FEDERAL COURT OF AUSTRALIA NULIFE Insurance Ltd ACN 008 406 737 v Norwich Union Life Australia Ltd [2005] FCA 1635 THE APPLICATION OF NULIFE INSURANCE LTD ACN 008 406 737 AND NORWICH UNION LIFE AUSTRALIA LTD ACN 006 783 295 NSD1515 OF 2005 EMMETT J 31 OCTOBER 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD1515 OF 2005 THE APPLICATION OF NULIFE INSURANCE LTD ACN 008 406 737 AND NORWICH UNION LIFE AUSTRALIA LTD ACN 006 783 295 JUDGE: EMMETT J DATE OF ORDER: 31 OCTOBER 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to section 191(5) of the Life Insurance Act 1995 ('the Act'), the need for compliance by the applicants with paragraph (2)(c) of section 191 of the Act, by giving to policy owners of NULIFE Insurance Limited ('NULIFE') whose current addresses are not recorded with NULIFE an approved summary of the Scheme the subject of this application, be dispensed with. 2. Pursuant to section 194 of the Act, the Scheme for the transfer and amalgamation of the life insurance business of NULIFE with the life insurance business of Norwich Union Life Australia Limited, a copy of which is annexed to these short minutes, be confirmed. 3. The applicants pay the costs of the proceedings of the Australian Prudential Regulation Authority as agreed or taxed. 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 NSD1515 OF 2005 THE APPLICATION OF NULIFE INSURANCE LTD ACN 008 406 737 AND NORWICH UNION LIFE AUSTRALIA LTD ACN 006 783 295 JUDGE: EMMETT J DATE: 31 OCTOBER 2005 PLACE: SYDNEY REASONS FOR JUDGMENT 1 Before the Court is an application, under s 193 of the Life Insurance Act 1995 (Cth) ('the Act'), for confirmation of a scheme pursuant to s 194 of the Act. Section 190(1) provides that no part of the life insurance business of a life company may be transferred to another life company, except under a scheme confirmed by the court. The application is made by NULIFE Insurance Ltd ('NULIFE'), and Norwich Union Life Australia Ltd ('Norwich Union'). Each of them is a life company for the purposes of the Act. It is proposed that the life insurance business of NULIFE, which is conducted through its No 1 Statutory Fund, will be transferred to Norwich Union so as to become part of the business conducted by Norwich Union through its No 1 Statutory Fund. 2 NULIFE's business consists mainly of consumer credit insurance ('CCI'), with an average sum insured of around $7,500. It also includes some mortgage protection insurance ('MPI'), with an average sum insured of around $100,000. The majority of the policies provide death cover. However, a few policies provide additional cover for total and permanent disability ('TPD'). 3 CCI is purchased when obtaining finance to purchase consumer goods. MPI is purchased when obtaining finance to buy a residential property. Both CCI and MPI provide a range of insurance covers, such as disablement, unemployment, death and TPD. The disablement and unemployment cover must be provided by a general insurance company. The death and TPD cover must be provided by a life company. 4 For the most part, NULIFE's policies were issued in connection with one of four different schemes, referred to as 'Adelaide Bank', 'CGU-VACC', 'AIM' and 'TGIO'. Under the policies, the death and TPD cover has been underwritten by NULIFE and the disablement and unemployment cover has been underwritten, or assumed by a policy transfer, by CGU-VACC Insurance Ltd. The latter company is a general insurance company of the Insurance Australia Group. 5 NULIFE no longer transacts new business and its existing business is in rapid decline. That is because of the short-time nature of the business and because refinancing of consumer loans generally results in a new CCI policy being written elsewhere. 6 Most of NULIFE's business allowed the policyholder to purchase a number of years' insurance coverage by paying a single premium at the start of the policy. On cancellation of the policy, before the end of the term, the policy owner is entitled to a refund of some of the premium, which is paid in the form of a surrender value. In addition, a small amount of NULIFE's business is regular premium business. For that business, future premium rates cannot be altered, since the policies do not entitle any review of premium rates by NULIFE. 7 Both NULIFE and Norwich Union are wholly owned subsidiaries of Aviva Group Limited ('Aviva'). Norwich Union is still engaging in new business, whereas NULIFE ceased writing business some years ago. It is no longer economic to maintain both life companies, since that involves duplication of fees and additional expenses, such as the production of separate financial statements. The combining of the business of NULIFE with the No 1 Statutory Fund of Norwich Union will result in significant cost savings. 