Ace Insurance Limited, in the matter of Combined Insurance Company of America [2010] FCA 962

REASONS FOR JUDGMENT 1 This is an application made by ACE Insurance Limited under Division 3A of Part III of the Insurance Act 1973 (Cth). The applicant seeks orders confirming the proposed scheme to transfer the Australian insurance business of Combined Insurance Companies of America (CICA) to ACE Insurance Limited (ACE). Both the transferor, CICA, and the transferee, ACE Insurance Limited are members of the ACE Insurance Group of Companies of which the ultimate holding company is ACE Limited, a Swiss company listed on the New York Stock Exchange. 2 The Court's approval of the transfer is required by s 17B(1) of the Insurance Act which provides: No part of the insurance business of a general insurer may be: (a) transferred to another general insurer; or (b) amalgamated with the business of another general insurer; except under a scheme confirmed by the Federal Court. 3 Section 17B(3) provides that the scheme pursuant to which the business is to be transferred must set out the terms and conditions of the proposed transfer and "particulars of any other arrangements necessary to give effect to the scheme". 4 In support of the application, counsel for ACE Insurance, Mr Owens, has provided detailed written submissions which I have marked for identification as MFI 1. The facts as stated in the submissions have been supported by evidence tendered at the hearing today and I accept those statements of facts as accurate. 5 Both CICA and ACE have been trading in Australia, a position which arose as a result of the acquisition of CICA from Aon Corporation on 1 April 2008. The inefficiency arising from two businesses owned by the one entity trading in the one market is the main reason for the proposed transfer. The applicant's submissions also explain the statutory framework within which the insurers operate. I accept that explanation as an accurate summary of the legislative provisions. In particular, of particular importance are s 17C and s 17F(1)(a). 6 Section 17C(2) provides that: 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 policy holder. 7 A critical element for the confirmation of a scheme is laid down by s 17F(1A) which, relevantly, provides that in deciding whether to confirm a scheme, the Court must have regard, inter alia, to the interests of the policyholders of a body corporate affected by the scheme. Thus the Court must consider the interests of both CICA policyholders and ACE policyholders. 8 The evidence tendered by the applicant addresses the interests of policyholders in several ways. In particular it shows that subsequent to the transfer there will be no change to the terms and conditions of the CICA or the ACE policies or to the way in which the policies are managed. 9 The evidence presented at the hearing also included an actuarial report prepared by Warrick Evan Gard of Ernst & Young. Mr Gard has concluded that the proposed transfer will not have a material adverse effect on the policyholders of either CICA or ACE. In reaching this conclusion Mr Gard considered the capital adequacy of ACE and CICA. Their position is set out in the applicant's submissions at [36]. 10 At 30 September 2009 CICA had a solvency ration of 6.63 which rose to 9.02 in June 2010. At 30 September 2009, ACE had a solvency ratio of 1.81 at level 1 and 1.56 at level 2. At 30 June 2010 the level 1 ratio had increased to 2.17 although there is no information about level 2 ratio. In summary, therefore, the evidence is that following the transfer the solvency ratio for CICA will decrease and that for ACE will be unaffected. While the decrease in the solvency ratio for CICA is extreme, Mr Gard stated that in his opinion a solvency ratio of 1.80 provides adequate security to the policyholders of ACE and CICA. His reasons, summarised in the applicant's submissions at paragraph 37, include that: a ratio of 1.80 is in line with the industry average; the increased diversification after the transfer will result in a reduction of overall risk; ACE's capital base is protected from individual large losses because of the nature of ACE's business and that capital base will be increased after the transfer. 11 The reduction in the solvency ratio relevant to CICA's policyholders was considered by the independent peer review actuary, Timothy Andrews. Mr Andrews reviewed Mr Gard's report and, in his affidavit affirmed on 18 August 2010, expresses the opinion that Mr Gard's report is sound and that he agrees with Mr Gard that the interests of ACE and CICA policyholders will not be materially adversely affected. 12 Mr Andrews points out that the solvency ratio is only one element in the assessment of financial security which takes into account other factors summarised in paragraph 38 of the applicant's submissions. It is perhaps relevant to note that, apparently, the reason for the extremely high solvency ratio of CICA is because of regulatory requirements in a foreign jurisdiction to which it is responding rather than regulatory requirements in Australia. On the basis of the evidence before me including the opinions expressed by Mr Gard and Mr Andrews I accept that the policyholders will not be adversely affected by the reduction in the solvency ratio as a result of the proposed transfer. 13 The applicant's submissions also refer to the importance of APRA's attitude to the scheme. The affidavit of Steven Girvan sworn on 10 August 2010 annexes a letter from APRA dated 22 June 2010 which shows that the relevant documents were sent to APRA. The letter is evidence of APRA's approval in terms of the requirements of the Act and Prudential Standard GPS 410. It is clear that no objection has been voiced by APRA. 14 The steps that must be taken prior to an application such as the present are summarised in [49] of the applicant's submissions. It is convenient to quote that summary which is as follows: a. The applicant must provide a copy of the scheme to APRA: s. 17C(2)(a). That must be done before the steps outlined at points (e) and (f) below are taken: Prudential Standard GPS 410 para. 5. b. The applicant must provide a copy of any actuarial report on which the scheme is based to APRA: s. 17C(2)(a). That must be done before the steps outlined at points (e) and (f) below are taken: Prudential Standard GPS 410 para. 5. c. The applicant must obtain APRA's approval of its summary of the scheme (the "Scheme Summary"): Prudential Standard GPS 410 para. 8. This approval must be obtained before the step outlined at point (e) below is taken: Prudential Standard GPS 410 para. 8. d. The applicant must obtain APRA's approval of its notice of intention: Prudential Standard GPS 410 para. 9. e. The applicant must publish a notice of intention to make the application: s 17C(2)(b). That notice