A London Court of Appeal recently vacated and remanded a High Court’s decision precluding the approval of a deal to transfer approximately 370,000 annuities after concluding that the High Court made several errors in its analysis of the relevant factors in play.

Prudential Assurance Co. (PAC) and Rothesay Life PLC entered into a reinsurance agreement “to transfer the majority of the economic risk and reward of the annuity business covered by the agreement from PAC to Rothesay.” The “assets backing the annuity policies were transferred by PAC to Rothesay as part of the premium for the reinsurance.”

A separate business transfer agreement “contemplated that the parties would cooperate to achieve the actual transfer of th[e] business through” regulatory and court approval.

As part of the approval process, the parties asked the High Court of Justice of the Business and Property Courts in London “to sanction a scheme … providing for the transfer from PAC to Rothesay of some 370,000 annuity policies written by PAC” under the United Kingdom’s Financial Services and Markets Act 2000, which permits discretionary court approval of such schemes if “in all the circumstances of the case, it is appropriate to sanction the scheme.”

The High Court declined to approve the scheme. In short, the court did so because, among other things, (1) “Rothesay did not have the same capital management policies or the backing of a large well-resourced group” (in other words, PAC, which was part of the Prudential family, had much more support from its parent in the event of a financial crisis) and (2) “it had been reasonable, in the light of PAC’s sales materials, age and reputation, for policyholders to have chosen PAC on the basis of an assumption that it would not seek to transfer their policies” (in other words, policyholders selected PAC for its financial strength and reputation and reasonably believed that they would be dealing with PAC for the life of their annuities, which could be decades).

PAC and Rothesay appealed, and the Court of Appeal vacated and remanded.

In sum, the Court of Appeal held, among other things, that the High Court “ought not to have concluded that there was a material disparity between the non-contractual external support potentially available for each of PAC and Rothesay” (put differently, the court wrongly believed Rothesay had less support from its parent than PAC had from its parent) because the High Court “disregarded the opinion of [an independent] expert and the [Prudential Regulation Authority] as to [PAC’s and Rothesay’s] future financial resilience on the false basis that those opinions were themselves founded upon only a snapshot of the current year” when they were not.

Even putting that aside, the Court of Appeal explained that the theoretical availability of “non-contractual parental support” that the High Court felt would be provided by PAC’s parent (Prudential) to protect its reputation in the event of a financial crisis at PAC was irrelevant because it was not proper to “assume that any non-contractual parental support will be available in the future” because, among other things, “[p]arents can never be required to support their subsidiaries” and “parents of insurers are always at liberty to sell their regulated subsidiaries.” The independent expert had, in any event, concluded that the risk of either “PAC or Rothesay needing external support in the future was remote,” and the High Court failed to give that opinion proper weight.

Turning to the High Court’s analysis concerning the policyholders’ decisions and expectations, the Court of Appeal concluded that the High Court “ought not to have accorded any weight to the fact that the objecting policyholders chose PAC on the basis of its age, venerability and established reputation, and reasonably assumed that PAC would always provide their annuities” because such subjective considerations were irrelevant and the “only correct question was whether the transfer would have a material adverse effect on the security of their benefits.”

In re Prudential Assurance Co., No. [2020] EWCA Civ 1626 (Feb. 12, 2020).