Australian Securities and Investments Commission v Zurich Australia Limited

Federal Court of Australia|2023-11-16|Before: Jackman J

Pursuant to section 17F(1) of the Insurance Act 1973 (Cth) (Act), the scheme for the transfer of the insurance business of OnePath General Insurance Pty Limited, the First Applicant (OnePath General), to Zurich Australian Insurance Limited, the Second Applicant (Zurich), in the form of Annexure A to these orders (Scheme) be confirmed without modification.
The Scheme is to take effect at 12:01am (AEST) on 1 December 2023.
Pursuant to section 17F(2) of the Act, all of OnePath General's contracts of reinsurance that respond to any policy transferred pursuant to the Scheme and all rights and obligations attaching to such contracts of reinsurance, be transferred to Zurich at 12:01 am (AEST) on 1 December 2023.
Zurich Financial Services Australia Limited pay the costs of the proceeding of the Australian Prudential Regulatory Authority as agreed or, if agreement cannot be reached, as assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 This is an application seeking orders under s 17F of the Insurance Act 1973 (Cth) (the Act) for confirmation of a Scheme to give effect to the transfer of the insurance business of OnePath General Insurance Pty Limited (OnePath General) to Zurich Australian Insurance Limited (Zurich). 2 On 8 August 2023, I made orders dispensing with the requirement of s 17C(2)(c) of the Act on certain conditions (Dispensation Orders).

Background and the business of the applicants 3 Zurich Financial Services Australia Limited (ZFSA) is the ultimate Australian holding company of both applicants and also Zurich Australia Limited (ZAL), which conducts a life insurance business. ZFSA and the companies ultimately owned by it are referred to as the ZFSA Group. Zurich Insurance Group Limited is the ultimate parent of the global group of Zurich companies (Zurich Group), with headquarters in Switzerland. ZFSA acquired the shares in OnePath General on 31 May 2019. 4 OnePath General no longer accepts new business and all of its remaining business lines were progressively closed to new business from 2016 to 2021. All of its portfolios have either been run off, are in the process of run-off or are closed to new business. The OnePath General business is very small relative to Zurich, representing less than 1% of the net earned premium of Zurich and less than 0.5% of its insurance liabilities. 5 The management of OnePath General has already been integrated into the ZFSA Group. The Scheme will not effect any changes to policy terms and conditions, and no significant changes are expected to OnePath General's policy administration or claims handling practices. As it is closed to new customers, the business and profits of OnePath General are gradually shrinking and will likely eventually lead to unprofitability, with it being unable to cover its overheads. The Scheme is the final formal step in the acquisition and integration of the insurance business into the ZFSA Group.

Relevant principles for confirmation 6 Section 17F(1A) of the Act sets out the factors to which the Court must have regard in deciding whether to confirm the Scheme. Relevantly, they are the interests of the policyholders of a body corporate affected by the Scheme, and any other matter the Court considers relevant. 7 The principles applicable to confirmation of the transfer of insurance businesses were summarised in Re Aioi Nissay Dowa Insurance Co Ltd [2023] FCA 697 (Aioi Nissay) at [7]: A critical factor on an application of this kind is whether implementation of the scheme will materially detrimentally affect policyholders: Re Westport Insurance Corporation (No 2) [2009] FCA 1598; (2009) 181 FCR 530 at [32] (Lindgren J). Although an "affected policyholder" is defined in s 17C as the holder of a policy being transferred under the scheme, it is well accepted that the Court is to look to the interests of the relevant policyholders of both the transferor and transferee insurers and consider whether implementation of the scheme will detrimentally affect them in a material way: Re Australian Branch of Great Lakes Insurance SE (trading as Great Lakes Australia) (No 2) [2020] FCA 1266 at [13] (Allsop CJ). A prime consideration is the nature of the actual and potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer: Great Lakes at [13]; Re Reward Insurance Ltd [2004] FCA 151 at [3] (Heerey J). See also Re Allianz Australia General Insurance Limited [2023] FCA 994 (Allianz) at [16].

