Colbourne Insurance Ltd & Anor, Re

JUDGE HODGE QC: This is my extemporary judgment on the hearing of an unopposed part 8 claim issued on 14 March 2017 by Colbourne Insurance Company Limited (Colbourne) and NRG Victory Reinsurance Limited (NRGV), as applicants, for: (1) an order under the Financial Services and Markets Act 2000 s 111(1) sanctioning an insurance business transfer scheme which effects the transfer to NRGV of all the general insurance and reinsurance business carried on by Colbourne and (2) ancillary orders under the Financial Services and Markets Act 2000 s 112.

On this application, Mr Martin Moore QC appears for the applicants. The application came on for hearing before me at 5.20 pm on Monday 17 July 2017. Unfortunately, the court recording equipment automatically switched itself off at 6.00 pm and it was not possible to reactivate it. Since the application was unopposed, I indicated that I would continue the hearing without any recording but that I would have to reserve my judgment until a later time when the judgment could be recorded. In the event, I am delivering this extemporary judgment at 10.00 am today, Wednesday 19 July.

The evidence in support of the application is contained in two witness statements of Elizabeth Anne Bagshaw dated 9 March and 12 July 2017, and two witness statements of Andrew Wilson bearing the same dates. Ms Bagshaw is a director of Chiltington International Limited, a specialist provider of services to the insurance and reinsurance industry which was appointed to manage the run-off of the business of Colbourne in 1991. She has been responsible for managing the run-off of that business for over ten years and has been closely involved with the intended transfer of the insurance business from Colbourne to NRG. Mr Wilson is a director of NRG and has been so since 1 March 2009. He too has been closely involved with the intended transfer of the insurance business from Colbourne to NRG.

In addition to those witness statements, I have two scheme reports from the independent expert, Mr Simon Sheaf, dated 9 March and 6 July 2017. I also have two reports from the Prudential Regulation Authority dated 14 March and 12 July 2017, and two reports from the Financial Conduct Authority dated 15 March and 12 July 2017. All of those witness statements and reports exhibit further supporting documentation.

In their most recent reports, the Prudential Regulation Authority has confirmed that it is not aware of any issue which would cause it to object to the scheme and, accordingly, it does not do so. The Financial Conduct Authority has confirmed that the scheme is within the range of reasonable and fair schemes available to the parties. Accordingly, it too does not object to the scheme. Neither Authority has been represented before me at this hearing.

Mr Sheaf, the independent expert, in his scheme reports has concluded that the scheme does not give rise to any material adverse impact on the reasonable expectations, security of contractual rights, or service levels experienced by any group of policy holders. He also opines that there is nothing in the intended strategy on communications to policy holders (which has been implemented) that is inconsistent with his understanding of the impact of the scheme on the parties to it or with the opinions that he has given.

The publicity given to the scheme has prompted little reaction of any kind from any policy holders or claimants. The only issue which has been raised is by the Institute of London Underwriters relating to the continuation of a guarantee given by Colbourne's insolvent parent.

The background to the application is that Colbourne has been in run-off since 1991, having written business through Lloyd's agencies and, after 1986, through the Institute of London Underwriters. The mix of business was traditional marine, hull and cargo, but with a very significant element of London Market marine excess of loss insurance. As at 31 December 2015, the total claims reserves were £2.61 million, of which £2.41 million was London Market marine excess of loss insurance.

Colbourne is technically insolvent and is wholly reliant on the continued support that it has been receiving from its ultimate parent company, Kinder Morgan Incorporated, which that entity is under no obligation to give or to continue.

Because of the difficulty, if not impossibility, of complying with applicable solvency requirements under the pan-European capital regime, and because of the uncertainty of funding, Colbourne has determined to transfer all of its business to a suitable transferee. If this scheme is sanctioned, it is proposed that Colbourne will be de-authorised and dissolved without winding up. NRGV has been identified as probably the only suitable transferee. It has a special interest in taking a transfer of the business because, as the member of a group which is ultimately the 100 per cent reinsurer of Equitas, it ultimately pays 58 per cent of Colbourne's claims in that capacity, and 73 per cent of Colbourne's outstanding claims arise from Equitas, with the result that amalgamating the business will make administration significantly easier and cheaper than if NRGV continued to have to deal with Colbourne as a third party. A useful graphic, at paragraph 2.29 of Mr Sheaf's independent expert’s scheme report, shows this interdependency.

