AAI Limited, application under the Insurance Act 1973 (Cth) (No 2) [2015] FCA 617

Federal Court of Australia|2015-06-16|Before: Yates J

REASONS FOR JUDGMENT 1 The applicant, AAI Limited (AAI), seeks an order under s 17F(1) of the Insurance Act 1973 (Cth) (the Act) that a scheme under Div 3A of Pt III of the Act be confirmed to give effect to the transfer of the insurance business of MTA Insurance Limited (MTAI) to AAI (the scheme). 2 On 6 May 2015, I made orders dispensing with the need for compliance with s 17C(2)(c) of the Act, provided that certain steps, by way of notification of the approved scheme summary, were undertaken (the dispensation orders): AAI Limited, application under the Insurance Act 1973 (Cth) [2015] FCA 452 (my earlier reasons). In my earlier reasons at [3]-[7], I set out the background to the scheme. I will not repeat that background, except to note that the scheme is part of an internal reorganisation within the Suncorp Group, of which AAI and MTAI are members.

The scheme 3 Under the scheme, MTAI will transfer all of its existing insurance business to AAI for an amount equal to the net book value of all assets and liabilities directly related to the business as at 30 June 2015, as contained in MTAI's balance sheet on that date. AAI will assume the liabilities and obligations of MTAI in respect of contracts of insurance issued, entered into or assumed by MTAI in the course of carrying on its general insurance business. AAI will indemnify MTAI against all present, future or contingent claims, losses, liabilities, costs and expenses that might arise in connection with the insurance contracts. All premiums and other amounts payable to or recoverable by MTAI under the insurance contracts will be payable to and recoverable by AAI. 4 The transfer will take effect on or around 1 July 2015 or on another agreed date that is approved by the Court. Any stamp duty and other costs and expenses incurred in connection with the scheme will not be paid by or charged to policyholders, but will be met by AAI. 5 It is important to note that the transfer will not change the terms of any insurance contract or affect any claim in respect of any insurance contract issued by MTAI, other than that AAI will become the insurer. The policyholders will continue to have the same rights and obligations under or in respect of any insurance contract or claim, but with AAI as the insurer. All outstanding claims-related rights and liabilities of MTAI in respect of the insurance contracts will be transferred to AAI such that any claims arising under or in connection with any insurance contract must be made against AAI rather than MTAI. AAI will be entitled to enforce all rights and remedies which, but for the scheme, would have been enforceable by MTAI under or in respect of the insurance contracts. Any policyholder under an insurance contract, or other person who has a claim on or obligation to MTAI under or in respect of an insurance contract, will have the same claim on or obligation to AAI in substitution for his or her claim on or obligation to MTAI, irrespective of when such claim or obligation arose.

Formal requirements 6 The applicant has read a number of affidavits in support of its application for confirmation of the scheme. The affidavits deal with a range of matters, with particular emphasis on the steps taken to comply with the dispensation orders and to satisfy the formal requirements imposed by the Act. 7 At [27] of my earlier reasons, I referred to the fact that the approved summary of the scheme was to be given to certain affected policyholders by email or by ordinary pre-paid post. I expressed my expectation that, at the confirmation hearing, comprehensive evidence would be given revealing, in a meaningful way, the integrity of the notification process that was to be undertaken in accordance with the dispensation orders. Such evidence has been provided. I refer, in particular, to the affidavits made by Jamie Dobbs on 12 June 2015 and 16 June 2015, to the affidavit made by Daniel Barker on 15 June 2015, and to the affidavit made by Daniel Trent Bunoza on 15 June 2015. I am satisfied that the dispensation orders have been substantially complied with. I am also satisfied that the other formal requirements have been complied with. 8 The steps taken in relation to these matters, and the evidence verifying those steps, have been helpfully summarised in written submissions filed by AAI on 15 June 2015: see [51]-[71] thereof. Mr Dobbs' affidavit of 16 June 2015 adds to the evidence referred to in the submissions.

