DOMESTICATIONS - A ROAD MAP TO SUCCESS

Transcription

1 DOMESTICATIONS - A ROAD MAP TO SUCCESS Some key regulatory and legal strategies for implementing Section 24 Schemes ASHK 17th Appointed Actuaries Symposium, 7 November 2017 Heng Loong Cheong, Partner, DLA Piper Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

2 AGENDA Section 24 Scheme Key Legal Principles Commercial Drivers Process and Timing Key Steps Execution Risks Communications with Policyholders Mitigating Policyholders' concerns Case Studies: Dealing with Objections Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

3 Section 24 Scheme Key Legal Principles (1) (1) Absolute discretion of the Court: hence, execution risks! (2) Exercised by giving "due recognition to the commercial judgment" of the directors (3) Court concerned with whether key 'stakeholders' will be adversely affected as a result of the transfer (3A) policyholders employees other interested person / any group of them (e.g. shareholders of the insurers, creditors) "primarily a matter of actuarial judgment" comparing security and reasonable expectations of policyholders Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

4 Section 24 Scheme Key Legal Principles (2) (3B) (3C) Court "will pay close attention to any views expressed" by the Insurance Authority ("IA") IA expected to have necessary material and expertise (by reason of its regulatory powers / function) to express an informed opinion scheme "as a whole" has to be "fair as between the interests of the different classes of persons affected" (4) NOT the Court's function to produce "the best possible scheme" directors' commercial rationale / judgment prevails (and not Court's own view) Court will not amend the scheme to improve upon individual provisions Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

5 Section 24 Scheme Key Legal Principles (3) (5) Court must first determine and compare (situation before and after the transfer) contractual rights and reasonable expectations of policyholders We will return to these key legal principles in the Case Studies! Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

6 Section 24 Scheme Commercial Drivers (1) Re-domicilation makes commercial sense, as it leads to [rationalisation, bringing significant savings in operating costs and expenses]: improved efficiencies of scale / better financial stability due to diversification benefits better aligning the insurer group's operating units along regional lines improving longer-term corporate flexibility more efficient conduct of administrative responsibilities simplified administration of the portfolio / increased efficiency of capital management increased efficiency of audit and regulatory compliance removing the tensions that currently exist within transferor as a result of the differing risk profiles and regulatory regimes that apply to its Hong Kong and non-hong Kong businesses, leaving each territory to pursue the strategy that best fits the needs of its market, policyholders and shareholders reduced costs and burden of the effects of the application of stringent accounting/reporting under Solvency II Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

7 Section 24 Scheme Commercial Drivers (2) As of 1 January 2016, Bermuda implemented regulations to meet Solvency II standards resulting in (for insurers which are branches of Bermuda companies): More governance requirements More oversight and engagement from the regulator (BMA) Enhanced methodologies for valuation and capital requirements NO MORE will HK-based insurers which are branches of Bermuda companies be given official or unofficial exemptions from Bermuda regulations Insurers have two choices (significant work entailed by either course of action): Comply with the new regulations; OR Re-domicile to HK or elsewhere Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

8 Section 24 Scheme Process and Timing (1) Long-term business ('portfolio') transfers have to undergo a Section 24 Scheme under the Insurance Ordinance (Cap. 41) The process itself is well defined and tested - the issues usually arise due to certain 'execution risks' involved in effecting such schemes Month Ongoing consultation and meetings with the IA IA's clearance Court Filing Directions Hearing Further Filing Sanction Hearing Judgment delivered Effective date of the transfer De-authorising and/or de registering the Transferee (if applicable) Phase 1 Phase 2 Phase 3 Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

9 Section 24 Scheme Process and Timing (2) Phase 1 Considerations: Appointing an Independent Actuary Scoping costs and fees, timing and resources, project management Policyholders' / other interested parties' communications and proposed waivers, analysing potential objections and mitigations Employee and pension arrangements Identifying all assets and liabilities to be transferred / excluded Identifying all non-insurance contracts to be transferred (e.g. IMAs) Stakeholder management (e.g. IA, internal stakeholders, third party reinsurers) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

10 Section 24 Scheme Process and Timing (3) Phase 2 Considerations: Impact assessment (subject to Independent Actuary) and tax impact Policyholders / creditor protections Potential objections Communications strategy (including waivers) to be agreed with the IA Timing (e.g. IA, court timetable) Court documents including affidavits / affirmations Scheme documentation and proposed accounting Requirements for reporting to the Court on communications strategy Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

11 Section 24 Scheme Process and Timing (4) Phase 3 Considerations: Timing of notification Handling of customers' / policyholders' enquiries and objections Preparing affidavits / affirmations in preparation for the sanction hearing Agreeing an approach on / strategy for the sanction hearing Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