Procedural matters and compliance with Dispensation Orders 8 The steps to be taken before an application for confirmation is made are set out in s 17C(2) of the Act and in Prudential Standard GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers (GPS 410). Additionally, the Dispensation Orders required the applicants to take steps (some of which reflect the statutory requirements) as a condition of the dispensation from compliance with s 17C(2)(c) of the Act. The applicants have approached the proof of these matters in light of the observations which I made in Allianz at [18] as to the Court being entitled to assume that its orders have been complied with, except to the extent that evidence is given as to any areas of non-compliance. 9 The procedural requirements under the Act, GPS 410 and the Dispensation Orders have been substantially complied with. These matters are addressed in Ms Manolios's further affidavit. A detailed explanation of compliance with procedural matters, including the Dispensation Orders, is set out in a letter from the applicants to the Australian Prudential Regulation Authority (APRA) dated 25 October 2023 (Final APRA Report). However, issues relating to compliance with two of the orders have been brought to the Court's attention. 10 First, there has only been partial compliance with Order 2(b) of the Dispensation Orders, because until 13 October 2023 the Media Release the subject of the Order was only accessible from a OnePath webpage different to that required by the Order. Order 2(b) required the applicants to issue and publish a Media Release (in the form of Annexure C to the Dispensation Orders) on specific webpages; in the case of OnePath General on the webpage "www.onepath.com.au/about-us" (OnePath About Us webpage). Due to an oversight, the correct form of the Media Release was made accessible from 28 August 2023 on the homepage for OnePath branded insurance products "www.onepath.com.au/insurance.html" (OnePath insurance homepage) rather than the OnePath About Us webpage. Upon becoming aware of this oversight on 13 October 2023, the Media Release was made accessible on the OnePath About Us webpage, while its accessibility to the OnePath insurance homepage was retained. 11 The OnePath About Us webpage provides general information about the OnePath insurance brand and the Zurich Group, whereas the OnePath insurance homepage provides more specific information about the OnePath branded insurance product suite, including links to information on how to make claims. The evidence shows that in the period to 20 October 2023, there were significantly more views recorded on the OnePath insurance homepage than on the OnePath About Us webpage and that there was a significant number of views on the OnePath insurance homepage before the oversight was detected. Further, the information contained in the Media Release is reflected in the content available on the dedicated Scheme webpages referred to in the Notice of Intention and the Scheme Summary that were made available to policyholders. 12 Accordingly, the objective of Order 2(b), namely to bring the Media Release to prominence to OnePath General policyholders, has been satisfied and the publication on the OnePath insurance homepage is likely to have been no less effective in bringing the Media Release to prominence to OnePath General policyholders. No issues have arisen concerning the publication of the Media Release on the Zurich webpage specified in Order 2(b). 13 Second, the evidence reveals that an initial batch of notifications of the Scheme Summary sent by email (required by Order 2(d) of the Dispensation Orders) to OnePath General policyholders was not precisely in the form contemplated in the evidence read at the Dispensation hearing, in that: (a) it referred to the Scheme Summary as being enclosed (as with postal notifications) rather than being at the end of the email, and (b) it omitted a hyperlink to the online version of the Scheme Summary. However, the body of the email in fact contained, as contemplated in the draft form of the notification, the entire Scheme Summary such that Order 2(d) has been complied with because the Scheme Summary in the requisite form has been sent by email to the relevant class of OnePath General policyholders. 14 Neither of the issues in complying with Orders 2(b) or 2(d) of the Dispensation Orders is such as to have adversely affected OnePath General policyholders or have deprived them of the opportunity to raise any reasonable objection to the Scheme. Nor does the partial non-compliance with Order 2(b) impede the exercise of the Court's discretion to confirm the Scheme: see generally Re AIA Australia Limited (No 2) [2023] FCA 1305 at [38], [44] (Derrington J) and the cases there cited. 15 As required by s 17C(2)(a) of the Act, a copy of the Scheme and the actuarial reports on which the Scheme is based have been given to APRA. 16 The Notice of Intention, approved by APRA, was published in the Government Gazette on 23 August 2023 and in the newspapers approved by APRA on 24 August 2023 in accordance with [9] of GPS 410 and Order 2(a) of the Dispensation Orders. APRA had provided its approval of the Scheme Summary on 28 July 2023, prior to the publication of the Notice of Intention in compliance with [8] of GPS 410. 17 The applicants have provided the Scheme Summary by email or by post to 59,237 affected policyholders, being the policyholders referred to in Orders 2(d) and 2(e) of the Dispensation Orders. 18 The public inspection requirements set out at [16] of GPS 410 and Order 2(l) of the Dispensation Orders have also been complied with. As at 20 October 2023, there had been no attendance at any of the public inspection sites. 19 The Inspection Documents (as defined in the Dispensation Orders) were made available on the Webpages referred to in Order 2(h) of the Dispensation Orders, and the Call Centre and the email contact addresses referred to in the Scheme Summary and Notice of Intention were operational in accordance with Orders 2(i) and (j) of the Dispensation Orders. As at 20 October 2023, there were 3,126 views of the dedicated OnePath General Webpage and 1,557 views of the dedicated Zurich Webpage. 20 The Scheme document and Inspection Documents were made available free of charge pursuant to s 17C(4) and Order 2(m) of the Dispensation Orders. No requests for these documents were received. 21 On 30 October 2023, APRA confirmed receipt of the Final APRA Report and indicated its satisfaction that there had been substantial compliance with the Dispensation Orders and that it considered the deviations from compliance with the Orders to be minor, such that affected policyholders have been given the opportunity to raise any reasonable objection to the Scheme. 22 The applicants have received no notice from any policyholder objecting to the Scheme, nor did any policyholder seek to be heard at the confirmation hearing. The lack of any objection to the Scheme by affected policyholders in circumstances where they have been given an adequate opportunity to do so is a matter in favour of confirmation of the Scheme: Aioi Nissay at [15]; Allianz at [20]. 23 The Scheme is intended to give effect to a Transfer Agreement dated 25 July 2023 for the transfer and acquisition of the Transferring Business, and the Transfer Agreement is conditional upon the making of a go-ahead decision by the Treasurer of the Commonwealth or a permitted delegate under s 41(1) of the Insurance Acquisition and Takeovers Act 1991 (Cth) (IATA) in relation to the acquisition by Zurich of the transferring business. On 31 July 2023, Ms Manolios received a notice of a "go-ahead decision" by a permitted delegate under s 41(1) of the IATA.

