Calliden Limited, in the matter of Calliden Limited [2009] FCA 186

REASONS FOR JUDGMENT 1 On 19 November 2008 I made orders pursuant to s 17F of the Insurance Act 1973 (Cth) ("the Act") confirming a scheme under which the general insurance business of Calliden Ltd ("Calliden") was transferred to Calliden Insurance Ltd ("Calliden Insurance"). At the same time, I also made orders transferring from Calliden to Calliden Insurance the benefits and burdens of all outward reinsurance contracts to which Calliden was a party with effect from 12.01am on 1 December 2008. These are my reasons for making those orders. 2 Section 17B of the Act provides that no part of the insurance business of a general insurer may be transferred to another general insurer other than under a scheme confirmed by the Federal Court. Section 17F provides: Confirmation of scheme

(b) confirm the scheme subject to such modifications as it thinks appropriate; or

(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

(2) The Federal Court may make such orders as it thinks fit in relation to reinsurance.

3 To understand the issues which arise it is necessary to say something about the structure and undertakings of Calliden and Calliden Insurance. Mr Adrian Diggelmann is the chief financial officer of Calliden Group Ltd ("Calliden Group") and its wholly owned subsidiaries which include Calliden and Calliden Insurance. On this application he gave evidence about those matters. 4 Both Calliden and Calliden Insurance are general insurers authorised and licensed by the Australian Prudential Regulation Authority ("APRA") under Part III of the Act. Broadly speaking, Part III operates to make unlawful the conduct of insurance business without the approval of APRA. Until December 2007, Calliden Group was also a general insurer authorised by APRA under Part III of the Act. Apart from being the ultimate holding company for the group, Calliden Group also conducted two separate insurance businesses. These were, first, an international inward general reinsurance business which had been in run-off since about the start of 2000. Secondly, a general insurance business which had been in run-off since March 2000 consisting of rural short-tail insurance placed through an underwriting agent. 5 Prior to December 2007 it was thought that it would be desirable for Calliden Group to operate as a non-operating holding company. This would reduce the number of authorised insurers within the group and also free up capital which, so long as Calliden Group was an authorised insurer, was required to be maintained by it. On 15 November 2007, this Court confirmed a scheme transferring Calliden Group's insurance business to Calliden: see Calliden Group Ltd in the matter of Calliden Group Ltd [2007] FCA 2019. From that day, Calliden operated the two former insurance businesses of Calliden Group. However, apart from that augmentation Calliden had its own pre-existing general insurance business. It was incorporated in February 2005 as a wholly owned subsidiary of Calliden Group. For the year ended December 2007, it had gross written premiums of about $65 million. It wrote policies in a number of areas of general insurance including commercial, public and product liability, sports, leisure and community, construction, commercial and domestic motor, household and niche personal lines but did not write workers compensation or compulsory third party. 6 It is those three insurance businesses - Calliden's own general insurance business and the two insurance businesses of the Calliden Group transferred to Calliden on 15 November 2007 under the previous scheme - that Calliden now wishes to transfer to Calliden Insurance. Mr Diggelmann explained in his evidence that the overarching purpose of the present scheme was to enable the entire group to streamline its delivery of insurance products. Prior to the 2007 scheme the group had three licensed insurers; following that scheme it had two; following this scheme it will have one. After the confirmation of the present scheme Calliden will no longer have any insurance businesses and will be able to apply to APRA to surrender its license. The immediate benefits of the scheme - if approved - are, first, it will mean that Calliden will no longer need to prepare actuarial reports, claims liability valuations or financial condition reports which presently cost in excess of $100,000 per annum; secondly, Calliden will not need to pay a licence fee of approximately $40,000 to APRA each year; thirdly, it will no longer be necessary for Calliden to maintain capital reserves in order to satisfy APRA's prudential requirements. After the confirmation of the scheme it is likely that Calliden will either be shelved or deregistered. 7 It is then necessary to say something of the policy holders of Calliden. Mr David Porteous is employed by 3 red Pty Ltd ("3 red") which is an insurance consultant retained by Calliden in relation to the present scheme. Mr Porteous gave evidence on the application about the nature of Calliden's insurance business. It is not necessary to deal with the detail of all of his evidence. For present purposes, it is sufficient to note the following. First, of the former Calliden Group's business (transferred to Calliden under the 2007 scheme) there were 964 policyholders in respect of the inward bound reinsurance business of which there were 36 notified but outstanding claims. The identity and addresses of all of these policy holders are known. Secondly, so far as Calliden Group's former domestic insurance business (also transferred to Calliden under the 2007 scheme) was concerned, this book consisted of about 3,500 policies written between 1999 and 2000. There were no outstanding claims nor did Mr Porteous expect there to be any further claims given the short-tail nature of the business. 8 Thirdly, the position in relation to Calliden's own insurance business was more complex due to its current nature and scale. Mr Porteous thought that there were likely to be about 110,000 policy holders. Mr Diggelmann explained that the nature of Calliden's own insurance business was such that its policies were written on its behalf by intermediaries who dealt with clients or their brokers. Section 17C(2)(c) of the Act requires affected policyholders to be notified of the scheme proposal. However, s 17C(5) permits an applicant to apply to the Court for a dispensation from the need to comply with s 17C(2)(c). Calliden made such an application with respect to three classes of policyholders. These were all of the policyholders of the former Calliden Group's inward bound reinsurance business other than the 36 in respect of whom there were outstanding claims; those policyholders of Calliden where, due to the actions of its underwriting intermediaries, details were not available; and new policyholders whose details were not yet to hand at the time of the mail-out. On 3 October 2008, Jacobson J granted the dispensation sought upon terms. 9 The scheme, if confirmed, is to be effected by two documents. The first is the scheme which the Court is asked to confirm; the second a related deed between Calliden and Calliden Insurance achieving that which the scheme, once confirmed, lawfully permits. The two critical features of the scheme are, first, provisions effecting the transfer of Calliden's insurance businesses to Calliden Insurance; secondly, an obligation upon Calliden to transfer investments to Calliden Insurance equivalent to the monetary value of Calliden's liabilities and obligations under those businesses. This is to occur in two stages. On or before 1 December 2008, Calliden is to transfer what is estimated to be the necessary amount of investments; subsequently, an actuary is to ascertain whether any further adjustment is necessary. Schemes featuring that kind of structure have previously been approved by the Court: Re Munich Reinsurance Company of Australasia Ltd [2004] FCA 1772 at [10]-[11] per Emmett J. The present scheme was approved by APRA on 30 September 2008 in its "go-ahead" letter of that date. 10 An actuarial report was prepared by Mr Geoff Atkins and submitted to Calliden on 12 September 2008. That report concluded thus: In this report, we have considered the interests of the policyholders of CIL and CL, having regard to the Scheme. In particular, we have considered the issues of policy terms and conditions, financial security and claims handling processes.

