HDI-Gerling Australia Insurance Company Pty Limited, in the matter of HDI-Gerling Australia Insurance Company Pty Limited (ABN 16 069 085 196) (No 2) [2010] FCA 669

Federal Court of Australia|2010-06-24|Before: Jacobson J

Subject to order 3, pursuant to s 17F(1) of the Insurance Act 1973 (Cth) ("the Act"), the scheme for the transfer of the general insurance business of HDI-Gerling Australia Insurance Company Pty Ltd to the Australian branch of HDI-Gerling Industrie Versicherung AG, in the form of Annexure A to these orders, be confirmed without modification.

Subject to order 3, pursuant to s 17F(2) of the Act, all reinsurance responding to any policy transferred pursuant to the scheme, and all rights attaching to it, be transferred to the Australian branch of HDI-Gerling Industrie Versicherung AG as part of the assets transferred by the scheme.

3.1 The obligation in Clause 12.2(b) of the Transfer Agreement dated 4 May 2010 between HDI-Gerling Australia Insurance Company Pty Ltd and HDI-Gerling Industrie Versicherung AG, a copy of which is Annexure H to the affidavit of Kenneth Stephen Devlin sworn 23 June 2010, remains to be satisfied on or before 1 July 2010;

3.2 HDI-Gerling Australia Insurance Company Pty Ltd will file, and serve on APRA, by 2 July 2010 affidavit evidence verifying that obligation has been satisfied;

3.3 In the event that the obligation has not been satisfied by 1 July 2010, Orders 1 and 2 will have no effect.

HDI-Gerling Australia Insurance Company Pty Ltd is no longer required to cause the notice described in Order 3 of the Orders of the Court made on 18 May 2010 to be displayed on the Talanx Group website.

HDI-Gerling Australia Insurance Company Pty Ltd pay the costs of APRA as agreed or, if agreement cannot be reached, as assessed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE MATTER OF HDI-GERLING AUSTRALIA INSURANCE COMPANY PTY LIMITED HDI-GERLING AUSTRALIA INSURANCE COMPANY PTY LIMITED (ABN 16 069 085 196)

Introduction 1 This is an application pursuant to Division 3A of Part III of the Insurance Act 1973 (Cth) ("the Act") for confirmation of a scheme under which the insurance and reinsurance business of HDI-Gerling Australia Insurance Company Pty Limited ("the Australian Subsidiary") will be transferred to HDI-Gerling Industrie Versicherung AG ("the German Company") Australian branch ("the Branch"). 2 I described the background to the scheme in my judgment dated 18 May 2010, HDI-Gerling Australia Insurance Company Pty Limited, in the matter of HDI-Gerling Australia Insurance Company Pty Limited (ABN 16 069 085 196) [2010] FCA 505. 3 Both the Australian Subsidiary and the German Company are part of a group of companies known as the "Talanx Group". The Talanx Group is a global provider of insurance. It is apparently the third largest German insurer and employs 17,000 people worldwide. It writes €20 billion annually in premiums. 4 The scheme is propounded principally to effect an internal reorganisation of the Australian insurance operations of the Talanx Group. Thus, following the implementation of the scheme, the general insurance business of the Talanx Group in Australia will be conducted by the German Company through the Branch, and the Australian Subsidiary will be deregistered. 5 The scheme has one additional feature to which I will refer later. It affects the solvency ratios of the Branch because what, in effect, will occur is that what is seen to be excess capital will be repatriated to the Talanx Group in Germany. The result will be that the policyholders will be transferred from the Australian Subsidiary, which is expected to have a solvency ratio at 30 June 2010 of approximately 300 per cent, to the Branch, which is projected to have a post-transfer solvency ratio of about 150 per cent.

The companies involved 6 The Talanx Group is known by that name because the finance and management holding company for the group is Talanx AG, which is a German company registered in Hanover. 7 I was taken in the earlier application to a corporate chart which describes the structure of the group. Talanx AG is not the parent company of the group companies, the ultimate parent being Haftpflichtverband der Deutschen Industrie Versicherung auf Gegenseitigkeit ("HDI"). HDI is a German mutual insurance association.

