Munich Reinsurance America Inc, in the matter of Munich Reinsurance America Inc (no 2) [2011] FCA 9

Munich Reinsurance America Inc, in the matter of Munich Reinsurance America Inc (no 2) [2011] FCA 9 - FCA 2011 case summary — Zoe

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REASONS FOR JUDGMENT 1 This is an application under s 17F of the Insurance Act 1973 (Cth) (the Act) for confirmation of two schemes prepared under Part III, Division 3A of the Act. The schemes are designed to effect the transfer of the direct insurance business (the Direct Insurance Scheme) and the reinsurance business (the Reinsurance Scheme) of the applicant, Munich Reinsurance America Inc (MRAm) to related companies. Following the hearing on 30 November 2010 (confirmation hearing), pursuant to s 17F(1)(a) of the Act, I confirmed both schemes without modification. These are my reasons for those orders. 2 On 13 August 2010, pursuant to s 17C(5) of the Act, Emmett J made orders dispensing with the applicant's obligation to comply with s 17C(2)(c) in relation to the Direct Insurance Scheme and the Reinsurance Scheme; Munich Reinsurance America Inc, in the matter of Munich Reinsurance America Inc [2010] FCA 948. The dispensation in connection with the Direct Insurance Scheme was conditional upon the applicant complying with orders relating to the dispatch of information about the Direct Insurance Scheme to policyholders of MRAm and for the publication of such information. In relation to the Reinsurance Scheme, the dispensation was conditional upon the applicant complying with orders relating to the dispatch of information about the Reinsurance Scheme. On 8 November 2010 the time for compliance with aspects of those orders was extended from 1 October 2010 to 1 December 2010. 3 Under the Direct Insurance Scheme the Australian direct insurance business of MRAm will be transferred to the Australian branch of Great Lakes Reinsurance (UK) Plc (Great Lakes). The reinsurance business will be transferred to the Australian branch of Münchener Rückversicherungs-Gesellschaft which translates as Munich Reinsurance Company (Munich Re). After confirmation of the schemes the applicant has no insurance liabilities in Australia. It proposed to ask the Australian Prudential Regulation Authority (APRA) to revoke its insurance authorisation issued on 25 June 2002. It would then close its Australian branch. 4 In his reasons for judgment on 13 August 2010 at [6]-[14], Emmett J gave a summary of the two schemes and the background of the companies involved in them, which, with respect, was very helpful and which I gratefully reproduce: 6 Munich Holdings of Australasia Pty Limited (MHA) is a sister company to MRAm. The substantive application is by MRAm for confirmation of the scheme to transfer its direct insurance business to the Australian branch of Great Lakes and the scheme to transfer its reinsurance business to the Australian branch of Munich Re. Munich Re has been registered in Australia as a foreign corporation since 11 June 1956 and has been authorised to carry on insurance business in Australia under the Act through a local branch. Since being authorised under the Act, Munich Re has had a mandate from the Munich Re Group to write non-life insurance business in Australia. 7 Great Lakes is incorporated in the United Kingdom and is regulated as a general insurer by the United Kingdom Financial Services Authority. It is a wholly owned subsidiary within the Munich Re Group. Great Lakes is registered in Australia as a foreign corporation and has been authorised to carry on insurance business in Australia under the Act through a local branch since 31 October 2007. Great Lakes has a mandate from the Munich Re Group to write only non-life direct insurance business. 8 MRAm is incorporated in the United States and is also a wholly owned subsidiary within the Munich Re Group. MRAm is registered in Australia as a foreign corporation and has been authorised to carry on insurance business in Australia through a local branch operation since December 1970. 9 MHA is also incorporated in Australia and is a wholly owned subsidiary within the Munich Re Group. MHA is the employer of all Australian staff of the Munich Re Group and is also the agent in Australia for both Munich Re and MRAm. 10 MRAm began writing direct insurance business in Australia in the late 1990s. Its business went into run-off in July 2002 with a limited exemption to write only direct insurance up until February 2003. Prior to commencing run-off, MRAm wrote a variety of traditional reinsurance business in Australia. Its reinsurance business was conducted directly with insurance companies and was administered through MRAm itself. All of MRAm's Australian reinsurance business conducted since the establishment of APRA in 1998 has been conducted with APRA regulated insurers. 11 Between 1993 and commencing run-off, MRAm wrote a variety of direct insurance business in Australia. Between 1993 and 2000, the business written was predominantly long-term business, including a significant proportion of professional liability business such as medical, legal and architects' professional indemnity. The term short-tail business is used to refer to the expectation that there is little likelihood of any claim arising either because policies have expired or time limits within which to bring a claim have passed. 12 The Munich Re Group describes its direct insurance business as program business, being insurance business written for specific types of risks. The underwriting, claims handling and administrative functions of the program business were outsourced to managing general agents (General agents). Between 2000 and the commencement of run-off, a mix of professional liability and public liability business was continued to be written. Under the arrangements between MRAm and the General agents, the General agents had delegated authority to administer the business and were responsible for all of the administration associated with such business, including maintaining policyholder lists and address details. In view of those arrangements, MRAm did not establish systems for the recording and maintaining of comprehensive lists of policyholders. 