FEDERAL COURT OF AUSTRALIA MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) [2004] FCA 1773 IN THE MATTER OF DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) and IN THE MATTER OF THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) and IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) TO SWISS REINSURANCE COMPANY (ABN 43 007 479 941) NSD 1436 OF 2004 IN THE MATTER OF DIVISION 3a OF PART III OF THE INSURANCE ACT 1973 (CTH) and IN THE MATTER OF SWISS RE AUSTRALIA LTD (ABN 28 004 360 909) AND SWISS REINSURANCE COMPANY (ABN 43 007 479 941) and IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM SWISS RE AUSTRALIA LTD (ABN 28 004 360 909) TO SWISS REINSURANCE COMPANY (ABN 43 007 479 941) NSD 1437 OF 2004 EMMETT J 24 NOVEMBER 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1436 OF 2004 IN THE MATTER OF DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) IN THE MATTER OF THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) and IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) TO SWISS REINSURANCE COMPANY (ABN 43 007 479 941) JUDGE: EMMETT J DATE OF ORDER: 24 NOVEMBER 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Evidence in matter NSD1436 of 2004 is to be evidence in matter NSD1437 of 2004 and evidence in matter NSD1437 of 2004 is to be evidence in matter NSD1436 of 2004. 2. The Court orders that Exhibit TWC-4 of the affidavit of Timothy Ward Clark affirmed on 23 November 2004 be confidential, and may not be disclosed to any person other than the applicant and the Australian Prudential Regulation Authority ('APRA') until further order. 3. Pursuant to section 17F(1) of the Insurance Act 1973 (Cth), the scheme for the transfer of the general insurance business of the applicant, a copy of which is Exhibit KS-21 to the affidavit of Keith Scott affirmed on 22 November 2004, be confirmed without modification. 4. The order in paragraph 3 is made on the basis that: (a) Condition 2(c) of the Transfer Agreement dated 13 October 2004 between the applicant and Swiss Reinsurance Company (ABN 43 007 479 941), a copy of which is Exhibit KS-20 to the affidavit of Keith Scott affirmed on 22 November 2004, remains to be satisfied prior to 1 January 2005; (b) The applicant will file and serve on the Australian Prudential Regulation Authority (APRA) by 1 January 2005 affidavit evidence verifying such condition has been satisfied by that date; and (c) In the event the condition has not been satisfied by 1 January 2005 the scheme will have no operation. 5. The costs of APRA be paid by the applicant upon agreement, or if agreement cannot be reached such costs are to be assessed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1437 OF 2004 IN THE MATTER OF DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) IN THE MATTER OF SWISS RE AUSTRALIA LTD (ABN 28 004 360 909) AND SWISS REINSURANCE COMPANY (ABN 43 007 479 941) and IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM SWISS RE AUSTRALIA LTD (ABN 28 004 360 909) TO SWISS REINSURANCE COMPANY (ABN 43 007 479 941) JUDGE: EMMETT J DATE OF ORDER: 24 NOVEMBER 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Evidence in matter NSD1436 of 2004 is to be evidence in matter NSD1437 of 2004 and evidence in matter NSD1437 of 2004 is to be evidence in matter NSD1436 of 2004. 2. The Court orders that the following exhibits tendered by the applicant are confidential, and may not be disclosed to any person other than the applicant and the Australian Prudential Regulation Authority ('APRA') until further order: (a) Schedule 3 of Exhibit KS-11 of the affidavit of Keith Scott affirmed 22 November 2004, of Exhibit 1A; (b) Exhibit KS-15 of the affidavit of Keith Scott affirmed 22 November 2004, of Exhibit 1A; (c) Exhibit JC-4 of the affidavit of Jeremy Challen affirmed 19 November 2004, of Exhibit 2A; (d) Exhibit TWC-3 of the affidavit of Timothy Ward Clark affirmed 23 November 2004. 3. Pursuant to section 17F(1) of the Insurance Act 1973 (Cth), the scheme for the transfer of the general insurance business of the applicant, a copy of which is Exhibit KS-12 to the affidavit of Keith Scott affirmed on 22 November 2004, be confirmed without modification. 4. The order in paragraph 3 is made on the basis that: (a) Condition 2(c) of the Transfer Agreement dated 13 October 2004 between the applicant and Swiss Reinsurance Company (ABN 43 007 479 941), a copy of which is Exhibit KS-11 to the affidavit of Keith Scott affirmed on 22 November 2004, remains to be satisfied prior to 1 January 2005; (b) The applicant will file and serve on the Australian Prudential Regulation Authority (APRA) by 1 January 2005 affidavit evidence verifying such condition has been satisfied by that date; and (c) In the event the condition has not been satisfied by 1 January 2005 the scheme will have no operation. 