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Schemes of Arrangement Schemes of arrangement a special supplement to www.runoffbusiness.com PricewaterhouseCoopers PricewaterhouseCoopers (www.pwc.com) is the world’s largest professional services organisation. Drawing on the knowledge and skills of more than 125,000 people in 142 countries, we build relationships by providing services based on quality and integrity. The following areas of the firm have contributed to this supplement: Solutions for Discontinued Actuarial & Insurance Insurance Business Management Solutions PricewaterhouseCoopers’ Solutions for Discontinued PricewaterhouseCoopers’ Actuarial & Insurance Insurance Business team comprises 140 insurance Management Solutions (AIMS) practice is a global experts dedicated to dealing with issues facing practice of more than 450 consultants, providing life and discontinued insurance business. The team has an non-life actuarial and insurance advisory services. With a extensive range of specialists with expertise in proven track record across five continents and practices restructuring. in 14 countries, AIMS offers the global presence, resources and expertise to meet its clients’ most critical They include qualified chartered insurance practitioners, needs. Our actuaries regularly provide advice to both the accountants, restructuring practitioners and specialists insurance industry and broader financial services in risk management, treasury and business providers. management. As part of the world’s largest professional services firm, This team has a broad range of experience, including AIMS can also call on the global expertise of auditors, board level strategic management, claims run-off tax advisers, corporate finance and discontinued management, collections, underwriting, risk insurance business specialists who specialise in the management, investigations and finance. insurance sector. The team can also draw on the strength of offices Our non-life practice is the UK’s largest practice of its around the world including dedicated staff in the US and kind. We support our discontinued insurance business Bermuda. The team’s credentials include cross-border practice in the development and implementation of run- assignments in the US, Continental Europe, Australia, off strategies and exit solutions. We evaluate creditors’ Far East and Middle East. liabilities, including those for complex and long-tailed Unless otherwise indicated, PricewaterhouseCoopers claims, and develop sophisticated approaches to refers to PricewaterhouseCoopers LLP a limited liability allocating funds to insureds in an equitable manner in partnership incorporated in England. the context of solvent and insolvent schemes of PricewaterhouseCoopers LLP is a member firm of arrangements. PricewaterhouseCoopers International Limited. comment There are fundamental changes in objectives when a company enters run-off, whether solvent or insolvent. In the confusion that regularly occurs during this transition, it is all too easy to lose sight of these changes, and for the company to carry on as before. The resulting misuse of company resources, loss of significant personnel, and diminishing morale can jeopardise the long term chances of achieving a favourable run-off. The challenge for companies entering run-off is to implement these significant changes as rapidly and painlessly as possible. Given that most finality solutions for insolvent companies ultimately involve a scheme of arrangement, and that an increasing number of solvent run-offs are also looking towards solvent schemes of arrangement as a means of achieving finality, it is clearly important for the culture change accompanying a decision to allow the run-off to get to a position where a scheme is feasible within the shortest possible timeframe. One of the main ideas to get over, to both management and staff, is that being in run-off isn’t that bad. Providing new objectives are embraced on day one, enormous value can be provided to creditors in relation to an insolvent estate and to shareholders in relation to solvent run-offs. Not least among the advantages to shareholders is the release of capital that can accompany a successful finality solution such as a solvent scheme. Neil Bruce, PwC 2 run off business special supplement contents Introduction World applications What is a scheme? 4 Global schemes 17 Closure for captives 18 Alternative exit options Making an exit 8 Reserving Change of focus 20 Stakeholders Managing expectations 11 Valuing liabilities Value judgement 21 Timeframes When is the right time to scheme? 