QBE Insurance (Australia) Limited, in the matter of QBE Insurance (Australia) Limited [2020] FCA 919

Solicitor for the Australian Prudential and Regulatory Authority (APRA) Ms J Favretto

ORDERS NSD 285 of 2020 IN THE MATTER OF QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035)

IN THE MATTER OF DIVISION 3A OF PART III OF THE INSURANCE ACT 1973 (CTH)

IN THE MATTER OF A PROPOSED SCHEME FOR THE TRANSFER OF INSURANCE BUSINESS FROM REALCOVER INSURANCES PTY LIMITED (ACN 103 975 355) TO QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035)

QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035) Applicant

AND: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

THE COURT ORDERS THAT:

1. That the proposed scheme to transfer the insurance business of Realcover Insurances Pty Limited (ACN 103 975 355) (Realcover) to QBE Insurance (Australia) Limited (ACN 003 191 035) (QIA) be confirmed without modification pursuant to s 17F(1) of the Insurance Act 1973 (Cth) with effect on and from 1 July 2020 (Effective Date).
2. Pursuant to s 17F of the Insurance Act 1973 (Cth) and with effect on and from the Effective Date, all rights and obligations owed to Realcover pursuant to any reinsurance treaties, be transferred to QIA and any reinsurance treaties to which Realcover was a party be amended by replacing Realcover with QIA, other than in respect of Realcover's rights in relation to reinsurance recoveries that have been requested but which remain outstanding at the Effective Date, which recoveries will remain payable to Realcover.
3. That QIA pay the reasonable legal costs of the Australian Prudential Regulation Authority in relation to this application, as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

