Re Prudential Assurance Company Limited

The Court of Appeal considered the proper approach to sanctioning insurance business transfers under Part VII of the Financial Services and Markets Act 2000, with particular focus on transfers of in-payment annuities and the weight to be given to Solvency II metrics, the independent expert and the regulators. The first instance judge (Snowden J) had refused to sanction a transfer of c.370,000 annuity policies from PAC to Rothesay principally because he considered (i) there was a material disparity in the likely availability of non-contractual parental support for the two firms over the long lives of the annuities and (ii) policyholders reasonably chose PAC on grounds of age and reputation and would not have expected a transfer. The Court of Appeal held that the judge had erred by (a) treating speculative non-contractual parental support as a material comparator once Solvency II metrics and ongoing regulatory supervision were satisfied, and (b) failing to give adequate weight to the independent expert and the regulators who had not objected. The court also held that subjective factors such as the venerability of an insurer are not relevant unless they demonstrably affect the security of benefits. The appeal was allowed and the sanction application remitted for rehearing in the High Court.

This is an appeal from Snowden J's refusal to sanction a Part VII transfer under section 111(3) FSMA of about 370,000 in-payment annuity contracts from The Prudential Assurance Company Limited (PAC) to Rothesay Life Plc (Rothesay). The transfer formed part of arrangements entered into in connection with a group demerger and a reinsurance agreement. The independent expert (an actuary) reported that the Scheme would not have a material adverse effect on security of benefits or reasonable expectations; both the Prudential Regulation Authority and the Financial Conduct Authority did not object and the PRA certified required documents.

The High Court judge refused sanction for six principal reasons, most notably his view that (i) a policyholder who chose PAC for its age and reputation would have reasonably assumed PAC would remain the provider, and (ii) there was a material disparity between the likely availability of external (largely parental) financial support for PAC and for Rothesay over the many decades that annuities run. He also gave weight to differences in capital management policies and to PAC having already achieved its commercial objective by entering the reinsurance agreement.

The Court of Appeal framed the central issues as whether the judge had wrongly (i) concluded there was a material disparity in potential external support and failed to accord adequate weight to the independent expert, (ii) failed to give weight to the regulators' non-objection and continuing supervision, and (iii) given excessive weight to policyholders' reliance on PAC's age and reputation. The court emphasised that the sanctioning exercise must begin with identification of the type of business and the relevant risks, that the court must carefully scrutinise but ordinarily give full weight to the independent expert and the regulators on actuarial and prudential matters, and that a material adverse effect must be a realistic, non-fanciful prospect, a consequence of the scheme and significant in its likely impact.

The Court of Appeal concluded the judge had erred: non-contractual, speculative parental support is not a reliable comparator where Solvency II metrics and ongoing regulatory supervision are satisfied; the independent expert and regulators should have been given full weight; and subjective considerations of reputation and venerability do not displace objective solvency analysis unless they demonstrably affect security of benefits. The court allowed the appeal and remitted the sanction application to the High Court for rehearing, indicating it would be preferable that another Chancery judge hear it.

Appeal allowed. The Court of Appeal held that Snowden J erred in treating speculative non-contractual parental support as a material comparative factor once Solvency II metrics and ongoing regulatory supervision were satisfied, and in failing to give adequate weight to the independent expert and the regulators who had not objected. The court further held that subjective factors such as a transferor's venerability do not displace objective solvency and regulatory assessments unless they produce a material adverse effect on the security of benefits. The matter was remitted to the High Court for rehearing of the sanction application.

First instance: application to sanction the Part VII insurance business transfer was refused by Snowden J (refusal given 16 August 2019 as recorded in the judgment). Appeal to the Court of Appeal (Neutral Citation [2020] EWCA Civ 1626) heard 27-29 October 2020; the appeal was allowed and the sanction application remitted to the High Court. Patten LJ ordered on 22 June 2020 that if the appeal were allowed, the sanction application would be remitted to the High Court for rehearing.