The german company 8 The German company is an indirect wholly-owned subsidiary of HDI, which also has its head office in Hanover. The German company is licensed as an insurer in Germany and is subject to regulation by the relevant German regulatory authority. 9 The German company writes insurance business throughout the world, including the business which it writes in Australia through the Branch. The German company is rated A+ (stable) by Standard & Poor's and A (excellent) by another rating agency, AM Best.

The branch 10 The German company is registered in Australia as a foreign company. It has been authorised by the Australian Prudential Regulation Authority ("APRA") to carry on insurance business in Australia since 1 October 2009, and has carried on insurance here since about that time. 11 The conduct of insurance business in Australia by foreign insurers is subject to various statutory requirements designed to ensure that the interests of Australian insureds are protected. There is a general requirement in section 28 of the Act that general insurers maintain, in Australia, assets at least equal to the value of their liabilities in Australia. There are other provisions of the Act which deal with this, including section 62M. 12 The meaning of assets and liabilities in Australia is dealt with in section 116A of the Act. There are also Prudential Standards which 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. These requirements are set out in Prudential Standard GPS 110 Capital Adequacy, especially at paragraph 11. 13 In addition, APRA places certain restrictions on the ability of foreign insurers to deal with their Australian assets. In particular, a foreign insurer may not reduce its Australian capital (save to the extent of current year profits) without obtaining APRA approval. 14 Thus the position is that although global assets of a foreign insurer may be applied for the benefit of Australian policyholders (subject to any contrary requirement of foreign law), the foreign insurer's assets in Australia may not be applied in satisfaction of claims by non-Australian policyholders. 15 As I said in my earlier judgment, the Branch is not a separate legal entity but a notional entity representing the insurance liabilities and associated assets of that company in Australia. This is the way in which branches of foreign insurance companies are treated for regulatory purposes in Australia.

The legislative framework 16 The relevant legislative framework is dealt with in sections 17B, 17C, 17E and 17F of the Act. I do not need to set out those provisions. It is well settled that the steps that are required by the Act to be taken prior to the "making" of an application need only be taken prior to the time at which the court is moved for an order for confirmation of the scheme. They are not required to have been taken prior to the filing of the application in the registry; see Re Armstrong Jones Life Assurance Limited (1997) 74 FCR 160 at 163 per Emmett J. His Honour's judgment was referred to with apparent approval in Re Royal & Sun Alliance Life Assurance Limited (2000) 104 FCR 37 at 39 per Katz J and Re Insurance Australia Limited (2004) 139 FCR 450 ("Re Insurance Australia Limited") at [30]ff per Lindgren J. 17 The steps which are required to be taken before an application for confirmation can be made are found in section 17C(2) of the Act and Prudential Standard GPS 410. I do not need to set out the steps save to say that the steps which must be taken in any case may be modified by an order under section 17C(5) of the Act, which provides for the court to be able to dispense with the need for compliance with section 17C(2)(c) in relation to a particular scheme. I made such an order in my judgment on 18 May 2010. 18 The steps are explained in full in the outline of submissions supplied by counsel for the applicant. I will mark the submissions as MFI2. 19 I am satisfied by the evidence that I was taken to this morning by Mr Owens that all of the necessary steps have been taken. Most of them are described in a letter dated 27 May 2010 from APRA to Mr Devlin, who is the agent in Australia of the German Company and the Branch.