LEE J: 1 This is an application pursuant to Div 3A of Pt III of the Insurance Act 1973 (Cth) (Act) for confirmation of a proposed scheme (Scheme) for the transfer of the insurance business of Realcover Insurances Pty Ltd (Realcover), a wholly-owned subsidiary of the Real Estate Institute of New South Wales (Real Estate Institute), to QBE Insurance (Australia) Limited (QBE), which, it hardly needs to be said, is one of Australia's largest general insurers and a corporation authorised to carry on an insurance business in Australia. 2 The background to the application is the intention of the Real Estate Institute to place Realcover into run-off from 30 June 2017, after securing professional indemnity facilities placed with QBE for its existing clients. 3 The commercial rationale for Realcover conducting insurance business was the perceived difficulties in obtaining access to insurance cover in the wake of the contraction of the insurance market following the collapse of the HIH Group in the early part of this century. Since 1 July 2017, Realcover's authorisation under the Act has been limited to the conduct of a run-off insurance business only. As part of the decision to run-off the insurance portfolio, Realcover and the Real Estate Institute have signed an enforceable undertaking with the Australian Prudential and Regulatory Authority (APRA) that outlines their commitments to APRA in relation to Realcover's future capital requirements and solvency levels. 4 In short, the proposed scheme involves the transfer to QBE of certain insurance contracts, insurance liabilities and certain other assets and liabilities of the insurance business conducted by Realcover. The intention is that QBE will acquire 100 per cent of the insurance business of Realcover. 5 The principles to be applied in determination this application are well known. Section 17F(1A) of the Act sets out the factors to which the Court must have regard when deciding whether to confirm a scheme: (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. 6 In relation to subsection (a), as I noted in Sunderland Marine Insurance Company Limited, in the matter of Sunderland Marine Insurance Company Limited (No 2) [2018] FCA 1721 (at [4]), the central consideration the Court must be satisfied of is that the Scheme will not detrimentally affect policyholders in a material way: see also Re Westport Insurance Corporation (No 2) [2009] FCA 1598; (2009) 181 FCR 530 (at 535 [32] per Lindgren J). The focus is on the "affected policyholder", as defined and used in s 17C of the Act, and which Lindgren J noted in Re Insurance Australia Limited [2004] FCA 524; (2004) 139 FCR 450 (at 456-7 [19]-[24]) refers to the holder of a policy being transferred under the relevant scheme. It follows that in the present case it is the policyholders of Realcover who are the relevant, "affected policyholders". Subsection (b) is not applicable to the present scheme. 7 In the circumstances of this case there are four particular matters to which the Court should pay particular regard in exercising the discretion to approve the Scheme. 8 First, is QBE's solvency. This is because following transfer of Realcover to QBE, it is QBE that the affected policyholders will be required to look to for satisfaction of their claims (equally, the existing policyholders of QBE, although not affected policyholders per se, will also be looking to QBE for the same purpose). Hence, it is necessary for the Court to be satisfied that QBE will have sufficient capital relative to its liabilities to provide adequate security for both existing and transferring policyholders. 9 Furthermore, for the purposes of considering the perspective of the affected policyholders, it is appropriate to have regard to a comparison as to any change in the solvency coverage that would be occasioned upon transfer. What the evidence discloses is that, as at 31 March 2020, the relevant solvency coverage ratio of Realcover was 1.60 and with regard to QBE was 1.33. Perhaps unsurprisingly, given its size, QBE's projected solvency coverage ratio (based on 31 March APRA returns) will be unaffected following any transfer. Although it is true that policyholders will, upon any transfer, move from an insurer with a solvency coverage ratio somewhat higher than post-transfer, this is of little significance in this case. Indeed, it is a distraction to have regard to figures devoid from the relevant overarching question, being whether or not there will be material impact on the policyholder security following transfer. In this regard, the evidence is more than sufficient to establish that there will be no material impact. 10 Mr Gard, an independent actuary, has provided a report, dated 7 February 2020 (and contained in Annexure WEG-1 to the affidavit sworn by Mr Gard on 23 June 2020, which (at 36) states: I have concluded that the Proposed Transfer will not have a materially adverse impact on the policyholders of either Realcover or QIA for the following reasons. ► Realcover's PCA coverage ratio at 31 December 2018 is 1.65, and based on the pro forma balance sheet as at 31 December 2018 following the Proposed Transfer, the PCA coverage ratio for QIA is estimated to be 1.58. O QIA's PCA coverage ratio post Proposed Transfer is lower than Realcover's PCA coverage ratio pre Proposed Transfer. However, Realcover policyholders transferring to QIA have access to a larger capital base after transfer which will be beneficial in the event of significant adverse run-off development and continue to be protected by the extensive reinsurance protection prior to the Proposed Transfer. O It is my view that there will not be a materially adverse impact on the policyholders of Realcover by the reduction in the PCA coverage ratio of QIA after the Proposed Transfer relative to Realcover. In fact, being part of a much larger entity with significantly more diverse risks and only a slightly lower PCA coverage ratio increases the security of the policyholders of Realcover in my opinion. ► There is no material adverse impact to QIA's policyholders from a capital perspective arising as a result of the Proposed Transfer. QIA policyholders continue to be protected by the extensive reinsurance contracts that QIA has in place, the PCA coverage ratio does not change as a result of the transfer due to the small size of the liabilities transferred compared to the existing QIA business and the PCA coverage ratio is well above QIA's ICAAP target. 