Australian Securities and Investments Commission v Zurich Australia Limited

1. Pursuant to s 17F of the Insurance Act 1973 (Cth) (Act), the scheme for the transfer of the insurance business of Allianz Australia General Insurance Limited to Allianz Australia Insurance Limited be confirmed in the form of Annexure 'A' attached to these orders.
2. The effective date for the purposes of the commencement of the scheme is 1 September 2023.
3. Pursuant to s 17F(2) of the Act, all of Allianz Australia General Insurance Limited's reinsurance contracts that respond to any policy transferred pursuant to the scheme be transferred to Allianz Australia Insurance Limited.
4. The Applicants pay the costs of the proceedings of the Australian Prudential Regulation Authority as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

JACKMAN J: 1 In these proceedings, the applicants, Allianz Australia General Insurance Limited (AAGIL) and Allianz Australia Insurance Limited (AAIL), make an application under s 17E of the Insurance Act 1973 (Cth) (the Act) for an order under s 17F of the Act confirming a scheme to give effect to the transfer of the insurance business of AAGIL to AAIL (Scheme). 2 The applicants are each companies in the Allianz group in Australia, headed by Allianz Australia Limited (AAL) (Allianz Australia Group). AAGIL is a wholly owned subsidiary of AAIL. AAGIL (formerly known as Westpac General Insurance Limited (WGIL)) was acquired from Westpac Banking Corporation (Westpac) on 1 July 2021, and it was renamed on that date. 3 Upon the acquisition of AAGIL, the Allianz Australia Group commenced a process of consolidation of its insurance business into AAIL in order to simplify its corporate structure and to reduce the number of general insurance entities in the group. The proposed Scheme will allow this process to be completed and enable AAGIL ultimately to be wound up. It is expected that the confirmation of the proposed Scheme will simplify the proposed structure, the financial management and the financial reporting obligations of the Allianz Australia Group. 4 The operation of AAGIL's insurance business is already fully integrated into the Allianz Australia Group. This includes the processing and handling of claims on AAGIL policies, which is carried out by Allianz Australia Group staff. AAGIL has no staff or computer systems of its own. All policies issued by AAGIL and AAIL and all claims made on those policies are administered on systems managed by Allianz Australia Group's information technology provider. When AAGIL was acquired, AAIL entered into a 100% quota share reinsurance arrangement with it. This intra-group reinsurance applies to losses arising from each of AAGIL's portfolios, other than those that are covered by certain external catastrophe reinsurance arrangements that AAGIL maintained up to 2021. As a result of this arrangement, the net insurance liabilities of AAGIL are zero, all of AAGIL's residual insurance risk exposures (ie exposures not covered by its external reinsurance) are effectively transferred to AAIL, and (as the independent actuary, Mr Atkins, puts it) the financial security of AAGIL policyholders is now represented mainly by the financial security of AAIL. 5 AAGIL is authorised to issue general insurance business and has held this authority since March 1989. It is closed to new business and its remaining exposures and claims are being managed to zero. Prior to its acquisition on 1 July 2021, AAGIL only issued policies of consumer credit insurance (CCI) and householders and landlord insurance (home insurance) under the Westpac brand. 6 AAGIL's CCI portfolio has been closed to new sales entirely since June 2019, and it comprises around 76,780 current policies as of 31 May 2023. The main types of CCI products in this portfolio are those that were sold to Westpac customers who held credit cards, personal loans or flexible lines of credit. Smaller categories of product have been in run-off since 2001 or 2002, including a credit card CCI product issued to customers of Australian Guarantee Corporation, a former Westpac subsidiary now known as Latitude Financial Services (LFS). 7 The nature of the CCI portfolio is first party loss occurrence based insurance. The duration of the cover is tied to the underlying credit card or loan product. For all its CCI products, AIGIL issued the general insurance component for disablement and unemployment cover, with the life insurance component issued by a Westpac life insurer. The records maintained for the CCI portfolio rely on the periodic receipt of data and information from Westpac and LFS. As at 31 May 2023, there are only approximately 20 customers who have open CCI claims but may not be current policyholders. 