must contain the information specified in Prudential Standard GPS 410 para. 10. That notice must be published in (a) the Government Gazette and (b) one or more newspapers, approved by APRA, circulating in each State and Territory in which an affected policyholder resides: Prudential Standard GPS 410 para. 9. This notice must be published before the step outlined at point (g) below is taken: Prudential Standard GPS 410 para 11. f The applicant must give to every affected policyholder the Scheme Summary described at point (c) above. In these proceedings, this requirement was waived pursuant to orders of Jacobson J made on 11 March 2010 and 9 June 2010. Those orders waived the requirement on the condition that certain other actions were taken. Those steps are outlined below. g. The applicant must make a copy of the scheme available for public inspection from 9.00 a.m. until 5.00 p.m. every day (except weekends and public holidays) for a period of at least 15 days at an office of the applicant or some other location approved by APRA in each State and Territory in which an affected policyholder resides: Prudential Standard GPS 410 para. 16. 15 As mentioned in (f) above, the applicant's the requirement to give each affected policyholder the scheme summary was waived subject to certain conditions which were also set out in the applicant's submissions: a. ACE was required, at least two business days before the public inspection period commenced, to send a copy of the Scheme Summary to each policyholder identified by the searches identified in accordance with an affidavit of Carl Nagle, affirmed on 9 March 2010, and read before his Honour on 11 March 2010 (order 2). b. ACE was required, at least two business days before the public inspection period commenced, to send a copy of the Scheme Summary to each person who became a policyholder of CICA between the date that the searches described in Carl Nagle's affidavit were concluded, and the date of the mail-out of the Scheme Summary (undertaking 6). c. ACE was required to provide an "information sheet" to all persons who sought to become insured with CICA, at the time they were provided with a product disclosure statement and statement of advice, after the mail-out of the Scheme Summary occurred and before 1 October 2010, and also in the "welcome pack" sent to that person (order 3 and undertaking 7). d. ACE was required to provide any person who made a claim under an "expired" policy after the mail-out of the Scheme Summary with a copy of the "information sheet" (undertaking 8). e. ACE was required to display on its website, and on the CICA website, a link to the various scheme documents (order 4). 16 The applicant's evidence shows that all relevant steps have been taken with one significant exception. Regrettably, the condition in O 3 made by Jacobson J on 11 March 2010 and the undertakings 6 and 7 (see paras (b) and (c) above) were not strictly complied with. 17 The cause appears to have been human error which could and should have been avoided. Regardless of this, the issue is what consequences should follow from the failure to comply strictly with the orders. Ultimately about 1300 policyholders were affected. The steps taken to remedy this default are set out in the applicant's submissions at [53] and are as follows: a. On 4 August 2010, a copy of the Scheme Summary was sent to all persons to whom it should have been sent (other than those who had already been sent a copy) in accordance with undertaking 6. Undertaking 6 was thus complied with, but on 4 August 2010 rather than 9 July 2010. b. On 4 August 2010 and 16 August 2010, a copy of the information sheet was sent to all persons to whom it should have already been provided by that time (other than those who had already been sent a copy of the Scheme Summary) in accordance with order 3 and undertaking 7. Those policyholders were thus provided with a copy of the information sheet on 4 August 2010 or 16 August 2010, rather than the date upon which they were provided with their product disclosure statement etc. Some of these letters were "returned to sender". Those letters have been resent, and telephone contact has been attempted. c. On 28 July 2010, a direction was given to ensure that, from that day forwards, information sheets would be provided in accordance with order 3 and undertaking 7. d. From 6 August 2010, a copy of the information sheet was/will be provided with the "welcome pack" sent to new policyholders. e. The public inspection period was extended from 6 August 2010 to 20 August 2010. f. The scheme documents were left on the ACE and CICA websites after 6 August 2010, and will be left on the websites until 1 October 2010. g. The customer inquiry telephone number will be left operational until 1 October 2010. 18 While those steps would have adequately addressed the problems in some cases the redress would have been less than adequate in others and in a very small number of cases entirely ineffective. 19 It is true that no policyholder has a right of veto over the scheme however the legislation requires policyholders to be notified. The purpose of notification is to enable policyholders to voice any objection they may have to a scheme and to give them a right to be heard. In this case in relation to some of the policyholders that right has either been denied or materially compromised. While it is true that it is an extremely small number of policy numbers that were affected - 1300 out of approximately 85,000 policyholders - nevertheless, their rights are important. The fact that had they appeared it is extremely unlikely that they could have put forward any argument that would have resulted in the scheme not being approved is not to the point. 20 The applicant has proffered an undertaking that goes some way to address the situation for the small number of policyholders whose rights have been compromised by the failure to comply strictly with the orders of 11 March 2010. The undertaking is as follows: The applicant by its counsel, undertakes to the Court that in the event that any affected policyholder of CICA: (a) who was sent a copy of the scheme summary and/or information sheet on 4 August 2010 or 16 August 2010; and (b) which correspondence was returned undelivered to CICA; and (c) who was not spoken to by telephone by CICA in relation to the scheme prior to 23 August 2010 requests, prior to 1 October 2010, to cancel their policy (no claim having been made or paid on that policy) by reason of their late notice of the scheme, that policyholder will be refunded in full all premiums paid in relation to that policy and the policy cancelled. 21 That undertaking to the Court having being given, I am satisfied that the scheme should be confirmed and will make the necessary orders. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.