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[2021] FCA 1653
Federal Court of Australia
2021-12-20
McKerracher J, Markovic J
Original judgment source is linked above.
MARKOVIC J: 1 On 20 December 2021 I made orders including an order pursuant to s 17F of the Insurance Act 1973 (Cth) confirming a scheme for the transfer of the insurance business carried on by FM Insurance Company Limited to Factoring Mutual Insurance Company (FMIC) (Scheme). These are my reasons for making those orders.
background 2 On 12 November 2021 McKerracher J made orders (November 2021 Orders) dispensing with the requirements of s 17C(2) of the Act: see In the Matter of FM Insurance Company Limited [2021] FCA 1442 (FM Insurance (No 1)). At [8]-[11] of FM Insurance (No 1) his Honour described the background to the proposed Scheme as follows: 8 FM Insurance is a foreign company registered in Australia and is authorised by the Australian Prudential Regulation Authority (APRA) under the Act to carry on insurance business in Australia. Since 30 September 2014, FM Insurance has only been authorised by APRA to conduct run-off insurance business in Australia. FM Insurance is the Australian branch of the UK-based FM Insurance Company Limited, and is a wholly owned subsidiary within the FMIC (US) global parent group. 9 FM Insurance's business consists of a portfolio of all risk property insurance contracts underwritten by FM Insurance in Australia between 8 September 1972 and 30 September 2014 (Business). The Business has been in run-off since 30 September 2014, with the final insurance policy issued by FM Insurance on 30 September 2014. The Scheme has been proposed for the transfer of FM Insurance's Business to FMIC as part of an internal reorganisation of the FMIC (US) group, with a view to revoking FM Insurance's run-off authorisation upon completion of the transfer of the Business. 10 There are no transferring reinsurances in relation to the transfer of the insurance business of FM Insurance to FMIC. 11 FMIC is a specialist insurer providing its policyholders, who consist solely of commercial organisations, with coverage for property damage (including cyber risk) and resulting business interruption exposures. (Emphasis in original.) 3 For the purposes of the proposed Scheme, FM Insurance relied on an actuarial report prepared by Daniel Smith of Taylor Fry who is currently the appointed actuary for both FM Insurance (Australia branch) and FMIC (Australia branch). 4 In his report Mr Smith considered the proposed transfer and its effect and concluded that "the proposed transfer of the run-off portfolio from FM Insurance Company Limited (Australia branch) to Factory Mutual Insurance Company (Australia branch) is not expected to have any material consequences for the policyholders or claimants of FM Insurance Company Limited (Australia branch) or Factory Mutual Insurance Company Limited (Australia branch)". 5 Among other things, Mr Smith considered the current and projected financial position of the Australian branches of each of FMIC (Australia) and FM Insurance (Australia). In his opinion both branches are in very solid financial condition and their respective parent companies have demonstrated their commitment to provide capital injections. On Mr Smith's analysis of the balance sheet position of each of those entities it is apparent that they each have sufficient capital coverage to meet liabilities. In particular, Mr Smith considered FMIC's capital coverage ratio which is the amount derived by comparing the adjusted net assets of FMIC in Australia as against its prescribed capital requirements. In 2020 FMIC's coverage ratio was 2.28, in 2021 it was budgeted to be 1.80 and in 2022 it is projected to be 1.97, which is well above the target range of 1.60 to 1.80. 6 In his affidavit Mr Smith pointed out one inaccuracy in his report. That is, since its preparation, it was brought to Mr Smith's attention that a further claim had in fact been received by FM Insurance (in addition to the open claim to which he refers in his report). Mr Smith's evidence is that while he was aware of this notification, he did not refer to it in his report as he did not consider it be a legitimate claim that impacted his assessment. As a result, to the extent that he stated at para 3.3 of his report that FM Insurance had only received one claim since that end of 2017, his report is inaccurate. Mr Smith notes that taking into account that claim there were in fact two claims received by FM Insurance since the end of 2017. Despite that inaccuracy, Mr Smith confirms that having considered the nature of the additional claim it does not affect his opinion that the Scheme will not have a materially adverse impact on the interested policyholders.
