FEDERAL COURT OF AUSTRALIA AXIS Specialty Europe SE (Australia Branch), in the matter of AXIS Specialty Europe SE (Australia Branch) (No 2) [2017] FCA 276 File number: NSD 2034 of 2016 Judge: ALLSOP CJ Date of judgment: 10 February 2017 Date of publication of reasons 21 March 2017 Catchwords: INSURANCE – application for confirmation of scheme for the transfer of insurance business – where transferor and transferee are Australian branches of foreign insurers – scheme confirmed without modification Legislation: Insurance Act 1973 (Cth), s 17C, 17F Cases cited: AXIS Specialty Europe SE (Australia Branch), in the matter of AXIS Specialty Europe SE (Australia Branch) [2016] FCA 1594 Atradius Credit Insurance N.V., in the matter of Atradius Credit Insurance N.V. (No 2) [2016] FCA 1495 Re Westport Insurance Corporation (No 2) [2009] FCA 1598; 181 FCR 530 W.R. Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) (No 3) [2016] FCA 1497 Date of hearing: 9 February 2017 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: 69 Counsel for the Applicant: Mr M Izzo Solicitor for the Applicant: HWL Ebsworth Lawyers Solicitor for the Australian Prudential Regulation Authority: 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: 10 FEBRUARY 2017 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 AXIS Specialty Europe SE (Australia Branch) (AXIS) to Swiss Re International SE (Australia Branch) (Swiss Re) (the Scheme), be confirmed in the form of Annexure "A" attached to these orders. 2. The transfer date for the purposes of the Scheme is 13 February 2017. 3. Pursuant to Section 17F of the Act, all outwards reinsurance to the extent referable to any contract transferred pursuant to the Scheme, including all rights and obligations attaching to it, be transferred from AXIS to Swiss Re and any such reinsurance to which AXIS was a party be amended by replacing AXIS with Swiss Re. 4. AXIS is to 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. REASONS FOR JUDGMENT ALLSOP CJ: 1 On 10 February 2017, I made orders 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 the Australian branch of AXIS Specialty Europe SE to the Australian branch of Swiss Re International SE. These are my reasons therefor. Background 2 Background information concerning the relevant insurers is set out in my earlier reasons for orders dispensing with the need for the applicant to comply with s 17C(2)(c) of the Act: see AXIS Specialty Europe SE (Australia Branch), in the matter of AXIS Specialty Europe SE (Australia Branch) [2016] FCA 1594. 3 The entities referred to in this application are defined in these reasons as follows: (a) the Australian branch of AXIS Specialty Europe SE (AXIS); (b) AXIS Specialty Europe SE (AXIS Europe); (c) AXIS Capital Holdings Limited (AXIS Capital), (d) the Australian branch of Swiss Re International SE (Swiss Re); (e) Swiss Re International SE (SRI); (f) the Australian branch of Swiss Reinsurance Company Ltd (SRAU); 4 Key elements of the scheme were highlighted in the actuarial report of Warrick Gard of Ernst & Young, dated 2 November 2016, at p 7 as follows: All insurance contracts underwritten by AXIS will be transferred from AXIS to Swiss Re; All rights and obligations of AXIS under insurance contracts will cease and become rights and obligations of Swiss Re as a result of the Proposed Transfer; Policyholders will continue to have the same rights and obligations under or in respect of any insurance contract or claim but with Swiss Re as the insurer rather than AXIS; All insurance liabilities in relation to these insurance contracts will be assumed by Swiss Re; Swiss Re will provide indemnification to AXIS Europe in respect of the Proposed Transfer; Insurance business liabilities including claims losses, liabilities, costs or expenses of any kind of the insurance business carried out by AXIS will be transferred to Swiss Re on the Transfer Date In consideration of the transfer of the Transferring Assets by AXIS to Swiss Re, Swiss Re will pay an amount equal to the Asset Price as defined in the Transfer Deed; The Transferring Assets include the transfer of the rights to the reinsurance recoveries associated with the reinsurance contracts entered into by AXIS to Swiss Re; In consideration of the assumption by Swiss Re of the Transferring Business, the Transferring Policies and the Transferring Liabilities, AXIS will pay to Swiss Re an amount equal to the Transfer Sum as defined in the Transfer Deed; and Swiss Re and AXIS agree to offset and adjust the amounts payable as referred to above. 