- This is an application
by Petition by AXA Sun Life plc ("ASL") under section 49 and paragraph
1 of schedule 2C of the Insurance Companies Act 1982 ("the 1982 Act")
for sanction by the Court of a scheme of re-organisation of the insurance
business of two insurance companies in the AXA Group, AXA Equity & Law
Life Assurance Society plc ("AELLAS") and ASL (together "AXA").
The Petition is opposed by Mr MacWhirter who appeared by Counsel and by the
Consumers Association as Solicitors and by three policyholders who appeared
in person and two policyholders who wrote to the court but did not appear.
In their opposition to the Petition the Consumers Association are supported
by some 1,800 policyholders of whom some 1,400 are "eligible policyholders"
pursuant to the scheme.
- On the 21st
December 2000 after hearing the Petition over four days I made an order sanctioning
the Main Scheme propounded by the Petitioner. Because of time constraints
and because I wished to choose my words with care I then summarised my reasons
for doing so in three sentences but indicated that I would deliver detailed
reasons for arriving at that conclusion later. This judgment sets out those
detailed reasons.
- On the 1st
November I gave judgment in an application in the Petition by Mr MacWhirter
for a pre-emptive costs order and for directions as to the future hearing
of the Petition. Pages 1-25 of the transcript of that judgment ("my first
judgment") sets out the background facts to the Petition which I will
not here repeat. The scheme involves approximately 750,000 eligible and 835,000
ineligible policies which are together held by approximately 1,350,000 policyholders.
Approximately 450,000 policyholders in respect of 542,172 eligible policies
have elected to receive the cash payments or, if appropriate, additional bonuses
("the Incentive Payments") and so waive their rights to receive distributions
from the Inherited Estate. Some 5,540 further policyholders wish to be allowed
to elect out of time and an amendment to the scheme is sought by ASL to permit
this to happen.
- At page seven of my first
judgment I describe the function of the Court in applications under schedule
2C of the 1982 Act by reference to the judgment of Hoffmann J in the un-reported
case of re: London Life Association Ltd in which judgment was
given on the 21st February 1989 and which was decided before the
introduction into the 1982 Act, by amendment, of the present schedule 2C.
There is no material difference for the purposes of this judgment between
schedule 2C and the legislation which preceded that amendment.
- I will not repeat here
the substantial quotation from the judgment of Hoffmann J in my first judgment
but would add to it by drawing attention to the description by Hoffmann J
at page five of the transcript, of the historical development of what are
now sections 49 and 50 of the 1982 Act and in particular, the origins of the
requirement on the Petitioner to produce a report by an Independent Actuary
to assist the Court in its examination of schemes, and, secondly, the provision
for those entitled to appear on the hearing of the Petition, to assist the
Court, to include the Secretary of State for Trade and Industry and "any
person… who alleges he would be adversely affected by the carrying out of
the scheme." By subsequent legislation the role of the Secretary of State
has now devolved on the Financial Services Authority ("the FSA").
- It seems to me that the
following principles emerge from the judgment of Hoffmann J which should govern
the approach of the Court to applications of this type. I gratefully adopt
those principles. They are: -
(1) The 1982 Act confers
an absolute discretion on the Court whether or not to sanction a scheme but
this is a discretion which must be exercised by giving due recognition to
the commercial judgment entrusted by the Company's constitution to its directors.
(2) The Court is concerned
whether a policyholder, employee or other interested person or any group of
them will be adversely affected by the scheme.
(3) This is primarily
a matter of actuarial judgment involving a comparison of the security and
reasonable expectations of policyholders without the scheme with what would
be the result if the scheme were implemented. For the purpose of this comparison
the 1982 Act assigns an important role to the Independent Actuary to whose
report the Court will give close attention.
(4) The FSA by reason
of its regulatory powers can also be expected to have the necessary material
and expertise to express an informed opinion on whether policyholders are
likely to be adversely affected. Again the Court will pay close attention
to any views expressed by the FSA.
