FEDERAL COURT OF AUSTRALIA AXIS Specialty Europe SE (Australia Branch), in the matter of AXIS Specialty Europe SE (Australia Branch) [2016] FCA 1594 File number: NSD 2034 of 2016 Judge: ALLSOP CJ Date of judgment: 9 December 2016 Date of publication of reasons: 3 February 2017 Catchwords: INSURANCE – application for transfer of insurance business – application for dispensation from compliance with s 17C(2)(c) of the Insurance Act 1973 (Cth) – where every affected policyholder cannot be identified from the policyholder records – dispensation orders granted Legislation: Insurance Act 1973 (Cth), s 17C, 17F Cases cited: Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983 W.R. Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) [2016] FCA 374 Insurance Australia Limited, in the application of Insurance Australia Limited [2016] FCA 1387 Date of hearing: 9 December 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: 45 Counsel for the Applicant: Mr M Izzo Solicitor for the Applicant: HWL Ebsworth Lawyers Solicitor for the Australian Prudential Regulation Authority (APRA): Ms S Neumueller, Australian Prudential Regulation Authority ORDERS NSD 2034 of 2016 IN THE MATTER OF AXIS SPECIALTY EUROPE SE (AUSTRALIA BRANCH) (ABN 19 131 203 122) AXIS SPECIALTY EUROPE SE (AUSTRALIA BRANCH) (ABN 19 131 203 122) Applicant JUDGE: ALLSOP CJ DATE OF ORDER: 9 DECEMBER 2016 THE COURT ORDERS THAT: 1. Pursuant to Section 17C(5) of the Insurance Act 1973 (Cth) (the Act) the need for the Applicant to comply with Section 17C(2)(c) of the Act be dispensed with on condition that the Applicant complies with Orders 2, 3, 4, 5, 6 and 7 below. 2. Prior to the date on which the scheme documents are to be made available for public inspection, the Applicant cause a copy of the approved summary of the proposed scheme (Scheme Summary) to be sent by pre-paid post to: 2.1 all persons identified, as at that date, as affected policyholders that have been identified from records and from the publicly available sources for which the Applicant has an address; 2.2 where a valid address of such affected policyholders is unascertainable, to the address of the broker or agent for such affected policyholder who placed the business when it was originally underwritten. 3. Prior to the date on which the scheme documents are to be made available for public inspection, the Applicant cause the Notice of Intention (as approved by APRA) providing notification of the proposed Scheme to be placed in the following newspapers approved by APRA in circulation in each State and Territory of Australia, in addition to the Government Gazette and the New Zealand Herald: 3.1 Australia Wide - Australian Financial Review; 3.2 New South Wales – The Sydney Morning Herald; 3.3 Victoria – The Age; 3.4 Queensland – The Courier-Mail; 3.5 Western Australia – The West Australian; 3.6 South Australia – The Advertiser; 3.7 Tasmania – The Mercury; 3.8 Northern Territory – The Northern Territory News; and 3.9 ACT – The Canberra Times. 4. Prior to the date on which the scheme documents are to be made available for public inspection and after the Notice of Intention is published and Scheme Summaries are sent to the affected policyholders, the Applicant cause a copy of: (a) proposed Scheme; (b) Scheme Summary; (c) Notice of Intention; and (d) actuarial report of Warrick Gard of Ernst & Young dated 2 November 2016. to be publically available on the Applicant's website: www.axiscapital.com/Australiadiv3atransferdocs 5. After the Notice of Intention is published and the Scheme Summaries are sent to the affected policyholders, the Applicant make a copy of the proposed Scheme, Scheme Summary, Notice of Intention and the 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 offices of the Applicant at Level 10, 20 Martin Place, Sydney, NSW 2000 and at the locations approved by APRA under Prudential Standard GPS 410 in each State and Territory of Australia in which an affected policyholder resides. 6. The Applicant provide, upon request, to any policyholders that identify themselves as such, a copy of all Scheme documents, free of charge. 7. The Applicant is to pay APRA's costs of this application. 8. The Application filed on 25 November 2016 is listed for hearing on 10 February 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ORDERS NSD 2034 of 2016 IN THE MATTER OF AXIS SPECIALTY EUROPE SE (AUSTRALIA BRANCH) (ABN 19 131 203 122) AXIS SPECIALTY EUROPE SE (AUSTRALIA BRANCH) (ABN 19 131 203 122) Applicant JUDGE: allsop cj DATE OF ORDER: 12 December 2016 THE COURT ORDERS THAT: 1. Order 8 made on 9 December 2016 be varied as follows: 1. The Application filed on 25 November 2016 be listed for hearing on 9 February 2017. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT ALLSOP CJ: 1 The applicant, AXIS Specialty Europe SE (Australia Branch) (ABN 19 131 203 122) (AXIS) has applied to the Court for confirmation pursuant to s 17F(1) of the Insurance Act 1973 (Cth) (the Act) of a proposed scheme providing for the transfer of all of its general insurance business to Swiss Re International SE (Australia Branch) (ABN 38 138 873 211) (Swiss Re). 2 By interlocutory application dated 25 November 2016, as modified by an amended interlocutory application dated 7 December 2016, the applicant sought orders pursuant to s 17C(5) of the Act dispensing with the need for compliance with s 17C(2)(c) of the Act, which requires an approved summary of the scheme to be given to every affected policyholder before an application for confirmation of the scheme is made. 3 I made the dispensation orders sought by the applicant on 9 December 2016, as varied by an order made on 12 December 2016. These are my reasons therefor. background to the scheme 4 Background information relevant to the businesses of AXIS and Swiss Re was set out in the affidavit of Mr Wayne Perry, Head of Finance and Agent in Australia of AXIS, sworn 25 November 2016. AXIS Specialty Europe SE and AXIS 5 AXIS Specialty Europe SE (AXIS Europe) is a company incorporated in Ireland with its registered head office located in Dublin. It has an Australian branch office in Sydney. 6 AXIS is authorised by the Australian Prudential Regulation Authority (APRA) to carry on general insurance runoff business in Australia as a branch operation. 7 It commenced underwriting from 1 July 2008 and its initial focus was directed to professional risks. Prior to 1 July 2008, AXIS Europe underwrote Australian insurance business on a direct basis as an Unauthorised Foreign Insurer (UFI) placed under a multi-year agency agreement with Dexta Corporation Pty Limited (Dexta). Following changes to the regulation of UFIs (which used to be referred to as Direct Offshore Foreign Insurers), AXIS Europe applied for and received authorisation from APRA on 19 May 2008 to carry on insurance business in Australia. 8 In early 2009, the AXIS group acquired Dexta and commenced underwriting the business on a direct basis. During 2010, AXIS added commercial property and energy risks to its portfolio. It also entered a relationship with Specialist Underwriting Agencies (SUA) which extended the portfolio to 'Business Practices Protection' risks and, in 2013, to a so-called iConstruct portfolio, which entered into runoff in early 2015. A marine portfolio also was established during 2013. 9 AXIS ceased writing new business on 8 October 2015 and was placed into runoff. As such, AXIS is restricted to winding up those liabilities arising from insurance and reinsurance contracts entered into prior to its entry into runoff. 10 Mr Perry summaries the broad lines of risks underwritten by AXIS as follows: (a) Professional lines (directors & officers liability, IT & media, employment practices liability, defence cost indemnity, statutory liability); (b) Financial lines (professional indemnity, directors & officers liability, crime); (c) Property and Energy (commercial property, mining, onshore/offshore); (d) Business Practices Protection (BPP); (e) Construction; (f) Marine cargo. Swiss Re International SE and Swiss Re 11 The information pertaining to the business of Swiss Re International SE (SRI) and Swiss Re contained in the affidavit of Mr Perry was based on advice received by him. 12 SRI was originally incorporated in the United Kingdom in 1949 under the name SR International Business Insurance Company Plc. With effect from 1 January 2008, it was re-domiciled to Luxembourg and renamed Swiss Re International SE. SRI is owned by Swiss Re Corporate Solutions Ltd, a company incorporated in Switzerland in 2011. The ultimate parent of SRI is Swiss Re Ltd, a joint stock company or so-called Aktiengesellschaft listed on the Swiss Stock Exchange with its registered office in Zurich, Switzerland. 13 Swiss Re was established and registered in Australia as a foreign company in late 2009. It has operated in Australia since 1 January 2010. Its initial portfolio comprised property and casualty insurance risks in the Australian and New Zealand markets. Since 2012, it has also written captive reinsurance arrangements providing insurance to corporate owners of the captives. 