Spring 2006
IQ
IQ
(Oct 2007) Ruxley in landmark reinsurance-funded acquisition(Apr 2007) Ruxley in Generali run-off talks(Autumn 2006) Part VII business transfers - adding flexibility to the run-off equation(Spring 2006) Why we need a scheme monitor(Spring 2006) BAIC and after(Feb 2006) Solvent Schemes of Arrangement Conference(Nov 2005) Scheming for solvency(Oct 2005) A wake-up call(Sept 2005) Time To Wake Up(Sept 2005) Free Audio Conference: Rating the Raters(Aug/Sept 2005) Air Your Views(Aug 2005) Ruling could curtail solvent runoff schemes(March 2005) Tackling The Pools(Spring 2005) Selling like hot cakes(Spring 2005) The scheming solution(28/02/05) Influx of capital can impact premiums(Feb 05) Bringing finality to underwriting pools(Winter 04) Dangerous waters(04/11/04) Solvent schemes offer real boost(01/09/04) Buying Run-off(05/07/04) Run-off moves to another level(03/02/04) Run-off on a positive note(2004) 2003 A year of innovation(Winter 03) Ruxley buys Aviation & General(06/10/03) Ruxley takes whole of A&G(04/07/03) End of asbestos saga?(03/07/03) Ruxley closes APH book(Summer 03) Vulture Culture?
In the wake of Mr Justice Lewison's High Court decision not to sanction the British Aviation Insurance Company Limited (BAIC) solvent scheme of arrangement, commentators expressed a range of views varying from predictions of the death of solvent schemes in the UK to declarations of business as usual - subject to a few tweaks.
In reality, however, the BAIC announcement late last year that it will not appeal the decision has left many questions unanswered.
Some further clarity has now started to emerge as a result of the progress, in the months following the BAIC judgment on 21 July 2005, of a number of other proposed schemes to the stage at which they became subject to the scrutiny of the Courts.
However, even here the picture has been complicated by the varying responses which solvent scheme promoters chose to adopt in light of both the different interpretations of BAIC decision and the specific characteristics of the insurance portfolios in question.
Mr Justice Lewison's ruling on the BAIC sanction and the supplementary comments in his written judgment raised a number of questions in respect of various aspects of solvent schemes, the two most important being:
• Can policyholders with claims in respect of paid and outstanding claims be considered to be in the same voting class as those with IBNR claims?
• Can schemes be applied to direct policyholders as well as cedants?
Post BAIC schemes
Both of these questions have been addressed to some extent in proposed schemes that have gone before the Courts since the BAIC decision.
The Mercantile & General Reinsurance Company Limited (M&G Re)
As the first scheme to seek Court sanction following the BAIC judgement, The Mercantile & General Reinsurance Company Limited (M&G Re) scheme drew considerable attention from industry commentators.
In the M&G Re scenario the scheme creditors meeting (at which creditors cast votes for or against the proposed scheme) had been held on 26 April 2005 prior to the BAIC judgement and, having achieved the required statutory majorities in favour of the scheme, was presented to the Court of Session in Edinburgh, Scotland for sanction on 18 August 2005.
The proposed scheme had only a single class of creditors for voting purposes which incorporated both claims in respect of paid and outstanding claims and those in respect of IBNR claims.
The scheme was duly sanctioned by the Court of Session on 1 September 2005 - a decision that appeared to be in direct conflict with the reasons given by Mr Justice Lewison for refusing to sanction the BAIC scheme.
However, two factors came into play with the M&G Re scheme which made it substantially different from the BAIC scenario.
The first is that it was sanctioned under Scottish law which is separate and different from the law in England and Wales applied to BAIC. The second is that M&G Re's outstanding liabilities related almost entirely to reinsurance business.
Accordingly, while it is relevant to the creditor classes question, this case is not generally regarded as providing clarification regarding Mr Justice Lewison's concerns over the applicability of solvent schemes to direct policyholders.
The Dutch Aviation Pool (DAP)
The next proposed scheme to come before the Courts was the Dutch Aviation Pool (DAP) scheme. This scheme concerned the liabilities of 17 solvent Dutch companies that had underwritten aviation insurance and reinsurance in a Pool arrangement which was managed and participated in by DAP Holdings NV, a company that is now insolvent.
The original proposed scheme, which technically comprised 17 solvent schemes of arrangement and one insolvent scheme, was signficantly amended prior to the creditors' meetings in the light of the BAIC judgement.
The number of classes of creditors for voting purposes was increased so that creditors with IBNR claims could vote separately from those with claims in respect of paid and outstanding claims and direct policyholders - which represented a tiny fraction of scheme creditors both by value and number -, were excluded from the proposals.
These changes directly addressed the main issues raised by BAIC judgement, but increased the number of classes of creditors from 18 to 37. Despite this additional complexity, the policyholders in every class voted in favour of the proposed scheme.
Interestingly, the application for sanction was heard on 26 September 2005 by the same Mr Justice Lewison who ruled on the BAIC sanction and the scheme received the necessary go ahead from the Court. However, given the amendments to the proposed scheme, the DAP scheme did not provide any clarification on the main issues raised in the BAIC case.