12 Section 24 Scheme Key Steps (1) Preparation of Petitions Identifying policyholders' issues (dealt with in Independent Actuary's Report) Preparing communications strategy Developing proposals and key documents with the IA Supporting documents for Court procedure Court filing documents Petitions, draft Order of the directions, summons for directions Scheme document Affidavits / affirmations of the Appointed Actuary and instructing solicitors Statutory statements and statutory notices Report from the Independent Actuary Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

13 Section 24 Scheme Key Steps (2) Pre-Sanction hearing Finalise Scheme documentation and fix date for the sanction hearing Regulator consultation Communications to policyholders and other interested parties with notifications Statutory notice in Gazette and newspapers Petition, Scheme and Independent Actuary's Report open to inspection in office / on website Liaise with SFC for approval of change of insurer of ILAS products (if applicable) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

14 Section 24 Scheme Key Steps (3) Further Court filing documents (for sanction hearing) Supplemental Report from Independent Actuary Supplemental affidavits / affirmations from the Appointed Actuary, CEO and instructing solicitors Objections from all policyholders and petitioners' responses Draft Order Post-Closing notifications ILAS policyholders on change of insurer (if applicable) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

15 Execution Risks Communication with Policyholders (1) Section 24(3)(b) of the Insurance Ordinance : except where the Court of First Instance has otherwise directed, a statement setting out the terms of the scheme; and [and a summary of the independent actuary's report] should be sent to each of the policyholders of the transferor and transferee and to every member of those insurers Aim is to just send individual notices to: all transferring policyholders of transferor all affected long-term policyholders of the transferee; and all affected long-term policyholders of transferor Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

16 Execution Risks Communication with Policyholders (2) What can be done to reduce the burden? Subject to Court approval and heavy reliance on Independent Actuary for this part of the process as the Actuary's Report determines this strategy, but, for e.g.: Limit notifications to only those transferee policyholders who are affected by the transfer Limit notifications to only those (non-transferring) transferor policyholders who are affected by the transfer Limit notifications to only those policyholders the insurers have current addresses for Set up a 24/7 helpline leading up to the Court hearing to actively deal with policyholders' enquiries and concerns in response to the notification Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

17 Execution Risks Mitigating Policyholders' concerns (1) Key Objective: Transferring policyholders should not be adversely affected in that the protections, benefits and rights provided by the transferee should be equivalent to those enjoyed before the transfer Issue 1A: Transferring policyholders may ask if the transferee will maintain the same standards (for e.g., corporate governance, investment returns, etc.) as the transferor Issue 1B: Non-transferring policyholders may ask if their investment returns will be affected by the transfer No changes to the T&Cs of the policy Following current credit rate policy, market value adjustment approach No changes to the identity of third party investment managers No changes to target asset allocation and investment mandate application No changes to dividend determination policies / bonus policy Assets backing transferring policies will be ring-fenced from assets backing transferee's other policies Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

18 Execution Risks Mitigating Policyholders' concerns (2) Issue 2: What kind of financial security will transferring policyholders have? Additional capital injected and undertaking from a parent Support agreements from parents/holding companies of transferee Issue 3: What kind of financial security will non-transferring policyholders have? No exposure to new risks of significance Standards and expectations will be maintained as before Potential letters of guarantee/comfort from transferor to this effect on its website Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

19 Execution Risks Mitigating Policyholders' concerns (3) Issue 4: Change in management standards and styles to the detriment of transferring policyholders? If with profits policyholders currently benefiting from overseas (e.g. UK) regulatory protections, ensure that the Principles and Practices of Financial Management ("PPFM") of the transferor is replicated by the transferee Potential letters of comfort to this effect published on transferor's and transferee's website Issue 5: If with profits funds involved, assets transferred out of transferor's funds will non-transferring policyholders be prejudiced? Transferor to serve an undertaking of shareholder support to maintain the benefit expectations and security of non-transferring policyholders Transferor to undertake to make good any deficiency arising from the transfer of the assets (including cash) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

20 Execution Risks Case Studies: Dealing with Objections (1) You cannot fully anticipate the unexpected. (i.e, dissentient Policyholders / other interested parties turning up to Court) BUT preparation is everything! In AXA scheme Only 3,133 (<0.5%) policyholders made enquiries (mostly oral) Only 21 policyholders actually complained Of which only 8 wrote and indicated an intention to appear in Court Only 3 policyholders (of both transferor and transferee) appeared in Court Similar experience for Prudential scheme Only 6 policyholders (of both transferor and transferee) appeared in Court Out of 1,751 enquiries from transferring policyholders and 22,885 from nontransferring policyholders (majority of which were oral) Only 39 complaints from transferring policyholders and 42 from nontransferring policyholders Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

21 Execution Risks Case Studies: Dealing with Objections (2) Case Study 1: Policyholder does not wish to deal with transferee as their consent has not been sought Section 24 provides for transfer of long term business even if policyholders' consent not obtained Court's scrutiny of the scheme provides protection for policyholders' interests (Key Legal Principle (3)) NOT Court's function to devise best possible scheme that could be devised (Key Legal Principles (3C) and (4)) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