The actuarial evidence and other commercial considerations 24 In their supplementary affidavits, the actuaries have updated the assessment in their actuarial reports of the regulatory capital position and the profitability of Zurich and OnePath General on the basis of more recent financial information, including regulatory submissions to APRA as of 30 June 2023. The estimated position of both Zurich, OnePath General and the combined businesses at the Effective Date of the Scheme (1 December 2023), as well as the after-tax profits for the first half of 2023, are conveniently set out at Table 2 in [8] of Mr Goodchild's supplementary affidavit: ZAIL OPGI ZAIL + OPGI $m pre-scheme (based on 30/06/2023) Profit (after-tax) 62 2 Capital Base 591 9 595 Prescribed Capital Amount 397 5 399 Capital Surplus 194 4 197 PCA Coverage Ratio 149% 186% 149%

25 When account is taken of dividends paid by OnePath General and intended to be paid by Zurich prior to the Scheme being effected, the estimated capital positions are not substantially different from those assessed in the actuarial reports. Both applicants were also profitable in the first half of 2023. 26 Ms Appleton's assessment as an independent actuary of the forecast regulatory capital position is the same as the appointed actuaries and is set out set out in [9] of her supplementary affidavit. 27 Zurich and OnePath General have regulatory capital well above the required minimum and their capital positions are expected to be in line with their internal targets if the Scheme is confirmed. Both businesses are expected to be profitable in 2024 and 2025, although OnePath General's profits are expected to diminish as its portfolio runs off to the point where it will not be able to meet its overheads. The combined position of the business is expected to yield a slight improvement to Zurich's capital position (148.8% to 149.2%) driven by the diversification benefit coming from the Scheme if it is confirmed. The post-Scheme PCA Coverage Ratio of 149% for the combined business is within Zurich's target capital range. Zurich continues to be rated AA- by Standard and Poor's. 28 While the capital ratio for the combined Zurich business is expected to be lower than the capital ratio for OnePath General immediately prior to the Scheme, Zurich is a much larger company with substantially greater levels of capital (a capital base of $591 million as opposed to $9 million) and this will provide additional security to OnePath General policyholders post transfer to absorb unexpected losses. 29 Further, OnePath General policyholders will continue to be insured by a company within the Zurich Group and to benefit from capital support that the Zurich Group may provide. 30 The appointed actuaries have opined that the Scheme does not have a material adverse impact on the likelihood that insufficient financial resources will cause valid Zurich or OnePath General policyholder claims to remain unpaid. In the same vein, Ms Appleton has concluded that having regard to financial position, capital adequacy, entity rating, profitability and reinsurance (separately addressed below), implementation of the Scheme will have no material impact on the financial strength of Zurich for both Zurich and OnePath General policyholders. 31 No changes are expected to administration systems, policy management or practices in respect of existing Zurich policyholders as a result of the proposed Scheme. 32 Similarly, no significant changes are expected to OnePath General's claims handling practices as a consequence of the Scheme. The claims management functions in respect of the Direct IP Policies and Credit Card Policies will continue to be carried out within the ZFSA Group operations. QBE will continue to be responsible for managing claims handling for remaining QBE Personal Line Policies. 33 No changes are expected to Zurich's product pricing or underwriting approaches as a consequence of the Scheme. No significant changes are expected to OnePath General's product pricing approach by reason of the Scheme and its products do not require underwriting. As with claims handling, the remaining OnePath General operations are expected to remain distinct from those of Zurich. 34 OnePath General's reinsurance arrangements are independent from Zurich. The main coverages are a 60% cession of risks under the Direct IP Policies with Scor Reinsurance Company (Asia) Limited (Scor) and catastrophe/individual large loss coverage for the QBE Personal Line Policies with approximately 30 reinsurers. OnePath General also has a 100% outward quota share arrangement for unexpired risks on its 50% share of risk under the personal lines business prior to 1 August 2015 with QBE Insurance (Australia) Limited (QBE Australia). 35 On 10 July 2023, OnePath General entered into a Novation Deed with Scor in respect of the reinsurance agreement for the Direct IP Policies which is conditional upon confirmation of the Scheme. The remaining external reinsurance arrangements (those unaffected by novation) will transfer under the Scheme upon Confirmation. These reinsurers have been separately notified of the Scheme and its effect. 