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The UK High Court’s rejection of Prudential Assurance’s proposed Part VII transfer of annuity policies to Rothesay1, which came despite prior approval from both the Regulators and the Independent Expert, should raise questions about the nascent insurance business transfer (IBT) process in the US. Particular attention is focused on the Oklahoma Insurance Business Transfer Statute, which is closely modelled on the Part VII process, both in its regulatory and legal processes, and the breadth of eligible business. Similar approval procedures are also present through the Rhode Island Statute, though the definition of eligible business is much narrower than in Oklahoma.

Applicants face higher hurdles in preparing a watertight case in the wake of the UK ruling. However, this watershed decision (although on appeal) could also bolster the credibility of the IBT process by subjecting it to closer judicial oversight. The ruling also highlights the critical distinction between cases involving knowledgeable commercial parties on the one side and personal lines portfolios on the other.

What then are the long-term ramifications of this ruling?

The Part VII transfer process has revolutionized insurance restructuring activities by allowing for the separation of portfolios that are no longer part of future business plans – live as well as discontinued – ready for sale or closure. Over 270 transfers have been sanctioned to date and the pipeline remains strong. Many of the transferees are businesses with divisions dedicated to run off acquisition, aggregation, and management, of which Rothesay is a prominent example.

The High Court’s rejection of the Part VII transfer from Prudential Assurance Company (PAC) to Rothesay won’t stem the momentum. Yet it should lead to something of a rethink about what is needed to secure judicial approval.

The PAC/Rothesay case wasn’t much different from dozens that have been approved in the past. Indeed, the High Court acknowledged that both the Regulators and the Independent Expert assigned to review the case concluded that the proposed transfer would not have a materially adverse effect on the interests of the policyholders2. However, the Court found that its “discretion is not constrained by the same actuarial factors which guide the analysis of the Independent Expert and the statute-based mandate of the Regulators, but can take into account a wider set of factors in striking a balance between the interests of policyholders and the commercial interests of the transferor and transferee.”3 In particular, while noting that Rothesay’s capital strength for the subject business matches PAC, the judge concluded that the proposed transferee doesn’t have either the heritage or diversification of insurance business enjoyed by the transferor.

We will examine the opinion and its significance. Additionally, we will look at how the thinking behind the Opinion might affect US insurance restructuring alternatives. The approval standards used with the Part VII transfer are similar to those found in the Rhode Island4 and Oklahoma5 Insurance Business Plan regulations and/or statutes.

As you will see, this piece is a little longer than my standard commentaries. However, it’s important to drill down to the detail of the judge’s deliberations to discern its impact on restructuring solutions in both the UK and US.

What was Decided and Why
The background to the Opinion is straightforward.

PAC sought to transfer around 370,000 annuity policies to Rothesay as part of a broader plan to reduce regulatory capital requirements ahead of a planned demerger of the Prudential plc group. No changes were to be made to the terms and provisions of the annuity policies other than Rothesay would make payments to the policyholders, rather than PAC.

Although the Part VII was approved by the Independent Expert and the Regulators, it was “strenuously opposed by a number of the annuitants who appeared at the hearing”6. “The policyholders contend that they selected PAC as their annuity provider based upon its long history as a leading UK insurance company, its established reputation for prudence, its size, and the fact that it is an integral member of the larger Prudential group which could be relied upon to support PAC if the need ever arose.”

“The opponents of the Scheme contend that their choice of PAC as the provider of their annuities for the remainder of their lives ought not to be negated by the compulsory transfer of their policies to Rothesay, which, in contrast to PAC, is a relatively recent entrant to the annuity market, is smaller in size and with a less diverse business, does not have an established reputation for prudence, and does not form part of a larger group of companies which could be relied upon to stand behind it if the need arose.”7

The Court provided a detailed overview of PAC, its lineage, capital strength, commercial reputation, and marketing materials as influencing the annuitants to select PAC as their carrier of choice. This was contrasted with the much more recent establishment of Rothesay. “In contrast to PAC, which has grown organically since 1848 and has a broad spread of insurance business, Rothesay was established in 2007 by The Goldman Sachs Group, Inc. to conduct business as a specialist provider of annuities.”8