In addition, as part of the Berkshire Hathaway Group of companies, NRG is of very considerable financial strength. Its book of business consists of both direct and reinsurance business which is predominantly asbestos and pollution claims. It has recently acquired a portfolio of business based in Sweden from a Swedish insurer comprising building construction cover and construction performance guarantees. NRGV has been granted a variation of its permission to act in order to accept Colbourne's business.

As at 31 March 2017, NRGV held available capital of some £194 million and, taking the transfer into account, would hold available capital of in excess of £195 million. The solvency coverage ratio, as at 31 December 2016, was 308.4 per cent. On a pro forma basis, taking the scheme into account, it would be just in excess of 305 per cent. Mr Sheaf describes NRGV as an “extremely well-capitalised company”.

In contrast, Colbourne cannot meet its capital requirement on the current Solvency 1 basis and could not meet it on a Solvency 2 basis. Indeed, Kinder Morgan has recently injected what was described by Mr Moore as a dowry of US$2.29 million into Colbourne.

There is nothing of particular complexity or difficulty in the features of the scheme which is in a fairly standard form. I do not need to consider the terms of the scheme in any detail. Under s 111 of the 2000 Act, before the court may make an order sanctioning an insurance business transfer scheme it must be satisfied, first, that appropriate certificates have been obtained and, secondly, that the transferee has the authorisation required to enable the business, or part which is to be transferred, to be carried on in the place to which it is to be transferred. I am satisfied that those technical requirements have been satisfied on the evidence. In addition, by subs (3) of s 111, the court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme.

The principles to which the court has regard in deciding whether to exercise that discretion have been set out in decisions of Hoffmann J in Re London Life Association Limited (unreported) 21 February 1989 and Evans-Lombe J in Re Axa Equity & Law Life Assurance Society plcand Axa Sun Life plc [2001] 1 All ER (Commercial) 1010.

Hoffmann J said that in the end the question was whether the scheme, as a whole, was fair as between the interests of the different classes of persons affected; but the court did not have to be satisfied that no better scheme could have been devised. The court is, therefore, not concerned with whether, by further negotiation, the scheme might be improved, but with whether, taken as a whole, the scheme before the court is unfair to any person or class of persons affected.

That approach was endorsed by Evans-Lombe J in the Axa Equity & Law case. He derived eight principles which he considered governed the approach of the court to applications for the sanction of transfers of long-term business. With some adaptation, those principles have been applied to business transfers generally.

It is unnecessary for me to set out those eight principles in order. The effect of them is that the court must first determine what the contractual rights and reasonable expectations of policy holders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policy holders if the scheme is put into effect. The fact that individual policy holders, or groups of policy holders, may be adversely affected does not mean that the scheme has to be rejected by the court.

The fundamental question is whether the scheme, as a whole, is fair as between the interests of the different classes of persons affected. It is no function of the court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the court may deem fair, it is the company’s directors’ choice which to pursue. Under the same principle, the details of the scheme are not a matter for the court provided that the scheme as a whole is found to be fair. Thus, the court will not amend the scheme because it thinks that individual provisions could be improved upon.

The role of the independent expert is unique and important. Whilst the court retains a discretion to sanction the scheme, and the independent expert scheme report does not trump every objection, nevertheless the conclusions of the independent expert are clearly a central, and ordinarily a decisive, matter. I am satisfied that Mr Sheaf has produced two detailed and compelling reports in which he examines the effect of the scheme on the reasonable expectations and security of the policy holders concerned. I have already stated what his conclusions are in that regard.