5. The costs of APRA be paid by the applicant upon agreement, or if agreement cannot be reached such costs are to be assessed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY IN THE MATTER OF DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) NSD 1436 OF 2004 IN THE MATTER OF THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) and IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AUSTRALIA LIMITED (ABN 35 000 172 350) TO SWISS REINSURANCE COMPANY (ABN 43 007 479 941) IN THE MATTER OF DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH) NSD 1437 OF 2004 IN THE MATTER OF SWISS RE AUSTRALIA LTD (ABN 28 004 360 909) AND SWISS REINSURANCE COMPANY (ABN 43 007 479 941) and IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM SWISS RE AUSTRALIA LTD (ABN 28 004 360 909) TO SWISS REINSURANCE COMPANY (ABN 43 007 479 941) JUDGE: EMMETT J DATE: 24 NOVEMBER 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me two applications for confirmation, under s 17F of the Insurance Act 1973 (Cth) ('the Act'), of schemes relating to the transfer of the insurance business of general insurers. The two proposed transferors are wholly owned subsidiaries of Swiss Reinsurance Company ('Swiss Re'). The transferors are Swiss Re Australia Limited ('SRAL') and the Mercantile and General Reinsurance Company of Australia Limited ('M&G'). M&G is a wholly owned subsidiary of SRAL, which in turn is a wholly owned subsidiary of Swiss Re. Swiss Re is incorporated in Switzerland and is a large global general life and health reinsurer. It has offices in 34 countries and employs approximately 8000 people. 2 As at 31 December 2003, Swiss Re had total assets of 169,698 million Swiss francs and total liabilities of 151,187 million Swiss francs. Swiss Re is registered in Australia as a foreign corporation under Part 5B.2 of the Corporations Act 2001 (Cth) and is licensed as a general insurer under the Act. While the Australian branch of Swiss Re ('SRAB') is not a separate legal entity, it is treated as such for prudential purposes. There is a general requirement under the Act that insurers maintain in Australia assets at least equal to the value of their liabilities. Prudential standards enforced in respect of general insurers refined that general position in the case of foreign insurers, requiring them to maintain assets in Australia in excess of their liabilities in an amount at least equal to their minimum capital requirement as that is determined in accordance with Prudential Standard GPS 110 published by the Australian Prudential Regulation Authority ('APRA'). 3 Swiss Re maintains separate accounts for its Australian operations. Those accounts depict the financial condition of a notional entity referred to as the Australian branch. That notional division between Swiss Re's Australian operations and its other operations is reinforced by restrictions imposed on the ability of a foreign insurer to deal with its Australian assets. That is to say, it may not reduce its Australian assets without the prior approval of APRA. The effect is that the non-Australian assets and liabilities of a foreign insurer such as Swiss Re are ignored. As at 31 December 2003, SRAB had total assets of $941 million and total liabilities of $548 million. 4 SRAL is incorporated in Victoria and is also an authorised general insurer under the Act. SRAL is the Swiss Re group's principal reinsurance underwriter in Australia and New Zealand and writes reinsurance across all lines and types of business, other than life and health reinsurance. SRAL writes a small amount of direct insurance amounting to about 5 per cent of its business. 5 M&G is incorporated in New South Wales and has operations in Australia and also has a New Zealand branch. M&G does not employ any staff and its operations are managed and run by employees of SRAL. M&G ceased to be an authorised general insurer on 21 June 2002. It is now authorised to conduct an insurance and reinsurance business solely for the purpose of discharging liabilities that arise under policies written before that date. It was placed in run-off from 1 January 1997 and its current business relates solely to discharging liabilities on policies written before that time. 6 Section 17B(1) of the Act provides that no part of the insurance business of a general insurer may be transferred to another general insurer or amalgamated with the business of another general insurer except under a scheme confirmed by the Federal Court. Section 17E provides that a party or body corporate affected by a scheme may apply to the Court for confirmation of the scheme. An application for confirmation must be made in accordance with the prudential standards and APRA is entitled to be heard on an application. Section 17F(1) then provides that the Federal Court may confirm a scheme without modification, confirm the scheme subject to such modifications as it thinks appropriate or refuse to confirm the scheme. Section 17F(2) provides that the Court may make such orders as it thinks fit in relation to reinsurance. 7 Under s 17G, when a scheme is confirmed, it becomes binding on all persons and it has effect in spite of anything in the constitution of any body corporate affected by the scheme. The body corporate on whose application the scheme is confirmed must cause a copy of it to be lodged at an office of the Australian Securities and Investment Commission in every State and Territory in which a company affected by the scheme carries on business. 8 Section 17B(4) provides that the prohibition in s 17B(1) does not require that a transfer or amalgamation of insurance business be made under a scheme approved by the Court if, immediately before the transfer or amalgamation, the insurance business is carried on outside Australia and the transfer or amalgamation will result in the insurance business being carried on outside Australia. The applications before me each involve, in part, the transfer to SRAB insurance or reinsurance policies written through the New Zealand branch of either M&G or SRAL. In those circumstances, the insurance business being transferred, although carried on outside of Australia prior to the transfer, will be carried on within Australia following the transfer. The effect of the proposed schemes is that the New Zealand liabilities of SRAL and M&G will become liabilities in Australia of SRAB. 9 The components of the scheme that are concerned with New Zealand are also the subject of an application to the High Court of New Zealand. That application is listed for hearing on 8 December 2004 and the approval of the New Zealand High Court is a condition precedent to the schemes becoming effective. Because the approval of the New Zealand High Court operates as a condition precedent, the Federal Court will not be in the position of authorising the transfer of New Zealand policies in the event of the New Zealand High Court refusing to allow such a transfer. 