22 Execution Risks Case Studies: Dealing with Objections (3) Case Study 2: There were no good reasons for the transfer the Petitioners have explained the purpose of the transfer; and have shown "that it is put forward in good faith and for sound commercial reasons". (Key Legal Principle (2)) Case Study 3: The transfer would dilute the interests of the transferee's policyholders since the transferring policyholders would become customers of the transferee and be entitled to look to its assets Assets will (continue to) be separately managed (with same third party investment manager and same investment policies) Ring fencing of assets of transferring policies and transferee policies Same dividend determination policies (Key Legal Principles (3) and (3A)) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

23 Execution Risks Case Studies: Dealing with Objections (4) Case Study 4: The consideration being paid for the transfer is not adequate This is paid out of shareholders' funds and not funds reserved / earmarked for payment to policyholders of benefits The financial position of transferor and transferee will not be materially affected by the proposed transfer and hence the interests of policyholders are not affected (Key Legal Principles (3) and (3A)) Case Study 5: Independent Actuary had not property assessed whether policyholders' reasonable expectations would be adversely affect as not provided (or asked for) sales materials (e.g. illustrative figures for likely returns of guaranteed and discretionary payments) Court has to consider whether policyholders' legitimate and reasonable expectations as to benefits to which they are entitled under the policy are adversely affected by reason of the proposed transfer (Key Legal Principles (3) and (3A)) No entitlement to particular level of discretionary bonuses / dividends Claim for mis-selling still open (against transferee) and this should be the option pursued by the policyholder Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

24 Execution Risks Case Studies: Dealing with Objections (5) Case Study 6: There is no benefit for policyholders from the transfer Looking at the commercial rationale for the scheme, the anticipated improvement in efficiency may well, even if indirectly, benefit policyholders (Key Legal Principle (2)) Benefit to policyholders is not a requirement for Court sanction of the scheme The key consideration is "whether the scheme as a whole is fair as between the interests of the different classes of persons affected" "Fairness" is gauged not only between policyholders themselves but also as between policyholders and the relevant insurers / their shareholders (Key Legal Principles (2), (3) and (3C)) Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

25 Any Questions Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

26 HENG LOONG CHEONG Heng Loong Cheong is an expert in both insurance M&A transactions and ASEAN regulatory issues. He has led on many cross-border mergers and acquisitions (both public and private), complex corporate reorganisations and equity and debt capital markets transactions. His practice also has a particular emphasis on the emerging markets. Heng Loong advises on various cross-border transactions with our large insurance clients in Asia and Europe such as Aetna, AIG, Aviva, Zurich, FM Global, Fosun, Ping An and MS Amlin Legal 500 Asia Pacific 2017 edition (Hong Kong: Insurance) notes client feedback that "Heng Loong Cheong is practical, responsive and has excellent industry knowledge ". Heng Loong is also recognised as a leading Corporate/M&A lawyer, including most recently by Asia Pacific Legal who consider him a 'South East Asian expert' for M&A and IFLR 1000, who ranked him as a leading individual in the area of Corporate/M&A in Hong Kong REPRESENTATIVE EXPERIENCE Advising Aetna on its purchase as part of a competitive auction process of the Bupa Health insurance business in Thailand Advising a leading loss adjuster on the acquisition of majority shares in a Malaysian loss adjuster company between its shareholders Acting as the preferred bidder's special advisers on insurance, legal, regulatory and key commercial issues in a competitive auction process to acquire Hong Kong Life Advising an international life and general insurance group as one of the bidders on the auction sale of a significant majority stake in PNB Life and related bancassurance agreement Advising a bidder on the proposed asset acquisition of the general insurance businesses of UK based international insurer RSA s Hong Kong and Singapore branches. This transaction involved the issues concerning the carve out of two large business divisions from an international financial institution Advising Fosun on its 85% investment in Peak Re, a US$550 million reinsurance start-up, with the International Finance Corporation as the minority 15% shareholder Advising AXA on an intra-group portfolio transfer in Hong Kong of a book of life insurance business Advising Alleghany Corporation on the Hong Kong insurance regulatory aspects of the merger transaction with Transatlantic Holdings, Inc Advising Fosun and its partners in connection with a proposed investment in AIA, AIG s primary life insurance subsidiary in Asia with operations in 15 geographical markets in the Asia region Advising Omega Insurance Holdings Limited on the application for admission of its common shares to the Official List and to trading on the LSE Main Market for listed securities. Also advising on its concurrent offer, on behalf of its subsidiary Omega Dedicated Limited, to acquire up to 125 million of capacity on Lloyd's Syndicate 958 for 2010 and each subsequent year of account, and on-going advice and counsel on corporate and securities matters Heng Loong Cheong DLA Piper Asia Head of Corporate Insurance Partner, Corporate Hong Kong, Singapore T: , F: , hengloong.cheong@dlapiper.com Heng Loong Cheong ASHK 17th Appointed Actuaries Symposium, 7 November

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