Munich Reinsurance Company of Australasia Limited (ACN 004 804 013) [2004] FCA 1772

REASONS FOR JUDGMENT 1 I have before me an application for confirmation, pursuant to s 17F of the Insurance Act 1973 (Cth) ('the Act'), of a scheme for the transfer of the insurance business of a general insurer. The application is made by Munich Reinsurance Company of Australasia Limited ('MRA') and Münchener Rückversicherungs Gesellschaft Aktiengesellschaft in Munchen ('MRM'). MRA is incorporated in Australia and is an authorised general insurer under the Act. MRM is incorporated in Germany. It is a large global life and non-life reinsurer. As at 30 September 2004 MRM had total assets of 214,759 million Euros and total liabilities of 195,257 million Euros. MRM is registered in Australia as a foreign corporation under Part 5B.2 of the Corporations Act 2001 (Cth) and is also authorised as a general insurer under the Act. 2 Section 17B(1) of the Act 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 the Federal Court. Section 17C sets out the steps that must be taken before an application for confirmation can be heard. Section 17E(1) then provides that any of the bodies corporate affected by a scheme may apply to the Federal Court for confirmation of the scheme. 3 Section 17F(1) empowers the Court to confirm a scheme without modification, or confirm the scheme subject to such modifications as it thinks appropriate or refuse to confirm the scheme. Under section 17G, when the scheme is confirmed, it becomes binding on all persons and it has effect, in spite of anything in the constitution of any body corporate affected by the scheme. The body corporate on whose application the scheme was confirmed must thereafter cause a copy of the scheme to be lodged at an office of the Australian Securities and Investment Commission ('the Commission') in every State and Territory in which a company affected by the scheme carries on business. 4 The Australasian Prudential Regulation Authority ('APRA') is concerned with the prudential protection of Australian policyholders. Under s 28 of the Act, insurers must maintain in Australia assets at least equal to the value of their liabilities. Prudential standards imposed by APRA also require that, in the case of foreign insurers, the foreign insurer maintain assets in Australia in excess of their liabilities in Australia in an amount at least equal to their minimum capital requirement, as that concept is explained in Prudential Standards GPS 110 and GPS 120, published by APRA. The effect is that MRM must maintain separate accounts for its Australian operations. Those accounts are prepared on the basis that they depict the financial condition of the Australian operations as a separate entity, referred to as a branch. 5 That notional separation of Australian operations from other operations is reinforced by restrictions imposed by APRA on a foreign company's ability to deal with its Australian assets. An insurance company may not reduce the net value of its Australian assets without the approval of APRA. By that control, APRA, in essence, quarantines within Australia assets of the foreign company sufficient to meet the Australian liabilities of the company. 6 A creditor of the company in respect of an Australian liability will have access to the worldwide assets of the company, subject to any foreign law that might regulate those matters. However, the effect of the quarantining is to preclude any foreign creditor having access to the Australian assets. It is convenient, therefore, to refer to the Australian branch of MRM as if it were a separate legal entity and I shall refer to the Australian branch as MRG. At present MRG's only business is to act as retrocessionaire for MRA. MRG has no policyholders other than MRA. As at 30 September 2004 the total assets of MRG amounted to $1,881,146,000 and its total liabilities were $1,396,142,000. 7 MRA is a wholly owned subsidiary of Munich Holdings of Australia Pty Limited ('MHA'). MHA is a wholly owned subsidiary of MRM. Its shares, however, are treated as assets of MRM's Australian branch, MRG. It is convenient, therefore, to speak of MHA as a wholly owned subsidiary of MRG. 8 MRA is the principal reinsurance underwriter in Australia of MRM and its group companies. As at 30 September 2004, MRA had total assets, excluding assets contained in its statutory life funds, of $2,130,384,000 and total liabilities, excluding liabilities referable to its statutory life funds, of $1,915,667,000. 