11 Further, in his affidavit (at [11]), Mr Gard provides a comparison of QBE's financial position as at 31 March 2020 and the position as at 31 December 2018 and states: The key point to note… is that QIA has a lower post-transfer PCA coverage ratio of 1.33 as at 31 March 2020, as compared to its PCA coverage ratio of 1.58 as at 31 December 2018. The latest forecast set out in table 13 at section 5.5 of the Actuarial Report is 31 December 2019, showed a PCA coverage ratio of 1.51. The decrease in the PCA coverage ratio is due to a combination of a dividend payment made between December 2018 and March 2020; and increase in insurance liabilities from catastrophe claims and discount rate movements. Over this period, QIA's PCA has increased by $35.1m while its capital base has reduced by $327.3m. QIA's PCA coverage ratio after the Proposed Transfer as at 31 March 2020 of 1.33 is below QIA's target ratio of 1.38, but still remains within the target capital range of 1.30 - 1.50. 12 As senior counsel for the applicant, Mr Owens SC, identified, the Court is able to obtain further reassurance from the fact that the appointed actuaries of both Realcover and QBE have expressed opinions to the effect that the Scheme will not have any material adverse effect. 13 It follows that the Court can be comfortably satisfied that from a financial security and solvency perspective, the position of the affected policyholders will not be materially disadvantaged if the transfer is approved. 14 Second, is the terms of the transferring contracts, which will not change as a consequence of the Scheme, other than the necessary substitution of Realcover as the insurer. 15 Third, are the views of affected policy holders and APRA. I am satisfied that all relevant steps have been undertaken to notify affected policyholders of the making of the Scheme, the approved summary and related information (see Schedule A which identifies the relevant provisions and the requirements, together with the evidence that establishes compliance). It follows that those most directly affected have been given notice of the Scheme and have had adequate opportunity to comment upon it. The lack of objection to the Scheme by the affected policyholders is obviously a matter that speaks in favour of the transfer being approved. 16 Additionally, and importantly, APRA has appeared and Ms Favretto has indicated that it does not object to the Scheme proposed in the orders. The evidence has disclosed that APRA has been closely involved in the oversight of the Scheme and, indeed, appeared at an earlier case management hearing. As I stated in Sunderland Marine Insurance (at [8]): …It hardly needs remarking that the non-objection of APRA, as the government regulator charged with ensuring that insurance businesses are conducted in such a way that the legitimate interests of policyholders are protected, is a matter from which the Court can (and in this case does) draw significant comfort: see Application of Sompo Japan Insurance Inc. under the Insurance Act 1973 (Cth) (No 2) [2014] FCA 677 at [41]-[42] per Yates J; ACE Insurance Ltd, in the matter of ACE Insurance Ltd (No 2) [2016] FCA 1258 at [44] per Gleeson J. This sense of reassurance is reinforced in circumstances where the evidence discloses that APRA has been closely engaged in detailed analysis in relation to the scheme. 17 Fourth, a further order is sought pursuant to s 17F(2) of the Act, transferring the outwards reinsurance relating to the transferring business to QBE. All reinsurers have been notified of the Scheme and informed that they should notify QBE if they had any objection to the proposed orders being made. Four of those reinsurers have signed deeds of novation, and QBE is awaiting novation deeds in respect of the remaining two. Importantly, no objections have been received. 18 In the circumstances, I am satisfied the Court should make the proposed order to ensure the affected policyholders are not deprived of the benefit of reinsurance that existed pre-transfer in relation to the liabilities. Such an order is not uncommon: see 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 228 (at [75]-[83] per Allsop CJ); Application of Sompo Japan Insurance Inc. under the Insurance Act 1973 (Cth) (No 2) [2014] FCA 677 (at [43]-[45] per Yates J); Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) (No 2) [2013] FCA 1329 (at [25]-[28] per Yates J); American Home Assurance Company, in the matter of American Home Assurance Company (No 2) [2011] FCA 316 (at [28]-[30] per Emmett J); 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 (at [58]-[59] per Jacobson J); Re Insurance Australia (at [80] per Lindgren J). 19 Finally, there has been some procedural difficulties in relation to this matter because of the current COVID-19 pandemic. It had been hoped that this application could have been dealt with somewhat earlier than today. As it turned out, because of these procedural difficulties, it has been necessary for the Court to find time prior to 30 June 2020 to hear the application, with some dislocation to current listing arrangements. This was to accommodate the fact that the application seeks a confirmation effective date of 30 June 2020, as QBE and Realcover have agreed to an effective date of the transfer as being the beginning of the new financial year. The making of orders today will ensure that Realcover is responsible for all end-of-year financial obligations, with QBE assuming ownership on 1 July 2020. 20 I am satisfied I should make the orders sought in the application, and I will do so in such a way as to confirm the Scheme with effect from 1 July 2020. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.