FEDERAL COURT OF AUSTRALIA Gordian RunOff Limited, in the matter of Gordian RunOff Limited (No 2) [2016] FCA 1498 File number: NSD 1617 of 2016 Judge: ALLSOP CJ Date of judgment: 23 November 2016 Date of publication of reasons: 13 December 2016 Catchwords: INSURANCE – application for transfer of general runoff insurance business – transferor insurer with no outstanding claims liability – scheme confirmed without modification Legislation: Insurance Act 1973 (Cth), ss 16, 17B, 17C, 17E, 17F Cases cited: Gordian RunOff Limited, in the matter of Insurance Australia Limited (No 2) [2011] FCA 1116 Gordian Runoff Limited, in the matter of Gordian Runoff Limited [2016] FCA 1190 In the matter of Reward Insurance Ltd [2004] FCA 151 Re Royal & Sun Alliance Life Assurance Ltd [2000] FCA 1259; 104 FCR 37 Re Westport Insurance Corporation (No 2) [2009] FCA 1598; 181 FCR 530 Date of hearing: 22 November 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Insurance List Category: Catchwords Number of paragraphs: 47 Counsel for the Applicant: Mr M F Newton Solicitor for the Applicant: HWL Ebsworth Lawyers Solicitor for the Australian Prudential Regulation Authority: Mr D Tran, Australian Prudential Regulation Authority Table of Corrections 14 December 2016 The paragraph numbering has been corrected and the paragraph number in the certification and cover page amended accordingly. ORDERS NSD 1617 of 2016 IN THE MATTER OF GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) Applicant JUDGE: ALLSOP CJ DATE OF ORDER: 23 November 2016 THE COURT ORDERS THAT: 1. Pursuant to Section 17F of the Insurance Act 1973 (Cth) (the Act), the scheme for the transfer of all the insurance business of Long Grove Insurance Company Limited (Long Grove) to Gordian Runoff Limited (Gordian) (the Scheme), be confirmed in the form of Annexure "A" attached to these orders. 2. The transfer date for the purposes of the Scheme be 30 November 2016. 3. Pursuant to Section 17F of the Act, all rights and obligations owed to Long Grove pursuant to any reinsurance treaties (other than any reinsurance treaty entered into between Long Grove and any of Lumbermens Mutual Casualty Company, its subsidiaries, its associated mutual insurance company and their respective predecessors, successors and assigns), be transferred to Gordian and any reinsurance treaties to which Long Grove was a party shall be amended by replacing Long Grove with Gordian. 4. Gordian pay the costs of the proceedings of APRA as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ORDERS NSD 1617 of 2016 IN THE MATTER OF GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) GORDIAN RUNOFF LIMITED (ABN 11 052 179 647) Applicant JUDGE: ALLSOP CJ DATE OF ORDER: 6 December 2016 THE COURT ORDERS THAT: 1. Order 2 of the Orders of 23 November 2016 be varied to the following: 2. The transfer date for the purposes of the Scheme is 1 December 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT ALLSOP CJ: 1 I made orders on 23 November 2016, as varied by an order on 6 December 2016, pursuant to s 17F of the Insurance Act 1973 (Cth) (the Act) confirming a scheme for the transfer of all of the insurance business of Long Grove Insurance Company Limited (Long Grove) to Gordian RunOff Limited (Gordian). These are my reasons therefor. background 2 It is necessary to outline briefly the structure and business of both the transferee and transferor insurers. Gordian 3 Gordian is the transferee insurer and the applicant in this matter. It was incorporated in Australia in 1991 and its business consists of two major portfolios, one of direct business (known as Gordian Direct) and one of reinsurance (known as Gordian Re). 4 Gordian entered into runoff in or about September 1999. Its authorisation under the Act was renewed effective 1 July 2002. Certain conditions attach to that authorisation including a prohibition on Gordian underwriting new business and a prohibition on its ability to extract capital without consent from the Australian Prudential Regulation Authority (APRA). 5 Enstar Australia Ltd (Enstar Australia) has managed the business of Gordian, including claims management, since March 2008. Both Gordian and Enstar Australia are wholly owned subsidiaries of the Bermuda based corporate group Enstar Group Limited. Long Grove 6 Long Grove was incorporated in Australia in 1973 and is a corporation authorised by APRA to carry on general insurance runoff business in Australia. It entered into runoff in 1998. 