Third-party guarantors of the liabilities of a long-term insurer may be released if the insurer’s long-term business is transferred to a new insurer using section 25 of Bermuda’s Insurance Act 1978 (“Insurance Act”).
Overview of section 25
Section 25 of the Insurance Act (“Section 25”) provides for the jurisdiction of the Supreme Court of Bermuda (“Supreme Court”) to sanction schemes for the transfer of long-term business from one insurer to another (“long-term business transfer scheme” or “transfer scheme”). The section is a longstanding feature of Bermuda’s insurance legislation and is similar to provisions found in the insurance legislation of many other jurisdictions. When sanctioned, a long-term business transfer scheme transfers the primary legal liability of the transferor insurer to its policyholders to the transferee, giving the transferor complete legal and economic finality. As well as the sanction of the Supreme Court, the procedure requires procuring an opinion of an approved actuary to the effect that policyholders would not be materially adversely affected by the transfer, the no-objection of the Bermuda Monetary Authority and proof of notification of the intended transfer to policyholders. Section 25 is an essential tool for long-term insurers in runoff seeking exit strategies or for use in the consolidation of insurance groups. Numerous long-term business transfer schemes have been sanctioned by the Supreme Court of Bermuda over the decades.
The facts of Re Amedex
In Re Amedex Insurance Company (Bermuda) Ltd.  SC (Bda) 48 Com (1 July 2022), the Supreme Court considered a petition to sanction a long-term business transfer scheme that included an unusual feature releasing a third party guarantor of the petitioner’s (“Amedex”) liabilities. The transfer scheme sought to transfer all of the in-force business of Amedex to AmFirst Life Insurance Company, I.I., an insurer registered and supervised in Puerto Rico. An affiliate of Amedex had guaranteed the obligations of Amedex to its policyholders. Clearly, the transfer scheme would not provide the necessary finality if as a result it did not bring about a release of the guarantor (not least having regard to the potential for indemnity claims against Amedex being brought by the guarantor should the guarantee be invoked by a policyholder).
The decision of the Supreme Court
While the release of guarantors has been achieved in Schemes of Arrangement under the Companies Act 1981, it has not reportedly been achieved in Bermuda as part of a long-term business transfer scheme.
After making orders sanctioning the transfer scheme and related orders to give effect to its provisions (including the guarantee release), the Chief Justice provided a helpful written ruling setting our reasons for his decision to sanction, including reasons for holding that Section 25 provided jurisdiction to sanction a transfer scheme that extinguished policyholder claims against a third party guarantor.
Applying the decision of Snowden J (as he then was) in Re Copenhagen Reinsurance Co (UK) Ltd  Bus LR 741, which concerned an application to the English High Court for sanction of a transfer scheme under section 111 of the UK Financial Services & Markets Act 2000, the Chief Justice noted that Section 25 did not give the Court jurisdiction to sanction the transfer of the benefit of a guarantee. This is because, on the authority of Re Copenhagen Re, a guarantee was an asset of the policyholders, not of the transferor insurer, and the assets that could be transferred with sanction under section 25 were confined to assets of the transferor only. It could be inferred from this that there could be no in principle objection to sanctioning a transfer scheme that extinguished such a guarantee, since to do so was merely declaratory of the legal effect of the transfer scheme. Furthermore, the jurisdiction of the court to effectively “hold back” or exclude a guarantee from a transfer scheme had been confirmed in another English authority, Re Excess Insurance Company Limited  EWHC 3572 (Ch). Since, in the case before the Court, excluding the guarantee was equivalent to depriving policyholders of the benefit of it, it followed that the Court could sanction a transfer scheme that provided for the extinguishment of the guarantee.
Since a parent company of the transferee had entered into a separate deed guaranteeing the policy liabilities after transfer, effectively replacing the pre-transfer guarantee, and the approved actuary had taken this into account in concluding that policyholders were not materially adversely affected by the transfer scheme, the extinguishment of the guarantee did not prevent the Court from finding that it was just and equitable to sanction the transfer scheme.
Jurisdiction to sanction transfers to insurers outside Bermuda
The ruling also serves as a helpful reported authority for the jurisdiction of the Supreme Court to sanction a transfer scheme that has the effect of transferring business to an insurer not registered or supervised in Bermuda. This was implicitly the decision of the Supreme Court in various earlier unreported cases where a transfer to a non-Bermuda insurer had been sanctioned, but it is very helpful to have a reported decision to that effect.
The Re Amedex decision illustrates the breadth and versatility of transfer schemes under Section 25 and will no doubt be welcomed by professional advisers operating in the runoff industry and their clients.