Based on our analysis, we make the following conclusions:

● given that the CL policies will be taken over by CIL with no change to terms and conditions, we are satisfied that the Scheme will not adversely impact the interests of CL policyholders in this regard

● given the expected financial position of CIL post-Transfer, we are satisfied that the Scheme provides adequate financial security to the policyholders of both companies, noting that there is always uncertainty with the outcome of insurance business and ongoing solvency cannot be guaranteed

● given the claims management practices of each company now and the plans for the Transfer, we do not believe that there will be any detriment to policyholders in this regard.

I have made all the inquiries that I believe are desirable and appropriate and no matters of significance that I regard as relevant have, to my knowledge, been withheld from the Court.

In summary, I am satisfied that the interests of policyholders should not be adversely affected in any material way as a consequence of the Scheme.

11 Mr Atkins also provided a supplementary letter on 14 November 2008. This letter took into account a revised capital management plan approved by the Board of Calliden Insurance during October 2008. Of course, that plan had not been available when Mr Atkins produced his report on 12 September 2008. The plan was the result of a condition imposed by APRA in its go-ahead letter of 30 September 2008. The critical features of the plan were: (a) a capital injection from Calliden Group at 1 December 2008 of $26.5 million which would bring the paid up capital to $50 million with total net assets of $63 million; (b) payment of a dividend of $13.6 million from Calliden Insurance to Calliden Group in early 2009; and (c) maintenance of capital in the future in excess of 1.5 times the APRA-prescribed minimum capital requirements. 12 On the basis of that information Mr Atkins concluded that the capital adequacy multiple for Calliden Insurance would be 2.7 after the transfer, whereas the capital adequacy multiple for Calliden before the transfer was 3.0 - that is, there would be a decrease. However, as a result of the capital management plan, the multiple for Calliden Insurance would increase to 2.8 in December 2008, fall to 2.4 in December 2009 and then fall to 2.1 in December 2010. In December 2010, but for the transfer, the capital adequacy multiple of Calliden would be 3.3. Mr Atkins was of the view that, notwithstanding those matters, the capital position of Calliden Insurance was still strong. Mr Atkins' actuarial report was peer-reviewed by Mr Jefferson Gibbs of KPMG Actuaries Pty Ltd, a fellow of the Institute of Actuaries and the Institute of Actuaries of Australia, in a report dated 15 September 2008. He concluded that nothing had come to his attention that would lead him to believe Mr Atkins' conclusions were unreasonable. The minimum capital adequacy multiple required by APRA is 1.5. Mr Atkins made the following assumptions for the purposes of his letter: It is our understanding that the assets to be transferred from CL to CIL, and also the capital to be injected from CGL to CIL, are in the form of cash and low risk, short term bank securities. To the best of our knowledge there are no assets held in CGL, CL or CIL that might of questionable value in the current financial turmoil.

