Re Armstrong Jones Life Assurance Limited (1997) 74 FCR 160 In the Application of Budget Insurance Company Limited and Auto & General Insurance Company Limited [2008] FCA 636 Colonial Portfolio Services Ltd v Australian Prudential Regulation Authority

JUDGE: YATES J DATE: 26 JUNE 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The applicant, Sompo Japan Insurance Inc. (Sompo), applies under Div 3A of Pt III of the Insurance Act 1973 (Cth) (the Act) for confirmation of a scheme pursuant to which the general insurance business of the Australian branch of Nipponkoa Insurance Company Limited (Nipponkoa) will be transferred to it (the scheme). 2 The background to the scheme, including the relationship between Sompo and Nipponkoa, and the nature and management of Nipponkoa's Australian branch insurance business, is summarised in Application of Sompo Japan Insurance Inc. under the Insurance Act 1973 (Cth) [2014] FCA 396. Those reasons and these reasons should be read together. I will use the same abbreviations in these reasons. 3 The scheme has been proposed in circumstances where Nipponkoa and Sompo intend to undertake a merger under Japanese law, with effect on 1 September 2014. After the merger, Sompo will be the surviving entity. Nipponkoa will cease to exist as a separate corporate entity. By proposing the scheme, Nipponkoa and Sompo seek to undertake the following steps in advance of the merger: The Australian branch insurance business of Nipponkoa will be transferred to Sompo. Nipponkoa will apply to APRA for revocation of its authorisation under the Act to carry on insurance business in Australia. Nipponkoa will wind up its Australian branch and apply to the Australian Securities and Investments Commission for deregistration as a foreign company in Australia.

The scheme 4 Under the scheme, Nipponkoa will transfer the insurance business carried on by it in Australia to Sompo, in accordance with a Transfer Agreement entered into on 21 May 2014. The business includes all insurance contracts and all insurance liabilities of Nipponkoa, as well as certain assets, including reinsurance entered into by, or on behalf of, Nipponkoa as reinsured. Nipponkoa will also pay Sompo an amount presently calculated as $7.935 million to reflect the amount of Nipponkoa's insurance liabilities, net of amounts due under insurance contracts or reinsurance contracts. This amount is subject to adjustment as at 1 July 2014, the commencement date of the scheme. Following the transfer, Sompo will indemnify Nipponkoa against all future claims, losses, liabilities, costs and expenses that might arise in connection with the insurance contracts into which Nipponkoa has entered. Any stamp duty and other costs and expenses incurred in connection with the scheme will not be paid by or charged to policyholders, but will be met by Nipponkoa and Sompo out of shareholder funds. 5 The scheme will not change the terms of any insurance contract, or affect any claim in respect of any insurance contract, other than that Sompo will become the insurer in place of Nipponkoa. Policyholders will continue to have the same rights and obligations under or in respect of any insurance contract or claim, but with Sompo as the insurer. The scheme and Transfer Agreement will also reflect the change in insurer as follows: All outstanding claims-related rights and liabilities of Nipponkoa in respect of the insurance contracts will be transferred to Sompo, such that any claims arising under or in connection with any insurance contract must be made against Sompo instead of Nipponkoa. All premiums and other amounts payable to or recoverable by Nipponkoa under the insurance contracts will be payable to and recoverable by Sompo instead of Nipponkoa. Sompo will be entitled to enforce all rights and remedies which but for the scheme would have been enforceable by Nipponkoa under or in respect of the insurance contracts. Any policyholder under an insurance contract or other person who has a claim on or obligation to Nipponkoa under or in respect of an insurance contract will have the same claim on or obligation to Sompo in substitution for his or her claim on or obligation to Nipponkoa, irrespective of when such claim or obligation arose. 6 Policyholders are not required to take any action before or as a result of the scheme.

