Allied Dunbar Assurance Plc & Ors, Re

Section 111 of the Financial Services and Markets Act 2000 “the Act” provides:-

Section 105 of the Act provides:-

Section 105 and Section 111 are part of Part VII of the Act which deals with the control of business transfers of certain types of business including the transfer of insurances businesses. On Friday 17^th December 2004 I had before me an application for the sanction, under Section 111, of a scheme for the transfer of the insurance businesses conducted by Allied Dunbar Assurance PLC (“ADA”), Zurich Assurance PLC (“Zurich”) City of London Insurance Company Limited (“COL”) and Pilot Assurance Company Limited (“Pilot”) to Eagle Star Life Assurance Company Limited (“Eagle Star”). Each of those companies is a subsidiary of Zurich Group Holding (a Swiss company) itself the subsidiary of Zurich Financial Services (a Swiss company) and Allied Zurich PLC. Each of those companies carries on insurance business in the United Kingdom. The scheme for sanction has the object of concentrating the insurance business conducted by the five companies in Eagle Star.

In the course of the hearing I satisfied myself that the transfers concerned were transfers of insurance businesses within Section 105 (2)(a) and that the substantive and procedural requirements prescribed by Part VII of the Act had been complied with in relation to the transfers in question. In the result I made an order sanctioning the scheme but, because of time constraints, indicated that I would give my reasons for doing so in writing later. These are those reasons.

One of the documents circulated to policy holders for the purposes of the scheme was an “insert” which gave a summary of the scheme provisions and of the report of the Independent Expert appointed by the Zurich Employment Services Limited, and whose appointment had been approved by the regulator, the Financial Services Authority (“FSA”), to examine and comment on the scheme. The rationale for the scheme was summarised in that insert as follows:-

Mr N. J. Dumbreck the Independent Expert appointed to report on the scheme made a report dated the 21^st September 2004 and a supplementary report updating the first report, dated the 15^th December 2004, and also a further letter of the 16^th December addressed to Mr M. D. Moule the finance director of Zurich Financial Services (UKISA) Ltd. Mr Dumbreck’s main report deals with two subjects: in the first he comments on the effect of the scheme, if implemented, on the security of existing policy holders for due performance of their policies taken out with the five companies: in the second, the effect of the scheme on their future benefit expectations. His conclusion on the security aspects of the scheme is set out at paragraph 7.100 as follows:-

Mr Dumbreck’s conclusion as to future policy expectations is set out at paragraph 8.30 as follows:-

Mr Dumbreck’s overall conclusions are set out at paragraph 2.2 as follows:-

Mr Dumbreck’s supplemental report dealt with the peculiar position of Zurich in relation to the scheme. This arises from the fact that, at the time the scheme was promulgated Zurich had recently received an infusion of new capital which had not been used in the financing of new business. In consequence Zurich’s solvency ratios were artificially high. The report highlights the reduction in this solvency ratio between 31^st December 2003 and 30^th September 2004 and the reasons for this, primarily “new business strain”. Mr Dumbreck’s conclusion is set out at paragraph 5.4 as follows:-

In Mr Dumbreck’s letter of the 16^th December, expressed by him to be written on the same basis as his reports, he clarifies his earlier conclusions as to the position of Eagle Star policyholders before and after the scheme highlighting the fact that their security cover is calculated as reducing from 2.8 times to 1.9 times cover as a result. He then continues:-

The FSA will have been actively consulted in the course of the preparation of the scheme. As the relevant Regulator the FSA has a right to attend at the hearing of the application for sanction in order to make representations. The FSA has given the certificates required of it under the relevant legislation and indicated that, because it found the scheme satisfactory, it would not be attending at the hearing of the application.

I refer back to the provisions of section 111 of the Act which I have set out above. Having satisfied itself that the prescribed substantive and procedural requirements have been met the Court “must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme.” The Court therefore has an overriding discretion whether to grant or refuse its sanction.

The leading authority on the function of the Court in these circumstances is the decision of Mr Justice Hoffmann, now Lord Hoffmann in re London Life Association Ltd an unreported decision decided on the 21^st February 1989 under the provisions of the Insurance Companies Act 1982 Part 1 schedule 2C the predecessor of the present legislation. In the first of my judgments in Re AXA Equity and Life Assurance Plc [2001] 2 BCLC p 447 at 452 I set out the relevant passage from Mr Justice Hoffmann’s judgment. In my second judgment in that case at page 468 of the report I summarise, hopefully accurately, what Mr Justice Hoffmann said as follows:-

In the course of promulgating the scheme to policyholders it was pointed out to them that it was open to them to object to the scheme or any parts of it either in writing or by attending at the hearing for sanction and making oral submissions. Two policyholders have made oral submissions to me and a number of written submissions objecting to the scheme have been received. I will deal first with the written objections which have been received. A total of approximately 50 policyholders have written to object to aspects of the scheme. With the assistance of counsel for the applicants I have grouped the objections under broad headings which I will deal with in turn.