(5) That individual policyholders
or groups of policyholders may be adversely affected does not mean that the
scheme has to be rejected by the Court. The fundamental question is whether
the scheme as a whole is fair as between the interests of the different classes
of persons affected.
(6) It is not the function
of the Court to produce what, in its view, is the best possible scheme. As
between different schemes, all of which the Court may deem fair, it is the
Company's directors' choice which to pursue.
(7) Under the same principle
the details of the scheme are not a matter for the Court provided that the
scheme as a whole is found to be fair. Thus the Court will not amend the scheme
because it thinks that individual provisions could be improved upon.
(8) It seems to me to
follow from the above and in particular paragraphs (2) (3) and (5) that the
Court, in arriving at its conclusion, should first determine what the contractual
rights and reasonable expectations of policyholders were before the scheme
was promulgated and then compare those with the likely result on the rights
and expectations of policyholders if the scheme is put into effect.
- The primary question
for decision is whether the scheme is unfair because AXA's offer to policyholders
of the Incentive Payments does not represent a reasonable price to compensate
them for their interest in receiving distributions out of the Inherited Estate
in the future. This question divides into two questions, first, are AXA policyholders,
before the promulgation of the scheme, to be treated as having had a reasonable
expectation that they would, at some time during the currency of their policies,
receive distributions in cash or by way of bonus from the Inherited Estate,
and, secondly, if so, do the Incentive Payments represent a fair value for
such interest in that Inherited Estate. The second question also subdivides
into two questions, first, do the Incentive Payments represent a fair value
having regard to the prospects that policyholders had, before the promulgation
of the scheme, that they would receive any such distribution from the Inherited
Estate it being accepted that whether or not such distribution was made was
within the discretion of the directors of AXA for the time being, and, secondly,
and alternatively, do they represent a fair value having regard to the benefits
acquired by AXA as a result of the scheme and, in particular, as a result
of having the proportion of the Inherited Estate attributable to electing
policyholders attributed to it as a result of the scheme.
- In the skeleton argument
submitted on behalf of Mr MacWhirter his complaints are summarised as follows:
-
"1.4 The FSA have failed
to protect policyholders' rights... in that they have not undertaken any such
negotiations (on behalf of policyholders with AXA to arrive at a scheme
containing the best possible terms for policyholders) and instead have
not objected to the proposal as they believe it falls within an (unspecified)
reasonable range, rather than ensuring that the policyholders have extracted
the best price possible from AXA.
1.5 AXA's proposal is
flawed and ought not be sanctioned by the Court because:
1.5.1 Both AXA and the
Independent Actuary have, in respectively formulating and assessing the proposal
failed to have proper regard to the reasonable expectations of the policyholders
in the Inherited Estate;
1.5.2 The true economic
value of the proposals to AXA's shareholders is significantly higher than
that represented by AXA to the policyholders.
3.3 Mr Roberts (the
Director of the Insurance & Friendly Societies Division of the FSA)
points out that the factors which need to be taken into account in determining
whether the offer is fair include:
3.3.1 The prospect of
future distributions of the Inherited Estate on a 90:10 basis; and
3.3.2 The value to the
shareholders of the proposed attribution.
3.4 It is submitted that
AXA's proposal fails to reflect either factor properly and is unfairly weighted
in favour of AXA's shareholders:
3.4.1 As to 3.3.1 above,
the proposals manifestly failed to recognise:
(1) The policyholders'
reasonable expectation that the Inherited Estate, or part of it, will be distributed
in due course or that they will realise value attaching to it: through a change
in the business or for some other reason;
(2) The fact that the
Inherited Estate will not need to be retained in the future - and ought to
be distributed - because
(a) With-profits business
is likely to decline; and
(b) The risks its retention
is designed to meet will not materialise.
3.4.2 As to 3.3.2 above,
AXA in the circular to Eligible Policyholders represented that the value to
shareholders of the Scheme would be £100 to £200 million. In fact, that figure
is a gross underestimate: the value to shareholders is of the order of £650
million. …
7.1 The principal grounds
of objection to the Main Scheme are that:
7.1.1 It fails to have
regard properly to the policyholders reasonable expectations ("PRE");
7.1.2 AXA has underestimated
the value of the proposal to its shareholders."