36 For more abundant caution, the applicants seek orders under the specific power under s 17F(2) of the Act to effect the transfer of these remaining reinsurance arrangements. Orders of the kind sought have frequently been made in order to ensure that affected policyholders are not deprived of reinsurance that existed pre-transfer in relation to their liabilities: Re Insurance Australia Limited (No 2) [2017] FCA 980 (Insurance Australia) at [119]-[121] (Gleeson J); Allianz at [27]. 37 The separate reinsurance arrangements maintained by Zurich will be unaffected by the Scheme. 38 As indicated above, the Scheme will not effect any changes to the terms and conditions of policies issued by OnePath General or Zurich. The Scheme will not change the progress or rights regarding any complaints, disputes, remediation or legal claims of any policyholder. Claims or proceedings against OnePath General will be made or brought against Zurich and OnePath General policyholders will have the same remedies that they presently have: see Australian Securities and Investments Commission v Zurich Australia Limited [2023] FCA 712. 39 The remaining remediation conducted by OnePath General in relation to the QBE Personal Line Policies has now been completed and is closed. There are no open remediation activities in respect of OnePath General. 40 Zurich is conducting, or in the course of planning, two remediation programs for its customers. The first relates to pricing promises made under certain products issued by Zurich. A further matter has been identified for remediation in relation to premiums paid on some commercial motor insurance policies which offered a nil excess windscreen only claim benefit. The anticipated costs of these programs are each less than $10 million and Mr Goodchild considers that they are or will be appropriately provisioned and are unlikely to change the assessed capital positions referred to above. 41 A class action commenced in this Court in February 2020 relating to consumer credit insurance against ANZ, QBE, OnePath Life Limited and OnePath General has been settled by orders made by O'Bryan J in June 2023 and the time for filing an appeal has now expired: see Reilly v Australia and New Zealand Banking Group Limited (No 5) [2023] FCA 896. Under the terms of settlement, OnePath General was not required to contribute financially. All requests for policy cancellation in relation to the settlement relating to the Credit Card Policies had been processed prior to the data extraction date for sending of the Scheme Summaries. 42 Finally, Zurich is, but OnePath General is not, a signatory to the General Insurance Code of Practice (GI Code). A review of the product administration and claims management arrangements for general insurance benefits under Credit Card Policies and Direct IP Policies was carried out from February to June 2023 in order to administer these portfolios in compliance with the GI Code. A small number of processes requiring uplifts for Zurich to administer these policies has been identified and Ms Manolios anticipates that Zurich will be able to administer these policies in full compliance with the GI Code by 1 December 2023. 43 Ultimately Mr Goodchild (the appointed actuary of Zurich) and Mr Gomes (the appointed actuary of OnePath General) have concluded that: (a) in respect of the effect of the Scheme on OnePath General Policyholders: (i) there will be no effect on their contractual benefits or other rights; (ii) there will be no adverse effect on business practices, including policy administration, claims handling, product pricing and underwriting; and (iii) Zurich is expected to be in a sound financial position following the Scheme; (b) in respect of the effect of the Scheme on Zurich Policyholders: (i) there will be no effect on their contractual benefits or other rights; (ii) there will be no effect on business practices, including policy administration, claims handling, product pricing and underwriting; and (iii) Zurich will likely have a slightly improved capital position following the Scheme; and (c) the interests of transferring OnePath General Policyholders and existing Zurich Policyholders will not be detrimentally impacted in a material way by the Scheme. 44 Ms Appleton (an independent actuary) has concluded that: (a) the Scheme will not materially reduce the financial security provided to OnePath General Policyholders; (b) there will be no change to the contractual rights of OnePath General Policyholders as a consequence of the Scheme; (c) there will be no material change in the service provided to OnePath General and Zurich Policyholders as a consequence of the Scheme; (d) the Scheme is not expected to result in an adverse deterioration in the capital position or solvency of Zurich; and (e) the interests of transferring OnePath General Policyholders, and existing Zurich Policyholders, will not be detrimentally impacted in a material way by the Scheme.