5 AXIS has indicated its intention to apply to APRA for revocation of its APRA authorisation after the transfer (actuarial report, p 7). Legislative framEWORK 6 Division 3A of Part III of the Act deals with the transfer and amalgamation of insurance business. 7 Section 17C sets out the procedural requirements in making an application of this kind as follows: 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. 8 The prudential standards referred to in ss 17C(2)(a) and (b) are contained in Prudential Standard GPS 410, Transfer and Amalgamation of Insurance Business for General Insurers (GPS 410). 9 Orders made on 9 December 2016 dispensed with the need for the applicant to comply with s 17C(2)(c) on the basis that certain other procedural steps directed to the notification of policyholders were undertaken before the confirmation hearing. 10 Section 17F deals with the Court's discretion to confirm a scheme. It provides: 17F Confirmation of scheme (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. 11 The Court will look to the interests of the policyholders of both the transferor and transferee insurers and consider whether implementation of the scheme will materially detrimentally affect them: see Re Westport Insurance Corporation (No 2) [2009] FCA 1598; 181 FCR 530 at 535 [32] per Lindgren J. 12 This matter involves a transfer of scheme between the Australian branches of two foreign insurers. The Court's focus will be on the impact of the transfer on the holders of policies issued by the Australian branches only: see Westport 181 FCR at 532 [11]. 13 As I have noted in previous applications of this kind, in considering the impact of a transfer of scheme on Australian policyholders, it provides meaningful context for the Court to have wider financial information pertaining to the financial position and risk profiles of the relevant foreign insurers beyond their Australian branch operations: see Atradius Credit Insurance N.V., in the matter of Atradius Credit Insurance N.V. (No 2) [2016] FCA 1495 at [17]; W.R. Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) (No 3) [2016] FCA 1497 at [15]. EVIDENCE 14 The following affidavits were read in support of the application and are defined in these reasons as follows: (a) affidavit of Wayne Perry, sworn 25 November 2016 (Perry 1); (b) affidavit of Heather Ballantyne, sworn 5 December 2016 (Ballantyne); (c) affidavit of Wayne Perry, sworn 3 February 2017 (Perry 2); (d) affidavit of Mark Kimberley, sworn 3 February 2017 (Kimberley); (e) affidavit of Warrick Gard, affirmed 2 February 2017 (Gard); (f) affidavit of Rick Shaw, sworn 3 February 2017 (Shaw); (g) affidavit of Adam Lewis Cox, affirmed 6 February 2017 (Cox); and (h) affidavit of Marc La Palme, sworn 3 February 2017 (La Palme). Actuarial evidence 15 The actuarial evidence in support of the application chiefly can be found in the actuarial report of Mr Gard. 16 The report sets out the solvency position of AXIS and Swiss Re before and after the transfer based on the 31 December 2015 APRA returns. It also contains a section with updated analysis based on the 30 June 2016 APRA returns. 17 Mr Gard also reviewed the applicable extracts of the APRA Q4 returns of AXIS and the draft APRA Q4 returns of Swiss Re outlining their financial position as at 31 December 2016, and noted that based on that most recent information, he has not identified any matters that caused him to change the conclusions or opinions set out in the actuarial report (Gard at [11]). Solvency position of AXIS and Swiss Re pre- and post-transfer 18 The following financial information regarding the solvency position of AXIS and Swiss Re is found in the actuarial report and the Gard affidavit. AXIS 19 As at 31 December 2015, AXIS had net assets in Australia of $112.9m and a total capital base of $112.9m. Its prescribed capital requirement was $46.9m, giving it a solvency coverage ratio of 2.41 (actuarial report, p 22). 20 As at 30 June 2016, AXIS had net assets in Australia of $108.9m and a total capital base of $108.9m. Its prescribed capital requirement was $22.1m, giving it a solvency coverage ratio of 4.93 (actuarial report, p 25). 21 Mr Gard sets out details of AXIS's financial position as at 31 December 2016. As at that date, it had net assets in Australia of $99.8m and a capital base of $99.8m. Its prescribed capital requirement was $15m, giving it a solvency coverage ratio of 6.66 (Gard at [12], [14]). Swiss Re 22 As at 31 December 2015, Swiss Re had net assets in Australia of $89.6m and a total capital base of $88.3m. Its prescribed capital requirement was $55m, giving it a solvency coverage ratio of 1.61(actuarial report, p 22). 