- A number of the objectors
to the Petition whom Mr MacWhirter through the Consumers Association represents
are policyholders who have elected to accept an Incentive Payment. It was
submitted that those who accepted did so relying on the Court's power to refuse
its sanction in the event that it concludes that the scheme is unfair. It
is submitted that such may well be true of many of the 450,000 policyholders
who also have elected to accept but who have not actively objected to the
Petition. I proceed on the basis that this is correct and that, as a result,
no particular weight is to be attached to the difference in numbers between
the numbers of those electing to accept and who have not objected to the Petition
and those who have actively objected.
- Policyholders' reasonable
expectations - PRE - is not a defined expression. It emerges from the provisions
of sections 37 and 45 of the 1982 Act. Section 37, which sets out the circumstances
in which the regulator, now, the FSA, can intervene in the conduct of an insurance
company's business as set out in sections 38 and 41 to 45, provides at sub-sections
(2) (a): -
"(2) The powers conferred
by section 38 and 41 to 45 below shall be exercisable on any of the following
grounds -
(a) That (the FSA
consider) the exercise of the power to be desirable for protecting policy
holders or potential policy holders of the company against the risk that the
company may be unable to meet its liabilities or, in the case of long-term
business, to fulfil the reasonable expectations of policy holders or potential
policy holders:"
- Section 45 (1) (a) also
refers to "the reasonable expectations of policy holders" in describing
the circumstances in which the FSA may compel an insurance company to take
specified steps.
- It is accepted, in the
case of AXA, that the starting point for assessing the PRE of a long-term
with profits policyholder is his "asset share". This is constituted
by a calculation of the value of the investments to be found in the insurance
company's long-term fund acquired from the accumulated premiums paid by the
policyholder together with the accumulated profits resulting from those investments.
See per Sir Richard Scott VC in the Equitable Life Assurance Society
v Alan David Hyman, at first instance, 1999 Pensions Law Reports page 297
at p 303 Para 41. To this must be added an appropriate share in the
profits made by the insurance company from its other operations financed from
its Long Term Fund, in particular, its "non-profit" business. From
these amounts there should be deducted an appropriate share of the tax incurred
by the insurance company as a result of its operations and a contribution
to the insurance company's expenses and its trading capital. It is upon the
increase in this asset share, taking into account PRE, that annual and terminal
bonuses are calculated to be added to the sums secured by the policy.
- Inherited Estate broadly
represents the accumulated surplus in the long-term fund of an insurance company
as a result of its past operations over the sum of the asset shares of current
policyholders. Inherited Estate can derive from a number of different sources
such as under declaration of surplus in the past for prudential reasons, un-returned
contributions of capital by shareholders in proprietary companies, surrenders,
lapses and tax repayments. It is accepted that in the case of AELLAS the Inherited
Estate stood at £67 million at the end of 1969 and that the amount now representing
that Inherited Estate, calculated as £1,680 million as at 31st
December 1999, is rather less than the amount of the accumulation of investment
returns on that £67 million since that date.
- It is also accepted that
Inherited Estate represents a significant resource for an insurance company.
The value of that resource to AELLAS is described at paragraph 2.1 of the
policyholders' circular. It has provided greater investment flexibility. It
has provided a fund from which bonuses can be smoothed so that they do not
reflect, too sharply, significant fluctuations in investment conditions. It
has added to the security of policy benefits generally and has been available
to finance the writing of new business. However it has not been used to systematically
enhance bonuses and other benefits.
- It is accepted that PRE
results from a number of different sources and that it will vary in extent
from company to company. It is the collective reasonable expectations of the
policyholders of a company as a class see per Scott VC in Equitable
Life v Hyman ibid at page 313 paragraph 95. Those sources include
the company's promotional material, the provisions of its articles, the past
practice of the company, in particular, its bonus policy, and the current
practice of the insurance industry generally.