The discretion to confirm the scheme 20 The authorities which have dealt with the exercise of the court's power to confirm schemes under Part III of the Act indicate that the critical factor governing the exercise of the discretion is whether policyholders will be materially detrimentally affected by the implementation of the scheme; see for example Re Insurance Australia Limited at [76]. 21 The emphasis is upon the position of "affected policyholders". In Re Insurance Australia Limited at [19] - [24], Lindgren J held that an affected policyholder is one whose policy is being transferred under the scheme. 22 It follows that in the present case it is the policyholders of the Australian Subsidiary who are "affected policyholders." However, Lindgren J observed at [25] in Re Insurance Australia Limited that this does not mean that the effect the scheme will have on other policyholders is irrelevant to the exercise of the court's discretion. 23 The court's discretion to confirm a scheme is conferred by section 17F. Heerey J said In the matter of Reward Insurance Limited [2004] FCA 151 at [3] that the discretion is a general one and the Act does not specify any criteria that are to be considered. 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. There are other authorities to the same effect. 24 Also, a similar approach is taken in the authorities which deal with schemes under the Life Insurance Act 1995 (Cth); see for example Re MetLife Insurance Limited (2007) 63 ACSR 492 at [28] per Gyles J. 25 The authorities under the Life Insurance Act 1995 (Cth) also point to the importance of the actuarial evidence. For example, in Re Commonwealth Insurance Holdings Limited [2007] FCA 1012 ("Commonwealth Insurance") at [14], Edmonds J said that the question of whether a policyholder is adversely affected is largely actuarial. 26 As Mr Owens said, there may be instances where the question is not an actuarial one, but ordinarily, that will be the focus of attention in applications of the present type. 27 The position must now be considered in the light of section 17F(1A) of the Act. Lindgren J referred to this in Westport Insurance Corporation, in the matter of Westport Insurance Corporation (No 2) [2009] FCA 1598 at [35]ff. I do not need to set out that subsection, which was introduced by legislation passed in 2008. What is important is paragraph (a) of that subsection, which requires the court, in deciding whether to confirm a scheme, to have regard to the interests of the policyholders of a body corporate affected by the scheme. 28 Lindgren J observed at [36]ff that there was a question of whether paragraph (a) requires the interests of the policyholders of the transferee company, other than those with policies written through the branch of such a company, to be taken into account. 29 His Honour held that those interests are not required to be taken into account; see, in particular, at [59]. However, his Honour at [60] respectfully suggested that legislative amendment is desirable to put the intended meaning of paragraph (a) of section 17F(1A) beyond doubt. 30 I was told this morning by Mr Claxton, who appears for APRA, that this is a step which is being considered.