14 While Swiss Re's current portfolio mainly comprises short-tail risks in the areas of commercial property, mining and energy, it has expressed an intention to expand its portfolio in long-tail classes. 15 Mr Perry was advised that the broad categories of risks underwritten by Swiss Re are as follows: (a) Property; (b) Liability; (c) Aviation & aerospace; (d) Executive risks; (e) Professional indemnity; (f) Credit and surety; (g) Agriculture; (h) Marine; (i) Engineering and construction; (j) Personal accident; and (k) Motor hull. 16 Swiss Re's operations are distributed primarily through brokers and facility arrangements with managing general agencies. Proceedings in the High Court of Ireland 17 As AXIS Europe is an Irish entity, proceedings relating to the proposed transfer of its Australian branch are required to be run concurrently in the High Court of Ireland. 18 The Petition filed with the High Court of Ireland was exhibited to the affidavit of Wayne Perry (Exhibit #WP1 at pp 1-19). Orders of the High Court of Ireland made on 5 December 2016 list the Petition for hearing on 1 February 2017 and direct the parties to publish notice of the hearing of the Petition in various Irish newspapers as well as to notify a Maltese incorporated policyholder and a Luxembourg incorporated policyholder of the proposed transfer. 19 The affidavit of Wayne Perry at [27]-[28] explained that the substantive hearing before the High Court of Ireland will take place prior to the final hearing before this Court. Subject to the sanction of the High Court of Ireland to the scheme being obtained, and upon receipt of the perfected order of the High Court of Ireland, the applicant proposes to tender the perfected order as an exhibit at the confirmation hearing before this Court. The legislative scheme 20 Section 17C deals with the procedural steps pertaining to an application of this kind. It provides: 17C Steps to be taken before application for confirmation (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 21 In Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983, Yates J said at [16]: The granting of dispensation pursuant to s 17C(5) of the Act is a matter of considerable importance and should not be regarded as a matter of course: Challenger Life Limited [2004] FCA 618 at [2]-[3]; Munich Reinsurance Company of Australasia Limited [2004] FCA 1391 at [4]. The plain policy intention is that every affected policyholder should be given a summary of the scheme and an opportunity to make submissions to the Court in respect of it on a confirmation application: The Application of Commonwealth Life Ltd & Anor [2003] FCA 501 at [8]; see also Westport Insurance Corporation, in the matter of Westport Insurance Corporation [2009] FCA 1357 at [38]-[39]; HDI-Gerling Australia Insurance Company Pty Limited, in the matter of HDI-Gerling Australia Insurance Company Pty Limited (ABN 16 069 085 196) [2010] FCA 505 at [38]-[39]. The application for dispensation in the present case is not directed to relief from a requirement that might be considered burdensome in particular circumstances. Rather, it is made in recognition that, despite the various inquiries that have been made, it is possible that not every affected policyholder is known. Thus, in a real and practical sense, there is no way of knowing whether purported compliance with s 17C(2)(c) of the Act would be complete compliance, despite efforts directed to that end. Such a case is plainly deserving of a favourable exercise of the discretion, provided the Court can be satisfied that all reasonable efforts have been made to identify all affected policyholders. 22 The Court is required by s 17C(5) to be satisfied that 'the nature of the scheme or the circumstances attending its preparation' mean that compliance with s 17C(2)(c) is not necessary. evidence Searches for policyholder details 23 The affidavit of Wayne Perry exhibits a memorandum describing the steps taken to identify and verify the names of affected policyholders and potential affected policyholders (Exhibit #WP1 at pp 82-88). The key aspects of the exercise are described as: (1) identifying the available sources of policyholder information; (2) reviewing the available sources of policyholder information and the identity of known affected policyholders; and (3) identifying what reasonable steps could be taken to obtain and verify the contact details of the affected policyholders and potential affected policyholders. 