- Inherited Estate forms
part of the long-term fund of an insurance company. The 1982 Act places restrictions
on how that fund can be disposed of by the directors. To start with it places
on those directors a duty to manage the fund using "sound and prudent"
management - see section 5 (1A), section 45 and schedule 2 A. Section
28 provides for the separation of the assets and liabilities of a company
attributable to its long-term business thus forming the Long Term Fund. Section
29 places restrictions on the ability of the company to transfer funds out
of its Long Term Fund. Section 30 prescribes how amounts in the Long Term
Fund can be allocated to policyholders. In a Ministerial Statement dated 24th
February 1995 intended to set out the position of the Department of Trade
and Industry on Inherited Estates the following passage appears:
"A Life Office may make
distributions from surplus in the long term fund as shown by the statutory
annual actuarial valuation. It is common practice to make distributions to
policyholders and shareholders in the proportion 90 - 10. In assessing policyholders
reasonable expectations, the Department would expect this ratio to be used
as the basis of attribution between policyholders and shareholders, unless
there was clear evidence, based on a company's circumstances, statements or
practice, that a different proportion was appropriate in respect of the surplus
arising from some particular part of the business."
- Article 75 of AELLAS
provides: -
"The profits (if any)
of the ordinary long-term insurance funds shall be ascertained by such methods
as the Directors shall think fit and shall be declared by them either by anticipation
or otherwise and subject to the two next following Articles such profits or
the balance thereof shall be apportioned between the Shareholders and the
participating policyholders in such manner that the sum apportioned to the
shareholders shall equal one-ninth of the sum apportioned to the participating
policyholders".
- However Article 76 gives
to the directors an absolute discretion as to how the Long Term Funds should
be disposed of including "to allow such sums as they think fit to be carried
forward."
- It is not in issue that
an AXA policyholder would have PRE in the Inherited Estate to the extent that
it has been available to back his policy and for the uses which I have described
above. Such policyholder would also have a reasonable expectation that any
distribution from the Long Term Fund would be on the basis of 90 – 10 in favour
of policyholders. In my judgment, however, an AELLAS policyholder would not
have, prior to the promulgation of the scheme by AXA, a reasonable expectation
that the whole or any part of the Inherited Estate would be distributed to
him as a bonus or otherwise during the currency of his policy. In particular
it would not be a reasonable expectation for him to hold that the directors
of AXA would promote a scheme of reorganisation which involved a distribution
of the Inherited Estate.
- This conclusion is consistent
with the views of the Independent Actuary. At para 5.5 of his first report
as part of the passage dealing with PRE he says:-
"PRE in respect of any
extraordinary distribution of the Inherited Estate is limited in that, in
my opinion there is normally no reasonable expectation that such an event
will occur. There must however be a reasonable expectation that such an event
would command a proper scrutiny…"
- It also appears to be
consistent with the views of Mr Brindley, a Consulting Actuary who filed a
witness statement on behalf of the objectors. In that witness statement he
sets out without dissent a passage from the report of a working party of the
Institute of Actuaries dated 25th April 1990 one of the conclusions
of which was as follows: -
"In the normal course
of events any orphan surplus (Inherited Estate) in an office does not form
part of the reasonable expectations of (with profit) policyholders since they
could not have "reasonably expected" its distribution when they effected their
policies."
- In my judgment payments
such as the Incentive Payments by insurance companies to their policyholders
are properly described as "windfalls". In the present case the Incentive
Payments were offered to persuade policyholders to compromise their right
to a 90 - 10 distribution from the Long Term Fund thereby enabling AXA to
attribute that part of the fund representing the Inherited Estate to shareholders
funds. The Incentive Payments formed no part of policyholders' reasonable
expectations at the time they took out their policies or at any time prior
to the promulgation of the scheme by AXA.
- Nonetheless the Incentive
Payments are part of the scheme before the Court and it is necessary to investigate
whether the offer of the Incentive Payments in exchange for a waiver by the
policyholders of the restrictions on distribution from the Long Term Fund
other than in accordance with the 90 - 10 rule renders the Main Scheme unfair.