8 AAGIL's home insurance portfolio has been closed completely to new business since December 2021. At the time of the acquisition of the business, WGIL held over 560,000 current home insurance policies. These policies were renewable on an annual basis and again were first party loss occurrence based policies, where the occurrence was a defined event under the terms of the policy. All of AAGIL's existing home insurance policyholders were offered a policy renewal with an equivalent policy issued by AAIL when their annual renewable policies expired from November 2021 onwards. The renewal process was completed in December 2022. Of the approximately 502,713 AAGIL policyholders offered a policy renewal, 436,894 elected to renew with the AAIL issued policy. Consequently, AAGIL has no current home insurance policies and about 90% of the policyholders of its recently expiring portfolio have elected to become policyholders of AAIL. As at 31 May 2023, there are only about 2,142 expired home insurance policies with outstanding claims to resolve. 9 AAGIL also has the benefit of an external reinsurance program maintained up to 2021 for its home insurance portfolio that provided catastrophe excess of loss reinsurance, property per-risk excess of loss reinsurance and liability excess of loss reinsurance. As at 31 May 2023, the outstanding recoveries under this program totalled approximately $7.673 million. It is estimated that since it commenced writing business in 1989, AAGIL may have issued over 3 million policies. Most of these policies have expired or been cancelled. 10 As to the insurance business of AAIL, AAIL is an authorised general insurer, the fourth largest in the Australian market. It has held its authorisation since June 2002. AAIL actively underwrites insurance across most personal and commercial general insurance lines, including motor (domestic and commercial), home insurance (which includes the AAGIL policyholders who renewed their policies with AAIL), Fire and Industrial Special Risks, compulsory third party and workers compensation. The gross written premium for the year to December 2022 for this portfolio was $6.5 billion. 11 The key elements of the proposed Scheme are: (a) AAGIL's run-off portfolio of CCI and home insurance business, including all open claims, will be transferred to AAIL (Transferring Business); (b) AAIL will assume all of the liabilities and obligations of AAGIL in relation to the Transferring Business; (c) AAIL will receive all AAGIL's assets referrable to the Transferring Business, except for $10 million in cash that AAGIL will maintain to retain its minimum required regulatory capital until its general insurance authorisation can be revoked; (d) AAIL will become the issuer of AAGIL's policies; and (e) any claims or proceedings against AAGIL at or after the effective date will be continued or brought against AAIL. 12 The Scheme is intended to give effect to a Transfer Agreement dated 13 June 2023 for the transfer and acquisition of the Transferring Business. No changes are proposed to the terms of any policies under the proposed Scheme. Nor will there be any changes to claims notification and claims handling processes. The intragroup quota share reinsurance arrangement will terminate immediately prior to the effective date of the Scheme (proposed to be 1 September 2023). The external reinsurance that AAGIL has in place will either transfer under the terms of the Scheme to AAIL or is expected to be novated to AAIL before the Scheme effective date (the novations involve 14 reinsurance contracts issued by three foreign non-authorised reinsurers where there is a pending recovery that is assessed to be material). 13 Division 4A of Pt III of the Act deals with the transfer and amalgamation of insurance business. Section 17B provides that no part of the insurance business of a general insurer may be transferred to another general insurer except under a scheme confirmed by the Federal Court. 14 Section 17C(2)(c) provides that an application for confirmation of a scheme may not be made unless a summary of the scheme approved by APRA (Scheme Summary) has been given to every affected policyholder. An "affected policyholder" is defined as "the holder of a policy affected by a scheme": s 17C(1). For the purposes of 17C, "affected policyholders" refers only to the holders of a policy being transferred under the scheme and not the holder of a policy that was in some way affected by the scheme taking place: Re Insurance Australia Limited [2004] FCA 524; (2004) 139 FCR 450 at [19]-[24] (Lindgren J); Re Australian Branch of Great Lakes Insurance SE (trading as Great Lakes Australia) [2020] FCA 629 at [11] (Allsop CJ); Re Aioi Nissay Dowa Insurance Co Ltd [2023] FCA 697 at [7] (Jackman J). 