Basic Protections
What then does the ruling say about what courts will expect as the foundation for approval? Drawing on a prior opinion in the Scottish Equitable case, the Court outlined the four ‘layers’ of policyholder protections that must be met prior to sanction of a Part VII Transfer9:

  • Protection One
    “First, there are the regulators who have general supervisory functions. They have involvement in the Part VII process through the appointment of the Independent Expert and the structure of his report. They have involvement in the production of their own reports. They have the entitlement to appear in this court …And the Financial Conduct Authority has an involvement in the communications exercise and the objectives of the Scheme.”
  • Protection Two
    “The second layer is the independent expert who is charged with assessing the application…”.
  • Protection Three
    “The third level of protection is the communication program, including a directions hearing and appropriate waivers which can be obtained for good reason…”.
  • Protection Four
    “The final layer of protection is the approval of the court, taking account of all the objections which are raised following the communication exercise.”

Judicial Discretion
Crucially, the Court reversed the expectation that it would simply follow the recommendations the Regulators and the Independent Expert. The Court “has a discretion of very real importance, which is not in any way intended simply as a ‘rubber-stamp’ for the opinion of the Independent Expert or the views of the regulators.”10

In its review, the Court considered the analysis of the Independent Expert, the relatively comparable Solvency Capital Requirements, capital management policies, parental support, and size and risk profile of PAC and Rothesay.11

Rights as Individuals
The Court also took into account the make-up of the PAC policyholders, PAC’s longevity as an annuity provider, its overall financial strength and the criteria upon which the policyholders had chosen PAC to provide their annuity coverage. When considering policyholder opinion, this isn’t a ‘vote’ that goes with the majority – even a small proportion of the overall policyholder cohort can influence the decision. PAC had received responses from approximately 7,300 of the 370,000 policyholders who had received the approximately 258,000 mailed policy packs. Of the 7,300 policyholders who submitted responses, only around 1,000 policyholders had objected to the Part VII Transfer. Eight policyholders appeared at the hearing. 12

Having considered – and rejected – policyholder issues relating to notice, the independence of the Independent Expert, adequacy of records and data, certain issues characterized by the Court as “Irrelevant”, selection of policies subject to the Part VII Transfer, and opt outs13, the Court focused on what it considered to be the primary objection: “…it should not be legally permissible, or at least it is not appropriate, that persons who specifically selected PAC as their annuity provider for life should be transferred against their will to a smaller insurer with a very different history and reputation, and without a larger group to support it, simply in order to further the commercial purposes of PAC.”14

Safeguards for Consumers
While the Court concluded that annuity policies could be transferred under a Part VII transfer, it highlighted the distinguishing characteristics relevant to personal lines coverage:

“Although I have reached the view that policyholders had no contractual rights which would prevent PAC from seeking to transfer their policies to Rothesay under Part VII, this does not mean that I cannot take the inherent nature of the annuity policies into account in the exercise of my discretion under section 111(3). On the contrary, I think that the particular nature of an annuity policy represents an important factor in the exercise of my discretion.”

“The purchase of an annuity is, for many people, one of the most important financial decisions that they will ever make…For many people, the annuity policy will provide the only, or the main, source of regular income for the rest of their life in retirement. In most cases, and certainly in relation to the contracts in issue in this case, once an annuity contract is purchased, the policyholder cannot encash the policy and take a lump sum out again. Nor can they change annuity provider.”15

“…it was entirely reasonable for policyholders to have assumed that PAC would not seek to transfer their policies to another provider…”16

“The purchasers of annuity policies such as those in the instant case make a significant investment of some or all of their pension pots, and have no option to change the insurer upon which they will be dependent for life. In that context, it was entirely reasonable for policyholders to have chosen PAC as the provider for their annuities based upon its age, its established reputation and the financial support which it would be likely to receive from the accumulated resources of the wider Prudential group if the need were ever to arise. I also consider that in light of the way in which their policies were described in the relevant documents, and in the absence of any clear statement to the contrary, it was entirely reasonable for policyholders to have assumed that PAC would not seek to transfer their policies to another provider. These factors mean that the choice of policyholders to take their lifetime annuities from PAC itself carries significant weight.”17

Echoes in US
So, is the UK ruling an aberration? Is it confined to the UK? No on both counts. Similar concerns have been raised by some leading life insurance groups in the US in relation to a series of new division and transfer statutes.

