In re Eagle Star Insurance Company Limited

The court sanctioned an insurance business transfer scheme under the Financial Services and Markets Act 2000 after concluding that the independent expert’s report established that the transfers would not have a material adverse impact on retained policyholders. The judgment addresses the statutory requirements under FSMA (notably ss.105, 101(2), 107 and 109 and Schedule 12) and emphasises the central role of an independent expert approved by the Financial Services Authority and reporting in a form required by the FSA (SUP 18 guidance).

The principal contested issue was the adequacy of Eagle Star’s post-transfer capital retention of £500 million and whether objectors should be permitted to test the independent expert’s detailed workings or to adduce rival expert evidence. The court refused an adjournment and held that, absent strong grounds of manifest error or bad faith, the court should accept the independent expert and the FSA’s oversight rather than permit routine forensic testing of the expert’s workings. The independent expert’s original and supplemental reports addressed asbestos exposure and ICA-based capital assessments, and the judge found those assessments sufficient to justify sanctioning the scheme.

This was an application for the court’s sanction of a scheme transferring certain general insurance businesses within the Zurich group to concentrate the United Kingdom business in the United Kingdom branch of Zurich Insurance Company. The transfers involved Eagle Star, Midland, Preferred and Whiteley and included proposed capital reductions in Eagle Star to eliminate a deficit and create a special capital reserve to be released progressively with court and FSA sanction.

The application was made under FSMA and accompanied by a scheme report prepared by an independent expert, Dr Lis Gibson, approved under the FSA regime. Objectors included two United States reinsurers (Gen Re and North Star) who sought an adjournment to prepare expert challenges and Mr and Mrs Birch, contingent claimants concerned about asbestos-related policy coverage. The main issue before the court was whether Eagle Star’s retention of £500 million post-transfer provided sufficient financial security for retained policyholders and whether the independent expert’s report could be further tested by objectors.

The court refused the adjournment as late and inadequately prepared. The judge analysed the role and independence of the FSA-approved independent expert and the extensive supervisory guidance in SUP 18. The court emphasised that the independent expert’s role is to give an objective assessment and that the court should generally accept such a report unless there are strong grounds showing manifest error, proven fact or improper motive. Dr Gibson’s report and supplemental report had specifically considered asbestos exposure, reserve scenarios and ICA calculations; she had stress-tested assumptions and concluded that £500 million retention would not have a material adverse impact. On that basis, and having considered authorities (Re London Life and re AXA Equity and Law) supporting deference to independent experts and the FSA, the court concluded the scheme was fair and sanctioned it.

The court also observed that the prospect of a future scheme of arrangement under Companies Act 1985 s.425 did not of itself make the transfers objectionable absent bad faith. Malta life business retained in a segregated, fully reinsured fund was not materially adversely affected.

The court sanctioned the insurance business transfer scheme. The judge held that the independent expert’s report (prepared and approved under the FSA regime and SUP 18 guidance) established that the transfers would not have a material adverse impact on retained policyholders, that the retention of £500 million was adequate in the circumstances and that, absent strong grounds of manifest error or bad faith, the court should accept the independent expert rather than permit routine external testing of the expert’s detailed workings.