Prudential’s £12bn transfer of annuity policies to Rothesay blocked by the High Court

August 22, 2019


The High Court has blocked a Part VII transfer of annuity policies by Prudential Assurance Company Limited (PAC) to Rothesay. The IE’s view (undisputed by the regulators) that the transfer would not have a material adverse effect on policyholders was not enough to satisfy the Court. The Judge said that other factors, which could not be quantified by an actuary or regulators, had to be taken into account.

The parties have been given leave to appeal.

The Proposed Transfer

The proposed transfer involved around 370,000 policies and liabilities of £12bn, but apart from its size, there was nothing unusual about it. Rothesay had reinsured the business as a preliminary step while the Part VII was completed. There were no changes to policy terms, and the policies would continue to be administered (at least initially) by the existing service provider.

Value of the IE and Regulators’ conclusions

While it has always been clear that Court approval is not a rubber stamp, it has come to be quite unusual for a transfer to fail if the IE gives a clean report and the regulators do not object. This case makes it clear that, even with IE support and no concerns from regulators,  the parties to a transfer cannot assume that the Court will be satisfied.

Snowden J declined to sanction the transfer, despite the IE’s conclusions, which were not disputed by the regulators, that:

  • there would be no material adverse effect on policyholders from the point of view of governance or service standards; and
  • the small size of Rothesay compared to PAC did not mean that policyholders would have less security.

He felt that the IE and regulators’ analysis was limited to actuarial and Solvency II derived regulatory principles. In deciding whether it was appropriate in all the circumstances to sanction a transfer, the Court should take account of broader questions outside these constraints. So while the views of the IE and the regulators were of considerable importance, they were not the determining factors.

The Court’s approach

In line with earlier cases, Snowden J's approach was to strike a balance between the parties’ commercial rationale and policyholder interests.  However, some of the factors he took into account were not obviously directly relevant to the question of whether the transfer would have a negative impact on policyholders.

Deciding factors in this case

Policyholders’ reasons for choosing PAC
Policyholders originally chose PAC based on its age and its established reputation. Rothesay, as a relative newcomer in the market,  did not share those attributes. Snowden J thought that the reasons for the policyholders’ choice of provider was a factor the Court should take into account in considering the alternative they were given under the transfer. 

Disparity in potential external support
The Prudential Group has assets of £508bn, compared to Rothesay’s post transfer asset base of £37bn. Snowden J felt that Rothesay did not have the backing of a large group with the resources and a reputational imperative to support it. The IE did not consider this to be a material issue, because the likelihood of Rothesay needing more capital was so remote. For Snowden J however this was a material point. If, against all the odds, Rothesay needed financial support, it would have to rely on what he saw as an uncertain capital raising exercise from its investors or the market.

Nature of annuity policies
The Judge was also influenced by the fact that annuity policies may provide the only source of income for a policyholder for the rest of their life. The IEs’ conclusions about SCR coverage over a one year timescale, and the PRA’s statement that there was nothing to suggest any "imminent" deterioration in Rothesay's current balance sheet did not give him comfort, given that annuities had to be paid over decades.

Policyholder expectation that policies would not be transferred
It was reasonable for policyholders to assume from PAC’s literature that it would not seek to transfer their policies. Although the policies were transferrable as a matter of law and contract, this expectation was still a factor the Court should take into account.

Striking a balance between the parties and policyholders
PAC had already achieved its commercial objective of releasing regulatory capital to support a proposed demerger through the reinsurance with Rothesay. As a result, Snowden J did not think the parties would suffer a prejudice if the transfer were not approved that was material enough to outweigh the disadvantages to policyholders.

Is lack of adverse impact no longer enough?

The Courts’ approach has previously been in broad terms to determine whether the transfer has a material adverse effect on policyholders. Snowden J however was influenced by the fact that PAC had qualities (longevity and reputation) which were not shared by Rothesay as a relative newcomer to the market. Even though there was no adverse effect in terms of security or service standards, this was an important factor for Snowden J. The same applied to the policyholders’ lack of expectation that policies could be transferred.

Low probability of risk not enough

Previous case law in the context of a general business transfer, states that the Court should have regard to real, not fanciful risks. The IE considered the risk of Rothesay not being able to meet its liabilities was remote, and that even if it did occur, its investors would be motivated to provide support. In Snowden J’s view though, it was not only the remoteness of the risk, but the severity of its impact if it did occur that had to be taken into account.  He could not regard the risk of Rothesay needing further capital, however unlikely, as fanciful because its consequences would be catastrophic for annuitants, who might lose their sole income. He thought their position was different from policyholders in a general insurance transfer, who had the option of cancelling their policy and/or renewing with a different insurer. This wouldn't of course be true in a transfer of a run‑off book of long tail liability policies, which may involve employees with latent diseases or claimants with catastrophic injury requiring long term care.

A new test?

The decision suggests that it is not enough for a Court to be satisfied that in all reasonably foreseeable circumstances a transfer will not adversely affect policyholders. Instead, Snowden J’s approach seems to be that if the transferor would be better able to withstand a shock, no matter how remote, than the transferee, the transfer ought not to be sanctioned. This is a step away from the previous position that as long as the transferee is in a strong financial position, it should not matter that its level of cover is lower, if a higher level of cover is never likely to be needed. The weight given to the fact that a policyholder may have taken the age and reputation of the insurer into account in purchasing the policy seems difficult to explain if the test is that the transfer should not have a negative impact.

The Judge said his view might have been different if PAC's commercial purpose for the transfer was different (and presumably was not largely satisfied by the pre-transfer reinsurance), the transfer was proposed to policyholders on different terms, or if there was less disparity between the parties in the characteristics policyholders considered important when selecting PAC as their annuity provider. If the Judge’s approach is correct, an insurer would need to find a counterparty that is not just in a strong financial position, but has the the same financial strength, longevity and reputation as the transferor. This could reduce the pool of potential acquirers in some cases to vanishing point. It could also make it difficult for specialist run-off acquirer to take on even a relatively small a book from a substantial live underwriter, with a long history and significant resources.