"Legal & regulatory aspects related to the restructuring of insurance portfolios"

Transcription

1 "Legal & regulatory aspects related to the restructuring of insurance portfolios" "Rechtliche & regulatorische Fragestellungen in der Umstrukturierung von Versicherungsportfolios" AIDA - Swiss Chapter, Zurich, 4 June 2012 Association Internationale de Droit des Assurances Swiss Chapter

2 Program of today Time Topic Speakers Opening / Introduction Christian Felderer Reasons for restructuring of the portfolio of an insurance company (in particular financial and economic aspects) Opportunities in UK / EUR Practical report - Part VII Transfers - Solvent Schemes of Arrangement - Decision of the Federal Court of Justice (BGH) in Germany The perspective of FINMA: Opportunities according to the Insurance Supervision and Swiss Merger Acts Break Andrew Gallacher Jan Heuvels Michel Kähr / Urs Halbeisen Panel discussion Andrew Gallacher / Jan Heuvels / Michel Kähr / Urs Halbeisen / Thomas Bründler / Detlef Huber from Apéro riche Moderation: Lars Gerspacher, Member of Organizing Committee of AIDA Swiss Chapter AIDA Swiss Chapter Event 4 June

3 AIDA Swiss Chapter We thank our sponsors of today s event: AIDA Swiss Chapter Event 4 June

4 AIDA Swiss Chapter The next AIDA Swiss Chapter-Event will take place on Monday, 5 November 2012, hours Please inform us about your topic suggestions or other inputs by to events@aidaswisschapter.org or Please help yourself with flyers for membership in SGHVR (Schweizerische Gesellschaft für Haftpflicht- und Versicherungsrecht) AIDA Swiss Chapter Event 4 June

5 "Legal & regulatory aspects related to the restructuring of insurance portfolios" Why are insurers restructuring?" AIDA - Swiss Chapter, Zurich, 4 June 2012 Andrew Gallacher, Deloitte Association Internationale de Droit des Assurances Swiss Chapter

6 The Current Situation Capital is becoming increasingly rare Risk-free assets are becoming rarer and rarer Insurers compete increasingly against banks that profit from government guarantees and low-interest rate policies Regulatory systems are changing unpredictably due to the struggle of many sovereigns to cope with the financial crisis and high government debt Legal certainty is decreasing in many jurisdictions Sovereign risk is increasing, leading to a high degree of uncertainty of the consequences and the potential fall-out caused by a possible sovereign default The extremely low interest rates in many jurisdictions lead to a deterioration of profits and of the financial position of (life) insurers The change to risk-based economic regulatory systems gives incentives to rethink many products and adaptations of business models 6 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

7 Portfolio Transfers: Drivers Appropriate Regulation Freedom of Operation Capital Efficiency Rule of Law Operational Efficiency Capital and Regulation Labor Force Streamlining Operations Profitability Expenses Location Advantages Capital mobility Transparency Legal Certainty Rule of Law Taxation 7 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

8 Legal Certainty We are freezing the assets of Icelandic companies in the UK where we can. We will take further action against the Icelandic authorities wherever that is necessary to recover the money., Gordon Brown on BBC TV, October 2008 As the financial crisis progresses, the risk of a retrenchment of globalization becomes higher Governments struggle with high debt, declining tax income and increasing social benefit costs The risk of some governments to change or misapply laws is increasing, resulting in an increasing focus of insurers to be situated in jurisdictions with legal certainty and the rule of law 8 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

9 Competing Financial Centers Financial centers are competing with each other based on: Tax systems Regulation (efficiency of setting up and running business, capital requirements, restrictions and freedom of operation, international acceptance, ) Legal systems (legal certainty, efficiency and lack of corruption, legal certainty) Attractiveness for work-force (schools, transportation, cost and quality of living) 9 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

10 Sovereign Default and other misdemeanors Brazil, US, F, Protectionist Measures UK France, use of government pension funds to invest in sovereign debt Trade Barriers Tariffs Disregard of Law Intergenerational default Nationalism Loss of international capital mobility Use of pension assets to cover other liabilities Ireland, using pension assets for the bailout Brazil, CH, Devaluation Extortion Currency Wars Nationalization Hungary Inflation Default on debt Postponement and Reduction of payments Outright default, domestic and external Greece 10 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

