Re Sompo Japan Insurance Inc

The court, applying section 111 and Schedule 12 of the Financial Services and Markets Act 2000 and Part 7 procedure, sanctioned an insurance business transfer scheme transferring reinsurance business from Sompo Japan Insurance Inc (UK branch) to Transfercom Ltd. The court applied established principles that it must be satisfied the scheme is fair as between classes of affected persons and that the independent expert's report and the FSA's views are key material.

The independent expert (Mr Graham Fulcher) concluded that the transferring policyholders would see a marginal and non-material reduction in their confidence level from 99.88% to 99.6% over the expected run-off period, a level comfortably above relevant FSA benchmarks; Transfercom and its parent NICO/Berkshire Hathaway provided enhanced reinsurance, a funds-withheld endorsement and a ratings-trigger endorsement to secure claims. The FSA raised no objection.

The judge considered and rejected the objectors' points concerning reduced security, future underwriting risk, conflicts of interest in administration, OFAC exposure, Solvency II readiness and partial ineffectiveness under foreign law, finding either no evidence of material unfairness or adequate safeguards. The court therefore exercised its discretion to sanction the Scheme.

Background and parties: Sompo sought court sanction under Part 7 of FSMA for a scheme to transfer certain reinsurance business written by its UK branch (largely aviation and catastrophe reinsurance in run-off) to Transfercom, a recently incorporated UK subsidiary of National Indemnity Company (NICO), part of Berkshire Hathaway. The FSA participated and did not object; four policyholder objectors initially opposed sanction, three later withdrew and one (AXA) did not attend the final hearing.

Nature of application: An application for the court's sanction of an insurance business transfer scheme under section 111 and Schedule 12 FSMA, seeking an order to substitute Transfercom for Sompo as reinsurer for the transferring policies.

Issues framed:

• Whether jurisdictional and procedural requirements of FSMA were met.
• Whether the scheme is fair between classes of affected persons, in particular whether transferring policyholders' security would be materially reduced.
• The weight to be given to the independent expert's reports and the FSA's views.
• Specific objections: adequacy and enforceability of new reinsurance from NICO (including funds withheld and rating-trigger endorsements), impact of potential future underwriting by Transfercom, conflicts in administration, OFAC exposure, Solvency II implications, and possible ineffectiveness of transfers governed by non-UK law.

Court's reasoning and conclusions: The judge emphasised that sanction is a discretionary but important exercise given the substitution of a new insurer without individual consent. He accepted the independent expert's detailed analysis using the FSA's Individual Capital Assessment confidence benchmarks (adopting a time-horizon approach for run-off), concluding that transferring policyholders would retain a high confidence level (99.6% over the mean run-off) and that the marginal reduction from 99.88% was not material. The expert's view that Transfercom (with NICO backing) would have sufficient resources, together with contractual protections (new reinsurance with non-avoidance except for fraud, funds-withheld endorsement holding >90% of reserves, increased existing reinsurance limit and rating-triggered trust), addressed core security concerns. The court found other objections either unsupported by evidence or satisfactorily mitigated by the structure and assurances. With the FSA not objecting and no persuasive challenge to the expert, the court sanctioned the scheme.

Procedural posture: first instance sanction hearing under FSMA Part 7; the judge gave written reasons after making the order at the hearing.

The court sanctioned the insurance business transfer scheme. The sanction rested on compliance with the jurisdictional and procedural requirements of FSMA (section 111 and Schedule 12), the unchallenged and detailed independent expert evidence that any reduction in transferring policyholders' security was marginal and remained above FSA benchmarks, and adequate contractual and parental support (new reinsurance, funds-withheld and rating-trigger endorsements) provided by NICO and Transfercom. Other objections were rejected as unsupported or adequately mitigated.