legal principles 7 Division 3A of Pt III of the Act is titled "Transfer and amalgamation of insurance business". 8 Section 17B relevantly provides that no part of the insurance business of a general insurer may be transferred to another general insurer or amalgamated with the business of another general insurer except under a scheme confirmed by this Court. 9 Section 17C sets out the steps to be taken before an application for confirmation and provides: (1) In this section: affected policyholder means the holder of a policy affected by a scheme. approved summary means a summary approved by APRA. (2) 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. (3) Without limiting the provision that may be made by the prudential standards for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each body corporate affected by the scheme, details of the place and time at which an affected policyholder may obtain a copy of the scheme. (4) An affected policyholder is entitled, on the person's request, to be provided by the company with one copy of the scheme free of charge. (5) The Federal Court may dispense with the need for compliance with paragraph(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. 10 Section 17F of the Act concerns confirmation of a scheme and relevantly provides: (1) The Federal Court may: (a) confirm a scheme without modification; or (b) confirm the scheme subject to such modifications as it thinks appropriate; or (c) refuse to confirm the scheme. (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 (c) any other matter the Court considers relevant. 11 In ACE Insurance Ltd, in the matter of ACE Insurance Ltd (No 2) [2016] FCA 1258 at [31] Gleeson J summarised the principles relating to the discretion conferred by s 17F of the Act to confirm a scheme as follows: In the matter of Reward Insurance Ltd [2004] FCA 151, Heerey J observed, at [3], that the discretion conferred by s 17F of the Act is a general one and that the Act does not specify any criteria which the Court must apply. His Honour described as "a prime consideration" the nature of the actual and potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer. In MDU Australian Insurance Company Pty Limited, in the matter of MDU Australian Insurance Company Pty Limited [2008] FCA 490, Emmett J identified, at [7], "[t]he critical consideration" as being whether relevant policyholders would be detrimentally affected by the implementation of the scheme. In QBE Insurance (Australia) Ltd, in the matter of Division 3A of Part III of the Insurance Act 1973 (Cth) & QBE Insurance (Australia) Ltd (No 2) [2016] FCA 288; (2016) 19 ANZ Insurance Cases 62-100 at [25], Allsop CJ observed that "the Court will ask whether the implementation of the scheme will materially detrimentally affect any of the relevant policyholders" (citing Re Westport Insurance Corporation (No 2) [2009] FCA 1598; (2009) 181 FCR 530 at [32]). 12 In Re Westport Insurance Corporation (No 2) (2009) 181 FCR 530 at [11]-[12] Lindgren J elaborated upon the notion of an "Australian branch" of a foreign insurer as follows: 11 An Australian "branch" of a foreign general insurer is a notional entity representing the assets and liabilities of that company in Australia. The branch is not a legal entity. However, the Australian Prudential Regulation Authority (APRA) is concerned only with the Australian branch and with the protection of the holders of policies issued by the Australian branch. There is a general requirement under the Act (s 28) that general insurers maintain "in Australia" assets of a value equal to or greater than the value of their liabilities "in Australia". Other provisions of the Act also express the test of ability to meet a general insurer's liabilities in Australia from its asset in Australia: see ss 62M, 62ZZC, 62ZZE. The meaning of assets and liabilities in Australia is refined and elaborated upon in s 116A of the Act. Prudential Standards require foreign general insurers to maintain assets in Australia in excess of their liabilities in Australia in an amount at least equal to a variant of a certain Minimum Capital Requirement (MCR) (see Prudential Standard GPS 110 Capital Adequacy, esp para 11). Foreign general insurers must therefore maintain a separate balance sheet in respect of their Australian operations in order to depict the financial condition of the Australian branch. 12 This notional division between a foreign general insurer's Australian operations and its other operations is reinforced by restrictions that APRA places on a foreign general insurer's liberty to deal with its assets in Australia. It may not reduce its assets in Australia (save to the extent of repatriation, to a certain extent, of current year profits) without APRA's approval. 13 Similar explanations have been adopted in other decisions of this Court: see for example Municipal Mutual Insurance Limited, in the matter of Municipal Mutual Insurance Ltd [2009] FCA 378 at [4]-[5]; Copenhagen Reinsurance Company Limited, in the matter of the application for Copenhagen Reinsurance Company Limited [2011] FCA 23 at [7]-[9]. It remains accurate save that the reference to a "Minimum Capital Requirement" is now to be substituted with a concept of "Prescribed Capital Requirement" referred to in Australian Prudential Regulation Authority (APRA) Prudential Standard GPS 110 Capital Adequacy: see Atradius Credit Insurance N.V., in the matter of Atradius Credit Insurance N.V. (No 2) [2016] FCA 1495 at [16]. 14 In considering the interest of policyholders of an Australian branch of a foreign insurer, it will often provide meaningful context for the Court to have evidence of the balance sheet and risk profiles of the transferor and transferee companies beyond their Australian branches: see for example Atradius at [29]-[36] and [73].