9 On 26 October 2004 a transfer agreement was entered into between MRA and MRM. Clause 3.1 of the transfer agreement provides that, on and from the effective date, which is defined as 11.59 pm Australian Eastern Summer Time on 31 December 2004,all Reinsurance Contracts as defined in the transfer agreement will be assigned to MRM, as valid, effective and continuing agreements between MRM and the parties other than MRA to those Reinsurance Contracts. The term 'Reinsurance Contracts' is defined as: 'all arrangements and contracts of insurance entered into by MRA in Australia, excluding its New Zealand Business, as reinsurer in the conduct of its Insurance Business [as defined] and subsisting as at the Effective Date.' Under clause 3.2 of the transfer agreement, MRM, through its Australian branch, is to be bound by, perform the obligations under, be entitled to the benefits of and take action under and assume any obligations and liabilities in respect of and relating to any matter arising out of the reinsurance contracts as if it were a party and at all times had been a party in place of MRA. Thus the intention is that the obligations of MRA under the reinsurance contracts will become obligations of MRG and under clause 3.3, MRA is to be released from all obligations and liabilities under the reinsurance contracts with effect from the Effective Date. 10 The transfer agreement contains a definition of Net Assumed Liabilities as the monetary value of the assumed liabilities as at the Effective Date determined in accordance with clauses 3.4 and 3.5, which provide for determination by the approved actuary in accordance with an Australian accounting standard. Under clause 4.1, MRA is to pay to MRG on or before the effective date an amount equal to the estimated Net Assumed Liabilities, as calculated by the approved actuary. 11 Clause 4.1 then provides that, not later than three months after the Effective Date, MRA and MRM must cause the approved actuary and provide all information and do all things necessary to enable the approved actuary to determine, in accordance with the relevant Australian accounting standard, the actual Net Assumed Liabilities at the Effective Date. Clause 4.2(b) provides for an adjustment to the extent that there is a difference. Under clause 6, the transfer of Reinsurance Contracts to MRG, in accordance with the agreement, is to take effect on the Effective Date and MRA will account to MRM and MRM will be entitled to the benefits and rights and will assume all obligations in respect of reinsurance contracts and Net Assumed Liabilities, as from and including the Effective Date. 12 The scheme which is presented to the Court for confirmation adopts the same terminology as is to be found in the transfer agreement and contains provisions having the same effect as the transfer agreement. 13 The evidence before me indicates that the scheme is part of proposed re-organisation of the Australian operations of the MRM Group. It is relevant that no policyholders currently outside that group will be brought into the group and, conversely, no policyholders of the group will be transferred to an insurer outside the group. 14 The applicants submit that the re-organisation is driven by a desire to make the Australian operations of MRM more efficient. At the moment the reinsurance activities are conducted through the two entities, MRG and MRA. That effective division of one business into two produces costs and inefficiencies that it is expected would be eliminated by the effectuation of the scheme. 15 In particular, the current structure entails significant capital inefficiencies. For example, APRA imposes significant risk charges on the retrocession transactions between MRA and MRG. Those risk charges have the effect of increasing the minimum capital requirements of both entities. Such risk charges are applied to ensure additional capital is maintained by an insurer in case of any adverse movement in the value of the insurer's assets or liabilities. By having all of the MRM Group's non-life reinsurance business in Australia conducted through MRG, the risk charges on the retrocession transactions will be eliminated. As at 31 March 2004 the effect of the scheme would have been to reduce the amount of capital required to be held by MRG and MRA by more than $40 million. 16 In order to realise the hoped for efficiencies, it is intended that a number of steps will occur following implementation of the scheme. First, MRA will request that APRA cancel its authorisation to act as a general insurer. Second, MRA will return to MHA by way of a dividend and capital reduction, capital that is in excess of the requirements of its life reinsurance operations. Third, MHA will return to MRG, by way of a dividend and capital reduction, capital that is in excess of its requirements. Finally, MRG will repatriate, to MRM in Germany, part of the capital that is in excess of the upper band of its target solvency. 17 These matters are disclosed only by way of informing the Court of the intentions of the applicants. Any such repatriation of capital to Germany can only occur with the approval of APRA. The scheme does not have any effect of authorising a return of capital from Australia. That is entirely a matter for APRA. 18 Other steps are also intended to be taken in relation to the re-organisation. First, the assets and property of various group subsidiaries of MRM will be transferred to MHA and those subsidiaries will be wound up. Employees of MRA and other subsidiaries will be transferred to MHA. Those employees will provide services to companies in the group by way of service arrangements between those companies and MHA. Thus, MHA will become responsible for all administrative and non-insurance related activities of the MRM Group in Australia. MRA will end up as the MRM Group's life insurance arm in Australia and MRG will become the MRM Group's non-life insurance arm in Australia. 