Part VII Transfers - IRLA

1 , VIIT ransfersMatthew Griffith NeilBrownJonathan Broughton JamesDickerson8 is a part VIItransfer? are people doingthem?a)lawyer s perspective (MatthewGriffith)b)commercial perspective (JamesDickerson) do you dothem?a)lawyer s perspective (NeilBrown)b)independent expert s perspective (JonathanBroughton)1. What is a part VIIT ransfer?2 Statutory method oftransferring insurance business between insurers3 part VII ofFSMAM andatory (for in scopetransfers)Protects policyholders viaPRA/FCA, Independent Expert & Court approvalWhat is a part VIItransfer? part VII of Financial Services and Markets Act20002. Why are people doing part VIIT ransfers?a) a lawyer sperspective4 Main uses of part Simplification, capital/regulatory efficiency,cost Brexit PRA Dear CEO letter April2017 Hard Brexit / transitionalarrangements2.

2 M&A /transactional Buying and selling portfolios ofbusiness Legacymarket2. Why are people doing part VIIT ransfers?b) a commercialperspective6 Commercial drivers for theDisposerDisposerExit a marketor business lineDisposeof non-core businessImprove capital positionSimplify group structureSupport widerM&A strategyTake advantage of market dynamicSolvencyII7 CompellingcommercialopportunitiesRe-depl oy trappedcapital & managementexpertiseCommercial drivers for theAcquirerAcquirerCreate centre of excellenceEntera new marketEnternew business lineIncrease liabilities under riskIncrease investable assetsProvide fuel for business operations8 Leverage expertisetoenhance profitflowsOther key strategicconsiderations9 Reputationalrisk Capitalimpact Implementation and opportunitycost Management time and businessdisruption Implications to employees and BAUoperations Competitivebehaviour Alternative

3 Options RI placement for capitalreliefExampletransactionsAegonRot hesay LifeRSAE nstar Facilitate change to companystrategy Exit market / productline Increase focus on corebusiness Facilitate capitalre-deployment Increase market share Leverage legacy portfolio managementexpertiseAXAR iverstone10 Proactively manage legacybusiness Focus on core business andproducts Leverage legacy portfolio managementexpertise3. How do you do a part VIItransfer?a) a lawyer sperspective11 The process is governed part VII FSMA 2000 ( to 117, and Schedule12) FSMA 2000 (Control of Business Transfers ) (Requirements on Applicants) Regs2001 FCA Handbook SUP18 PRA s approach to insurance business Transfers (Statement of Policy) April 2015 FCA Guidance Consultation (GC17/5) May2017 CaselawJurisdictionaltest13 Section 105 ofFSMA Transferee must carry on transferred business from an EEAS tate Transferormust: be a UK authorised person ( incorporated in the UK and authorised in the UK) and carrying on business in one or more EU member states.

4 Or be an EEA Firm carrying on reinsurance business in the in theUK be neither a UK or EEA Firm, but authorised to carry on the transferring business in theUK Channel Islands parrallelschemesPower of theCourt14 Transfer must be sanctioned by theCourt Statutorymagic Policyholder consent not required .. but they canobject Outwards reinsurance can betransferredKeyworkstreams15 Regulatory approval (PRA will lead, supported byFCA) Actuarial / independent expertreport EEA regulator notifications /consents since 1 Jan 2016, location of risk test changed to where the contract wasconcluded Policyholder (and other)communications WitnessstatementsTimelineApplicantagrees timetable with CourtClaim form issuedseeking thetransferAdvertisements and noticessentDocuments in near final formto PRA(FCA)Transfer effectiveDirections HearingDirections.

5 Advertisements Notices to policyholders previously approved by PRA/FCAW aiversOtherregulators notifiedCommence conferringwith PRA(FCA)IECommsplanSanction HearingWitness statement with company documents, the terms of the scheme andIE's reportetcJudge ordersthe transfer of the business and relevant assets, including outwards reinsurance coverAt least sixweeks Three months forotherregulators toobjectAt least sixweeks 16 CommunicationsApproach17 Regulation (b) of the Financial Services and Markets Act 2000 (Control of Business Transfers ) (Requirements on Applicants) Regulations2001 Starting point: notice of the transfer mustbe sent to every policyholder of theparties sent to every contracts of to betransferred FCA guidance goes wider: SUP anyone with an interest in the policies beingtransferred Waiver, on terms set out in Communications Approachdocument Why?

6 Incompleterecords Cost Difficulty of transferring a live businessRe Aviva International Insurance Ltd [2011] EWHC 1901 (NorrisJ) of of of of other of on collateral object of the transfer itself and its likely effect onpolicyholdersCommunicationsTools19 Directmailing De-duplicating Updates for goneaways Email and/or textmessage? Indirect mailing (brokers and distributionpartners) Advertising Formal Informal Targetted Website Schemehelpline?Keydocuments20 Timetable Communications ApproachDocument Policyholder circular and notices toreinsurers Pressads Reports (Independent Expert &PRA/FCA) Actuarial report (for long-termbusiness) Witnessstatements SchemeDocument CourtOrder Business transfer agreement and reinsurance agreement (see laterslides)M&A / transactional PartVIIs21 Reinsurance followed by PartVII Transfers economic risk though reinsurance pending PartVII part VII occurs some time later - Transfers directliability Reinsurance fallsaway A share deal is all ornothing part VII enables part of an insurance business to besold Cherrypicking Acquire the liabilities youwant Not the skeletons in thecupboardDeal Documents(1)

7 22 Framework Agreement / Business TransferAgreement Price Warranties Our watch / your watchindemnity Additional capitalrequirements Incentivising the purchaser to complete the PartVII VATclearance TUPEDeal Documents(2)23 Claims handing / administrationagreement Transitional ServicesAgreement Reinsuranceagreement Security deed / collateralaccount3. How do you do a part VIItransfer?b) an Independent Expert sperspective24 Policyholders from the IE sperspectiveSELLERABCBUYERDEFBEFOREBBUYE RTRANSFERTRANSFERRINGSELLERACREMAINING25 DEFEXISTINGC onsiderations of the IndependentExpert26 part VII Transfer does not have material and adverseeffecton: Transferringpolicyholders Existingpolicyholders Remainingpolicyholders Qualitativeaspects Reinsurers Review andconsider: Accounts and reinsurancewordings Best estimate reserves extent of reliance onothers?

8 Variability use of Solvency II outputs (internal models, standard formula,ORSA) Capital Cover Ratio how capitalised relative to SCR; under, adequate, well,stronglyA + B may not equalC27Q&A28