10 Section 17C of the Act sets out the steps to be taken before an application for confirmation. Those steps do not have to be taken prior to the filing of an application to the court. They are required only to have been taken prior to the time when the Court is moved for an order confirming the scheme. 11 On 29 October 2004, I made orders in accordance with an application then made on behalf of each of M&G and SRAL, waiving compliance with certain of the requirements of the Act subject to the steps then directed being carried out. I am satisfied from the evidence that has been filed by way of affidavit and read on the hearing of the applications that all of the steps required to be taken have been taken and that there has been, except for a minor departure, compliance with the directions that I gave on 29 October 2004. The question, therefore, is whether on a detailed examination of the schemes, the Court is satisfied that the interests of policy holders either of SRAL and M&G or the Australian branch of Swiss Re will not be prejudiced by the implementation of the schemes. 12 Both schemes are part of a reorganisation of the Swiss Re group's Australian and New Zealand operations. No policy holders currently outside the group will be brought into the group and no policy holders of the group will be transferred to an insurer outside the group. The evidence indicates that the reorganisation is driven by a desire to make the Australian and New Zealand operations of Swiss Re more efficient. In one sense, those operations are presently being conducted through five different entities, namely, SRAB, SRAL, the New Zealand branch of SRAL and the New Zealand branch of M&G together with M&G. 13 The splintering of one business into those five entities produces significant costs and inefficiencies. Estimates have been provided that approximately $500,000 will be saved each year, in direct legal, regulatory and audit costs as a consequence of the proposed reorganisation. Considerable time and effort on the part of employees of the group will also be saved. It is proposed that, if the schemes become effective, all staff of SRAL will be transferred to the Australian branch of Swiss Re and the insurance authorisations of SRAL and M&G will be cancelled. It is also proposed that the capital remaining in SRAL and M&G will be used to repay an intra group loan, part of the remainder will be repatriated to Switzerland as a dividend paid to Swiss Re. 14 The two schemes are essentially identical so far as their operative provisions are concerned. In each case a transfer agreement has been entered into between the transferor on the one hand and Swiss Re on the other. The operative provision of the transfer agreement is clause 3, which provides that on the Effective Date, which is 1 January 2005, for the consideration set out in clause 4, SRAL will transfer and SRAB agrees to accept the transfer of the business of issuing contracts of reinsurance or insurance carried on by SRAL in Australia and New Zealand, and in particular the transfer of the reinsurance and insurance contracts as defined and the business assets as defined. 15 Under clause 4.1, in respect of SRAB's assumption of all liabilities under and any benefits arising under the reinsurance and insurance contracts, SRAL is to pay to SRAB an amount equal to the 'transfer value', as defined, and SRAL is to discharge its obligation to pay the transfer value by paying such an amount in cash and transferring investments having a value equal to the 'transfer amount', as defined. Transfer value means the amount calculated by reference to the audited statutory accounts in so far as they relate to the Australian assets and liabilities of SRAL for the year ending 31 December 2004 in accordance with the methodology set out in a schedule to the agreement. 'Value', in relation to investments, means the value that would be ascribed to an investment on a particular day using the same methodology. 16 The transfer agreement contains provisions for completion to take place on the effective date and for an adjustment to be made when the statutory accounts as at 31 December 2004 are available. In the meantime, a payment is to be made on the Effective Date by reference to the accounts of the transferor as at 30 September 2004. The scheme for which confirmation is sought adopts definitions identical to those in the transfer agreement. 17 By paragraph 2 of the scheme, on the Effective Date SRAL transfers to SRAB the 'business', as defined, and in particular the 'Reinsurance and Insurance Contracts', as defined. Under paragraph 3, SRAL agrees to transfer cash or investments to SRAB equal in value to the transfer value. By paragraph 4, on and from the Effective Date, SRAL transfers to SRAB and SRAB accepts the transfer of the Reinsurance and Insurance Contracts and SRAB assumes and takes over and shall indemnify and keep SRAL indemnified from and against all claims under or in connection with the liabilities under the Reinsurance and Insurance Contracts. For that purpose, SRAB has executed a deed poll confirming that it will make payment of claims in relation to the Reinsurance and Insurance Contracts written by SRAL through its New Zealand branch and its office in Sydney unless previously paid elsewhere. On or from the Effective Date, the assumed liabilities are to be liabilities of SRAB which it is required to satisfy through its Australian branch. As I have indicated, the transfer agreement and scheme for M&G follows the same outline. 