13 MRAm also wrote a small proportion of reinsurance business that included both Australian and New Zealand risks. The New Zealand risks have always been treated by MRAm as New Zealand business and included in its regulatory returns. That business is to be transferred to the New Zealand branch of Munich Re by way of a scheme in respect of which approval will be sought from the High Court of New Zealand. There may be an argument that the liabilities of that business may be liabilities of the Australian business. Accordingly, MRAm intends to provide a copy of the proposed reinsurance scheme summary to all such New Zealand policyholders and to include those policies in the reinsurance scheme. 14 The proposed schemes are part of an intricate restructure by the Munich Re Group to rationalise the number of business entities that are operating and regulated in Australia in order to improve capital efficiency and support for the Australian operations. The estimated value of the liabilities of the insurance and reinsurance business to be transferred is approximately $60,000,000, consisting of approximately $26,000,000 for the direct insurance business, and approximately $34,000,000, for the reinsurance business. The proposed schemes will not involve any change in the terms or conditions of the policies being transferred, other than the name of the insurer or reinsurer.

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Statutory framework 5 Part III, Division 3A of the Act regulates the transfer and amalgamation of insurance business. Relevantly, s 17B provides: (1) No part of the insurance business of a general insurer may be: (a) transferred to another general insurer; or (b) amalgamated with the business of another general insurer; except under a scheme confirmed by the Federal Court. (2) … (3) A scheme must set out: (a) the terms of the agreement or deed under which the proposed transfer or amalgamation is carried out; and (b) particulars of any other arrangements necessary to give effect to the scheme. 6 Confirmation of a scheme is binding on all persons and has effect "in spite of anything in the constitution of any body corporate affected"; s 17G(B). 7 There are established procedural requirements for obtaining confirmation of a scheme which are to be found in the Act and in Prudential Standard GPS 410. These requirements are discussed below at [31] et seq. 8 The court may confirm a scheme with or without modification or may refuse to confirm it; s 17F(1). In exercising its discretion the Court must have regard to the interests of policyholders of a body corporate affected by the scheme and any other matters the Court considers relevant; s 17F(1A). It may also make such orders as it thinks fit in relation to reinsurance; s 17F(2). The applicant submitted that the Court must also have regard to the main object of the Act which is expressed in s 2A(1) as follows: The main object of this Act is to protect the interests of policyholders and prospective policyholders and prospective policy holders under insurance policies (issued by general insurers and Lloyd's underwriters) in ways that are consistent with the continued development of a viable, competitive and innovative insurance industry. 9 In principle I accept that s 2A(1) may be relevant however as the reasons given below show, there is nothing in the present application that invites consideration of that section separately from the other legislative provisions. For that reason I do not need to refer to that provision again. 10 In In the matter of Reward Insurance Ltd [2004] FCA 151, Heerey J observed at [3] that s 17F conferred a general discretion not limited by specific criteria for its exercise. Despite the absence of specific criteria, it is well established (as Heerey J accepted) that a prime consideration is the financial viability of the transferee. Prior to the introduction of s 17F(1A) it was accepted that consideration must be given to policyholders whose policies were to be transferred under a scheme. It was less clear whether the interests of other policyholders (for instance those already holding policies issued by the transferee) should be taken into account; Re Insurance Australia Limited (2004) 139 FCR 450 at [19]-[25] per Lindgren J. 11 Section 17F(1A), which was introduced into the Act by the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 (Cth) (No 105, 2008), s 3, Schedule 3, Item 7 has clarified this issue. The reference to "policyholders of a body corporate affected by the scheme" clearly includes the policyholders of both the transferor and the transferee. In Re Westport Insurance Corporation, in the matter of Westport Corporation (No 2) (2009) 181 FCR 530 at [36]ff Lindgren J raised the question of whether the section encompasses the interests of the holders of policies issued otherwise than as part of the business of an Australian branch. In other words, must the Court have regard to the interests of the holders of policies issued in any of its branches anywhere in the world by a foreign general insurer that is affected by the scheme? 12 His Honour observed that those interests would be encompassed only on a very literal construction of the section which would be "at odds with the Act's concern with Australian branches; would give rise to inconvenience; and was almost certainly not intended". His Honour explored the implications of such a construction in detail and concluded that it should be rejected. 13 If it were necessary for me to decide the point in this proceeding I would agree with Lindgren J however I do not think it arises here. No submissions were put concerning this issue including by APRA, which made submissions on the point before Lindgren J in Re Westport. In any event, the Australian businesses of MRAm, Great Lakes and Munich Re are effectively quarantined from their international businesses by APRA's requirement that they obtain its approval before removing any of the assets of their Australian branch operations from Australia or applying to those assets to their non-Australian liabilities.