Actuarial report 9 An actuarial report dated April 2015 and updating letters dated 16 April 2015 and 10 June 2015 have been prepared by Finity Consulting Pty Limited (Finity). The opinions and conclusions expressed in the actuarial report and updating letters have been verified by Mr Tim Andrews. Mr Andrews is the author of the report and letters. He is an actuary and employee of Finity. Mr Andrew Huszczo, the Appointed Actuary of the general insurers in the Suncorp Group, has reviewed the actuarial report and updating letters. He has verified each statement of fact therein, as well as the figures in the tables. 10 The actuarial report is based on the audited annual APRA returns as at 30 June 2014 for AAI and MTAI. The financial position in the updating letters is based on each company's unaudited quarterly APRA returns as at 31 December 2014 (for the 16 April 2015 updating letter) and 31 March 2015 (for the 10 June 2015 updating letter). 11 In the actuarial report, Mr Andrews expressed the opinion that the interests of policyholders of both AAI and MTAI will not be adversely affected in a material way by reason of the scheme. He advanced four reasons for that opinion. 12 First, the main interest of policyholders is to have their valid claims paid when due. There is no material adverse change in this aspect for policyholders of either insurer, noting the following matters: The scheme is intra-group. The ultimate security provided to all policyholders is from Suncorp Group Limited, and this would be unchanged. Capital levels would be well in excess of the minimum regulatory level for AAI post-scheme. The likelihood of claims not being paid is remote, noting that there is always uncertainty with the outcome of insurance business and ongoing solvency cannot be guaranteed. The solvency protection is effectively unchanged for AAI policyholders post-scheme, noting that the MTAI business is small relative to AAI's portfolio. The solvency protection will appear lower post-scheme for MTAI policyholders when measured using a simple multiple of the coverage of APRA's minimum requirements. However, the real protection for MTAI's policyholders will be higher post-scheme because AAI is substantially larger and its insurance business is more diversified than MTAI's present business. For AAI policyholders, there will be no material change to the risk profile to which they are exposed. While MTAI policyholders will be exposed to a wider range of risks post-scheme, the overall risk will be low, once again because AAI is substantially larger and has a more diversified insurance business than MTAI's present business. 13 Secondly, AAI will assume MTAI's insurance liabilities for current and prior policyholders on the same terms and conditions as currently apply. Effectively, MTAI's current and prior policyholders will be in the same position as before the scheme. 14 Thirdly, there is no impact on the premiums for current MTAI policyholders. 15 Fourthly, MTAI policyholders will have their policies and claims managed by the same team, using the same processes as immediately before the scheme. 16 Mr Andrews noted that, as at 30 June 2014, AAI had net assets of $2.85 billion with a Prescribed Capital Amount (PCA) coverage ratio of 1.96, and that MTAI had net assets of $28.8 million with a PCA coverage ratio of 4.17. He observed: Both insurers operate at levels of capital in excess of their regulatory PCA. The PCA Coverage represents the ratio of an insurer's APRA Capital Base to its PCA. • MTA's PCA Multiple is 4.17. The insurer targets a multiple of 2.5. • AAI's PCA Multiple is 1.96, which compares to its target of 1.45. The lower ratio and target for AAI is to be expected given it is a much larger and more diversified business, which would be expected to lead to lower volatility. While MTA has a higher PCA Coverage, the capital position of both entities is strong. In each case the current position is in excess of target levels. 17 Based on the financial information as at 30 June 2014, Mr Andrews concluded that, post-scheme, the consolidated PCA coverage for AAI would be 1.97. Mr Andrews said: The transfer would have no immediate material impact on the solvency protection of AAI policyholders, noting the small size of the MTA portfolio in relation to AAI. The solvency protection will appear lower post transfer for MTA policyholders when measured using the PCA Coverage. However in our assessment the real protection would be higher post transfer, noting that the insurer will be substantially larger and more diversified. 18 In the updating letter of 16 April 2015, Mr Andrews noted that, based on the financial information available as at 31 December 2014, the PCA coverage for AAI, post-scheme, would be 1.74. He said: The PCA coverage for the consolidated entity has reduced from 1.97 as at 30 June 2014 to 1.74 as at 31 December 2014. This is predominately due to the following reductions to the capital base: • $713 million of profits for AAI being distributed as dividends. This is offset by $335 million first half year profits for 2014/15. • Seasonal impact of premium liabilities which reduces the capital base by around $125 million. The PCA Coverage as at 31 December 2014 remains in excess of AAI's target level of 1.45. 19 He also said: Nothing has emerged from the review of the updated data presented in this letter that would cause us to alter our opinion. While the PCA coverage has reduced, it remains at a level well in excess of target and has reduced as a result of dividends, not due to any adverse experience. We continue to be satisfied that the interests of policyholders should not be adversely affected in any material way as a consequence of the transfer. 20 In the updating letter of 10 June 2015, Mr Andrews noted that, based on the financial information available as at 31 March 2015, the PCA coverage for AAI, post-scheme, would be 1.68. He said: The PCA coverage for the consolidated entity has reduced from 1.97 as at 30 June 2014 and 1.74 as at 31 December 2014, to 1.68 as at 31 March 2015. This is predominantly due to reductions in the capital base due to a declared dividend of $248 million to AAI's parent entity during the 3 months to 31 March 2015. This is in addition to $713 million distributed as dividends in the 6 months to 31 December 2014, bringing total year to date dividends paid to $961 million. This is offset by $367 million year to date profits for 2014/15. The payment of dividends and the reduction in solvency were largely as planned. Notwithstanding this, the PCA Coverage is slightly lower due to the worse than expected natural perils losses, though this is normal for a business such as AAI. The PCA Coverage as at 31 March 2015 remains in excess of AAI's target level of 1.45. 21 He also said: Nothing has emerged from the review of the updated data presented in this letter that would cause us to alter our opinion. While the PCA coverage has reduced, it remains at a level well in excess of target and has reduced as a result of dividends, not due to any adverse experience. We continue to be satisfied that the interests of policyholders should not be adversely affected in any material way as a consequence of the transfer.