15 Section 17C(5) permits the Court to dispense with the need for compliance with s 17C(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. At an initial hearing of the present proceedings on 5 July 2023, I made orders dispensing with the requirements of s 17C(2)(c) of the Act in so far as it requires a Scheme Summary to be given to every affected policyholder. The effect of those orders, in substance, was to dispense with the need for a Scheme Summary to be given to: (a) policyholders of expired or cancelled AAGIL policies who have not made a claim by 7 July 2023 but who may in the future make a claim after that date; and (b) policyholders to whom it is proposed to send a Scheme Summary but in respect of whom, as it may transpire, the applicants do not have an accurate and current mailing address. The orders of 5 July 2023 required the applicants to provide a Scheme Summary to policyholders of current AAGIL policies and AAGIL policyholders who have an open claim as at 7 July 2023, and to take a number of steps to publicise the Scheme in order to bring it to the attention of affected policyholders. 16 Section 17F(1A) of the Act sets out the factors to which the Court must have regard in deciding whether to confirm a scheme, including relevantly the interests of the policyholders of a body corporate affected by the Scheme, and any other matter the Court considers relevant. As I said in Re Aioi Nissay Dowa at [7], a critical factor on an application on this kind is whether implementation of the Scheme will materially detrimentally affect policyholders, and that, 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. In that regard, 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. 17 Turning to the circumstances of the present application, 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). In addition, the dispensation orders made on 5 July 2023 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. 18 There is a question of principle as to the extent to which evidence is required of compliance with the earlier orders of the Court, bearing in mind the overarching purpose of the civil practice and procedure provisions expressed in s 37M of the Federal Court of Australia Act 1976 (Cth), namely to facilitate the just resolution of disputes according to law, and as quickly, inexpensively and efficiently as possible. In Re Vita Group Ltd [2023] FCA 400 at [14], I said that the overarching purpose identified in s 37M applied in the context of Court hearings for schemes of arrangement pursuant to s 411 of the Corporations Act 2001 (Cth), even though schemes of arrangement applications are typically conducted on an ex parte basis, without a contradictor. I noted that the obligation imposed by s 37M(3) is expressed in language which is imperative and immediate. With great respect to Perram J and his Honour's reasoning in Re Tesserent Limited [2023] FCA 969 at [19]-[22], I do not understand that obligation to be qualified by any need to await the "inevitably slow" processes of the Harmonisation Committee convened under the authority of the Council of Chief Justices. In applying s 37M in the context of members' schemes of arrangement under s 411, I said in Re Vita Group Ltd (No 2) [2023] FCA 623 at [4] that it was not necessary to provide evidence as to the explanatory statement and accompanying material having been dispatched in accordance with the orders made by the Court at the first Court hearing, in that the Court is 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. Any non-compliance would have to be raised at the second Court hearing in discharge of the responsibility of the plaintiff in an ex parte hearing of bringing to the Court's attention all matters that are material to the exercise of its discretion: see Re Vita Group Ltd [2023] FCA 400 at [42]. In my view, that reasoning is equally applicable to applications for confirmation of insurance schemes pursuant to the Act. 19 In the present application, the applicants have provided evidence of compliance with the Court orders of 5 July 2023, but have done so in a more economical way than has typically been the case in past applications. The evidence is contained in four paragraphs of the affidavit of Mr Tully of 16 August 2023, Mr Tully being the General Manager, Consumer Partners for the Allianz Australia Group, together with a letter to APRA dated 10 August 2023 confirming in detail that the applicants have complied with each of the orders made on 5 July 2023 in relation to dispensation. That evidence also establishes that the procedural requirements under the Act and GPS 410 have all been complied with. 20 The applicants have received no notice from any policyholder objecting to the Scheme or seeking to be heard at the confirmation hearing. There was no appearance by any objector at the confirmation hearing. That in itself is a matter in favour of confirmation of the Scheme in circumstances where affected policyholders have been given ample opportunity to make any such objection: Re Aioi Nissay Dowa at [15]. 