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Direct Insurance Scheme 16 The Direct Insurance Scheme was prepared under Part III, Division 3A of the Act to give effect to the Direct Insurance Transfer Agreement between MRAm and Great Lakes acting through their respective Australian branches). In brief, it provides for the transfer of all insurance contracts (other than reinsurance contracts) underwritten by the Australian business of MRAm and certain business assets to the Australian business of Great Lakes. Under the Scheme, Great Lakes assumes all of MRAm's rights and liabilities in relation to the contracts. As stated in the Direct Insurance Scheme summary approved by APRA MRAm agreed to pay consideration in the amount of "$26,900,000 reduced by an amount certified by the Appointed Actuary to reflect the amount of claims paid by MRAm in respect of the Insurance Contracts between 31 December 2009 and the date on which the Scheme takes effect". 17 It is important to note that the Direct Insurance Scheme will not make any change to the terms of any insurance contract that is transferred to Great Lakes nor will it affect any claim made under the affected contracts. All policyholders will continue to have the same rights and obligations under their insurance contracts and in respect of any claims although the insurer in respect of those contracts and those claims will be Great Lakes and not MRAm. 18 The effective date for the transfer was 1 December 2010 however cl 2 of the Direct Insurance Transfer Agreement stated that the substantive provisions of the Agreement would have no effect unless and until: (a) the Scheme is confirmed by the Federal Court of Australia; (b) the Treasurer of the Commonwealth of Australia (or APRA acting under its delegated authority) has approved, or otherwise confirmed that it has no objection to the acquisition by [Great Lakes] of the Business under section 41 of the Insurance Acquisitions and Takeovers Act 1991 (Cth) (IAT Act); and (c) the regulator of [Great Lakes] in the United Kingdom is notified of the transfer of the Business from MRAm to [Great Lakes]. 19 Evidence in support of the application was given in the affidavit of Andrew Priest affirmed on 15 November 2010. Mr Priest is employed as an Investment Administration & Project Consultant by MHA and was authorised by the applicant to make his affidavit. Exhibited to Mr Priest's affidavit was a letter from APRA dated 27 October 2010 which attached a Notice of go-ahead decision made under s 41(1) of the IAT Act. This evidence established that condition (b) above had been satisfied. Evidence that condition (c) was also satisfied was provided to the Court in the form of a letter dated 26 November 2010 from Mr Campbell to the United Kingdom Financial Services Authority, which is the regulator of Great Lakes.