As I have said, policyholders had a reasonable expectation that any distributions
from that fund during the currency of their policies would be in accordance
with that rule.
- The Main Proposals involve
an elective allocation of the assets of AELLAS comprised in the Inherited
Estate of that company. If a policyholder elects he will on payment of a sum
by ASL out of shareholders funds, averaging £400 per policy, no longer have
any prospect of any future distribution of future surplus and the proportion
of the Inherited Estate attributable to that policy will be allocated to a
new fund of ASL in which distributions from the Inherited Estate do not go
through a 90 – 10 gateway.
- Under the scheme the
Inherited Estate, whichever fund it is allocated to, will still be utilised
for the purposes for which it was previously used. The attribution of the
Inherited Estate to the new fund of ASL will enable AXA to account for the
elected portion of the Inherited Estate but it cannot access the funds unless
it satisfies very stringent actuarial tests and the other restrictions on
distributions from the Long Term Fund which I describe below.
- The Scheme provides that
at five-yearly intervals ASL will conduct an investigation into both funds
into which the Inherited Estate has been allocated. If, so far as the un-elected
portion of the Inherited Estate is concerned, it can be demonstrated that
any part of it is no longer required to perform the functions described above
then a Special Bonus will be declared of which 90% must be allocated to with
profits policyholders. Similarly the same calculation will be done for the
elected portion of the Inherited Estate. No Special Bonus or distribution
which would be allocated as to 100 % to shareholders, can occur unless after
the distribution ASL's Free Asset Ratio remains above 10% and is projected
to do so for a further 38 years and, further, ASL's Free Asset Ratio remains
in the highest three of its peer group of companies.
- Under the scheme a bonus
to the value of £225 million would be declared in respect of all policies,
whether or not elected, and provided for out of the Inherited Estate of AELLAS.
- The Independent Actuary
has concluded that the reasonable benefit expectations of policyholders are
maintained by the scheme and, in fact, enhanced if the Main Proposals proceed.
He has also concluded that the security of all policies is not materially
affected. Finally he concludes that the election process qualifying policyholders
for the incentive payments was fair and equitable. With relation to this latter
conclusion the Independent Actuary says at paragraph 10.11 of his initial
report: -
"Electing policyholders
are being paid for electing for their policies to be allocated to the New
With Profits Fund with the result that they will not be eligible to benefit
from future possible distributions of Special Bonus. I would regard the payments
as fair and reasonable with regard to the value of such possible future participation.
The payments bear a reasonable relationship to the economic value derived
by AXA as a consequence of policyholders electing."
- In their skeleton argument
submitted in the proceedings the FSA's position is summarised in this way:-
"The FSA advised by the
Government Actuary's Department ("GAD") after lengthy negotiation with AXA
is satisfied that the Main Scheme is substantially consistent with the FSA's
objectives, namely that:
(a) Any scheme should
be consistent with the principles set out in the Ministerial Statement of
February 1995 and in particular with the so-called 90 - 10 principle;
(b) Policyholders' security
and reasonable expectations were properly protected;
(c) Policyholders who
did not wish to accept the company's offer should be able to remain in the
same position as now, retaining their interests in any future distributions
from the Inherited Estate ("contingent IE rights"); and
(d) The terms of the offer
to policyholders should be such that, set against the likely value to policyholders
and to the company itself, the offer fell within a reasonable range to put
to policyholders.
(2) The FSA concluded
in such circumstances that there is no regulatory reason why an offer should
not be made to with profits policyholders to make them an incentive payment
in exchange for giving up their contingent IE rights, provided that adequate
safeguards are in place. The FSA is satisfied that, from a regulatory point
of view, those safeguards are in place.
(3) The FSA, advised by
GAD, considers that the incentive payment offered by AXA falls within a reasonable
range having regard both to what policyholders are invited to give up and
what AXA shareholders stand to gain and accordingly the payment offered is
not unfair;
(4) The FSA is satisfied
that the provisions of the Main Scheme contain adequate safeguards for policyholders'
security and reasonable expectations."