7 Long Grove's ultimate parent is Lumbermens Mutual Casualty Company, which entered into runoff in 2003 and into liquidation in May 2013. 8 Long Grove's business was public and product liability policies and property policies (fire and industrial special risks) for schools, churches, shopping centres, commercial properties, office buildings and residential homes. 9 Long Grove does not employ staff as its management of the runoff business and any compliance and regulatory matters are attended to by QBE Insurance (Australia) Ltd. The Scheme 10 The proposed transfer of the insurance business of Long Grove to Gordian is to be given effect by way of a bilateral Deed of Transfer of Insurance Business entered into by Gordian and Long Gove, whereby Long Grove agreed to pay Gordian approximately A$930,000 and Gordian agreed to pay Long Grove A$2.00 on the 'Transfer Date' as provided for under the Scheme documents. 11 The effect of the Scheme will be that Gordian will replace Long Grove as insurer under every contract of insurance written or assumed by Long Grove prior to the 'Transfer Date', with all liabilities under those contracts, be they known or unknown, to become liabilities of Gordian. In releasing Long Grove of such liabilities, Long Grove will then be in the position to have its authorisation to conduct insurance business in Australia revoked by APRA pursuant to s 16 of the Act. 12 It is the transferee insurer, Gordian, that will then be liable to the transferring policyholders of Long Grove for any future claims in respect of policies written by Long Grove. the legislative scheme 13 The application is brought pursuant to Division 3A of Part III of the Act. 14 Section 17B(1) 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 Court. Section 17B(3) requires the scheme to set out the terms of the agreement or deed under which the proposed transfer or amalgamation is to be carried out; and the particulars of any other arrangements necessary to give effect to the scheme. 15 The application must be made in accordance with the prudential standards as determined by APRA: s 17E(2) of the Act. 16 The procedural requirements attending an application of this kind are set out in s 17C as follows: (1) In this section: affected policyholder means the holder of a policy affected by a scheme. approved summary means a summary approved by APRA. (2) An application for confirmation of a scheme may not be made unless: (a) a copy of the scheme and any actuarial report on which the scheme is based have been given to APRA in accordance with the prudential standards; and (b) notice of intention to make the application has been published by the applicant in accordance with the prudential standards; and (c) an approved summary of the scheme has been given to every affected policyholder. (3) Without limiting the provision that may be made by the prudential standards for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each body corporate affected by the scheme, details of the place and time at which an affected policyholder may obtain a copy of the scheme. (4) An affected policyholder is entitled, on the person's request, to be provided by the company with one copy of the scheme free of charge. (5) The Federal Court may dispense with the need for compliance with paragraph (2)(c) in relation to a particular scheme if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with. 17 The requirement to provide every affected policyholder with an approved summary of the scheme under s 17C(2)(c) was dispensed with by orders of the Court made on 6 October 2016 on account of the fact that the records obtained by the applicant were insufficient to identify or make contact with every affected policyholder of Long Grove: see Gordian Runoff Limited, in the matter of Gordian Runoff Limited [2016] FCA 1190. Instead, the applicant was required to take additional steps to ensure, as far as possible, that notification of the scheme reached those affected policyholders whom it could not identify in the records. 18 Section 17F deals with the Court's discretion to confirm a scheme. It provides: (1) The Federal Court may: (a) confirm a scheme without modification; or (b) confirm the scheme subject to such modifications as it thinks appropriate; or (c) refuse to confirm the scheme. (1A) In deciding whether to confirm a scheme (with or without modifications), the Federal Court must have regard to: (a) the interests of the policyholders of a body corporate affected by the scheme; and (b) if a report relevant to all or part of the scheme has been filed with the Court under section 62ZI—that report; and (c) any other matter the Court considers relevant. (2) The Federal Court may make such orders as it thinks fit in relation to reinsurance. 