8 There are a number of overheads associated with the separate corporate and licensing structure of NULIFE. The proposal is that the NULIFE policies, which are currently comprised in its small No 1 Statutory Fund, will be transferred to and amalgamated with a much larger statutory fund which will provide much more scope for the more efficient investment of the combined assets. At present, NULIFE shares the same staffing and management structure as Norwich Union, and the proposed transfer of business can take place with minimal changes to existing systems, processes, staffing and management structure without any disruption to either business. 9 There are only 4,795 policies referable to NULIFE's No 1 Statutory Fund. All the business is non-investment linked. Norwich Union has a full range of life insurance products and operates four statutory funds. The No 1 Statutory Fund of Norwich Union is maintained in respect of non-investment linked business. The other three statutory funds consist of investment or unit linked business and are not affected by the proposed scheme. 10 NULIFE had a reinsurance treaty in place with ANZ Life Assurance Company Ltd. That treaty has been transferred to ING Life Ltd ('ING'). ING has consented to the novation of the treaty with Norwich Union. 11 By an agreement between NULIFE and Norwich Union, bearing the date 5 August 2005 ('the Transfer Agreement'), NULIFE and Norwich Union agreed to the proposed transfer and amalgamation. By clause 3 of the Transfer Agreement, Norwich Union agrees, with effect from and including the effective date, as defined, to assume and take over all liabilities and obligations of NULIFE, under, and in respect of, scheme policies, as defined, and all other liabilities of NULIFE's No 1 Statutory Fund. Norwich Union agrees to indemnity NULIFE from, and against, all of those liabilities as from the effective date. The effective date is defined as the last business day of the calendar month in which the proposed scheme is confirmed by the Court. 12 By clause 4.1 of the Transfer Agreement, NULIFE agrees to transfer to Norwich Union assets of NULIFE's No 1 Statutory Fund, equal in value to the value of the scheme liabilities referred to in clause 3. Upon their transfer, such assets are to become assets of Norwich Union's No 1 Statutory Fund, as provided for in the scheme. The consideration for the assumption of the scheme liabilities by Norwich Union is that transfer of assets by NULIFE. 13 Under clause 4.2 of the Transfer Agreement, the value of the scheme liabilities as at the effective date is to be determined by the actuary of NULIFE appointed under the Act. The assets to be transferred to Norwich Union are to be cash assets, meaning bank deposits, of that value. 14 The Transfer Agreement contemplates that completion of the transactions is to take place on, or as soon as practicable after, the effective date, when NULIFE will, when requested by Norwich Union, execute and deliver all such assignments, transfers and other documents as Norwich Union may require, to vest in Norwich Union ownership of, and title in, the assets of NULIFE's No 1 Statutory Fund agreed to be transferred under the Transfer Agreement. 15 The scheme propounded for the Court's confirmation involves a transfer and assumption of liabilities and a transfer of assets as contemplated by the Transfer Agreement. The Transfer Agreement itself is conditional upon confirmation of the scheme by the Court and the relevant Minister making a go ahead decisionwith respect to the proposed transfer pursuant to the Insurance Acquisitions and Takeovers Act 1991 (Cth) ('the Takeovers Act'). 16 A delegate of the relevant Minister under the Takeovers Act, namely the Treasurer, by Notice of Unconditional Go Ahead Decision, dated 25 August 2005, has decided that the Commonwealth Government has no objection to the acquisition by Norwich Union of assets of NULIFE, and the acquisition by Norwich Union of interests, rights or benefits of NULIFE under its contracts of insurance. I am satisfied that that condition has therefore been satisfied. 17 Mr Robert John Donaghy is a Fellow of the Institute of Actuaries of Australia and is the appointed actuary of NULIFE and of Norwich Union under the Act. Mr Donaghy has prepared an actuarial report upon which the scheme is based. Mr Donaghy says that the purpose of his report was to outline the arrangements under which the transfer of life insurance business from NULIFE to Norwich Union would take place and to provide an actuarial opinion on those arrangements as they might concern the affected policy holders of NULIFE and Norwich Union. 