Consideration 15 For the following reasons I was satisfied that the orders sought by FM Insurance should be made. 16 First, as required by s 17C(2)(a) of the Act, copies of the Scheme and the actuarial report upon which it is based were given to APRA by February 2021 and final drafts were provided to APRA on 9 November 2021. The scheme summary and the notice of intention were approved by APRA on 11 November 2021 which was prior to publication of the notice of intention to make the application for confirmation of the Scheme as required by APRA Prudential Standard GPS 410. 17 Secondly, FM Insurance had complied with the November Orders as follows: (1) a copy of the scheme summary was provided to Statewide Property Mutual, the affected policyholder, on 15 November 2021; (2) notice of FM Insurance's intention to make an application to the Court for confirmation of the Scheme was published on 17 November 2021 in the publications and newspapers set out in Order 3 of the November Orders. GPS 410 requires notice to be published before the scheme is released for public inspection. However, as the Scheme was made available on 15 November 2021, publication of the notice on 17 November 2021 was not in conformity with GPS 410 and thus not in compliance with Order 3 of the November 2021 Orders. Notwithstanding that, I accepted FM Insurance's submission that its non-compliance was of a technical nature only having regard to the two day period involved and in circumstances where the notice of intention was published on FM Insurance's website alongside the Scheme on 15 November 2021; (3) since 15 November 2021 FM Insurance has provided a link to various documents in relation to the Scheme on its website; (4) since at least November 2021 FM Insurance has maintained a dedicated telephone line and email address to answer questions in relation to the Scheme; and (5) while Order 6 of the November 2021 Orders required FM Insurance to provide free of charge to any policyholder who so requested by nominated email address or telephone number a copy of the Scheme documents, no policyholder made any such request. 18 Thirdly, the evidence relied on by FM Insurance established that the interests of policyholders would not be adversely affected by the Scheme. In particular, Mr Smith's report concludes that the Scheme will not have any material consequences for the policyholders of claimants of either FM Insurance, the transferor, or FMIC, the transferee. Mr Smith explained that was because the Australian branch of FMIC is in very solid financial condition with its capital coverage ratio projected to be 1.97 in 2022. 19 Fourthly, the effect of the Scheme will be negligible in terms of claims handling and administration. The Scheme is essentially an internal restructure and, as Mr Smith observed, there will be no change in claims management and policy administration as a result of it. Claims will continue to be handled by the same staff after the transfer. 20 Further, Lynette Kay Schultheis, Operations Senior Vice President, Australia Operations Manager for FM Insurance, explained that if the Scheme was implemented and any further claim emerged policyholders would be able to contact FMIC using the same contact details currently allocated to FM Insurance, those contacts details will remain on the FM Global website for at least 24 months and policyholders will find that FMIC is located at the same physical address as FM Insurance's current registered address. 21 Fifthly, FM Insurance has been in run-off since 30 September 2014 and has not written any new policies since that time. The last of the policies written by FM Insurance expired on 30 September 2015 and, since 30 September 2014, FMIC wrote any new policies. Further, all of the policies written by FM Insurance were occurrence based-policies such that they covered occurrences during the policy period. Accordingly, in order for there to be any claim under any one of the policies it would have to relate to an occurrence that occurred, at the latest, by 30 September 2015. 22 There is only one open claim and, as FM Insurance submitted, given the length of time that has elapsed since the last policy was written it is unlikely that a further claim will emerge, particularly in circumstances where the policies require that immediate written notice of any loss be provided. 23 Sixthly, the position outside the Australian branches is largely irrelevant to the Scheme because FM Insurance and FMIC are companies within the same corporate group and share the same ultimate holding company so that the status of their potential financial backer is the same. 24 Seventhly, APRA did not oppose the proposed Scheme and the orders sought by FM Insurance. APRA is the government regulator charged with ensuring that insurance businesses are conducted in such a way that the legitimate interests of policyholders are protected. Thus, its non-opposition is a matter from which the Court could draw some significant comfort: see ACE Insurance at [44]. 25 Finally, FM Insurance was not notified by any interested party that it proposed to attend the confirmation hearing and thereby oppose the Scheme. Further, while the hearing of the matter took place via the Microsoft Teams platform, the fact of its listing was advertised in the Court list. No interested party sought to join the hearing and, upon the matter being called three times outside the Court room, no such party appeared at the hearing.
Conclusion 26 For those reasons I made the orders sought by FM Insurance. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.