Policyholders have raised concerns that there is only one independent expert, as to whether the independent expert is independent, and as to the extent to which he has verified the information he has relied upon.

At paragraph 18 of his judgment in the Norwich Union Linked Life Assurance Ltd & ors case unreported but delivered on 1^st December 2004 the judge, Mr Justice Lindsay, dealt with similar objections in this way:-

I gratefully adopt what Mr Justice Lindsay said in the Norwich Union case in relation to Mr Dumbreck’s report in that case. Mr Dumbreck’s appointment as Independent Expert in the present case was approved by the FSA.

Mr Justice Lindsay also had a complaint as to the accuracy of the figures from which Mr Dumbreck prepared his report. At paragraph 20 of his judgment in that case Mr Justice Lindsay says this:-

As regards the suggestion that there should be more experts it should be pointed out that the scheme has been considered by “the appointed actuary”, employed by the proponents of the scheme but who is under statutory and professional obligations. In addition the FSA has, within its organisation, great actuarial expertise and experience which will have been used in reviewing the scheme.

Complaints have also been raised regarding the imprecision of or the meaning of, terms used in the Independent Expert’s report such as “satisfactory” level of security or “no material adverse effect” etc. I accept the applicants’ counsel’s submission that these complaints are misplaced. The various reports and communications leading up to this application are couched in professional language. I am satisfied that the way approval in those reports has been expressed does not indicate any lack of confidence in the opinion given.

“RMM” is an abbreviation for the “Required Minimum Margin of solvency” a standard of solvency imposed on insurance companies by legislation derived from the EU Life Directive. The Independent Expert’s report indicates that, whereas ADA’s RMM cover would have improved from 1.6 to 1.9 as a result of the scheme Eagle Star’s has declined from 2.8 to 1.9 and Zurich’s from 2.2. to 1.9.

The Independent Expert’s supplemental report deals with Zurich’s peculiar situation as I have explained above. I accept that account and Mr Dumbreck’s expression of confidence that Zurich policyholders’ interests have not been materially affected by the scheme. Again Mr Justice Lindsay encountered similar complaints in the Norwich Union case and dealt with them between paragraphs 14 and 16 as follows:-

In paragraph 17 of his judgment quoted above Mr Justice Lindsay deals with a complaint, also made in this case, that the benefits of the scheme from the efficiencies of administration which result from it, pass almost entirely to shareholders and not policyholders. Like him I do not accept that this is a valid objection. In particular the scheme provides for an annual subsidy from what are, in effect, shareholders funds to be paid into the two with profits funds run by Eagle Star and for other elements of capital support to be provided to both the with-profits funds. All policyholders stand to gain from the increased security resulting from the diversification of risk of the acquiring company, Eagle Star. Increased efficiency of administration will result in a reduction of costs in administering the various plans which will benefit policyholders.

Policyholders expressed concern at the increased risk to the performance of their policies resulting from possible future claims against transferring companies, in particular ADA, for insurance mis-selling. These anxieties are well expressed in Mr David Richardson’s letter to the CEO of Allied Dunbar dated 18^th October 2004 and Mr Newport’s response to that letter of 21^st October 2004. It seems to me that the response of Mr Newport ought to lay these anxieties to rest. For the sake of brevity I have not set his explanations out in this judgment but have scheduled a copy of his letter to it. The Independent Expert deals with the question of possible future claims for insurance mis-selling at paragraphs 7.58 and following of his main report. From these paragraphs it will be seen that the Independent Expert has obtained the best expert assessment obtainable as to the extent of the likely threat from mis-selling claims. True it is that the pre-scheme threat to ADA was more substantial than that to the other companies and that that threat will now be transferred to Eagle Star. The Independent Expert remains satisfied that notwithstanding this potential threat there should be no material effect on the security of policyholders and their reasonable expectations.

Some ADA policyholders were concerned that assets of ADA were going to be used to provide capital support to the Eagle Star with-profits funds following the implementation of the scheme.

It is true that the capital support mechanism described in paragraphs 7.18 to 7.29 of the Independent Experts report will subsidise Eagle Star’s two with profits funds. However, as already pointed out, this support will, in effect, come from shareholders’ funds. It is to be noted that the level of RMM cover is calculated to be increased as a result of the implementation of the scheme with relation to ADA policyholders.

With relation to ADA, there were some policyholders who objected to ADA retaining substantial shareholder funds after the implementation of the scheme which would not be transferred to Eagle Star. Before the scheme those funds would have provided financial support for policyholders. The fact remains that provided the appropriate RMM cover is retained, as the Independent Expert’s report indicates, policyholders can have no objection to a transfer of surplus funds elsewhere. The management of an insurance company, save as restricted by the Act, has the same power as any other company’s management to dispose of funds within its control as it wishes.