- The principal evidence
adduced to support Mr MacWhirter's objections is contained in the witness
statement of Mr Jenkins who was the primary deponent for the objectors at
the November application. Mr Jenkins is a consulting actuary attached to KPMG.
His objections can be grouped under three main heads, choice, PRE, and value.
- Mr Jenkins' complaints
as to the choice being given to policyholders sub-divide into a complaint
that the documentation of the scheme was so complicated as to make it impossible
for an average policyholder to understand and thus to deny him the opportunity
to make an informed choice, and, the suggestion that the choice offered was
biased in favour of acceptance. Neither of these contentions was pressed in
the course of the hearing. Indeed they could not be. In the light, in particular,
of the FSA's explanatory circular, quoted at length in my first judgment,
it is impossible to say that policyholders did not receive a clear explanation
of the scheme in terms easily understandable by an ordinary individual. It
seems to me that the choice available to policyholders was a plain one. They
could accept the Incentive Payment and take a cash sum now in place of a problematical
future special bonus or continue their status quo. The fact that the Petitioner
was recommending acceptance does not, it seems to me, make the choice "biased".
In the course of the hearing I asked each of the individual objectors who
appeared in person and who had not elected acceptance whether any aspect of
the scheme would place them in a worse position than before. They were not
able to give me any convincing reason why the implementation of the scheme
would adversely affect the interests of non-electing policyholders.
- I have already dealt
with Mr Jenkins' contention that prior to the promulgation of the scheme policyholders
had a reasonable expectation that they would receive a distribution from the
Inherited Estate during the currency of their policies. I wish at this point
to deal with the suggestion made in Mr Jenkins' witness statement and pursued
in argument that policyholders might have a reasonable expectation that for
some reason the long-term fund might be closed to new business in which case
they might expect the fund, over time, to be distributed to them during which
time they would receive distributions from the Inherited Estate.
- I accept the submissions
on this point made by ASL and the FSA. We are not dealing with the situation
of a mutual association where policyholders could themselves decide upon and
put into effect a closure of the fund. In the circumstances of a proprietary
company insurer, the decision whether or not to close the fund is one for
the directors. Save in circumstances where the company had got into difficulties
it is highly unlikely that directors would decide to close the fund thereby
precluding taking on new business. In the present case it is not in issue
that AXA's financial position makes it one of the strongest insurers in the
market. There is no question of the AXA directors deciding to close the fund.
In my judgment the possibility that the AXA directors might have done so cannot
be taken as justification for the contention that policyholders had a reasonable
expectation, prior to the promulgation of this scheme, that they would receive
distributions from the Inherited Estate.
- I turn to Mr Jenkins'
objections under the heading of value. These amounted to a critique of AXA's
estimate of the value to itself of attribution of the Inherited Estate to
shareholders funds.
- It is common ground that
in calculating the value to AXA of attributing the Inherited Estate to shareholder's
funds, the accepted value of that estate as at the 31st December
1999 of £1,680 million must be reduced to £1,287 million as a result of deductions
of £225 million in respect of the "reorganisation bonus" and a further
£25 million the consequent allocation of the shareholder's entitlement to
10% of the distribution. The starting figure should further be reduced by
£143 million representing the shareholders' 10 % interest in the balance remaining
after the deduction of that £250 million.
- It is AXA's position
that there should be further deductions of £400 million in respect of current
and future taxation which AXA would have to bear and which would have been
chargeable on the fund and £437 million in respect of "lock- in and risk".
Thus, after payment of £300 million from shareholders funds, to provide the
Incentive Payments the net value of the attribution of the Inherited Estate
to shareholders funds is, according to AXA's estimate, £150 million.
- The deduction for taxation
of £400 million sub divides into two deductions of £200 million. Of the first
£200 million £50 million is said by AXA to be a deduction for tax on current
operations and the balance of £150 million for taxation which will accrue
in the future.