18 I have before me the evidence of two actuaries concerning the effect of the scheme on the policy holders of SRAL and M&G on the one hand and SRAB on the other. Mr Timothy Ward Clark is the approved actuary of Swiss Re, SRAL, M&G and SRAB. Mr Clark has prepared reports in relation to the schemes having been asked to investigate whether the interests of the policy holders are adequately protected under the schemes. Mr Clark describes the effect of the schemes on the policy holders. 19 As a result of the schemes, SRAL's policy holders will be transferred from a company with a solvency ratio of 263 per cent to a company with a solvency ratio of 158 per cent. M&G's policy holders will be transferred from a company with a solvency ratio of 588 per cent to a company with a solvency ratio of 158 per cent and SRAB's policy holders will find that the solvency ratio of their insurer is reduced as a result of the schemes from 342 per cent to 158 per cent. In one sense, therefore, the policy holders of all three companies are detrimentally affected by the schemes. Mr Clark has described in his report how the solvency ratios are determined and has referred to arrangements in place to the effect that, following implementation of the schemes, SRAB will maintain a solvency ratio of at least 150 per cent. 20 That intention is reflected in a capital management plan submitted by Swiss Re to APRA. The plan provides that, should SRAB's solvency ratio drop below 150 per cent, steps will be taken to raise the solvency ratio back to 150 per cent. Mr Clark describes in his report the effect of the schemes on the policy holders of SRAL, M&G and SRAB, noting that in each case all policy holders will be protected by a balance sheet that is managed under a capital management plan that targets 150 per cent of the APRA minimum, together with the additional protection of the balance sheet of Swiss Re itself, including its foreign assets. Mr Clark expresses the opinion that, as the approved actuary of each of the three companies, he is satisfied that under the schemes and on the basis of the transfer agreements, together with the agreed capital management plan, the interests of all the Australian policy holders are adequately protected. 21 Mr Geoffrey Michael Atkins is a director of Trowbridge Deloitte Limited and a Fellow of the Institute of Actuaries of Australia. Mr Atkins was asked by Mr Clark to undertake an independent review of Mr Clark's report. Mr Atkins has produced a report in response to that request. Mr Atkins examines the effect of the schemes, considering a number of issues, including the issue of excess capital. His conclusion is that Mr Clark's actuarial reports are sound and concurs with the conclusion of Mr Clark that the interests of policy holders are adequately protected following the implementation of the schemes. 22 Under the terms of the schemes, the terms and conditions of all policies will remain unaltered save for the identity of the insurer. As I have indicated, the staff systems and culture of SRAB will be the same as those of SRAL, M&G and SRAB at present. To the extent that the schemes facilitate a return of excess capital to Swiss Re, that capital is in excess of what is required. It is significant that it would be possible, subject to the approval of APRA, for capital to be returned to Swiss Re without the necessity for the schemes. One might assume that, if APRA has no objection to the schemes, then there would have been no difficulty in obtaining APRA's approval for a return of capital by a different method, if that were desired. APRA has been represented on the hearing of these applications and has indicated that the proposals have been examined in detail and that APRA has no objection to this implementation of the schemes. 23 While it is not strictly necessary, according to the terms of the Act, it is appropriate in considering a scheme of the nature of the schemes before me, that the interests of policy holders of the transferee company be examined, notwithstanding that they are not affected policy holders within the meaning of the Act. As I have indicated, the effect of the schemes, on one view, is to affect the interests of existing policy holders of SRAB detrimentally, because their insolvency ratio will be reduced. However, the reduction will not be to a figure that causes any concern. It may be desirable for the Act to be examined with a view to possible amendment to ensure that the interests of policy holders of a transferee company are expressly considered before a scheme of this nature is approved. 24 In all of the circumstances I am satisfied that the Court should confirm the two schemes and I will make orders accordingly. I certify that the preceding twenty-three (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 28 January 2005 Counsel for the Applicant: Mr J T Gleeson SC & Mr N J Owens Solicitor for the Applicant: Allens Arthur Robinson Solicitor for APRA: Ms T Boyce of Australian Government Solicitor Date of Hearing: 24 November 2004 Date of Judgment: 24 November 2004