18 Mr Donaghy's opinion may be summarised as follows: (a) The reasonable benefit expectations of the owners of the NULIFE policies will not be adversely affected by the transfer of business to Norwich Union. In particular, the transfer will not result in any changes to NULIFE policy owners' benefits, conditions or guarantees. (b) The reasonable benefit expectations of Norwich Union policy owners will not be adversely affected by the transfer of NULIFE's business to Norwich Union. In particular, the transfer will not result in any changes to Norwich Union's policy owners' benefits, conditions, guarantees or result in a change in future premium rates, the transfer will not affect the benefit expectations of Norwich Union policy holders and the transfer will not effect the expectation of policies that participate in the profits of the business or the benefits that reflect invested performance of supporting assets. (c) The transfer of NULIFE business to Norwich Union's No 1 Statutory Fund will not materially affect the security of NULIFE or Norwich Union policy owners' entitlements. In particular, after the transfer, Norwich Union's No 1 Statutory Fund will continue to meet the regulatory Capital Adequacy Requirements and the security of policy holders entitlements, measured against the regulatory Capital Adequacy Requirement, will not be materially different. (d) The transfer of the NULIFE business to Norwich Union will not result in an inequitable treatment of any group of policy holders. Specifically, the shareholders of NULIFE will meet the costs associated with the transfer, and the NULIFE business, which is classed as ordinary non-participating business, will be transferred to Norwich Union's ordinary non participating class. In his report, Mr Donaghy sets out a detailed summary of the figures derived from the accounts of the two companies that give rise to those conclusions. By supplementary report, dated 27 October 2005, Mr Donaghy confirmed that the opinions summarised above remain unchanged. 19 Mr Donaghy also expressed the opinion, in his supplementary report, that, as at the expected effective date, there will be sufficient assets in the No 1 Statutory Fund of NULIFE to cover the scheme liabilities at the effective date of the transfer. That additional opinion is expressed following a query raised by Hely J when the matter first came before his Honour on 15 September 2005. The supplementary report makes clear that there are substantial assets of the NULIFE No 1 Statutory Fund in excess of its liabilities, as at 30 September 2005. As at that date, the total policy liabilities were valued at $102,785 and there were assets in excess of those liabilities in the sum of $913,119. Those figures showed a strong increase in the coverage ratio from 30 June 2005, by reason of the reduction in policy liabilities caused by the continuing run off of the underlying portfolio as loan balances reduce or loans are repaid or refinanced. 20 In accordance with the requirements of s 191(2) of the Act, a copy of the proposed scheme and Mr Donaghy's actuarial report have been given to Australian Prudential Regulation Authority ('APRA'), in accordance with the regulations made under the Act. In accordance with the Regulations, APRA has approved the form of notice of intention to make the application to the Court that has been published by NULIFE and Norwich Union. APRA has also approved the list of newspapers in which that notice must be published and the summary of the scheme that has been given to every affected policy holder, subject to the dispensation referred to below. Finally, APRA has confirmed that it has no objection to NULIFE and Norwich Union proceeding with their application to the Court for confirmation of the scheme. 21 For reasons that Hely J gave on 15 September 2005, his Honour dispensed with the need for compliance by the applicants with s 191(2)(c) of the Act, by giving to the owners of policies that are referable to the No 1 Statutory Fund of Norwich Union an approved summary of the scheme for the transfer and amalgamation of the two businesses. NULIFE and Norwich Union also seek further dispensation in relation to the requirement of the Act for an approved summary of the scheme to be given to certain policy holders of NULIFE. 