21 Under cl 4(a) of the Scheme, it is a condition precedent of the Scheme taking effect that the Treasurer or a permitted delegate makes a go-ahead decision under s 41(1) of the Insurance Acquisition and Takeovers Act 1991 (Cth) in relation to the transfer. By letter dated 9 August 2023, the applicants received notice that such a decision had been made by a permitted delegate. 22 The application is supported by two affidavits of Mr Atkins, an independent actuary of more than thirty years standing. In his first affidavit of 21 June 2023, Mr Atkins annexes an actuarial report which he prepared at the request of AAIL, dated 16 June 2023 (the Actuarial Report). In his second affidavit of 11 August 2023, Mr Atkins updates the Actuarial Report, and confirms that he has not identified any matters that have caused him to change the conclusions or opinions set out in the Actuarial Report. The salient aspects of Mr Atkins' evidence are as follows. 23 Dealing first with the issue of financial security, as a result of the 100% quota share agreement, all of AAGIL's residual risk exposure (ie not covered by external reinsurance) has already effectively been transferred to AAIL, such that AAGIL's net insurance liabilities are zero. AAIL's pre-transfer balance sheet includes AAGIL's risk exposures. Further, both entities are part of the level 2 group headed by AAL, and share its key documents and policies, including its Internal Capital Adequacy Assessment Process (ICAAP), its target capital ratio and risk management framework. As at 31 December 2022, AAIL had net assets of $3.3 billion, exceeded its Prescribed Capital Amount (PCA) and met its target capital ratio of 130%. Its actual capital expressed as a percentage of PCA, also referred to as its Capital Adequacy Multiple (CAM) was 158%. Mr Atkins has updated his analysis as at 30 June 2023 with the benefit of quarterly APRA returns and management accounts. The post-transfer position for CAM of AAIL was 1.59 as at 31 December 2022, and 1.40 as at 30 June 2023. That reduction is the result of a dividend payment by AAIL to the Allianz Australia Group's ultimate parent, Allianz SE, in accordance with its ICAAP. However, AAIL will continue to meet its internal target level of 1.3 times its PCA and its policyholder obligations. Based on the 30 June 2023 position, Mr Atkins considers that the proposed scheme will not impact the financial security interests of either AAGIL's or AAIL's policyholders. 24 AAGIL's gross insurance liabilities (before reinsurance and other recoveries) have declined by 43% since 31 December 2022 to $92.3 million. As AAGIL has been in run-off for some time, this reduction is expected as claims on home insurance policies from 2022 and earlier are paid out. AAGIL's insurance liabilities continue to be 100% quota share reinsured by AAIL. 25 AAGIL's CAM as at 31 December 2022 was 3.82, and as at 30 June 2023 increased to 7.11 (reflecting a reduction in its operational risk charge driven by the cessation in December 2021 of writing any new or renewal business). However, as Mr Atkins observes, due to the 100% quota share arrangement and the ownership of AAGIL by AAIL, the assessment of financial risk for AAGIL and its policyholders through the lens of the CAM alone is flawed. This is because AAGIL's current net assets are less than its gross insurance liabilities (roughly only 80% as at 30 June 2023). Accordingly, if, in an entirely hypothetical situation, AAIL were to default on its reinsurance and stop paying claims, AAGIL would not be able to meet its obligations. Further, it would be open for AAL and AAIL to access, by way of dividend, excess capital in AAGIL above its prudential and internal capital requirements. In short, the financial security of AAGIL policyholders, as matters stand, is derived from AAIL. The financial security of AAGIL policyholders will remain essentially unchanged (noting the transfer or novation of reinsurance arrangements referred to below) as a result of the Scheme. Rather than relying on rights that AAGIL has under the inward reinsurance arrangement, current AAGIL policyholders would become policyholders of AAIL. Further, both AAIL and AAGIL policyholders will continue to have the benefit of support from Allianz SE on a global basis. 