24 Policyholder information was collected from various channels including: (1) Directly by AXIS from documents and other information submitted by insurance brokers on behalf of their clients, and entered into the AXIS computerised insurance management systems; (2) By SUA acting pursuant to a Managing General Agency Agreement with AXIS, and entered into AXIS's computerised information management system and subsequently transferred into the relevant AXIS computerised insurance management system via electronic transaction files; or (3) By insurance brokers acting pursuant to a Binding Authority Agreement with AXIS and communicated to AXIS via periodic bordereau report, and then entered into the AXIS computerised insurance management system. 25 The result of the searches was that 3700 records contained incomplete policyholder addresses. Approximately 2500 of such incomplete addresses came from the data collected by SUA. For those incomplete records, SUA were requested to and did provide to AXIS the valid address for each policyholder. For the 1200 incomplete policyholder records from AXIS's own systems, of which almost all marine portfolio address details were found to be incomplete, AXIS undertook further searches through policyholder documents on the computerised insurance management systems, company searches, ABN/ACN searches and Google searches. 26 The result of these further searches was that 1,883 policyholder addresses remain unknown. For these policyholders, however, the address of the relevant agent or broker is ascertainable and is intended to be used in the mail-out. 27 In total, 11,563 affected policyholders were able to be identified. 28 The total policies are written across the following lines of business: Portfolio Number of Policies Professional Lines 8,085 Financial Lines 257 Marine 588 Property 104 SUA 2,529 Total 11,563 29 While most of the policies issued by AXIS have expired, exposures from current and expired policies are considered to be potential across all portfolios, in particular the portfolios of Professional Lines, Financial Lines and SUA due to the long-tail nature of the policies: see affidavit of Wayne Perry at [44]. Underlying Insureds 30 The affidavit of Ms Heather Ballantyne, sworn 5 December 2016, explained at [7] that while AXIS's policies did not include co-insureds, some of its policies provided coverage for subsidiaries and related entities of the named policyholder. AXIS does not separately identify such related entities as insureds. 31 Further, Ms Ballantyne explained at [8] that some of the professional lines policies provided cover not only for the company but also for its directors. The policies provided cover for directors as a class of individuals rather than as named individuals and as such, AXIS keeps no records of the addresses or contact details of individual directors. 32 Recent applications for dispensation in the context of the Act have raised the issue of whether so-called underlying insureds, that is those persons who receive the benefit of insurance cover under master policy arrangements or pursuant to individual terms of policies, are 'affected policyholders' for the purposes of the notification requirement of s 17C(2)(c) of the Act: see W.R. Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) [2016] FCA 374; Insurance Australia Limited, in the application of Insurance Australia Limited [2016] FCA 1387. 33 While I expressed the view in Berkely that the applicant made a wise assumption in identifying the underlying insureds of certain industry policies as affected policyholders to be notified of the transfer, I did not express as a general conclusion that the broader group of beneficiaries of every type of policy could be described as affected policyholders. 34 It is not necessary to reach a final conclusion on whether potential underlying insureds in the present case are affected policyholders, given that the applicant made arrangements for adequate notification of the scheme by way of publication in print and online sources, as described below. CONSIDeration 35 For the reasons put forward by the applicant in its submissions in support of the dispensation orders, I was and am satisfied that the Court should exercise its discretion to make the orders sought. 36 First, from the total number of affected policyholders identified in the searches, only 1,883 could not be identified. Of that number, an agent or broker address is available. The applicant intends to send the approved summary to all policyholders identified though its searches and, where a valid address of such affected policyholders cannot be obtained, to the addresses of the broker or agent who placed the business when it was originally underwritten. 