It is important in this case to bear in mind that the transferee, NRG, is extremely well-capitalised whereas the capital position of Colbourne is fairly to be described as “woeful”. Mr Sheaf is of the view that NRGV will be an extremely well-capitalised insurer after, as well as before, the scheme. Unsurprisingly, it is his conclusion that the scheme will result in a substantial improvement in the security of the transferee policy holders. He concludes that service levels are unlikely to be adversely affected because the claims handlers will be familiar with the claims as a result of their involvement already with the Equitas claims.

At section 6 of his original scheme report, Mr Sheaf sets out his findings on the effect of the scheme on the transferring policy holders, existing NRGV policy holders and reinsurers. I am satisfied that those findings justify the conclusions set out at section 7 of his original report which I have already stated. Mr Sheaf's supplemental report of 6 July updates his analysis in the light of more recent financial data and updated developments. Overall, he sees no reason to change his earlier conclusions.

In addition, Mr Sheaf's further report gives his view on the continuation of the ILU guarantee. That is addressed at paragraphs 3.43 through to 3.50 of Mr Sheaf's second report. His conclusion is that at the current time the ILU guarantee effectively has no value. He considers a suggestion that the guarantee should be amended so as to cover the liabilities following the scheme. At paragraph 3.50, Mr Sheaf stated that whatever the conclusions were reached with the ILU guarantee, his opinion is that the guarantee need not be amended for the following reasons:

Ms Bagshaw addresses the ILU guarantee in section 9 of both of her reports. Her conclusion is that the continuation of the guarantee following the transfer would involve Kinder Morgan, the ultimate parent of Colbourne, in significant additional costs while conferring no discernible benefit on policy holders.

Mr Moore has drawn my attention to the decision of Snowden J in The Copenhagen Reinsurance Company (UK) Ltd[2016] EWHC 944 (Ch). Mr Moore indicates that the applicants accept that an enforceable parental guarantee from a solvent party ought normally to be extended unless, by agreement, a satisfactory alternative is proposed to be put forward. He points out that the Copenhagen case concerned a solvent guarantor who, the court felt, was acting opportunistically. In the present case, it is said that Kinder Morgan is not.

Mr Moore invites the court to take a realistic view of the change in the policy holders' position that will be effected by approval and implementation of the scheme. He has referred me to the decision of Henderson J in the case of Excess Insurance Company Limited[2015] EWHC 3572 (Ch) as an example of that approach. In that case, it is said that the court did not require the continuation of a doubtfully enforceable guarantee where an appreciably better covenant was available as the result of the transfer.

Mr Moore acknowledges that the Institute of London Underwriters have fulfilled a useful service to the court, and to policy holders, by raising the issue of whether the ILU guarantee should be amended as part of the scheme. He raises no criticism of the ILU in doing that. However, he submits that to go further, and for the court to require a Re Copenhagen type order, would be neither appropriate nor reasonable because the elimination of the guarantee is inevitable and such an order would simply force that elimination to be done by a route which would be more expensive than is strictly necessary. In that regard, reference should be made to paragraph 9.8 of Ms Bagshaw's second report.

Mr Moore submits that such an order would:

I note that in his penultimate paragraph (paragraph 47) of the approved transcript of his judgment in the Excess Insurance Company Limited case, Henderson J referred to what he described as a more general point:

On the facts of the case before him, Henderson J was satisfied that the proposals were, indeed, fair and that, far from being materially worsened, the position of the policy holders would, in fact, be significantly improved under the scheme. I am satisfied that those observations apply to the scheme proposed in the present case.

I, therefore, do not consider that any amendment to the terms of the ILU guarantee is necessary consequent upon the court's approval of the scheme. For those reasons, and for the reasons set out in Mr Moore's supporting skeleton argument of 14 July 2017, I am satisfied that this scheme is one which, in all the circumstances of the case, it is appropriate for the court to sanction. I am satisfied:

For those reasons which, because of the failure of the court recording equipment, I was unable to express on the evening of Monday 17 July, I indicated then that I would sanction the scheme subject to one very minor definitional amendment. For those reasons, therefore, I sanctioned the scheme.