13 Mr Diggelmann gave evidence as follows: The understanding of the quality and nature of the assets to be transferred to CIL, as discussed on page 2 of the Actuarial Letter, also accords with my understanding and belief in relation to the quality and nature of those assets.

14 This evidence was of significance. The deed required the transfer from Calliden to Calliden Insurance of "Investments" which was defined in the Scheme (and the deed) to mean: government bonds, semi-government bonds, bank bonds, commercial bills, corporate bonds and other fixed interest securities that are beneficially owned by CL;

15 Without Mr Diggelmann's evidence, I would not have been satisfied that the investments had the quality assumed by Mr Atkins, namely, "cash and low risk, short term bank securities", for the definition of investments is somewhat broader. 16 Section 17C(2) of the Act provides: 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.

17 As will shortly appear, there has been no compliance with that provision. However, compliance with s 17C(2) is not a jurisdictional prerequisite to the power of the Court to confirm the scheme arising: see Re Armstrong Jones Life Assurance Ltd (1997) 74 FCR 160 at 162 per Emmett J; Re Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37 at 40 per Katz J; Re Insurance Australia Ltd (2004) 139 FCR 450 at 461-463 per Lindgren J; MLC Lifetime Company Ltd and MLC Ltd (No 2) [2006] FCA 1367 at [11] per Bennett J; Re Calliden Group Ltd [2007] FCA 2019 at [81] per Lindgren J. 18 Two difficulties arose in relation to the procedural requirements of notification. First, the notice of intention which was published and the approved scheme summary which was sent to policy holders included a statement that the scheme documents would be available for inspection at "KPMG, Level 8, 45 Murray Street, Hobart". In fact, after the documents were delivered to the mailing house, it was discovered that KPMG had moved offices to Level 3, 100 Melville Street, Hobart and the office at Murray Street was occupied by a mortgage broking service called the Apple Group. However, Calliden arranged the display for both KPMG's new office and the premises of the Apple Group. It also included a slip with the scheme summaries informing policyholders of this and ran notices to similar effect in The Australian and the Hobart Mercury newspapers. APRA was satisfied by the display at Murray Street. In these circumstances, I am satisfied GPS 410 was complied with and hence that there was compliance with s 17C(2). 19 I am also satisfied, however, that s 17C(2) was not complied with in another instance. There was evidence before me that 220 policyholders were not contacted. These were policyholders whose policies had been written through an intermediary Watkins Taylor Stone. This occurred because the address recorded for these policyholders was a DX address and Calliden had not made arrangements for delivery to DX addresses. Calliden subsequently arranged for Watkins Taylor Stone to inform any policyholder who made a claim of the scheme. The evidence of Mr Porteous showed that the error had occurred though oversight. It was submitted that given the widespread public notification the Court should, nevertheless, confirm the scheme. I agree - the oversight was accidental, the number of persons involved relatively minor and the subsequent steps taken by Calliden were diligent. 20 It is useful to record that no formal objection to the scheme was received. The matter was called outside the Court at the hearing and no party appeared to object. The reinsurers affected by the scheme were also given notice. None appeared.

Consideration 21 The scheme should be confirmed. It is true that the capital adequacy margin of Calliden Insurance is not as substantial as the equivalent margin for Calliden would have been but for the transfer. However, it is still well above the requirements of APRA. The assets injected into Calliden Insurance are also cash-like assets unlikely to be affected by the present financial turmoil. It is true that policyholders will now hold policies with an insurer who has a lesser capital adequacy margin and that, in one sense, may at some level mean they are less valuable. However, it is unlikely that that effect is meaningful given compliance with APRA's requirements. The actuary has expressed satisfaction with the situation and that opinion has, in turn, been positively peer reviewed. Finally, it is relevant that there were no objections. 22 I made orders accordingly on 19 November 2008. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate: Dated: 4 March 2009 Counsel for the Applicants: Mr RA Dick