The actuarial evidence 31 I will turn, then, to the actuarial evidence. That evidence is contained in an actuarial report of Mr Adam Payne, who is the appointed actuary of the Australian Subsidiary and the German Company. Mr Owens took me through the report dated 21 May 2010 in some detail this morning. There are a number of aspects of the report that I should refer to briefly. 32 As Mr Payne points out, the underwriting or portfolio risks of the Australian Subsidiary were 100 per cent reinsured within the Talanx Group. This reinsurance is net of claims handling expenses and policy administration provision, which are of course not reinsured. 33 The Australian Subsidiary is in run-off, but the Branch is writing insurance business on a net retained basis. The planned net retention of the Branch is approximately 22 per cent of claims in the initial years of operation in the lines of business proposed to be written. 34 Mr Payne's report proceeds upon a number of assumptions referred to in paragraph 5.2. These include an assumption that all of the Australian Subsidiary's reinsurance arrangements will be transferred to the Branch, and that all the rights and obligations of the Australian Subsidiary under those reinsurance policies will become rights and obligations of the Branch. 35 In paragraph 5.3 of his report, Mr Payne refers to a matter which is of some importance. He refers to the fact that if there is a shortfall in the minimum capital ratio as at the effective date, then funds sufficient to increase the minimum capital requirements to a figure of 145 per cent of APRA's minimum capital requirement will be made. 36 Although the reinsurance is within the Talanx Group, Mr Payne has assumed that the probability of non-recovery of reinsurance is remote. His valuation of the insurance liabilities therefore assumes full recoverability of the reinsurance assets. 37 There is a table at page 16 of Mr Payne's report which shows the capital adequacy multiples before the transfer contemplated by the scheme. The position as at 31 December 2009 was that the Australian Subsidiary had a ratio of 268 per cent as against the Branch which was at 274 per cent. The projected figure at 30 June 2010 is 299 per cent for the Australian Subsidiary and 267 per cent for the Branch. 38 Another matter which is relevant to consider is the loss deposit account referred to at paragraph 8.1 of the report. As Mr Payne there observes, provision is made for the Australian Subsidiary to transfer the balance of the loss deposit account to the Branch. 39 The loss deposit account is comprised of funds which have been deposited by the reinsurer against the reinsurance liabilities. The arrangements that underlie the scheme are that an amount of $12 million will be transferred from the loss deposit account held by the Australian Subsidiary to the Branch. There is at present approximately $15 million in the account but $3 million will be repatriated to the Talanx Group in Germany. However, an additional $10 million in a separate loss deposit account will be provided so that the total amount in the account upon the implementation of the scheme will be in the order of $22 million. 40 Table 8.1 at page 18 of Mr Payne's report is an important table. It shows the statement of expected financial position as at 30 June 2010 and shows the position pre- and post-transfer. I do not need to set out the figures that are contained in the table. It is sufficient to say that the position pre-transfer for the Australian Subsidiary was 299 per cent of APRA's capital adequacy requirements whereas the position of the Branch upon implementation of the scheme will be 152 per cent. 41 Mr Payne's report proceeds upon the basis that he considers the probability of the Branch not being able to meet its insurance liabilities following the portfolio transfer to be less than 0.5 per cent. He sets out in table 8.2 on page 19 the projected position pre- and post-transfer for the Branch which shows that the comparison is 267 per cent pre-transfer as at 1 July 2010 and 152 per cent post-transfer. There are projections for these capital ratios out to 2013. 42 The effect of Mr Payne's report is that he was satisfied that the interests of policyholders should not be adversely affected in any material way as a consequence of the scheme. 43 However, following the provision of Mr Payne's report, Mr Jefferson Robert Gibbs provided a peer review of Mr Payne's report. As Mr Owens has pointed out this morning, the peer review was extremely detailed and raised a number of questions in relation to the report. 44 The conclusion reached by Mr Gibbs was that nothing came to his attention that would lead him to believe that Mr Payne's conclusions are unreasonable. Mr Gibbs set out, and commented upon, the text of Mr Payne's conclusions on page 35 of his report which is annexed to his affidavit of 23 June 2010 as follows: I have reviewed the following aspects of the Scheme Transfer Report: - The methods used by the AA in assessing the Scheme. - Judgements made by the AA for reasonableness and materiality. - Whether key risks and uncertainties, and their implications, have been identified. The AA's conclusions are summarised within Section 10 of the Scheme Transfer Report as set out below: "Given the expected financial position of HG/AUST immediately following the 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 that the HDI-GAUS policies will be assumed by HG/AUST with no changes to the policy terms and conditions, we are satisfied that the Scheme will not adversely impact the interests of HDI-GAUS policyholders in this regard. Give the claims management practices of each company now and the plans for claims management practices following the transfer, we do not believe that there will be any detriment to policyholders in this regard. In summary, we are satisfied that the interests of policyholders should not be adversely affected in any material way as a consequence of the Scheme." Having carried out the review as described in this report, nothing has come to my attention that would lead me to believe that the AA's conclusions are unreasonable. 45 The points which Mr Gibbs noted were twofold. First, there was a shift for the policyholders of the Australian Subsidiary from an ASIC registered company to a branch and Mr Gibbs points out that any risks and implications of that shift are not discussed in Mr Payne's report. The second point is that Mr Gibbs says that he "noted a number of ambiguous statements" in Mr Payne's report. The ambiguities are not set out, but he said they were discussed with Mr Payne but remain unchanged in Mr Payne's final report. 46 Mr Payne deals with the issues raised by Mr Gibbs. He responds to Mr Gibbs's report in his affidavit of 23 June 2010 in a way which is sufficient to satisfy me that the issues raised by Mr Gibbs do not affect the conclusions reached by Mr Payne. The conclusions are summarised by Mr Payne in paragraph 4 and 5 of his affidavit as follows: 4. For the reasons set out in my report, I am of the opinion and belief that: (a) given the expected financial position of the Australian branch of the German Company immediately following the transfer, I am 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; (b) given that the Australian Subsidiary policies will be assumed by the Australian branch of the German Company with no changes to the policy terms and conditions, I am satisfied that the Scheme will not adversely impact the interests of the Australian Subsidiary policyholders in this regards; and (c) given the claims management practices of each company will remain unchanged as the same staff will continue to manage the claims following the transfer, I do not believe that there will be any detriment to policyholders in this regard. 5. 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.