11 Macro-Trends Retrenchment of Globalization In more and more jurisdictions home markets will be protected by implicit or explicit government guarantees, rules and regulations that give advantages to incumbents and other means These jurisdictions will become less attractive for outsiders that run their business on an economic basis Insurers with government guarantees will have an advantage due to higher rating, lower cost of capital and lower regulatory requirements Banks and insurers might be used as tools for market stability by some sovereigns and will be pressured to invest in their home market or in credit risky sovereign bonds and to support banks by buying up their debt and CoCos and supply liquidity to the banking sector in exchange for illiquid assets. This pressure might force in particular foreign companies to leave these jurisdictions, resulting in portfolio transfers 11 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

12 Capital Requirements Different Regulatory Requirements Divergent capital requirements give incentives for portfolio transfers The lack of a harmonized international insurance regulatory framework leads to the same portfolio being subject to different valuation standard and capital requirement For example, Solvency II, the SST and the US RBC all lead to materially different requirements, for both life and P&C books Regulatory systems are also not yet harmonized w.r.t. treatment of diversification, capital requirements for different risk classes (e.g. financial market risks), acceptable forms of capital and much more A portfolio can then be non-economical in one jurisdiction but profitable in another 12 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

13 Capital Requirements Regulatory Requirements Differing from Firms Internal View Regulatory capital requirements that diverge substantially from an insurer s own assessment of cost and risk give incentives for portfolio transfers: If regulatory capital requirements are higher than the firm s own assessment, holding the portfolio is seen as inefficient If regulatory capital requirements are lower than the firm s own assessment, it is likely that the insurer perceives competitors as under-pricing the business 13 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

14 Capital Mobility Capital mobility is an important reason for portfolio transfers Jurisdictions where capital is locked and cannot be transferred out are not attractive Insurers that aim to optimize their capital structure and their management options have incentives to sell or transfer their business out of these jurisdictions in order to unlock capital In addition, it is likely that supervisory authorities increasingly require liquid capital to be held in their home markets. This will give further incentives to unlock captured capital via portfolio transfers 14 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

15 Operational Efficiency Combining Portfolios Combining portfolios with similar business allows for efficiency gains Streamlined administration systems Experienced work force (e.g. underwriters, claims handlers, ) Clear regulatory requirements Diversification benefits due to size of portfolio In general, the number of people managing a combined portfolio is less than sum of people managing the sub-portfolios 15 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

16 Changes in Business Models Insurers increasingly adapt their business models to the low-interest rate environment and to economic, risk-based metrics This has led to a number of portfolio transfers during the last months and years: Pure life insurers going into P&C business for diversification benefits and less exposure to interest rate risks Life insurers going out of Swiss life group business to reduce interest rate risk Shedding portfolios that are not seen as core anymore to concentrate resources and gain efficiencies 16 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

17 Summary Several factors are converging Increasing capital requirements Reducing capital availability Much more pressure on profitability Protectionism and increasing government intervention Regulatory competition All of which will lead to increases in the number of restructuring / transfer deals 17 Portfolio Transfers 2012 Deloitte AG. Private and confidential.

18 Contact Andrew Gallacher Partner Deloitte Zurich Tel:+41 (0) Portfolio Transfers 2012 Deloitte AG. Private and confidential.