Some policyholders expressed general concerns that their policies were being moved to a different company than that which they had originally contracted to join. Some of these complaints may have originated in the misapprehension of policyholders that their company, Eagle Star for instance, was not already part of the Zurich group. The answer to this objection is similar to that which I have just expressed. Without more the management of a company or group of companies is entitled to dispose of its assets and make provision for its liabilities in such way as that management thinks fit. In the case of insurance companies such management discretion is controlled by legislation, in this case, the Act. However provided the regulatory controls imposed by the Act are met, management discretion remains.

It has been suggested by some policyholders that they should be entitled to a free transfer to another pension provider if they are not prepared to accept the proposed scheme. Mr Justice Lindsay faced a similar request and dealt with it at paragraph 26 of his judgment as follows:-

I agree with Mr Justice Lindsay’s approach which reflects the authorities as summarised by me in particular at paragraph (6) in the quotation from my judgment in the AXA case set out above.

Certain policyholders have expressed concerns that they or their policies might be meeting the costs of the scheme. As pointed out at para 3.7 of the Appointed Actuary’s Report, in fact, the costs of the scheme are to be borne by shareholders.

A concern has been raised that the mortality calculations applied to the plans may change as a result of the implementation of the scheme. It appears from paragraphs 8.15 and 8.16 of the Independent Expert’s report that there will be no changes of policy in this regard.

Complaints such as these have no bearing on the proposals contained in, or the implementation of, the scheme.

I received oral submissions from Mr Patrick and Mr Shane for which I am obliged. I hope it will not be taken as any disrespect for those submissions that I do not separately deal with the points that they raise. The objections voiced in those submissions are similar to written complaints with which I have dealt with above and, I trust are covered by my comments on those written complaints.

For these reasons I concluded that the Court’s sanction should be given to the scheme in this case.

Your first concern is in relation to the liabilities of Allied Dunbar. You suggest that the proposed restructuring of the Zurich life companies may be viewed as an attempt by Allied Dunbar's directors to avoid or limit Allied Dunbar's liability to its planholders. I can confirm that is very far from its purpose. Under the Scheme, all of the planholder assets and liabilities of Allied Dunbar will transfer to Eagle Star. Further, the Scheme provides that any proceedings which are pending against Allied Dunbar in connection with the plans being transferred will continue against Eagle Star. Therefore, to the extent that you have a claim or action against Allied Dunbar prior to the Scheme taking effect, this claim or action will continue after the effective date of the Scheme against Eagle Star. The Scheme does not in any way reduce the ability of a planholder to bring any claim; it just means that their rights will be against Eagle Star instead.

You state “reference is made solely to compensation payments regarding mis-sold mortgage endowment plans, the full effect of which may not be acknowledged at present”. This issue has been considered in detail by the Independent Expert in his report, a copy of which is enclosed. The Independent Expert has concluded, at paragraph 7.75 of his report, that Eagle Star not only has the ability to withstand a full-scale mortgage endowment review, but also has sufficient protection against other potential latent mis-selling liabilities.

You state that the liability in relation to mis-selling compensation payments may impact the company’s statutory solvency position, which cannot yet be determined. Again, this is an issue, which the Independent Expert has considered when determining whether the Scheme as a whole is fair to planholders. The Independent Expert has concluded, at paragraph 7.67 of his report, that Eagle Star “could absorb a fairly extreme outcome in relation to mortgage endowment compensation and still meet its regulatory capital requirements"” In drawing this conclusion, the Independent Expert considered that Eagle Star has enough capital to pay many times the current level of mortgage endowment compensation. Please see paragraph 7.68 of the Independent Expert’s report in which he noted that the capital cover in respect of mortgage endowment risk is adequate in a sufficiently large proportion of the possible outcomes to provide an appropriate level of security.

In relation to your concern regarding the reduction in excess assets, we believe the financial strength of the restructured company will be more than adequate following the Scheme taking effect. This aspect of the proposal has been fully considered by the Independent Expert (see paragraphs 7.80 to 7.83 of his report) and I can confirm that discussions have been held with the FSA throughout. The amount of capital available to Eagle Star following the effective date of the Scheme, even taking into account the retention by Allied Dunbar of £279m, will still exceed both the current minimum regulatory requirement and the estimated future individual capital assessment requirement stipulated by the FSA.

Finally, you note that the Zurich Group is not obliged to provide additional shareholder capital to support the restructured company's liabilities to planholders. While this is true, the position is no different after the Scheme than it was before - none of the Zurich Group entities is currently obliged to provide additional capital to any of the Zurich life companies.