19 In particular, the Court will have regard to the interests of the transferring as well as remaining policyholders, in this case the policyholders of Long Grove and Gordian. The Court will consider, on the basis of actuarial evidence brought in support of the application, whether the implementation of the scheme will materially detrimentally affect the policyholders: see Re Westport Insurance Corporation (No 2) [2009] FCA 1598; 181 FCR 530 at 535 [32] per Lindgren J. In this respect, the Court will consider changes to financial profile or risk profile that may be experienced by policyholders, as well as any issues attaching to claims management or changes to contractual terms of the transferring policies. A 'prime consideration' is 'nature of the actual or potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer': see In the matter of Reward Insurance Ltd [2004] FCA 151 at [3] per Heerey J. Evidence Actuarial Evidence 20 The actuarial evidence in this matter was prepared by Mr Rick Shaw, an actuary and partner of Deloitte Actuaries & Consultants Limited. Mr Shaw discusses the impact of the proposed scheme in an affidavit, affirmed 15 November 2016, and in an actuarial report dated 27 June 2016 (the Actuarial Report). 21 The actuarial evidence assists the Court by providing an assessment or estimate of the transferring liabilities of Long Grove policies now and into the future as well as the key financial metrics of the transferee insurer that provide insight into its ability to meet any future liabilities under the transferred contracts. 22 Mr Shaw conducted a review of Long Grove's insurance policies and historic claim data, which showed that no claim has been reported since 2002, with the most recent claim having been settled in 2005: see [8] of the affidavit of Rick Shaw. Mr Shaw estimates Long Grove's outstanding claims liability to be zero (at [8]) and its known liabilities at all estimated probabilities of sufficiency to be nil (at [9]). 23 In both his affidavit and Actuarial Report, Mr Shaw discusses the various policies underwritten by Long Grove, and the possibility of any latent claims that may be transferred to Gordian. The property policies of Long Grove were written on a "claims made basis" and thereby any valid claims were required to be notified during the policy period. As Long Grove's most recent contracts in that area expired in 2000, there is no exposure to claims on any of Long Grove's property policies. 24 The casualty risks covered by public and product liability policies of Long Grove, by contrast, were mostly written on a "losses occurring" basis, where claims attach to the policy in operation at the time of the event which gives rise to the claim. While this raises the real possibility of latent claims, Mr Shaw's review revealed that as at this time, the types of casualty policies underwritten by Long Grove did not give rise to claims with long reporting delays. 25 The Actuarial Report at p 6 notes five categories of policies written by Long Grove that may be associated with latent claims, namely health hazards (including blood products); product related hazards (including asbestos related exposure); other product related hazards (including exposure to materials such as silica, toxic mould, tobacco, lead, farming chemicals etc.); industrial claims; and public liability claims (including venues hired by infant care homes, religious organisations and other organisations). 26 Mr Shaw's conclusion is that Long Grove has no remaining likely exposure to latent claims in these areas. While asbestos related exposure claims are recognised as having a particularly long latency period, Mr Shaw notes that 'most entities have a good understanding of asbestos exposures and new notifications in recent years have been in respect of insureds where previous asbestos claims have been notified and the exposure already established' (p 7 of the Actuarial Report). As Long Grove has received no valid notification of asbestos liabilities to date, its exposure to future asbestos related claims is assessed by Mr Shaw as zero. 27 In relation to public liability claims, Mr Shaw notes that the claims arising from these policies typically involve accidents which occur during the period of venue hire. Mr Shaw states that claims arising from mistreatment or abuse would be directed to the organisations hiring the venue and are not covered under Long Grove's policies. 