- Mr Jenkins suggests in
his witness statement that the deduction for corporation tax on current business
is contentious and inappropriate. This challenge was not pursued in oral submissions
for the objectors. Mr Jenkins' challenge to the charge of £150 million in
respect of future tax was pursued as inappropriate. It is AXA's case that
it will not distinguish between existing and new business in the manner in
which liability to tax is met. In the past all such taxation has been met
from the Inherited Estate and there appears be no reason to make a change.
Charging corporation tax in that way by continuing past practice does not
mean that the Main Proposals are creating value for the shareholders because
such charge would have occurred regardless of whether the proposals were put
into effect. Both the Independent Actuary and the FSA concur with AXA's view.
- The second tranche of
£200 million deduction for tax results from distributions in the future of
the Inherited Estate. This deduction is challenged by Mr Jenkins on the basis
that the discount implies rates of tax higher than those currently in force.
He contends that the allowance should be reduced by £50 million. AXA accepts
that the calculation was on the basis alleged but contends that it is highly
likely that in the future the Inland Revenue will seek to close what they
regard as a loophole in the taxation of insurance funds and that accordingly
tax rates will rise. AXA's position is supported by the Independent Actuary
and the FSA say that they do not regard AXA's tax assumptions as unreasonable.
- The "Lock-in and risk"
deduction is based on the fact that AXA proposes to use the Inherited Estate
attributed to it to fund further with profits business which it expects to
rise in the future at a rate of 2% over RPI. It is accepted that a provision
of £122 million should be made against future liabilities arising from guaranteed
annuity rate provisions in current policies. In addition AXA says that there
may be future liabilities in respect of insurance mis-selling in the past
by agents of AXA. Capital may be required to back future with profits business
particularly if the rate of return on investments suffers a decline. In those
circumstances competitive pressure will increase, smoothing bonuses may work
against the company, guaranteed sums assured and bonuses may be more difficult
to meet and assumed lapse rates and surrender rates of policies may not turn
out to be correct. Generally, funding for future growing with profits business
may require the transfer back from shareholders funds to the Long Term Fund
without the prospect of that subsequently being released back again.
- Mr Jenkins challenges
AXA's contention that it will be able to expand its future with profits business
at the rate suggested. He takes a gloomier view of the prospects of future
with profits business and in this he is supported by other deponents for the
objectors. He also challenges the risk factors advanced by AXA including the
necessity of attributing any negative value to the fact that capital may be
locked into future with profits business.
- The Independent Actuary
supports AXA's position. However the FSA do not accept that allowance should
be made in respect of competitive pressures in the future requiring policy
payments greater than can be afforded or the risk that the FSA in future may
require compensation payments for mis-selling may have been incorrectly assessed.
Further the FSA do not accept that there should be as substantial a further
allowance for tax under this head as that contended for by AXA nor that there
should be a provision for loss of liquidity owing to the lock-in of capital
over a lengthy period. In the result the FSA conclude that the net benefit
to AXA resulting from the attribution of the Inherited Estate would be between
£300 million and £400 million after paying the Incentive Payments of £300
million. The FSA do not disagree with AXA's estimate of future growth of with
profits business.
- Despite these disagreements
resulting from the FSA's assessment of the value to AXA of the attribution
of the Inherited Estate compared with those of the Independent Actuary and
AXA itself, the FSA considers that the level of Incentive Payments "falls
within a reasonable range having regard both to what policyholders are invited
to give up and what AXA as shareholders stand to gain and accordingly the
payment offered is not unfair."
- Save for the unchallenged
evidence of AXA that its past practice in meeting tax obligations from its
long-term fund accords with the practice of the overwhelming majority of other
insurance companies in the same field, the differences of view between the
objectors, AXA, the Independent Actuary, and the FSA appear to depend on which
forecast of future events or which actuarial calculation of potential risk
of certain events occurring, is to be preferred. This Court has no actuarial
skills and is in no better position (in fact in a much worse position) to
forecast future relevant events and market movements than are those parties.