26 As to the management of claims, AAGIL policyholders have an interest in the maintenance of the processes and standards for managing their claims. All claims from AAGIL policyholders have been managed within the AAIL claims department since April 2022, with the same staff, systems, policies and procedures being used for both companies. Since the acquisition of the AAGIL business, customers continue to lodge claims using the same contact telephone numbers that existed prior to the sale of the business and it is not proposed to change these contact details or the current claims notification and management processes if the proposed Scheme is confirmed. Mr Atkins is satisfied that the proposed claims handling arrangements do not present any threat to the interests of policyholders, as those arrangements will not be changed as a result of the Scheme. 27 As to reinsurance, in keeping with APRA's preferred practice, AAGIL has now novated to AAIL all 14 of its existing reinsurance contracts with foreign non-authorised reinsurers where a pending reinsurance recovery was assessed to be material (ie greater than $100,000). Mr Hollo SC, who appeared for the applicants, informed me of some minor and immaterial clerical errors in the deeds of novation, which the applicants intend to rectify consensually. The remaining external reinsurance placed with local and Lloyd's authorised reinsurers will be transferred under the Scheme upon confirmation (cl 6.3 of the Scheme). For more abundant caution, the applicants seek orders pursuant to the specific power under s 17F(2) of the Act to effect the transfer of the remaining reinsurance arrangements. Orders of that kind 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 at [119]-[121] (Gleeson J). Mr Atkins is satisfied that any risk of failure in transferring the benefit of past reinsurance to AAIL is minimal. 28 As to risk issues affecting the Transferring Business, as indicated above, the Scheme will not effect any changes to the terms and conditions of policies issued by AAGIL or AAIL. The Scheme will not change the progress or rights regarding any complaints, disputes, remediation or legal claims of any policyholder. A class action involving the historic sale of CCI policies to Westpac customers has been resolved by settlement orders made by the Court on 21 June 2023. In any event, AAGIL and AAIL have the benefit of an indemnity from Westpac in relation to AAGIL's exposure to the outcome of those proceedings. All of the historic customer remediation programs involving AAGIL's insurance business have been completed. There are no customer remediation programs on foot that affect the Transferring Business. 29 The applicants are, however, the subject of a current investigation by ASIC into the handling of home and contents insurance claims from March 2019 arising from flooding events in New South Wales and Queensland. ASIC has made no decision to take any enforcement action and the investigation is expected to take 6 to 12 months to complete. In Mr Atkins' second affidavit, specific reference is made to that investigation by ASIC. Mr Atkins concludes that the transferring AAGIL policyholders will not be disadvantaged by the AAIL's ability to address customer issues and remediation where required, or AAIL's risk management systems and risk governance. To the extent that any prejudice to ASIC's potential claims against AAGIL is relevant to the assessment under s 17F(1A) of the Act, I do not consider there to be any such prejudice, because any liability of AAGIL will be transferred to AAIL under the Scheme: see my reasons in Australian Securities and Investments Commission v Zurich Australia Limited [2023] FCA 712 at [16]-[23]. 30 Mr Atkins' conclusion is that the interests of AAGIL's policyholders and those of the existing policyholders of AAIL will not be adversely affected in a material way by the proposed Scheme. In particular: (a) the policy terms and conditions for AAGIL policyholders will not change other than the insurer becoming AAIL; (b) AAGIL's policyholders will continue to have their policies and claims managed by AAIL in the same way as they currently do and involving the same operating systems, staff, claim lodgement process, policies and procedures; and (c) there will be no change to the capital position of AAIL and no change in the financial security for AAGIL's policyholders, and capital levels for AAIL will continue to be in excess of the minimum required regulatory level after the proposed Scheme takes effect. 31 As to the position of APRA, APRA has been involved in the oversight of the Scheme, and appeared at the hearing on 5 July 2023, and at the confirmation hearing, and supported the making of the orders sought by the applicants on both occasions. APRA has confirmed that it has no objection to the proposed Scheme. APRA also draws attention to cl 8 of the Scheme, under which the costs and expenses incurred in connection with the Scheme are to be paid by AAIL, and not by any policyholders of AAGIL or AAIL. 32 In my view, there is no reason why the orders sought by the applicants should not be made. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.