28 The actuarial opinion therefore is that 'Long Grove's exposure is extinguished and Long Grove has no liabilities in respect of insurance business carried out by it in Australia' (affidavit of Rick Shaw at [20]). This is relevant for the purposes of assessing the impact of confirmation of the Scheme on existing Gordian policyholders. The evidence indicates that they will experience no material detriment in light of the fact that no additional liabilities at any estimable probability of sufficiency are to be assumed by Gordian. Gordian has a larger balance sheet than Long Grove and the payment of the transfer sum will result in an increase of Gordian's solvency coverage ratio from 4.40 to 4.45 (Actuarial Report, p 11). 29 Transferring Long Grove policyholders are entering a much larger pool of assets. As at 31 December 2015, Long Grove reported net assets of $3,550,000 and a PCA coverage ratio of 1.78 at both a 75% and 99.5% probability of sufficiency. Based on Gordian's position as at 31 December 2015, the effect of the transfer will be that Long Grove policyholders would have claims against an entity with net assets of A$473,398,000 and a PCA coverage of 4.45. Mr Shaw's conclusion therefore is that the transfer would offer adequate protection to policyholders. The evidence from the financial information as at 31 December 2015 is that the total of the capital base and the risk margin, representing capital in excess of the 99.5% estimate of liabilities, is $1.6 million for Long Grove and would be $77.1 million for Gordian following the proposed transfer (Actuarial Report, p 11). Thus, even if the claims assessment turns out to be overly optimistic, the policyholders will have a larger entity and more assets to respond to any claims. 30 The transfer will see any claims administration for Long Grove managed by Enstar. Given that no claims are expected to arise, however, there will be no additional costs to be assumed by Enstar as regards claims handling or policy management expenses (Actuarial Report, p 10). 31 Mr Shaw reviewed APRA Form 110 detailing Gordian's capital position for the period up to 30 September 2016 and noted that nothing in that Form changes the conclusions reached by him in the Actuarial Report (affidavit of Rick Shaw at [25]). 32 The actuarial evidence before me therefore provides a satisfactory basis to conclude that no material detriment is to be experienced by either the transferring or remaining policyholders as a result of the scheme. I so conclude. Procedural Evidence 33 Section 17C(2)(a) of the Act, along with para 5 of Prudential Standard GPS 410, Transfer and Amalgamation of Insurance Business for General Insurers (GPS 410), requires the applicant, before making an application for confirmation of a scheme, to provide to APRA a copy of the scheme and any actuarial report on which it is based. 34 I am satisfied from the evidence exhibited to the affidavit of Ms Sandra O'Sullivan, Chief Executive and Financial Officer of Enstar Australia, sworn 14 November 2016, that these documents were provided to APRA on 8 July 2015 as required (see Exhibit #SOS2, pp 1-2). I am also satisfied that the summary of the Scheme and notice of intention was approved by a delegate of APRA on 15 September 2016 as required by GPS 410 at [8] and [9] (see Exhibit #SOS2, p 3-4). 35 The applicant, prior to the date on which the Scheme documents are to be made available for public inspection, is required to publish a notice of intention to make the application: see s 17C(2)(b). GPS 410 at [9] specifies that the notice must be published in the Government Gazette and one or more newspapers, approved by APRA, circulating in each State or Territory in which an affected policyholder resides. I also made orders to this effect at the dispensation hearing. The affidavit of Mr Vu Pham, Manager of Actuarial Services of Enstar Australia, sworn 11 November 2016 exhibits evidence that the notice was published in all the approved newspapers on 17 October 2016 (see Exhibit #VP1, pp 15-23) 36 On 6 October 2016, I made orders pursuant to s 17C(5) of the Act dispensing with the need for the applicant to comply with s 17C(2)(c) of the Act, which requires the summary of scheme to be given to every affected policyholder, on the condition that certain additional procedural steps were taken by the applicant. 