Accordingly my approach, as indicated by authority is to accept the views
of the Independent Actuary and the FSA as advised by the Government Actuaries
Department in preference to those of AXA and the objectors where they are
in conflict except if there were a compelling reason, based on proven fact,
or demonstrable mistake in calculation or forecast, which points to a contrary
view. Where the views of the FSA or the Independent Actuary conflict I propose
to prefer those of the FSA. No such compelling reason, proven facts or demonstrable
mistake has emerged.
- It follows that I cannot
accept Mr Jenkins' objections under the heading of value.
- Of the three policyholders
who appeared in person, Messrs Tomlinson Gascoyne-Cecil and Hitman, it emerged
that Mr Hitman was not an eligible policyholder at the qualifying date and
his concern was to obtain an amendment of the scheme to broaden the definition
of such eligible policyholder. As I have already said that is not the Court's
function. Messrs Tomlinson and Gascoyne-Cecil and the two objectors who wrote
in but did not appear Messrs Loughran and Hyde raised points which, on analysis,
did not extend beyond those raised on Mr MacWhirter's behalf. Amongst other
matters raised by Mr Gascoyne-Cecil, he pointed out that the scheme demonstrated
that there was a surplus of Inherited Estate of £550 million (the reorganisation
bonus with shareholder 10% and the Incentive Payments) which was not required
for the continuing business of AXA. He suggested that that sum should be distributed,
as bonus or otherwise to policyholders without the remainder of the scheme
proceeding. Though this idea might be immediately attractive to current policyholders
it overlooks the fact that these distributions are proposed by the AXA directors
to facilitate a reorganisation of the group for commercial purposes which
the FSA accept are bona fide and which include that set out in paragraph 3.4
of the policyholders' circular.
- Mr Jenkins has a further
complaint under the heading "ongoing shareholder reporting" set out
in section 9 of the report appended to his second witness statement. This
complaint was not supported in oral submissions. Section 9 of the report is
mainly directed to demonstrating how AXA's accounting for the Inherited Estate
is more consistent with Mr Jenkins's assessment of its value to shareholders,
when attributed, than the assessment of AXA. The burden of any separate complaint
under this head appears to be set out in paragraph 9.2. which reads: -
9.2 If, subsequent
to completion of the Transfer, AXA were to use more generous bases for quantifying
this economic value (of the Inherited Estate after attribution to shareholders)
then the terms and fairness of the proposals will be retrospectively invalidated.
During my meeting with him, the independent actuary agreed with me that the
subsequent use of more generous bases would cause concern in this area."
- As the FSA point out
in their written submissions, if subsequent reporting to shareholders by AXA
shows that the basis of the case presented by AXA in support of the Petition
was false, that would be a cause for concern and possible intervention by
the FSA. No allegation has made been to me that the case presented by AXA
on the value to it of the attribution to shareholders of the Inherited Estate
is more than " conservative".
- The conclusion of the
FSA is set out at paragraphs 43 and 44 of the skeleton argument submitted
on its behalf as follows: -
"In essence, the FSA's
objective was that any offer put to policyholders should represent as nearly
as possible the deal that might reasonably have been struck between an informed
and willing group of policyholders and AXA, recognising what benefits each
side was gaining and what each side was providing. It is of the nature of
such a deal that it cannot be determined with precision particularly when
no established market or precedent exists.
44 However, in considering
the offer as ultimately proposed the FSA took into account that: -
(1) For Policyholders
contingent rights of uncertain value were to be given up in return for the
certainty of a "cash" sum;
(2) For AXA the price
to be paid represented an immediate payment while the benefit gained was subject
to considerable uncertainties; and
(3) As a further part
of the offer, the company reduced the level of new business that would be
able to be written so as to make some of the Inherited Estate available for
distribution in the (90–10) ratio providing a better benefit to electing and
non-electing policy holders."
- I can discern no error
in this approach to assessing the value to policyholders of AXA's offer.
- In my judgment the Court
should sanction the Petitioners' Main Scheme.
