trending Market Intelligence /marketintelligence/en/news-insights/trending/jvufyFF6ejjxu4hchTul4w2 content esgSubNav
In This List

Judge blocked £12B Prudential PLC deal over policyholder objections, reinsurance

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


Judge blocked £12B Prudential PLC deal over policyholder objections, reinsurance

A judge blocked Prudential PLC's £12 billion annuity transfer to fellow U.K. life insurer Rothesay Holdco UK Ltd. in part because of the difference between the two companies.

Justice Richard Snowden of the High Court of England and Wales also said in his judgment that the reinsurance agreement between the companies achieved Prudential's intended outcome of releasing regulatory capital, without the transfer being required. Under the deal, Rothesay had reinsured the business to be transferred, so that Prudential could get the economic benefits before the transfer took place.

Prudential said Aug. 16 that it was "disappointed" that the court had not approved the transfer of business from subsidiary Prudential Assurance Co. Ltd., or PAC, which was part of the U.K. insurer's exit from the bulk annuities market. Prudential noted that the independent expert appointed to the court had deemed there to be no detriment to policyholders, while Rothesay pointed out in a statement that the U.K.'s Prudential Regulation and Financial Conduct authorities had approved the deal.

Policyholder complaints

Snowden's judgment said that of the 7,300 policyholder responses received about the transfer, about 1,000 could be characterized as objections, which he described as a "significant level of objection" in the context of this type of scheme.

A key theme of the objections, Snowden said, was that policyholders had specifically chosen PAC as their annuity provider because of its history and reputation and they were being transferred against their will to a smaller insurer, with a different history and reputation, and without the backing of a large group to support the commercial aims of PAC.

Prudential was established in 1848 and and Rothesay in 2007.

Snowden said it was "entirely reasonable" that policyholders had chosen PAC for its age, reputation and group backing, and that, given the way the policies were described, they would have assumed PAC would not transfer them elsewhere. He said this choice by policyholders carried "significant weight."

He also said that although Rothesay's solvency coverage ratio under the Solvency II capital regime was "at least equal" to PAC's, it does not have the same capital management and group support. He said "I cannot dismiss as fanciful" that such support may be needed over the long life of the policies, and that the reliance policyholders would have to place on an "uncertain capital raising exercise" from Rothesay's investors or the market more generally "is a material disadvantage" to policyholders of the transfer.

Reinsurance deal

Snowden noted that PAC's choice to transfer the policies was "entirely driven" by the need to release regulatory capital to support the planned de-merger of Prudential and its U.K. asset management arm, M&G Prudential. However, the insurer had "achieved that commercial objective" with the reinsurance deal backing the transfer, he said, pointing out that the reinsurance would continue to exist whether or not the transfer was sanctioned.

The judgment said both Prudential and Rothesay indicated that they would face costs if the transfer did not go ahead. PAC would have to hold £100 million of regulatory capital to cover its credit risk to Rothesay and incur operational costs reporting on Rothesay's management of the collateral needed to support its obligations to PAC under the reinsurance agreement.

Rothesay faced costs of £6.05 million a year to administer policyholders under the reinsurance agreement, as well as the opportunity cost of not being able to use the capital held as collateral. It also complained of its inability to manage the longevity risk of the transferring policies by buying direct reinsurance, and that, as an insurer rather than a reinsurer, it was only reinsuring the policies in the expectation of them being transferred.

But Snowden said he did not regard the costs or loss of commercial opportunities as "significant prejudice when set against the fundamental change in status and material disadvantage that they seek to impose on the transferring policyholders."

Snowden also said he did not expect his judgment to preclude PAC from ever transferring the policies in question, or Rothesay from acquiring annuity portfolios from other insurers with different characteristics or on different terms. He added that he was "not making any value judgement" on Rothesay's suitability to provide annuities.