Discussion 47 The conclusions which I reach upon the basis of the actuarial reports and the other matters to which Mr Owens referred me this morning are that I ought to exercise my power to confirm the scheme. The reasons are essentially as follows. 48 First, the terms and conditions of the transferred policies will remain unaltered, save for the substitution of the Branch of the German Company as the insurer liable on them. 49 Second, claims management procedures in respect of the transfer policies will be unaltered. 50 Third, the Branch will hold adequate capital to protect policyholder interests, being capital of at least 145 per cent of the minimum APRA requirements. 51 In this regard, the decision of Emmett J in Re Mercantile & General Reinsurance Company of Australia Limited [2004] FCA 1773 is of some guidance. His Honour referred at [19] of his reasons to the effect on the solvency ratio of the transferee company. 52 There were a number of schemes before his Honour, and the solvency ratios of the transferor companies varied from 263 to 558 per cent, whereas the solvency ratio of the transferee company in each case was 158 per cent. His Honour referred to this in some detail at [19], and to a report which was before him. 53 His Honour was satisfied that the reduction of capital involved in the schemes did not preclude him from exercising his power to approve the schemes under section 17F of the Act. 54 Mr Claxton, who appeared this morning for APRA, informed me that the 150 per cent figure to which I have referred above is within the range of capital management plans approved by APRA. He informed me that as a matter of practice, APRA would be concerned if the level fell below 120 per cent, but APRA had no objection to the reduction of capital inherent in the present scheme. 55 It is important to bear in mind in looking at the capital ratio figures that the 150 per cent figure is an amount which is equal to the amount that APRA regards as the minimum capital ratio plus a buffer of 50 per cent. 56 Accordingly, in the present case, the transfer of the policies to a company which is expected to have more than 50 per cent in excess of the minimum amount that APRA thinks is required to provide security is one to which APRA does not object. Moreover, the appointed actuary, Mr Payne, has taken this into account. So too has Mr Gibbs in his peer review. 57 As I said earlier, Edmonds J in Commonwealth Insurance observed that the central question in an application such as this is largely an actuarial one. Accordingly, in exercising my discretion, I have given particular weight to the views expressed by Mr Payne and Mr Gibbs. I have also taken into account the matters which Mr Gibbs raised, and subject to two matters which I will address very briefly, I am satisfied that I should exercise my power to confirm the scheme. 58 The first matter is the importance of the reinsurance. Plainly, the security of the affected policy holders is dependent, in large measure, upon the reinsurance arrangements remaining in place. 59 The orders which are proposed today provide for the transfer of the existing reinsurance policies and all rights attaching to them to be transferred to the Australian branch. Thus the assumption upon which Mr Payne expressed his opinion will be satisfied by the making of that order. 60 The second issue is the loss deposit account. That, too, is an important part of the security of the affected policyholders. Although the transfer agreement between the parties deals with this issue, I have thought it of sufficient importance to make it a condition of the confirmation order that the loss deposit account be transferred and that evidence be supplied to APRA of the satisfaction of that condition. 61 The final matter to which I should refer is the position of APRA. It is well established that the court pays particular regard to the attitude of APRA to an application for confirmation of a scheme. Katz J referred to this and to the relevant authorities in Re Royal & Sun Alliance Life Assurance Ltd [2000] FCA 1259 at [24] - [27]. 62 Mr Claxton informed me this morning that the view of APRA is that the scheme should be confirmed. That is an important matter, which I take into account in the exercise of my discretion.

conclusion 63 For these reasons, I will make orders in terms of the draft orders submitted by Mr Owens. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

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