The High Court has handed down its judgment on the Part VII transfer application between Rothesay Life PLC and Monument Life Insurance DAC. On 31 July, the court approved the transfer of around 400 in-force life insurance policies, with a best estimate liabilities of around £114m from Rothesay to Monument.
The judge has now published his reasons for approving the transfer.
The policies are individual annuities issued to beneficiaries of Irish defined benefit schemes by MetLife, an English subsidiary of a US insurer, which had written the business in Ireland using its passport. Rothesay acquired MetLife in 2014, and the policies were transferred to it under a Part VII transfer scheme. The policies are currently administered by Mercer, and could continue for 30 years or more, as they are either annuities now in payment or deferred annuity policies. All but 3 of the relevant policyholders are resident in Ireland. So the rationale for the transfer is to ensure continuity of service once Rothesay loses its passport at the end of the Transition Period.
The judge described the scheme as “relatively straightforward”, but the court must still look to apply its unfettered discretion on approving the transfer. It looked at:
- whether a policyholder or group of policyholders (whether transferring or not) would be adversely affected – so, whether on the whole it is fair to all. The judge commented that where the reason for the transfer is an external circumstance, such as Brexit, rather than the parties’ free commercial choice, the court may approve the scheme notwithstanding some elements of prejudice to policyholders, if it will achieve a better result overall;
- here, the direct changes for the transferring policyholders would be a transfer of both insurer and administrator; while for the non-transferring policyholders, an indirect change could be in security of benefits;
- key elements drawn out by the court were:
- that there is no expected immediate or radical diversion between solvency requirements, given – apart from anything else – that Solvency II was closely modelled on the UK regime. But the effect of the transfer on the capital position of the parties would likely be to reduce Monument’s SCR coverage ratio from 193.8% to 185.4%, while Rothesay’s would remain at 204% – both above what is required, and the respective firms had in place similar capital management policies;
- as a result, implementation of the scheme, in the view of the Independent Expert, would have no material adverse effect on the benefit security for the transferring policyholders or the non-transferring policyholders;
- there was no suggestion that reasonable expectations or service standards for non-transferring policyholders of either entity would be affected. For transferring policyholders, there may be some scope for different uses of discretion, but Monument had agreed to change its policy so this would not be a risk;
- Access to FOS (for those policyholders eligible) will be retained for mis-selling and historic breach liabilities. Post-transfer complaints will be dealt with by the Irish equivalent scheme to FOS, and, in addition, Monument has agreed voluntarily to comply with the DISP rules in the FCA Handbook insofar as they applied to policies before their transfer. Therefore, there should be no material adverse effect on the reasonable expectations and service standards for transferring policyholders;;
- 7 policyholders objected.
- PRA dismissed those who wanted to wait longer to see what might be agreed at the end of the Brexit Transition Period, citing the real risk that Rothesay would at some stage become unable to service the policies – and the independent expert agreed;
- the choice of Monument was queried, with objectors alleging it was small and not well-established. This was dismissed on the basis that some of the factual allegations were not correct, that absolute size of a company is not a reliable guide for security of benefits, and pointing out that the policyholders had not in fact chosen Rothesay as it had itself been a transferee of the policies;
- one policyholder alleged there were fundamental differences between regulation in the UK and Ireland, but the court said that in essence they do provide the same requirements and there is no reason to suppose they will diverge significantly in the foreseeable future;
- the question of FSCS protection was raised. The FSCS would pay 100% of an eligible claim, and all transferring policyholders are believed to be eligible claimants. But Ireland has no comparative scheme for life insurance business, and several policyholders said they had chosen an English insurer for this reason. The court noted that Monument Life has applied to enter the TPR, and intends to establish a third country branch in the UK. If this is so, then the FSCS will continue to cover eligible claimants unless and until Monument ceases to be a “relevant person” for FSCS purposes. The judge also noted that UK Financial Services Contracts Regime, which will (currently) extend coverage for 15 years after a firm leaves the UK TPR without seeking authorisation. So, since Monument Life is in the TPR, FSCS coverage will remain available for some years to come. In any event, the risk of its insolvency is very low, added to the fact that the policyholders’ more immediate concern should be the continuing ability of the insurer to service the contacts. The judge said it was unfortunate that Rothesay did not have a branch in Ireland, but the court has no power to require it to do so (nor to require it to find a UK authorised transferee with an Irish branch), and the UK regulators do not find it appropriate to require it to do so. The judge also noted that in the case of London Life Association Limited, the court does not have to be satisfied that no better scheme could have been devised. For Rothesay and Monument, he accepted that the most important thing was to ensure continuity of service, and that, anyway, there has been no concrete suggestion that any other scheme that could ensure ongoing FSCS protection could be put in place in time;
- some policyholders said that Covid-19 had made everything even more uncertain, but the independent expert confirmed nothing about the pandemic had caused him to change his views – but did not specifically comment (and neither did PRA or FCA) on whether Rothesay might be better able to withstand stresses caused by Covid-19 than Monument. The key regulatory comment appeared to be that PRA places no reliance on levels of excess capital, and simply relied on the CBI being satisfied that Monument could meet its SCR.
On the basis of all these arguments, the judge sanctioned the scheme.