23 As at 30 June 2016, Swiss Re had net assets in Australia of $81.8m and a total capital base of $76.8m. Its prescribed capital requirement was $45.6m, giving it a solvency coverage ratio of 1.68 (actuarial report, p 25). 24 As at 31 December 2016, Swiss Re had net assets in Australia of $93.7m and a capital base of $88.3m. Its prescribed capital requirement was $56.7m, giving it a solvency coverage ratio of 1.56 (Gard at [13], [15]). Actuarial opinion on the impact of the transfer of scheme on policyholders 25 Mr Gard noted that had the transfer occurred on 31 December 2015, the post-transfer solvency coverage ratio for Swiss Re would be 1.38. This represents a decrease in the solvency coverage ratio for AXIS's transferring policyholders as at 31 December 2015 from 2.41 to 1.38, as well as a decrease in solvency coverage ratio for Swiss Re's existing policyholders from 1.61 to 1.38 (actuarial report, p 23). 26 Mr Gard noted that AXIS deliberately targeted a relatively high solvency coverage ratio considering it was a relatively new business with deteriorating claims experience and that it sought to provide a similar level of comfort from a capital perspective as a more mature, established and stable business operating in similar markets (actuarial report, p 27). 27 Mr Gard further noted that the post solvency coverage ratio of 1.38 translates into a target capital coverage ratio of 0.94 for Swiss Re. This falls within Swiss Re's target capital coverage range of 0.90 to 1.10 as defined in its Internal Capital Adequacy Assessment Process (actuarial report, p 27), whereby immediate action is only required when the ratio falls below 0.90. 28 For these reasons, Mr Gard concluded that there will not be a materially adverse impact on the policyholders of AXIS by the reduction in the solvency coverage ratio of Swiss Re relative to AXIS. 29 Further, there was nothing in the 30 June 2016 APRA returns and the APRA Q4 returns of AXIS and the draft APRA Q4 returns of Swiss Re that caused Mr Gard to alter his conclusions concerning the security available to policyholders of either insurer (actuarial report, p 26; Gard at [11]). 30 Mr Gard concluded that there is a benefit to AXIS's policyholders as a result of the transfer that arises from Swiss Re being part of SRI, which has a higher S&P credit rating (AA-) than Axis Europe (A+) (actuarial report, p 27). 31 Further, Mr Gard concluded that the existing policyholders of Swiss Re would not suffer a materially adverse impact from a capital perspective as a result of the transfer for the reasons that the reinsurance arrangements in place effectively cede 100% of the liabilities to SRAU and the increased credit risk to which Swiss Re is exposed is mitigated by the fact of the excellent credit ratings of SRAU (actuarial report, p 27). 32 It should be noted in this respect that SRAU is the reinsurance branch of Swiss Re operating in Australia. From 1 April 2016, AXIS entered into a 100% quota share and adverse development cover reinsurance arrangement with SRAU. Mr Gard noted that this arrangement covers AXIS's losses net of the existing external reinsurance i.e. the same losses previously covered, in part, by AXIS's intra-group reinsurance arrangements. An assessment of the capital and operations of SRAU was not contained in the actuarial report. The applicant did, however, supply a Statement of Financial Performance of SRAU for the period ended 31 December 2016. As at 31 December 2016, SRAU had total assets of $2,719.9m and total equity of $562m. This statement was not subject to actuarial analysis, but nevertheless provides a basis for confidence as to SRAU in relation to this reinsurance. Claims Management 33 The evidence indicated that Swiss Re will adopt a similar claims management process to AXIS's current arrangements. 34 From 31 October 2016, a third party administrator, Proclaim Management Solutions Pty Limited (Proclaim), was appointed to manage a certain subset of AXIS's existing claims on its portfolio. All other claims were managed by AXIS's in-house claims managers or by Specialist Underwriting Agencies Pty Ltd (SUA) (Cox at [20]-[22]). 