A recent submission to the National Association of Insurance Commissioners (NAIC) Restructuring Mechanisms Working Group underlines misgivings about developments that the senders see as undermining the policyholder trust upon which the industry depends:

“As life insurers, the financial security that we provide to our policyholders is often delivered gradually, over decades. Consumers have this long-term promise in mind when they enter into life insurance, annuity, and long-term care insurance contracts, and expect that the company that sold them a policy will stand behind it over the years to come. Life insurers, knowing that their obligations will last decades, manage their assets and liabilities conservatively to ensure they will maintain the financial strength needed to fulfil their promises. And the guard rails of our state insurance regulatory framework and backstop provided by our guaranty association system have developed over the years to be efficient and effective counterparts to a system where life insurers remain obligated for their promises. Insurance business transfer and insurer corporate division statutes have the potential to turn this paradigm on its head. If consumers no longer can expect that the company that sells them their policy will stand behind it, will they trust life insurers to meet their financial security needs? If life insurers anticipate that they have an out for unsuccessful business, will they have less incentive to exercise their traditional conservatism in writing and managing long-term business? And, what strains and gaps might appear in our insurance regulatory system and guaranty backstop if life insurer liabilities become “fungible”?”18

“If consumers no longer can expect that the company that sells them their policy will stand behind it, will they trust life insurers to meet their financial security needs?”19

Main Street Versus Wall Street
The life insurers’ concerns provide an important reminder of what is at stake. However, they relate to personal lines policyholders rather than fully knowledgeable parties such as commercial lines policyholders and reinsurance cedents.

While the impact of the regulatory developments in insurance restructuring are often lumped together, there are significant differences in focus that go the heart of this Main Street versus Wall Street distinction. In particular, Rhode Island’s Statute – Voluntary Restructuring of Solvent Insurers – applies to commercial insurance liabilities only. Oklahoma’s Insurance Business Transfer Statute is notably broader, covering property, casualty, life, health, and long-term care, accident, surety, title, and annuity business.

Will the commercial insurance limitation of the Rhode Island Statute insulate parties from the types of objections raised in PAC/Rothesay ruling? Perhaps so. As the Rhode Island Statute applies most easily to assumed reinsurance obligations, then the parties to those prospective IBT plans will be sophisticated ceding companies and their reinsurance counterparties. Both entities can readily evaluate the nature and extent of their prospective exposure. However, it will be for the regulators and the courts to determine the capital adequacy of the Assuming Company – perhaps to ensure that the cedents will be as protected following novation as they were before. Additionally, will the regulatory and judicial consideration be the same, if as in PAC/Rothesay, the Assuming Company does not have the depth of capital support or industry longevity as the transferring company?

Challenges may exist for those seeking to implement an Oklahoma IBT for personal lines covers such as annuities or long-term care. However, as the PAC/Rothesay ruling highlights, it is not simply the nature of the business subject to a Part VII transfer that the courts focus on, but the quality, capital strength, and industry reputation of the assuming party:

“For completeness I should also indicate that I do not accept . . . that the effect of my refusing to sanction the Scheme would be to make it very considerably more difficult for PAC ever to utilize Part VII in relation to these annuity policies, or to make it very considerably more difficult for Rothesay to acquire further annuity policies. I have held that such policies are transferrable as a matter of law and contract, and that although policyholders might reasonably have assumed that PAC would never transfer them, that is simply a factor to be taken into account. The result might be different if, for example, PAC’s commercial purpose for the transfer was different, if the transfer was proposed to policyholders on different terms, or if there was less disparity between transferor and transferee in the characteristics that policyholders reasonably considered important when selecting PAC as their annuity provider. Likewise, there is no reason why Rothesay should not be able to acquire portfolios of annuities from other insurers with different characteristics or on different terms.”20

