Rothesay Assurance Ltd, Re

Factual and Procedural Background

An application was heard on 9 November 2015 under section 107 of the Financial Services and Markets Act 2000 ("FSMA") seeking court approval pursuant to section 111 of FSMA for an insurance business transfer scheme ("the Scheme"). The Scheme proposed the transfer of the entire long-term insurance business of Company A (formerly known as MetLife Assurance Limited) to Company B, both entities within the same corporate group. Company A had been a wholly-owned subsidiary of Company B since May 2014.

Both companies conduct similar long-term insurance business involving bulk purchase annuity contracts issued to trustees of defined benefit pension schemes domiciled in the United Kingdom or the Republic of Ireland. The Scheme aimed to simplify corporate structure, reduce administrative and overhead costs, and diversify risk by consolidating the two businesses into a single entity to achieve capital efficiency under the existing regulatory regime and the forthcoming EU-wide Solvency II regime.

The policyholders affected are primarily pension scheme trustees for buy-in policies or individual beneficiaries for buy-out policies. Approximately 90,000 pension scheme beneficiaries are covered by the contracts issued by the two companies.

Financial evidence was presented showing the assets, liabilities, and capital resource requirements ("CRR") of both companies as at 31 December 2014, with Company A holding assets of approximately £3.125 billion and Company B holding assets of approximately £10.087 billion. Both companies were well capitalised under the Pillar I regulatory test, which is more onerous than the Pillar II test based on individual capital assessments ("ICA").

The independent expert, an actuary, provided a report concluding that the Scheme would not materially adversely affect the security or reasonable benefit expectations of policyholders, nor the service standards and governance of the policies. Supplementary reports confirmed these conclusions despite updated financial data and concerns raised by certain policyholders.

The Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA") reviewed the Scheme and submitted reports indicating no objection to the Scheme, having considered representations from policyholders and their representatives.

At the hearing, submissions supporting the Scheme were made by counsel for the applicants, and representations were also heard from a policyholder and his actuarial adviser, who raised concerns about the Scheme's impact on policyholder security.

The court announced approval of the Scheme and later provided detailed reasons for this decision.

Legal Issues Presented

1. Whether the court should approve the insurance business transfer Scheme under section 111 of FSMA.
2. Whether the Scheme would materially adversely affect the security or reasonable benefit expectations of the policyholders of Company A and Company B.
3. Whether the Scheme is equitable to all classes and generations of policyholders involved.
4. Whether there are real, as opposed to fanciful, risks to the position of policyholders arising from the Scheme.

Arguments of the Parties

Appellant's Arguments (Policyholders Opposing the Scheme)

• The transfer would materially adversely affect the security of Company A’s policyholders by causing them to lose their first call on excess assets previously held by Company A.
• The capital coverage ratio for Company A’s policies would decrease significantly post-transfer, reducing the security margin for policyholders.
• Concerns were raised about whether Company B would meet Solvency II requirements post-transfer.
• Longevity risk was highlighted as a significant concern, with a risk that increased life expectancy could reduce policyholder security.
• Requested an order that Company B modify the Scheme to retain a first call on a defined amount of excess capital for the former Company A policyholders.
• Argued that the larger pool of policyholders post-transfer would dilute the security and benefits of the former Company A policyholders.

Respondents' Arguments (Company B, Regulators, and Independent Expert)

• The regulatory capital requirements, including Pillar I, Pillar II, and Solvency II, incorporate significant margins of prudence designed to protect policyholders.
• Company B’s internal capital policy requires holding capital well in excess of regulatory minima, providing a strong buffer.
• Company B comfortably exceeds its Pillar I requirements and has recently increased its Tier 2 capital, further strengthening its position.
• The independent expert concluded that the Scheme would not materially affect the financial strength supporting policyholder benefits.
• The alleged longevity risk is mitigated by reinsurance arrangements covering 70% of mortality improvements.
• The governance and management of policies will remain unchanged post-transfer, with overlapping board members and consistent oversight.
• Precedents show that it is permissible for the excess capital coverage ratio to decrease without materially endangering policyholder security.
• The first call on surplus assets is not a legal entitlement and can be altered without adverse effect if the overall capital strength remains robust.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by outlining the statutory framework and established principles for sanctioning insurance business transfer schemes, emphasizing the need to consider the real risks to policyholders. The independent expert’s detailed analysis was given significant weight, particularly his assessment that the Scheme would not materially affect the financial strength supporting policyholder benefits or the reasonable benefit expectations of policyholders.

The court noted that both companies were well capitalised under the current regulatory regime and that Company B would remain in a strong capital position post-transfer, including under the forthcoming Solvency II regime. The court considered the concerns raised by policyholders and their actuarial adviser, particularly regarding the loss of first call on surplus assets and the reduction in capital coverage ratio. However, it found that these concerns did not amount to a material risk to policyholder security given the robust capital buffers and regulatory oversight.

The court also accepted the respondents’ arguments that the regulatory capital requirements incorporate prudential margins, and that the internal capital policy of Company B provides an additional layer of protection beyond regulatory minima. The court further observed that the governance and management of the policies would continue unchanged, with overlapping board membership ensuring consistent oversight.

Regarding longevity risk, the court was satisfied that reinsurance arrangements and prudent management mitigated this risk sufficiently. The court also referenced relevant case law confirming that excess capital levels above regulatory minima are not guaranteed entitlements and may fluctuate without undermining policyholder security.

Consequently, the court concluded that the Scheme posed no real risk to the solvency of Company B or the security of the transferring policyholders and was equitable to all classes and generations of policyholders affected.

Holding and Implications

The court gave its APPROVAL to the insurance business transfer Scheme under section 111 of FSMA.

This decision permits the transfer of the long-term insurance business of Company A to Company B, consolidating the businesses within the group and achieving the intended capital efficiencies. The approval confirms that the Scheme does not materially adversely affect policyholder security or reasonable benefit expectations. No new legal precedent was established; rather, the court applied established principles and precedent to the facts before it. The direct effect is the lawful and regulated transfer of the insurance business as proposed, with ongoing regulatory oversight to ensure continued policyholder protection.