35 In order that the existing claims management processes and procedures continue to operate after the transfer, the following steps have been or will be taken: (a) Swiss Re will enter into an agreement with Proclaim on terms similar to the agreement between AXIS and Proclaim; (b) SUA will continue to manage the existing portfolio of claims that it managed prior to the transfer; and (c) For the remainder of the claims, a handover process will take place from the applicant's claims managers to Swiss Re's claims managers to ensure continuity of claims management (Cox [22]). Risk profiles of the foreign parent companies 36 Evidence was also directed to the risk profiles of the transferor and transferee companies beyond their Australian branches. AXIS Europe and AXIS Capital 37 AXIS forms part of the AXIS Group headed by AXIS Capital, a company incorporated in Bermuda that operates insurance and reinsurance business worldwide (Perry 2 at [10]). 38 AXIS Capital operates three business units internationally: AXIS Insurance, AXIS Accident and Health and AXIS Re. AXIS Europe forms part of the AXIS Insurance unit. The lines of insurance business written by AXIS Capital include property, marine, terrorism, aviation, credit and political risk, professional lines, liability accident and health. 39 On the basis of its 2015 Annual Report, exhibited to the affidavit of Mr Perry, AXIS Capital has total assets of US$19,981.9m and shareholders' equity of US$5,866.9m. 40 AXIS Capital has credit rating of A+ (Strong) with Standard & Poor's; and A+ (Superior) with A.M. Best (Perry 2 at [12]). 41 Based on its reports and financial statements as at 31 December 2015, exhibited to the affidavit of Mr Perry, the balance sheet of AXIS Europe show total assets of approximately US$1,810m and shareholders' funds of approximately US$275m. The gross premium written for the financial year ended 31 December 2015 was approximately US$552m. This spanned various classes of business comprising marine, aviation and transit, property, liability, credit and surety and accident and health. SRI and Swiss Re Ltd 42 SRI is part of a group ultimately owned by Swiss Re Ltd, a joint company (Aktiengesellschaft) listed on the Swiss stock exchange. 43 The group balance sheet included in Swiss Re Ltd's 31 December 2015 Annual Report shows total assets of approximately US$196,135m and total liabilities of $162,529m. Shareholders' equity is US$33,517m (Exhibit ALC-1 to the affidavit of Cox at 81). 44 SRI's 31 December 2015 Annual Report shows total assets of EUR5,640m and total capital of EUR347m . The gross premium written for the year ended 31 December 2015 was EUR1,336m (Exhibit ALC-1 at 151-152). 45 SRI is authorised to write insurance across the following lines: accident, sickness, land vehicles, railway rolling stock, aircraft, ships, goods in transit, fires and natural forces, motor vehicles liability, aircraft liability, liability for ships, general liability, credit insolvency, miscellaneous financial loss, legal expense and assistance. Its business is sourced primarily through its branch operations in Germany, the UK, the Netherlands, Switzerland, Italy, France, Japan, Singapore, Hong Kong, Slovakia, Spain and Australia. 46 SRI has a AA- credit rating with S&P, Aa3 with Moody's and A+ with A.M. Best (Cox at[11]). APRA's view 47 Ms Neumueller appeared on behalf of APRA and noted that APRA had carefully reviewed and considered all the material relating to the transfer of scheme and had no objection to the orders sought by the applicant. Conclusion on actuarial evidence 48 Mr Gard's conclusion was that the proposed scheme does not materially adversely impact the interests of policyholders of the applicant and Swiss Re (actuarial report, p 26; Gard [16]). That opinion was supported by Mr Rick Shaw of Deloitte, who was engaged by the applicant to conduct an independent peer review of Mr Gard's draft report (Shaw report, p 3; Shaw at [10]) 49 The actuarial evidence, coupled with the wider contextual information provided about the transferor and transferee insurers beyond their branch operations, provides an adequate basis for the Court to be satisfied that the interests of policyholders are not detrimentally affected by the scheme. I am so satisfied. Reinsurance orders 50 The applicant seeks an order under s17F(2) transferring the outwards reinsurance responding to any contract transferred pursuant to the scheme 51 In addition to seeking the reinsurance order, the applicant has sought for foreign reinsurers to execute deeds of novation and local reinsurers have also been given notice of the impeding novations (La Palme and Perry 2 at [39]-[40]). 52 I am satisfied in this case that it is appropriate to make the reinsurance orders sought, to ensure that affected policyholders are not deprived of the benefit of reinsurance that existed prior to the transfer: see WR Berkley Insurance (Europe) Ltd, in the matter of Division 3A of Part III of the Insurance Act 1973 (No 3) [2016] FCA 1497 at [59]. Procedural requirements 53 Formal requirements relating to an application for confirmation are set out in 17C(2) of the Act and are supplemented by GPS 410. 