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The Actuarial Reports in relation to the Direct Insurance Scheme 20 Mr Kaise Stephan is a Fellow of the Institute of Actuaries of Australia and an employee of MHA. He was engaged by MRAm to prepare a report in relation to the Direct Insurance Scheme and in particular to investigate whether the interests of MRAm and Great Lakes Australian business policyholders were adequately protected under that Scheme. Mr Stephan's report is comprehensive and detailed and prepared in accordance with the provisions of the APRA Prudential Standard GPS 410. 21 In his affidavit sworn on 23 November 2010, to which a copy of his report was exhibited, Mr Stephan said that he was "of the opinion and belief" that the transfer of insurance policies under the Direct Insurance Scheme would not "materially adversely impact" either the policyholders of the Australian branch of MRAm or the policyholders of the Australian branch of Great Lakes. 22 In reaching this conclusion Mr Stephan considered the capital position of Great Lakes after implementation of the Scheme. He reviewed the APRA returns for the Australian branches of the Australian branches both MRAm and Great Lakes and also considered their solvency ratios. He found that the solvency ratio of both was in excess of APRA's requirements and, in relation to Great Lakes, "in line with the target solvency range" as detailed in the Great Lakes' Australian branch 2010-2012 Capital Management Plan. Mr Stephan deposed that, having regard to the APRA returns and the solvency position of the Australian branch of each company, he had not identified anything that would cause him to change the opinion expressed above. Similarly, he did not know of any other matter that would lead him to change that opinion. 23 An independent review of Mr Stephan's report was carried out by Melissa Siew-Mei Yan, an actuary and executive of KPMG Actuarial Pty Ltd. In her affidavit affirmed on 25 November 2010, Ms Yan stated In summary, and for the reasons set out in my report, having carried out my review of Mr Stephan's report, sighting the 30 September 2010 APRA returns … and reviewing MR Stephan's affidavit, nothing has come to my attention that would lead me to believe that the conclusions reached by Mr Stephan in his report are unreasonable. I have made all the enquiries 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. Based on the materials presented to me to the date of my report, I am not aware of any other matter or circumstance that would cause me to change the opinion or belief expressed … above.

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The Reinsurance Scheme 24 The Reinsurance Scheme was also prepared under Part III, Division 3A of the Act to give effect to the Reinsurance Insurance Transfer Agreement between MRAm and Munich Re acting through their respective Australian branches. It provides for all reinsurance contracts of MRAm's Australian business, together with all liabilities under those contracts and related business records, to be transferred to Munich Re in accordance with the terms of that agreement. The Agreement provides that, on and from the date on which the Reinsurance Scheme becomes effective (Effective Date) Munich Re accepts responsibility for "all Reinsurance Liabilities in connection with the Business". In consideration of Munich Re accepting the transfer, MRAm is to pay: The amount of $33,050,000 reduced by an amount certified by the Appointed Actuary to reflect the amount of claims paid by MRAm in respect of the Reinsurance Contracts between 31 December 2009 and the Effective Date. 25 As with the Direct Insurance Scheme, the Reinsurance Scheme will not make any change to the terms of any reinsurance contract that is transferred to Munich Re nor will it affect any claim made under the transferred contracts. All policyholders will continue to have the same rights and obligations under their reinsurance contracts and in respect of any claims, although the insurer in respect of those contracts and those claims will be Munich Re and not MRAm. 26 Clause 2 of the Reinsurance Transfer Agreement provides that the transfer and the mutual obligations imposed by the Agreement are conditional on confirmation of the Scheme by this Court and approval or confirmation by the Treasurer of the Commonwealth (or APRA acting under its delegated authority) that there is no objection to the acquisition by Munich Re of the business under s 41 of the IAT Act. Evidence that the latter condition had been satisfied was provided at the hearing in the form of a letter from APRA dated 27 October 2010 attaching a Notice of go-ahead decision made under s 41(1) of the IAT Act.