19 I am satisfied from the evidence that the procedural steps required by the Act to be taken and those steps required by an order made by Madgwick J on 4 November 2004 have been completed subject to minor non-compliance, which is of no consequence. The applicants have provided full disclosure concerning the scheme to APRA and APRA has been represented on the hearing of the application and has indicated that it has no objection to the proposals. 20 Apart from the procedural requirements, the Court's function is to be satisfied that the interests of policyholders will be adequately protected following implementation of the scheme. In that regard I have been furnished with the opinions of three actuaries concerning various aspects of the scheme in relation to possibly affected policyholders. 21 Mr John William De Ravin is the actuary appointed by MRA and MRG for the purposes of s 39 of the Act. Mr De Ravin has prepared an actuarial report on the scheme. He has explained the effect of the scheme on the financial position of MRA and MRG. 22 As at 30 September 2004 the net capital allowed for solvency purposes of MRA was 164.8 per cent of its minimum capital requirement. Following completion of the scheme, the net capital allowed for solvency purposes of MRG will be 150.4 per cent of its minimum capital requirement. As at 30 September 2004, the net capital allowed for solvency purposes of MRG was 168.2 per cent of its minimum capital requirement. However, according to the figures prepared by Mr De Ravin, based on the accounts as at 30 September 2004, MRA's policyholders will be transferred from a company with a solvency ratio of 164.8 per cent to a company with a solvency ratio of 168.2 per cent. 23 The effect, on one view, of the scheme will be to reduce MRG's solvency ratio from 186.7 per cent to 150.4 per cent. That, however, is illusory in one sense: because of a double counting of the value of the assets of MHA in MRG's accounts, the real solvency ratio is 128.4 per cent. Thus, as a result of the scheme, the policyholders of MRG will be better off because they will have a company with a solvency ratio of 150.4 per cent rather than 128.4 per cent. 24 Mr De Ravin's report has regard to a number of relevant factors. First, the staff currently managing MRA's non-life claims will be responsible for MRG's claims administration following the transfer. Secondly, prior to the scheme MRA retroceded approximately 80 per cent of its portfolio risk to MRG. MRG thus made significant contributions to the financial security enjoyed by MRA's policyholders. Thirdly, there will be no change to the terms and conditions of the policies of policyholders. Mr De Ravin expressed the opinion that no material detriment or disadvantage is likely to result to affected policyholders as a result of the scheme. After the portfolio transfer, those policyholders will be adequately protected in terms of the criteria by which policyholders protection is measured financially under the Act since MRG will continue to meet the minimum capital requirement required. 25 Mr Frederick Rosswell Jorgensen is the actuary appointed by MRA for the purpose of s 93 of the Life Insurance Act 1995 (Cth). Mr Jorgensen has provided a report in which he expresses the opinion that the security of the rights and interests of holders of life reinsurance contracts with MRA and security of the rights and interests of MRA's direct life insurance policyholders are likely to remain appropriate after implementation of the scheme. He expressed the opinion that, after the proposed restructure of which the scheme is a part, the rights and interests of life policyholders will be adequately protected in terms of the criteria by which such protection is measured financially under the Life Insurance Act. 26 Mr Gregory Clive Taylor is a director of Taylor Fry, Consulting Actuaries. Mr Taylor was asked to prepare a report on Mr De Ravin's report, which he did. In his report, Mr Taylor addressed the question of security of policyholders and, while his views varied to some extent from those of Mr De Ravin's, they do not vary in any material aspect. Mr Taylor considered that the reasoning and methodology employed by Mr De Ravin were reasonable and appropriate. He expressed the conclusion that he was not aware of any material prejudice that the scheme might have on policyholders of either MRA or MRG other than those that he expressly addressed in the report and, as I have said, those matters did not raise any matter of materiality. 27 I am satisfied that there will be no detrimental effect on any policy holder who might be affected by the scheme. I consider, therefore, that it is appropriate for the scheme to be confirmed pursuant to s 17F. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.