12 Taxation issues How long do schemes take? 13 The tax implications 23 Life market Information technology Life restructuring 14 The impact of IT 24 Portfolios and pools Tables A rescue from the pool 15 Insolvent schemes of arrangement 26 Solvent schemes of arrangement 27 Lloyd’s Exiting Lime St 16 Schemes of arrangement is a special supplement sponsored and written by: Contributors: Gary Bray Mark Jones Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)207 583 5000 [email protected] Neil Bruce Emma Pugsley Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)207 583 5000 [email protected] Simon de Young Nigel Rackham Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)207 583 5000 [email protected] Paul Duffin Andrew Rothseid Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)1 267 330 2024 [email protected] Diana Gardner-Brown Andrew Ward Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)1 267 330 2027 [email protected] Neil Gayner Nick Watford Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)207 583 5000 [email protected] Kevin Gill Clare Whitcombe Tel: +44 (0)207 583 5000 [email protected] Tel: +44 (0)207 583 5000 [email protected] Baljit Goraya Tel: +44 (0)207 583 5000 [email protected] Schemes of Editors: Advertisement sales: arrangement Derek Austin William Barker Tel: +44 (0)1908 660836 Tel: +44 (0)20 7686 3997 a special supplement to Fax: +44 (0)1908 660856 Email: [email protected] Run Off Business magazine autumn 2003 Email: [email protected] ISSN 1477-7568 Printed by Newnorth Print Helen Perry © B D Communications (London) LLP Barbara Hadley Tel: +44 (0)20 7387 6620 All rights reserved. No part of this publication may be Tel/Fax: +44 (0)20 7916 2835 Email: [email protected] reproduced, stored in any retrieval system or transmitted Email: [email protected] in any form – electronic, mechanical, photocopying or otherwise – without the prior permission of the publisher. Published by: Every care has been taken to ensure that the information Design: B D Communications (London) LLP in this publication is accurate, but the publisher cannot Christine Narain 153 Simpson, Milton Keynes MK6 3AH accept and hereby disclaims any liability to any party for loss or damage caused by any errors or omissions. Email: [email protected] www.runoffbusiness.com Michelle Morgan Email: [email protected] 3 Introduction Gary Bray and Baljit Goraya explain what exactly s425 schemes are and how they are evolving in the solvent and insolvent markets What is a scheme? or a number of years now, schemes of arrangement F(schemes) have been used extensively when dealing with the unique issues arising in connection with insolvent insurance or reinsur- ance companies. The emergence of schemes as the primary tool of insol- vency practitioners in the insurance industry reflects their distinctive fea- tures and inherent flexibility, which have enabled the run-off of insolvent insurance businesses to be specifical- ly tailored to the precise circum- stances of each case. In particular, schemes are usually more beneficial to creditors compared to other insol- vency procedures such as liquidation or company voluntary arrange- ments, typically resulting in earlier payments to creditors than might otherwise be the case. In recent years, there have been an increasing number of solvent insur- ance and reinsurance companies entering run-off, or placing specific books of business into run-off, both in the UK and overseas. This trend has been accelerated by increasing 4 run off business special supplement Introduction commercial pressures arising from implement an exit strategy which is framework and possibly with the adverse claims development, poor fair and commercially acceptable to involvement, if agreement cannot be investment returns and increased all stakeholders involved. reached in the normal course, of an operating costs — particularly for Naturally, there are many parties independent adjudicator. long tail business — and the increas- with a legitimate interest in the terms In this way, schemes can provide a ing need to focus on the optimum of any scheme. Such stakeholders framework for an insurance compa- use of scarce capital. This is a combi- include shareholders, policyholders, ny in run-off to accelerate the agree- nation of circumstances and pres- service providers, employees, rein- ment and settlement of policyhold- sures that seems set to remain a fea- surers and regulators – the flexibility ers’ and other creditors’ claims and, ture of the landscape for the of schemes allows a ‘deal’ to be for- ultimately, to achieve finality, the foreseeable future. mulated that strikes an acceptable holy grail of run-off. In these conditions, solvent insur- balance between the needs of each. ance companies have increasingly Accordingly, each stakeholder must What are the benefits of a used schemes as a mechanism for be carefully considered and, where scheme? effecting planned exits from the mar- appropriate, consulted during the Although there are a number of ket or from specific sectors of it, promotion and implementation of a alternative strategies available to an enabling capital to be released and re- scheme to ensure that all perspectives insurance company seeking to exit a deployed in pursuit of key, or at least are considered and all parties satisfied market (see page nine), these do not more pressing, strategic objectives.
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