Court of Appeal sets out correct approach to transfer of long-term Insurance.

Victoria Sander, Jon Holland, Alex Cox, and Duncan Graves

Latham & Watkins has won an appeal on behalf of Rothesay Life Plc (Rothesay) in an unprecedented challenge to the High Court’s refusal to sanction the transfer of around 370,000 annuity policies in August 2019 (comprising total policyholder liabilities of approximately £11.2 billion) from The Prudential Assurance Company Limited (PAC) to Rothesay.

The Court of Appeal overturned the High Court’s refusal to sanction the scheme in a judgment[1] handed down on 2 December 2020, and set out the correct approach for a court to adopt when dealing with applications to sanction transfers of insurance business under Part VII of the Financial Services and Markets Act 2000 (FSMA).  The case is the first time an application under Part VII FSMA has been considered in detail by the Court of Appeal.

The Court of Appeal held that the judge was “not justified in making an adverse comparison between the financial strength, record and expectations of PAC and Rothesay”; that his reasoning had been based on a misunderstanding of the applicable financial metrics; and that he did not give adequate weight to the views of the independent actuarial expert or the on-going regulatory role of the PRA.  The Court of Appeal also held that, although non-actuarial factors may be relevant to the assessment of some Part VII applications, the subjective choice of provider by policyholders is not a relevant factor to be considered.

The Court of Appeal also set down definitive, yet flexible, guidance on how a court should approach consideration of a Part VII application. It emphasised that the court should:

  • identify at the outset which factors are relevant to the assessment of a particular scheme, bearing in mind the nature of the business being transferred and the underlying circumstances giving rise to the transfer, and
  • interrogate those factors to determine whether the transfer will give rise to a “material adverse effect” on policyholders.

The Court of Appeal confirmed that, unless the court identifies errors, omissions, or inadequate or defective reasoning in the reports from the independent expert and the Regulators, their views  should be given full weight in the judge’s exercise of his or her discretion.

The PRA, FCA, and a number of the policyholders affected by the transfer participated in the appeal. The Association of British Insurers applied for, and was granted, permission to intervene on behalf of the insurance industry given the importance of the outcome for UK insurers, who routinely use the Part VII procedure to transfer books of business.

This is a significant decision, for the parties and for the UK insurance industry.  The guidance laid down by the Court of Appeal allows insurers and other financial institutions that use the Part VII process to reorganise their businesses in the expectation of a much more certain outcome once the relevant regulatory hurdles have been crossed.

The Latham & Watkins team was led by London Insurance M&A partner, Victoria Sander and London Litigation & Trial partner, Jon Holland, with support from litigation associates, Alex Cox and Duncan Graves.

[1] In the matter of The Prudential Assurance Company Limited, and In the matter of Rothesay Life plc, and In the Matter of Part VII of the Financial Services and Markets Act 2000 [2020] EWCA Civ 1626