No opposition to the scheme 22 Although, as a result of the notification process required by the dispensation orders, a number of policyholders contacted the Suncorp Group, or those acting on its behalf, it does not appear that the inquiries made by these policyholders involved any objection to the scheme. Certainly no policyholder has come forward to oppose the scheme, or has given notice of an intention to do so. 23 Further, APRA, which was represented at the hearing of the confirmation application, does not oppose the scheme. This is an important consideration.

AAI's submissions 24 AAI submitted that the court should confirm the scheme pursuant to s 17F(1) of the Act, for the following reasons: The actuarial opinion before the Court is that the interests of policyholders of both MTAI and AAI will not be adversely affected in a material way as a consequence of the scheme. AAI will retain a PCA coverage ratio well above APRA's minimum capital requirement, noting that excess capital could be released with APRA's pre-approval whether or not the scheme proceeds. The policy terms and conditions of contracts of insurance the subject of the scheme will remain unchanged other than the substitution of MTAI for AAI as insurer. The claims and policy administration for the transferred business will remain unchanged. There is no anticipated change to the level of service to policyholders as a result of the transfer. The transfer of MTAI's liabilities to AAI will allow the Suncorp Group to, amongst other things, gain some compliance synergy and reduce operational costs. APRA has not expressed any objection to confirmation being granted. Further, it has approved the relevant documents in accordance with the Act and Prudential Standard GPS 410 and has not arranged (as it is entitled to) an independent actuarial report on the scheme. The notice of the application to confirm the scheme has been published in the Commonwealth Gazette and newspapers approved by APRA. AAI has provided the approved scheme summary to affected policyholders or their intermediaries in accordance with the dispensation orders. The scheme documents have been available for public inspection in locations in each state and territory as approved by APRA. AAI has also made available information about the scheme on a website and maintained a call centre for the purpose of taking inquiries in relation to the scheme. No policyholder, or any other person, has communicated any opposition to or concern about the scheme, or has given notice of intention to appear at the confirmation hearing. All of the procedural and formal requirements set out in the Act and Prudential Standard GPS 410 have been complied with (other than those for which dispensation has been granted by the dispensation orders).

Conclusion and disposition 25 I accept these submissions. I am satisfied that the scheme should be confirmed. Orders, substantially as sought by AAI, will be made. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

Insurance Act 1973(Cth)ss 17C, 17F

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