The U.K. High Court's surprise decision to block Prudential PLC's £12 billion annuity transfer to Rothesay Holdco UK Ltd., if upheld, could prompt insurers to carefully consider their plans for similar deals, according to advisers.
It could also push them to give more thought to reinsuring the business rather than effecting a complete transfer.
The deal between Rothesay and Prudential covered 370,000 policies and was structured as a transfer of annuities, as opposed to a bulk annuity buy-in or buy-out. It was being conducted under Part VII of the Financial Services and Markets Act 2000, which requires a court sanction. A key feature of the deal, and the judge's rejection of the transfer, was that Rothesay had reinsured the business to be transferred, which the judge argued effectively achieved Prudential's commercial aims.
Pausing for thought
David Ellis, U.K. leader of bulk pensions insurance advisory at consulting firm Mercer, said it was not clear how the specifics of this case would affect other back-book deals, but that it would cause people to "raise eyebrows and think hard about the deal."
Ben Stone, pensions director at accounting and consulting firm PwC, said "there is definitely a pause for thought at the moment" following the ruling and that "it could potentially see a slowdown" in Part VII annuity transfers, although he did not expect a complete stop.
One point the judge raised in his ruling was that policyholders chose an insurer expecting to remain with them for a lifetime. Stone said that where insurers intended to go for a full Part VII transfer of annuities, "I imagine that advisers and insurers will be looking closely at past member communication to understand how definitive the wording was to policyholders about the potential of moving to different insurers in the future."
He added insurers may want to ensure any new individual or bulk annuity policies contain wording informing policyholders that a future transfer to another insurer is possible.
The judgment may also change insurers' perspective about the role of reinsurance in such deals. With annuity transfers and other types of insurance back-book deals, such as the sale of nonlife run-off portfolios, reinsurance is typically used so the transferring company does not have to wait until the Part VII transfer is sanctioned by the court to get the economic benefit of the deal.
With its Part VII deal in limbo, pending the result of any appeals, Prudential is now relying on its reinsurance deal with Rothesay. A spokesman for Rothesay said reinsurance deals in such cases are always expected to be long-term and that there were no short-term implications for the two companies from the deal expiring.
The judge's ruling on reinsurance "might mean insurers have to compartmentalize the two outcomes," Stone said, and consider whether the reinsurance alone is compelling enough if the Part VII transfer fails, rather than the previous thinking that the two were a package.
Mercer's Ellis said reinsurance in annuity back-book deals is "a common structure that is going to continue — maybe even have more force."
Neither Ellis nor Stone thought that there would be a direct effect from the ruling on the related business of bulk annuity buy-ins and buy-outs, where companies transfer the liabilities from their defined benefit pension schemes to insurers. However, they noted that following the news, members of schemes considering such transactions might need more clarity and reassurance.
While acknowledging the judge's insistence that his ruling was not a commentary on Rothesay Life's suitability to provide annuities, Ellis said some policyholders might apply the ruling to their own situation. He said: "I think some people might take the emotion from it, and say... 'Somebody has stopped a deal with Rothesay. What does that mean for us?'"
He added that policyholders "needed to take proper advice" and urged those concerned by the ruling to look at the specifics of their own transaction.
Stone said it was "more important than ever" for scheme trustees to explain to scheme members about the due diligence they had undertaken and insurers' capital strength.
"The judgment last week means that if members have just read the headline, that could raise questions, so those communications have to be very well thought through," he said.
He also predicted that 2019 would be another "record year" for U.K. bulk annuities, estimating that around £35 billion would be written, excluding any back-book deals.
Prudential declined to comment beyond its stock exchange announcement on the court decision.