54 The applicant put on evidence to demonstrate its compliance with those formal requirements as well as its compliance with the dispensation orders made on 9 December 2016. Approval of APRA 55 The scheme and the actuarial report in final form were given to APRA on 25 November 2016 (Perry 1 at [51]) as required by s 17C(2)(a) of the Act. 56 GPS 410 at [8] requires an insurer to secure APRA's approval of the summary of the scheme before publishing a notice of intention. APRA approved the scheme summary and notice of intention on 7 December 2016 (Perry 2 at [23]). Mail-out of the approved summary 57 Order 2 of the dispensation orders required that, prior to the scheme being released for public inspection, the applicant cause a copy of the approved summary to be sent by pre-paid post to all persons identified as affected policyholders for which the applicant has an address. Where a valid address could not be ascertained, the applicant was required to send the approved summary to the address of the broker or agent who placed the business. 58 On 21 December 2016, Mr Perry caused the approved summary to be sent by post to the 11,563 affected policyholders identified through the searches of the applicant, or their brokers, if AXIS only had the address of the broker who placed the business (Perry 2 at [29]). 59 1880 envelopes were returned by way of return to sender and were retained by Mr Perry (Perry 2 at [31]). Publication of notice of intention in newspapers 60 Order 3 of the dispensation orders required the applicant to cause the approved notice of intention to be placed in the Government Gazette, The New Zealand Herald, the Australian Financial Review and eight nominated metropolitan newspapers. 61 Mr Perry arranged for the notice of intention to appear in each of the newspapers referred to in Order 3 and provided evidence that it was so published in the week of 2 January 2017 (Perry 2 at [26]) Notification of the scheme on AXIS's website 62 Order 4 of the dispensation orders required the applicant to make available on its website a copy of the scheme, the scheme summary, the notice of intention, and the actuarial report. 63 Mr Perry gave evidence that since 16 December 2016 to the date of his swearing of the second affidavit (3 February 2016), the documents were accessible at the applicant's website (Perry 2 at [32]). Public Inspection of the scheme documents 64 Paragraph 16 of GPS 410 requires that a copy of the scheme be open for public inspection from 9am to 5pm every day (except weekends and public holidays) for a period of 15 days at an office of the insurer or another location approved by APRA in writing in each State and Territory in which an affected policyholder resides. 65 This requirement was supplemented by order 5 of the dispensation orders which required a copy of the scheme, approved summary, notice of intention and the actuarial report to be available for public inspection at the applicant's office in Sydney and at the other locations approved by APRA. 66 The scheme, approved summary, notice of intention and the actuarial report were made available at the applicant's offices in Sydney from 9 to 30 January 2017 from 9am to 5pm (Perry 2 at [36]). Those same documents were also made available at the other locations approved by APRA from 9 to 30 January 2017 from 9am to 5pm (Kimberley at [7]-[15]). Provision of copy of the scheme free of charge 67 Section 17C(4) of the Act provides that an affected policyholder is entitled to request to be provided by the company with one copy of the scheme free of charge. 68 This requirement was supplemented by order 6 of the dispensation orders, which required the applicant to provide a free copy of any of the scheme documents to any policyholder. Mr Perry noted that he has not received any request from persons to be provided with a copy of the Scheme documents (Perry 2 at [35]). Disposition 69 I was satisfied on the basis of the actuarial evidence before the Court and the fact that the applicant has attended diligently to the procedural requirements for the making of an application of this kind that the scheme should be confirmed without modification, and therefore made the orders sought by the applicant on 10 February 2017. I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop. Associate: Dated: 21 March 2017