APRA's position 45 The applicants have liaised with APRA since December 2022 to discuss and consult on various aspects of the proposed Scheme including the terms of the Scheme document and the actuarial reports. Following the Dispensation hearing, the applicants have provided regular updates to APRA about compliance with the Dispensation Orders and feedback in relation to the Scheme which culminated in the Final APRA Report. 46 APRA has been involved in the oversight of the Scheme, appeared at the Dispensation hearing and supported the making of the Dispensation Orders. APRA has been furnished with the APRA Final Report and, as noted above, considered that there has been substantial compliance with the Dispensation Orders. APRA has no objection to the proposed Scheme. As the government regulator charged with ensuring that insurance businesses are conducted in a way which protects the legitimate interests of policyholders, APRA's position is a matter from which the Court can draw significant comfort: Aioi Nissay at [14]; Insurance Australia at [109]-[116] (Gleeson J); see also Allianz at [31].

Orders 47 The proposed orders do not depart from existing practice. For the reasons set out above, it is appropriate that the Court confirm the Scheme without modification. 48 Order 4 of the proposed orders provides that ZFSA pay APRA's costs of the proceeding as agreed, or if agreement cannot be reached, as assessed. Under the Scheme (cl 9) and the Transfer Agreement (cl 16), the costs incurred in connection with the Scheme are to be paid by ZFSA, reflecting a requirement that such costs are not to be borne by policyholders. Although ZFSA is not a party to the proceedings, the Court has power and discretion to make an order for the payment of costs against it: Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50; (2012) 200 FCR 154 at [73]-[90] (Keane CJ, Lander and Foster JJ). On 25 July 2023, the board of ZFSA resolved to consent to the proposed costs order. ZFSA has a sufficient connection to the proceedings to be the subject of the order as proposed: see Re OnePath Life Ltd [2022] FCA 406 at [20] (Jagot J). I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.

Insurance Acquisition and Takeovers Act 1991(Cth)s 41

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

At a glance

Court

Decision date

Before

Source

Judgment (9 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (13)

Cited By (1)