19 EXITING INSURANCE LIABILITIES A UK PERSPECTIVE Jan Heuvels Partner 4 June 2012

20 OVERVIEW - EXITING INSURANCE LIABILITIES Method Summary Advantages Disadvantages Claim Settle all outstanding claims in Simple, no extra cost as just observing policy Only works for claims-made settlement accordance with policy terms terms where policy period has expired. policies Settlements must be performed in accordance with reinsurances Commutation Agree to commute current and future claims by paying over sums to individual policyholders Relatively simple, with no court or regulatory approval required. Have to negotiate with each policyholder. Reinsurance recoveries likely to be difficult will require negotiation in advance. Share sale Sale and purchase of insuring entity. Scheme of arrangement May be combined with other methods pre- or post- sale (e.g. commutation, Part VII transfer of business out of entity) to limit economic impact. Court-sponsored process where 50% in number, representing 75% by value, of policyholders can approve terms of commutation which is then binding on all Policyholder notification/consent not required. Could be invisible as far as policyholders concerned. Reinsurance not impacted unless there are change of control clauses. Only need 50% by number, representing 75% by value, of policyholders need to consent in order to approve the scheme. Purchaser will still need to maintain regulatory capital to support entity. Subject to regulatory approval. Court process and policyholder meetings may be expensive. Reinsurance recoveries likely to be difficult will require negotiation in advance. Portfolio transfer ( Part VII ) Court-approved process where policies are transferred to a new insurer. Policyholder approval not required (although objections may be heard). Well-established procedure, recognised in EEA. Some problems with recognition outside the territory? Cost can be high, policyholder notification can be expensive. Problems with non-english law contracts? Subject to regulatory approval. 20

21 UK SOLVENT SCHEMES OF ARRANGEMENT > Key elements of the process Process may take a year for simple schemes, or up to two years for more complex Initial court hearing to approve form of creditors (policyholders ) meeting Ahead of the meeting, values of policyholders claims needs to be ascertained for voting purposes. This is a complex exercise. Creditors (policyholders ) meetings scheme is approved if 50% by number, representing 75% by value, approve. Separate meetings likely for different classes of creditor, i.e. different classes of policyholder, each requiring above majorities. Final sanction court hearing: regulator has power to object. Court approval means the scheme is binding on all policyholders, even those dissenting. Two main types of scheme relevant to insurance:- Cut-off or estimation schemes with a single payment after the scheme has become effective (suitable for short-tail books and sometimes the completion of a reserving scheme) Reserving or run-off schemes with regular payments to established creditors adjusted over time to reflect the outcome of claims and available assets. 21

22 UK SOLVENT SCHEMES OF ARRANGEMENT >Legal effect of the transfer Policies within the scheme are commuted by operation of law (subject to the particular mechanism of the scheme) Reinsurance assets may be impaired, as the commutation payments are likely to fall outside policy wordings (hence prior negotiation with reinsurers is required) 22

23 UK SOLVENT SCHEMES OF ARRANGEMENT > Overseas recognition Recognition of the scheme in overseas jurisdictions (where policyholders are located) is important so that claims cannot be brought before local courts on the basis that claims have not been validly compromised. The effect of non-recognition in a policyholder s jurisdiction would depend on the circumstances, but is likely to be of little impact if there are no assets of the company in that jurisdiction (including reinsurance assets). To avoid any problems, issues regarding recognition should be considered before effecting the scheme. Generally the position on overseas recognition is: Commonwealth jurisdictions often have legislation that enables schemes of arrangement to be effected, and for English law schemes to be recognised, in their jurisdiction. These include Australia, Bermuda, the Cayman Islands and Jersey. In the US, a UK scheme of arrangement may be recognised under Chapter 15 of the US Bankruptcy Code. Chapter 15 provides mechanisms for handling insolvency matters. A petition would need to be filed at the US court in respect of the scheme. This procedure is now well-established for obtaining US recognition of a scheme. In the EU, UK solvent schemes do not qualify for recognition under the EU Insolvency Regulation but may be recognised as a valid judgment under the general Brussels Regulation on enforcement of foreign judgments. The position may vary from member state to member state. Germany BGH (IV ZR 194/09) found that a solvent scheme of arrangement relating to Equitable Life did not fall within (1) the EU Insolvency Regulation or (2) the Brussels Regulation on enforcement of foreign judgments. A solvent scheme is a compromise between a company and its creditors rather than an insolvency process or a judgment recognised respectively under the above Regulations. 23

24 UK SOLVENT SCHEMES OF ARRANGEMENT >Current Issues Recent case law has confirmed that no special, compelling reason need exist to enter into a solvent scheme thereby disturbing policyholders normal rights. So general corporate restructuring purposes would work. (A sham scheme, carried out for purposes such as tax avoidance, may however be refused by the court.) Certain types of policy remain outside the permitted scope of schemes, for example compulsory liability policies which are there to protect third parties (e.g. employer s liability, third party motor liability) 24