Scottish Lion Insurance Company Limited
In the weeks immediately preceding the BAIC judgement three related solvent schemes were also proposed in respect of Scottish Lion Insurance Company Limited (Scottish Lion), Scottish Eagle Insurance Company Limited (Scottish Eagle) and the UK Branch of La Mutuelle Du Mans Assurances IARD (MMA UK Branch). The Scottish Lion scheme was subject to Scottish law, while the Scottish Eagle and MMA UK Branch schemes were subject to English law.
The Scottish Lion scheme was withdrawn in October 2005 for reasons unrelated to BAIC and so provides no further guidance regarding the impact of the BAIC judgment.
Scottish Eagle and MMA UK Branch
However, both the Scottish Eagle and MMA UK Branch schemes were sanctioned by the High Court on 28 October 2005.
This decision was made all the more significant by the fact that both schemes included direct policyholders and both schemes were approved by a vote of a single class of creditors including paid, outstanding and IBNR losses.
While this decision appears to conflict with the ruling in BAIC, the absence of a written judgement regarding the decision to grant these sanctions prevents any informed analysis as to why a different view was taken.
Interestingly, both the Scottish Eagle and MMA UK Branch schemes were slightly modified before sanction so that claims payments to certain creditors could not be made in advance of the payment to all scheme creditors. However, this was not an issue addressed in the BAIC case and no public explanation has been given as to the reasons for this modification.
Experience Gained from Post BAIC Schemes
Overall, therefore, despite four solvent schemes receiving sanction since the BAIC decision, it is not as yet possible to claim that they have both been answered satisfactorily.
Granted, on the question of whether direct policyholders can be included in a solvent scheme, the position seems clear.
Both the Scottish Eagle and MMA UK Branch schemes included creditors who were direct insureds, and these schemes were sanctioned. However, the absence of a written judgment may hide a critical difference between the circumstances of these cases and that of BAIC that led to the Court's decisions.
Separately, the issue of whether policyholders with IBNR claims need to vote as a separate class from those with paid and outstanding claims seems little clearer given that the results of the M&G Re, Scottish Eagle and MMA UK cases appear to directly contradict the judgement in BAIC.
On the plus side, however, some further clarity has been gained regarding concerns raised by Mr Justice Lewison in his supplementary comments to the BAIC judgment.
For instance, all four of the schemes which have been sanctioned since the BAIC decision have included revert to run-off clauses, despite the fact that the use of potentially one sided “revert to run-off” clauses was one of the concerns raised by Mr Justice Lewison when commenting on BAIC.
However, the relevant DAP scheme clause described in detail the circumstances in which the clause would be invoked, a factor which may have swayed the judge's view on this point.
Separately, the DAP scheme proscribed a period of six months between scheme sanction and the bar date for claims as opposed to the 12 months which, in his supplementary comments to the BAIC ruling, Mr Justice Lewison indicated would have been more appropriate.
The reason given by the judge for this apparent discrepancy between the BAIC and DAP schemes was that DAP creditors had been notified of the scheme some five months before the application for sanction.
Accordingly, it is clear that, providing notification to creditors is undertaken effectively, Mr Justice Lewison considers a period of 11 months from initial notification of the proposed scheme to the claims Bar Date as sufficient time for creditors to perform any work necessary for claims submissions.
The DAP scheme also provided clarity on another issue totally unrelated to the BAIC ruling.
Given all of the DAP companies were resident in The Netherlands, the scheme broke new ground in that Mr Justice Lewison provided a positive written judgement regarding the previously untested issue of whether EU companies can take advantage of solvent schemes pursuant to Section 425 of the UK Companies Act 1985.
Forthcoming Solvent Schemes
In addition, while various question marks still remain post BAIC, there are a number of solvent schemes in the pipeline that should provide the market with further clarification - although, again, this will depend on specifics of each scheme and the approach taken to the key issues.
For instance, a scheme proposed by QBE Reinsurance (UK) Ltd that had been approved by a vote of a single class of creditors just prior to the BAIC case, has since been revised and, as we go to print, is imminently due for a new vote. The major change to the proposed scheme was to separate creditors into two classes, one for those with paid and outstanding losses, and one for creditors with IBNR losses.
Gordian Run-Off (UK) Ltd is in a similar position to QBE Re, but has yet to publish its intentions in respect of its proposed scheme.
Reliance National Insurance Company (Europe) Ltd has successfully applied for High Court permission to convene a single meeting of creditors to consider its scheme proposals, and the outcome of that meeting is awaited.
More recently, several new scheme proposals have been announced by Global General and Reinsurance Company Ltd, NRC Reinsurance Company Ltd, the Orion Pool and the WFUM Pool.
Accordingly, while it is clear initial predictions of the death of solvent schemes in the UK have proved unduly pessimistic there is still some way to go before the various outstanding concerns are settled.
What does seem to be emerging is a picture in which it may well have been the specifics of the BAIC case – and the application of specific clauses within that proposal - which triggered the concerns which lead to that scheme's failure to receive sanction.
As such, the next few months should prove interesting to anybody considering proposing a solvent scheme.