Discussing the appeal of cross-border transfers, Tim Goggin of Hogan Lovells looks at Part VII transfers of insurance businesses to and from the UK, both inside and outside the EEA.
For one reason or another, over the past few years we have helped quite a few clients moving business out of the UK; fortunately for the UK, there have been others looking to move business in.
As, for now at least, the UK remains in the EEA, there are some mechanisms available under European law where the traffic is going to or from the EEA. The position is different for those with destinations or starting points that are further afield.
The best-known method is the Part VII transfer. This is a really useful tool that we work with a lot. With one wave of the court’s magic wand, you can transfer a UK insurer’s business to another insurer anywhere else in the EEA.
However, to get to that point has always involved some work: an independent expert’s report; some policyholder mailing costs; and often compliance with the requirements of up to 31 EEA regulators. And the process is not getting any simpler. IE reports have to cover more and more areas. Discussions with two UK regulators now tend to take months rather than weeks.
Are there alternatives? Yes. A merger under the cross-border mergers directive or to form a Societas Europaea (se) under the SE regulation? Under either process you start with two companies incorporated in two different EEA states. You then determine which one of them is going to be the surviving company and which will be the disappearing company: so, if you were looking to move business from the UK to Germany, the disappearing company would be the UK one and the surviving company the German one. Each company then completes the formalities required under its local law (these will typically include board approval of draft merger terms, the publication of a notice and the holding of a shareholders’ meeting). The surviving company then gets its relevant local body to check that all of the merger formalities have been complied with. Finally, the merger is registered at the companies registry of the surviving company.
The issue you have here is that, if the process results in policyholders starting in a UK company and ending up in another company, the received wisdom is that there is a “transfer of insurance business” and so you have to do a Part VII transfer as well.
The real alternative we have found is a two-stage process: change your UK company into an SE, and then relocate the registered office of the SE to wherever you are intending it to go. The critical difference here is that it’s the UK company that survives as the SE. The advantage here is, because there is no transfer of business between legal entities, there is no basis on which a Part VII transfer should be required.
The reason this route works is that, unlike other companies, SEs have the ability to relocate their registered office. So by going through a relatively straightforward process, you can change a UK company into, say, a German company.
Once your UK insurer has become an SE, there is a relatively straightforward process it can go through to relocate its registered office to its chosen destination.
This two-stage process itself tends to be achievable in around seven months, but takes some planning and so from start to finish going down this route is more likely to take nine months to one year. An advantage it has over a Part VII transfer is that it does not involve the time and expense of an independent actuarial report.
You can use Part VII to move business from a UK insurer to a non-EEA carrier provided that non-EEA carrier has operations in the EEA (because it is a requirement of Part VII that the transfer must result in the transferred business being carried on in the EEA).
So if the transferee does not have a branch in the EEA, it needs to form one.
If business is heading to an entity that is regulated outside the EEA, the PRA is going to have to be convinced that the level of regulation of the transferee is such that transferring policyholders are not going to be disadvantaged. And they are going to want the independent expert to show he or she is so convinced, and that means quite a lot of comparative analysis has to be performed and has to appear in the expert’s report.
After business has been transferred, it may be possible to relocate the administration of the business to the transferee’s head office. This means that the business will have successfully left not just a UK insurer, but left the EEA too.
Under the insurance and reinsurance directives, each EEA state has to have some mechanism in place for transferring a portfolio of policies from a locally authorised insurer to an EEA transferee.
However, the directives do not require those mechanisms to have all the bells and whistles of Part VII. And most do not. In particular most transfer mechanisms do not provide for the transfer of assets like outwards reinsurance.
Are there alternatives? Again, the answer is yes. Here, a merger under the cross-border mergers directive, or SE regulation (with the UK insurer as the surviving company in the merger) may be the easiest way to secure the transfer of all assets and liabilities to the UK.
But if the EEA company has assets, liabilities or contracts outside the EEA, it may be that the safest approach is to change the company into an SE and then relocate its registered office to the UK, converting it into a UK company. That way there can be no question that assets, liabilities or contracts have been left behind, because they have been in the same company throughout.
This is something that we have done on several occasions for Japanese companies, looking to move business to the UK to bring it within the jurisdiction of the English court for the purposes of Part VII. That then allows the business to be transferred out of the transferor’s group to a run-off acquirer.
Part VII provides that the court has jurisdiction in respect of insurance or reinsurance business carried on in the UK by a non-EEA transferor. “Carried on” includes business “effected” or “carried out” in the UK. “Effecting” essentially means entering into new insurance contracts; “carrying out” essentially means performing them. So if as a matter of fact the run-off of business takes place in the UK, that business is carried on in the UK and the court has jurisdiction to transfer it. Thus, the non-EEA insurer will need to relocate the run-off of the business it wishes to transfer to a UK branch. Then it will be in a position to transfer the business out of its group, using Part VII.
With the increased pressures of Solvency II, persistently competitive market conditions and the continuing evolution of the regulatory environment, we see the appeal of cross-border transfers continuing to grow. With the UK Chancellor of the Exchequer’s promised steps to encourage reinsurance in the UK, we hope to see more of this travel in the direction of the UK.