37 Secondly, additional steps proposed by the applicant will assist in notifying affected policyholders of the proposed transfer. These include making available the proposed scheme, approved summary and actuarial report on the applicant's website and publishing the notice in a range of metropolitan newspapers as well as in New Zealand (the domicile of 21 identified policyholders). 38 Thirdly, the applicant draws attention to the fact that the actuarial evidence indicates that the implementation of the scheme will not have a materially adverse impact on the affected policyholders. AXIS commissioned Ernst & Young to provide an actuarial report on the proposed scheme. This report, dated 2 November 2016, was prepared by Mr Warrick Gard. AXIS also sought a peer review of Mr Gard's draft actuarial report by commissioning a report from Mr Rick Shaw of Deloitte Consulting Pty Ltd, dated 14 September 2016. 39 Actuarial evidence in support of the scheme as set out in the applicant's submissions is as follows: (1) While AXIS's PCR coverage ratio at 31 December 2015 is 2.41, and following the proposed transfer the PCR coverage ratio for Swiss Re is estimated to be 1.38, this will not represent a material detriment to transferring policyholders. AXIS had deliberately targeted a relatively high PCR coverage ratio given that it was a new business with deteriorating claims experience. (2) Swiss Re's target capital coverage ratio of 0.94 following the proposed transfer falls within Swiss Re's target capital coverage range of 0.90 to 1.10. (3) Transferring policyholders will be comforted by the fact that Swiss Re is part of SRI, which has a higher credit rating than Axis Europe. (4) No detriment will be experienced by Swiss Re's existing policyholders from a capital perspective as reinsurance arrangements will cede 100% of the liability to Swiss Re-Insurance Company Ltd. (5) The increased credit risk to which Swiss Re is exposed is mitigated by the reinsurance arrangements placed with Swiss Re-Insurance Company Ltd. (6) Swiss Re intends to adopt similar claims management to the applicant's current arrangements following the transfer. (7) Mr Gard's review of the Q2 2016 solvency position and balance sheets of both the applicant and Swiss Re suggest that there has been no material change in the level of security afforded to policyholders of either entity compared to the position as at 31 December 2015. 40 The conclusion in the actuarial report of Ernst & Young at p 27 is that neither the change in the capital position or operations of Swiss Re as a result of the proposed transfer will materially adversely impact the existing or transferring policyholders. Mr Shaw concurs with the conclusion of Mr Gard (p 3 of the Deloitte report). 41 While the actuarial evidence is to be explained in more detail at the final hearing, the conclusions at this stage suggest a reduced likelihood of opposition to the scheme from transferring or existing policyholders at the final hearing. 42 Fourthly, Ms Neumueller appeared on behalf of APRA at the interlocutory hearing, noting that APRA considered the scheme documents and proposed some amendments that were incorporated in the amended interlocutory orders as handed up. Further, APRA recorded no objections to the interlocutory orders sought and will continue to be involved in overseeing preparations for the proposed transfer. As noted by Yates J in Gordian [2013] FCA 983 : 22. …the making of a dispensation order under s 17C(5) of the Act does not in any way fetter or restrict APRA's role in assessing and scrutinising every aspect of the schemes, nor does it limit in any way the exercise of the Court's discretion at a confirmation hearing. Any perceived deficiency in the notification of policyholders, even where it is done in accordance with dispensation orders, may be taken into account by the Court in determining whether to give its approval. 43 Fifthly, this scheme will also be subject to additional scrutiny by the High Court of Ireland. 44 These factors satisfy me that due to the nature of the scheme and the circumstances attending its preparation, it is not necessary for the applicant to comply with s 17C(2)(c). 45 It is for these reasons that I made the interlocutory orders sought by the applicant. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop. Associate: Dated: 3 February 2017