22 The name and address records of NULIFE policy holders are held on computer systems maintained by CGU Insurance, the general insurer under those policies for which NULIFE provides the life component. CGU maintains data for NULIFE and makes available the information contained in its databases to NULIFE on request. NULIFE recently became aware that CGU does not have a current mailing address for some of its policyholders. Letters enclosing summaries of the scheme were sent to those policy owners on 23 September 2005, but were subsequently returned by Australia Post. Some 328 letters had been returned by 27 October 2005. 23 NULIFE attempted to contact relevant policy holders by carrying out an electronic White Pages search to identify their new addresses. As a result of that search, NULIFE successfully mailed the scheme and covering letters to a further 80 policy holders. As at 27 October 2005, there was a total of 248, of some 4,100 policy owners, whose addresses were unknown. Having regard to the nature of the business in question, it is understandable that addresses may no longer be current for policy holders. Notice of intention to make this application has been published in accordance with the regulations and APRA has, as I have said, no objection to the Court being asked to dispense with the need for compliance with s 191(2)(c) of the Act. 24 The function of the Court in considering an application for confirmation of a scheme under s 193 of the Act is to ensure that the scheme will not be prejudicial to the interests of policy owners and that the interests of policy holders will be properly safeguarded. The Court should be concerned that there is not likely to be any material detriment to policy holders affected by the scheme. 25 I have already referred to the opinions expressed by Mr Donaghy. In June 2005, Mr Clive Graham Aaron, a fellow of the Institute of Actuaries of Australia, was requested by Aviva to conduct an independent review of the scheme. Mr Aaron is a principal of the Tillinghast business of Towers Perrin. By a report of 25 July 2005, Mr Aaron confirmed that a review had been conducted and that he was of the opinion that the policy owners of NULIFE and Norwich Union would not be adversely affected by the scheme. 26 In particular Mr Aaron expressed the opinion that: 1. The benefit expectations of NULIFE policy owners should not be adversely affected; 2. The scheme should not materially affect the security of NULIFE policy owners; 3. The benefit expectations of Norwich Union policy owners should not be adversely affected; 4. The scheme should not materially affect the security of Norwich Union policy owners. 27 The NULIFE business is in run-off and has not written new business for approximately three years. There are clear benefits in the saving of administrative costs by the amalgamation of the two businesses. It is of relevance that APRA has declined to exercise the discretion conferred upon it under s 192 of the Act. By s 192(1), APRA may arrange for an independent actuary to make a written report on a proposed scheme. In the light of the failure to exercise that discretion, the Court is entitled to assume that APRA is satisfied, from the material presently provided, in the form of the reports of Mr Donaghy and Mr Aaron, that there is adequate evidence that none of the policy owners of NULIFE or Norwich Union will be adversely affected by the scheme. 28 The requirements of the Act for the notification and publication of the intention to apply for confirmation of the scheme have been complied with. No policy owner has communicated any opposition to, or concern with, the scheme. Subject to ordering dispensation with the need for compliance with certain requirements, to which I have referred, all of the procedural and formal requirements of the Act and the regulations have been complied with. The evidence upon which that conclusion is based consists of a total of 24 affidavits. 29 In all of the circumstances I am satisfied that the Court should confirm the scheme without modification and that the Court should dispense with the need for compliance with s 191(2)(c) in relation to those policy holders of NULIFE whose addresses are no longer ascertainable. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 22 November 2005 Counsel for the Applicant and Norwich Union Life Australia Ltd: Mr R.S. Hollo Solicitors for the Applicant: Minter Ellison Solicitors for the Australian Prudential Regulation Authority: Australian Government Solicitor Date of Hearing: 31 October 2005 Date of Judgment: 31 October 2005