfers under the UK Scheme, Trower J concluded at paragraph 127:

"127.   While the Court of Appeal contemplated that there will be cases in which other circumstances may have a material impact on the exercise by the court of its discretion under section 111(3), it also made clear that the paramount concern of the court in a case such as the present will be to assess whether the transfer will have any material adverse effect on the receipt by the annuitants of their annuities (and indeed on the receipt of payments by other annuitants, policyholders and creditors of the transferor and the transferee).  Service standards to be provided to the annuitants are also important, but I have not been persuaded that there are any other circumstances, the consideration of which calls into question the conclusions I have reached based on the security of policyholder benefits."

21.      There were no objections to the Jersey Scheme.  One policyholder had written but it transpired that his policy was not one of those being transferred under the Jersey Scheme.  We have already set out the conclusions of Mr Dumbreck, which applied equally to the Jersey policies and the Jersey Financial Services Commission had confirmed that it had no objections to the Jersey Scheme.  No tax implications arose and all of the procedural requirements had been met. 

22.      The task of this Court was made very much simpler by the very detailed consideration and analysis that has been undertaken for the UK Scheme, to which the Jersey Scheme was very closely connected, both by the home regulators, the PRA and the FCA, and by the English Court.  Applying the approach set out in paragraph 12 above and having identified the nature of the business being transferred and the underlying circumstances giving rise to the Jersey Scheme, the Court concluded that the transfers would not have any material adverse effect on receipt of payments due by relevant parties and would not have a material adverse effect on service standards.  In carrying out that assessment, the Court took into account the Independent Actuary's Report and the non-objection from the Jersey Financial services Commission, together with the judgment of Trower J and having done so, decided to sanction the Jersey Scheme.  

Authorities

The Insurance Business (Jersey) Law 1996

Re the Prudential Assurance Company Limited and Another [2019] EWHC 2245 (Ch). 

Re The Prudential Assurance Company Limited and Another [2020] EWCA Civ 1626. 

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

Re Axa Equity and Law Life Assurance Society plc and AXA Sun Life plc [2001] 2 BCLC 447. 

The Norwich Union Life Insurance Society v Norwich Union Annuity Limited & ors. (25th April 1997) (Jersey Unreported 81/97). 

In Representation of Royal London 360 Limited and Royal London 360 Insurance Company Limited [2011] JRC 192. 

Prudential Assurance Company Limited [2021] EWHC 31 52 (Ch).