Looking at this point in relation to prospective IBT in the US, relevant parties should expect that regulators and the reviewing courts will look at the entirety of each transaction, taking into account the subject business, the stated purpose of the transaction, and the current and prospective capital adequacy of the assuming party to determine if policyholders face a materially adverse impact.

And what of the separation of liabilities through the division statutes that have been adopted in Connecticut, Illinois, Michigan, Georgia, and Iowa? Will those plans be subject to the same scrutiny as in PAC/Rothesay transaction? Much may depend on the identity and capital strength of the Dividing Insurer. If it is a company with the history, business diversification, and capital strength of a company such as PAC, the review may not be as severe as articulated in the Opinion. The reverse may occur if the Dividing Insurer has limited capital resources and is seeking the division simply to protect its balance sheet from the strain of the business that is the subject of the division.

Five Takeaways from the PAC/Rothesay Ruling
What then can we conclude from all this? This is by no means a definitive list as, for all the reasons given in this blog, there are a lot of nuances governing judicial review and each transaction needs to be prepared and judged on its individual merits. However, five broad themes emerge:

  1. Courts have considerable discretion in determining whether policyholders’ reasonable expectations are being met
  2. It only takes a few personal line policyholders to lodge a successful objection
  3. The thresholds for personal lines and knowledgeable parties are different. But that doesn’t in any way preclude a transfer of the former as long as policyholders get a deal that is at least as good as, and ideally better, than what they have. In turn, knowledgeable party transfers still need to meet exacting thresholds in areas such as capital adequacy
  4. The nascent IBT process is the US is alive and well, but the UK ruling may clip its wings. There are no shortcuts
  5. This is a reputational as much as judicial issue – deals depend on trust. Tighter judicial scrutiny can help to bolster policyholder, counterparty, and public faith in the IBT process and hence increase the deal flow



  1. In the Matter of the Prudential Assurance Company Limited and in the Matter of Rothesay Life PLC and in the Matter of Part VII of the Financial Services and Markets Act 2000, Case No.: CR-2018-003686 (“PAC/Rothesay” or the “Opinion”)
  2. Opinion at ¶177.
  3. Opinion at ¶178.
  4. Following approval by the domiciliary and Rhode Island regulator (and independent expert review) “[i]f the Court finds that the Insurance Business Transfer Plan should be approved, the Court by its order may make provisions as it deems fit on the following issues. . .(b) A finding that there is no material adverse impact to policyholders, reinsureds or claimants on the transferred policies.” 230-RICR-20-45-6.4-D-4.
  5. “If the court finds that the implementation of the Insurance Business Transfer Plan would not materially adversely impact the interests of policyholders or claimants that are part of the subject business, the court shall enter and implementation order.” Enrolled Oklahoma Senate Bill No. 1101 Section 6(C)(3).
  6. Opinion at ¶ 4.
  7. Opinion at ¶ 4 and 5.
  8. Opinion at ¶ 25.
  9. Opinion at ¶ 33.
  10. Opinion at ¶115.
  11. Opinion at ¶42 – 71.
  12. Opinion at ¶83 and 85.
  13. Opinion at ¶ 87 – 99,
  14. Opinion at ¶100.
  15. Opinion at ¶ 120 – 121.
  16. Opinion at ¶ 180.
  17. Id.
  18. Excerpted from an August 14, 2019 Letter to the Co-Chairs, NAIC Restructuring Mechanisms (E) Working Group from The Guardian Life Insurance Company of America, Massachusetts Mutual Life Insurance Company, New York Life Insurance Company, and The Northwestern Mutual Life Insurance Company
  19. Id.
  20. Opinion at ¶ 183.