37 Order 5 was directed to the public inspection period as follows: 5. The applicant make a copy of the proposed scheme, summary of the proposed scheme, notice of intention and actuarial report available for inspection for a period of at least 15 business days (between the hours of 9:00 am and 5:00 pm Monday to Friday), prior to the date on which the proposed scheme is to be confirmed by the Court, at the locations approved by APRA under Prudential Standard GPS 410 in each State and Territory of Australia in which an affected policyholder resides. 38 The affidavit of Mr Mark Kimberley, Partner of HWL Ebsworth Lawyers, sworn 15 November 2016, satisfies me that the Scheme was made available for inspection in the approved locations between the hours of 9.00am to 5.00pm in the period commencing on 19 October 2016 and concluding on 10 November 2016. Mr Kimberley received an e-mail response from each of the responsible persons at the inspection sites that confirmed compliance with this requirement. The affidavit of Mr Vu Pham, sworn 11 November 2016, at [19] also confirms that the scheme was available for inspection at Enstar Australia's Sydney office between the hours of 9.00am and 5.00pm on 19 October 2016 to 10 November 2016 inclusive. 39 Order 2 made on 6 October 2016 required Gordian, prior to the date on which the Scheme documents are to be made available for public inspection, to cause a copy of the approved summary to be sent by prepaid post to all persons identified, as at that date, as affected policyholders that have been identified from the records and the publically available sources for which the applicant has an address. The affidavit of Mr Vu Pham, sworn 11 November 2016 at [12] to [15] confirms that Mr Pham caused to be sent by post the Scheme Summary to the 560 affected policyholders registered with ASIC, 21 of which had overseas addresses. 84 envelopes were returned by way of return to sender, for which alternative addresses could not be found. No further steps were taken in this regard. 40 The proposed scheme, summary of proposed scheme, notice of intention and the Actuarial Report were also required by Order 4 to be available on Enstar's website. A screenshot of the website link to the documents is exhibited to the affidavit of Mr Pham. The link was live on the website from 14 October 2016 to the date of the hearing (see Exhibit #VP1 p 33). 41 Gordian was required by Order 6 to provide a copy of the Scheme documents to any policyholders on request. No such request was made (see affidavit of Mr Mark Kimberley at [16] and of Vu Pham at [18]). 42 Order 6 was that the applicant pay APRA's costs of the interlocutory application filed on 20 September 2016 as agreed or assessed. This was not complied with because the costs have not been agreed or assessed to date. 43 The totality of the evidence demonstrates that the procedural requirements arising from the Act, the prudential standards and the orders of the dispensation hearing were carried out by the applicant in a diligent fashion. 44 It is through these steps that the affected policyholders were given adequate notice of the scheme and an opportunity to comment or refrain from commenting upon it. No affected policyholders of Long Grove or Gordian opposed the confirmation of the Scheme at the final hearing. The view of apra 45 APRA, which under s 17E(3) of the Act is entitled to be heard on an application for confirmation, expressed no objection to any aspect of the scheme. Mr Tran, the solicitor for APRA who appeared at the hearing, noted that APRA reviewed the relevant documents, consulted internally, including receiving APRA's internal actuarial advice, and communicated its recommendations to the applicant, which were duly adopted in the final Scheme documents. 46 The non-objection of APRA to any of the proposed orders is a factor that goes to the Court's discretion to confirm such a scheme: see Gordian RunOff Limited, in the matter of Insurance Australia Limited (No 2) [2011] FCA 1116 at [31]; Re Royal & Sun Alliance Life Assurance Ltd [2000] FCA 1259; 104 FCR 37 at 40-41 [24]–[27] per Katz J Conclusion 47 For the above reasons and in light of the evidence placed before the Court, I was satisfied to make orders that the scheme be confirmed without modification. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop. Associate: Dated: 13 December 2016