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Procedural requirements 30 Omitting reference to s 17C(2)(c) and s 17C(5) which were the subject of Emmett J's decision (see [2] above), the procedural requirements laid down by the Act are: (a) A copy of the scheme and any actuarial report on which it is based must have been given to APRA in accordance with the prudential standards - s 17C(2)(a); (b) Notice of intention to make an application for confirmation of a scheme must be published in accordance with prudential standards and must contain details of the place and time at which an affected policyholder may obtain a copy of the scheme - s 17C(2)(b) and (3). (c) APRA may arrange for an independent actuary to make a written report on the Scheme and may give a copy of the report to each body corporate affected by it - s 17D; (d) Any of the bodies corporate affected by the scheme may apply to the Court for confirmation - s 17E(1); and (e) An application for confirmation must be made in accordance with the prudential standards and APRA is entitled to be heard on the application - s 17E(2) and (3). 31 The prudential standard relevant here is Prudential Standard GPS 410 which was made under s 32 of the Act and applies to all general insurers authorised under the Act. In its written submissions the applicant accurately summarised the key requirements of GPS 410 as follows: (a) a copy of the Scheme and any actuarial reports on which the Scheme is based must be provided to APRA (paras 4-6); (b) a Notice of Intention to make application for confirmation of the Scheme must be published in a form approved by APRA and in newspapers approved by APRA (paras 7-11); (c) APRA must approve a summary of the Scheme, which summary must be sent to affected policyholders before the Scheme is released for public inspection (paras 12-15); (d) a copy of the Scheme must be open for public inspection at least 15 days (not including weekends and public holidays) in each State and Territory in which an affected policyholder resides (para 16); and (e) an application to the Court for confirmation may be made no earlier than the expiry of the period of inspection provided for in paragraph 16 of GPS 410 or 15 days after the approved summary of the Scheme has been given to every affected policyholder under that paragraph (whichever is the later) (para 17). 32 As Jacobson J remarked in HDI-Gerling Australia Insurance Company Pty Limited (No 2) [2010] FCA 669 at [16]-[17], it is well established that the procedural steps are not required to be taken prior to the filing of the application for Court approval. It is sufficient if they are taken "prior to the time at which the court is moved for an order for confirmation of the scheme"; see also Re Armstrong Jones Life Assurance Limited (1997) 74 FCR 160 at 163 per Emmett J; Re Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37 at 39 per Katz J and Re Insurance Australia Ltd (2004) 139 FCR 450 at [30]ff per Lindgren J. 33 The evidence presented at the confirmation hearing established that all of the above requirements had been met. That evidence is to be found in the following affidavits: The affidavit of Andrew Priest affirmed on 15 November 2010. Mr Priest is employed as an Investment Administration & Project Consultant by Munich Holdings of Australasia Pty Ltd, a "sister company to the applicant" and was authorised by the applicant to make his affidavit. Mr Priest's evidence related to the preparation and approval of the Scheme Summaries; the approvals under the IAT Act; the preparation of actuarial reports and the independent review of those reports; notification of the Direct Insurance Scheme to the UK Financial Services Authority; the advertisements publicising in newspapers throughout Australia, a notice of intention to apply to the Court for confirmation of the two Schemes; the public inspection of both Schemes; publication on the relevant websites and the mail out of Scheme summaries. Affidavit of Susan Mary Alexander sworn on 25 November 2010. Ms Alexander is employed as an Executive Secretary, Corporate by MHA. Ms Alexander's evidence related to results of the mail out of the Scheme Summaries including the receipt by MHA of envelopes marked "return to sender". Ms Alexander described the steps taken to identify alternate addresses in such cases. Exhibited to Ms Alexander's affidavit was a list of the 13 recipients (10 relating to the Direct Insurance Scheme and 3 for the Reinsurance Scheme) for whom alternate addresses could not be identified. The affidavit of Neale David Campbell referred to at [14] above. In addition to the background information there described, Mr Campbell also confirmed aspects of the evidence given by Mr Priest and Ms Alexander. He also stated that in response to the publication of the notice of intention and the provision of the summaries of the Schemes, he received 5 telephone calls in relation to the Direct Insurance Scheme and 2 emails in relation to the Reinsurance Scheme. Those who called in relation to the Direct Insurance Scheme requested further explanation which was provided by Mr Campbell. Mr Campbell deposed that each of the callers expressed satisfaction with the explanation provided. In relation to the Reinsurance Scheme, Mr Campbell received enquiries from the liquidator of HIH and from QBE Insurance. In each case additional information was provided and there was no follow-up to the initial enquiry. Affidavit of Jefferson Robert Gibbs affirmed on 29 November 2010. In addition to his role in reviewing the actuarial report in relation to the Reinsurance Scheme, Mr Gibbs was engaged by the solicitors for the applicant to co-ordinate the Public Inspection of the Scheme documents in each State and Territory in accordance with the inspection protocol provided by the solicitors for the applicant. Mr Gibbs outlined the steps that were taken in this regard and exhibited relevant documents. He stated that he was "of the information and belief that the Public Inspection has taken place in accordance with the requirements of the Inspection Protocol". Affidavit of John Morgan affirmed on 29 November 2010. Mr Morgan is the solicitor on the record for the applicant in this proceeding. Mr Morgan referred to the publication of the notice of intention to apply to the Federal Court for confirmation of the two Schemes in Mr Priest's affidavit and to the evidence given by Ms Alexander concerning the mail out of the Scheme summaries. Mr Morgan, who was named as the contact person in those summaries and in the notice of intention, deposed that at the date of his affidavit he had received no notification from any person expressing a wish to inspect the scheme documents or indicating an intention to appear at the confirmation hearing.

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