25 UK PART VII PORTFOLIO TRANSFERS > Key elements of the process Applies to EEA-wide business of UK companies, UK business of non-eea companies, and UK branches of EEA reinsurers In each case where transferee will be within the EEA Typically achievable within 9 months Initially, parties agree terms of the transfer some of which will be set out in public documentation, other (e.g. financial considerations) will be kept private Advisors are appointed, including an independent expert The independent expert is paid for by the parties, but must remain independent of the parties. The expert s role is to decide whether policyholders will be adversely effected by the transfer, in other words whether it is likely that any policyholders will be worse off because of the transfer. The identity of the expert and form of report must be approved by the FSA, but not the conclusions (though the FSA has a general power to make its own submissions) First court hearing sets timetable for process including deadline for policyholder notification (or waiver) Policyholders (and reinsurers) are then notified (subject to any waiver by the court) and the independent expert compiles the report Sanction hearing is the final court hearing where the court will approve the transfer. The court will consider policyholder responses and any FSA objections. 25

26 UK PART VII PORTFOLIO TRANSFERS >Situations where Part VII process not required include: All policyholders are in the same group as the transferee (e.g. a captive arrangement) and all policyholders have consented The business is reinsurance and all policyholders have consented, and a certificate of solvency obtained from the regulator. Can still use the Part VII process in the above cases if desired. 26

27 UK PART VII PORTFOLIO TRANSFERS >Legal effect of the transfer Insurance policies transfer as a matter of law Reinsurance in respect of those policies also transfers 27

28 UK PART VII PORTFOLIO TRANSFERS > Overseas recognition Recognition of a Part VII in an overseas jurisdiction is important to ensure that the transferor cannot still have claims brought against it by policyholders, and outwards reinsurers cannot refuse to respond to transferee claims. Part VIIs recognised throughout the EEA. But any court in the world (including an English or EEA court) faced with a non-eea law contract would have to determine whether the Part VII could transfer such a contract. It is possible that some non-eea jurisdictions could also have a problem with an EEA-law contract transferred under a Part VII (depending on an analysis of whether a contractual or property right existed). In the US recognition of a UK Part VII would be under Chapter 15 of the Bankruptcy Code. Currently an open question, with only a few (contradictory) cases under the s.304 regime. Complexity and uncertainty means that reinsurer consent usually obtained to a cross-border Part VII. 28

29 UK PART VII PORTFOLIO TRANSFERS > Current issues Waiver of policyholder notification requirements typically the court gives a waiver to the insurer in respect of contacting every policyholder, instead approving a package of measures likely to bring the proposed transfer to the policyholder s attention. Recent case law has suggested that the courts are becoming more wary of such waiver applications, and requiring clearer evidence as to why they should be waived and the efficacy of alternative arrangements. The FSA is taking an increased interest in the responses of policyholders, and requiring statistical breakdowns of responses (in terms of type of policy and nature of response). VAT on transfers if the transfer does not fall within the transfer of a going concern then VAT will be applicable to the transfer (more relevant to partial transfers or to transfers of run-off). 29

30 Dubai Hamburg Hong Kong Le Havre London Monaco Paris Piraeus Shanghai Singapore

31 Short Break... Association Internationale de Droit des Assurances Swiss Chapter

32 Panel Discussion Andrew Gallacher, Deloitte Jan Heuvels, Ince & Co. Michel Kähr / Urs Halbeisen, Swiss Financial Market Supervisory Authority (FINMA) Thomas Bründler, ART Allianz Detlef Huber, Aurigon Advisors Moderation: Lars Gerspacher, Member of the Organizing Committee of AIDA Swiss Chapter Association Internationale de Droit des Assurances Swiss Chapter

33 Versicherung & aktive Rückversicherung Passive Rückversicherung Übertragung des Industrieportfolios im Allianz Konzern 100% Allianz SE Allianz Global Corporate & Specialty AG 100% Allianz Risk Transfer AG 100% Allianz Suisse Passive Rückversicherung Vermögens- & Personalübertragung Industrieportfolio Übertragung qua FINMA Verfügung Schweizerischer Versicherungsbestand Singularsukzession Übriger Versicherungsbestand Copyright Allianz Risk Transfer AG 33

34 Thank you for your attention! Association Internationale de Droit des Assurances Swiss Chapter