The relevant legislative framework 7 The legislative framework under which, relevantly, the present application is made is to be found in ss 17A to 17G of the Act. 8 Section 17B(1) 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 Court. Section 17C sets out the steps to be taken before an application for confirmation of the scheme can be made. In effect, this requires those steps to be taken prior to the time at which the Court is moved for the order of confirmation: Re Armstrong Jones Life Assurance Limited (1997) 74 FCR 160 at 163; Re Insurance Australia Ltd (2004) 139 FCR 450 at [30]-[37]. It is not necessary for me to detail those steps for the purpose of providing these reasons. They are conveniently summarised in Re Westport Insurance Corporation (No 2) (2010) 181 FCR 530 at [29]. 9 One step that is required is the giving of an approved summary of the scheme to every holder of a policy affected by the scheme: s 17C(2)(c). This has been taken to mean the holder of a policy to be transferred under the scheme: Re Westport at [48]. Section 17C(5) provides that the Court may dispense with the need for compliance with this requirement 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 requirement be complied with. 10 In the present case, orders were made on 8 April 2014 dispensing with this requirement provided that Sompo caused a copy of the summary of the scheme, approved by APRA, to be sent by pre-paid post to those policyholders of Nipponkoa: listed in annexure PTT1 to the affidavit of Phillip Tavake Tuinauvai affirmed on 7 April 2014, in each case to the addresses recorded in that annexure, and any other holders of policies issued by Nippon Express who notify a claim before 1 July 2014, upon Nipponkoa receiving notification of such claims, in each case to the address recorded in the declaration form for the relevant policy. 11 Section 17F(1A) of the Act provides that, in deciding whether to confirm a scheme, the Court must have regard to: the interests of the policyholders of a body corporate affected by the scheme; any report filed with the Court under s 62ZI of the Act; and any other matter the Court considers relevant. 12 In the present case, no report under section 62ZI has been filed. 13 Section 17F(2) provides that the Court may make such orders as it thinks fit in relation to reinsurance. In the present case, Sompo seeks an order that all of Nipponkoa's reinsurance that responds to any policy transferred pursuant to the scheme (other than reinsurance provided by Sompo), and all rights and obligations attaching to such reinsurance, be transferred to Sompo. I will return to that question. 14 Section 17G provides that when a scheme is confirmed, it becomes binding on all persons and has effect in spite of anything in the constitution of any body corporate affected by the scheme.

The role of APRA 15 APRA plays a significant role in the process of the confirmation of schemes under Div 3A of Pt III of the Act. That role has been discussed in Re Royal & Sun Alliance Life Assurance Ltd (2000) 104 FCR 37 at [23]-[28] and in a number of succeeding cases in terms which need not be repeated in these reasons. It is sufficient to note that its role has been described as "something of a watchdog in relation to transfers …": Colonial Portfolio Services Ltd v Australian Prudential Regulation Authority (2000) 11 ANZ Insurance Cases ¶90-103 at [28]. APRA is entitled to be heard on an application for confirmation (s 17E(3)) and is intimately involved in approving steps to be taken under the Act in relation to applications for confirmation. It can be taken that the interests of policyholders are likely to be attended to by it on their behalf: see the corresponding observation in Re Armstrong Jones at 163 with respect to the then regulator, the Insurance and Superannuation Commissioner. 16 APRA has appeared in the present application. It has been supportive of the transfer contemplated by the scheme and has raised no objection to the scheme being confirmed by the Court. Indeed, in light of the intended merger between Nipponkoa and Sompo under Japanese law, it has urged on the Court the desirability of confirming the scheme so that the rights of affected policyholders are clear.

The actuarial reports 17 In general terms, the question of the interests of policyholders affected by a scheme is informed principally but not exclusively by actuarial evidence: In the Application of Commonwealth Insurance Holdings Ltd and The Colonial Mutual Life Assurance Society Ltd [2007] FCA 1012 at [14]; 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 [25]. The independence of actuaries and, in particular, the responsibilities placed on the Appointed Actuary, "are matters upon which this Court can rightly place considerable reliance when exercising the discretion conferred by s 17F": In the Application of Budget Insurance Company Limited and Auto & General Insurance Company Limited [2008] FCA 636 at [34]. 18 The Appointed Actuary for Sompo and Nipponkoa, Mr Perkins has made a written report in relation to the scheme. He has expressed the opinion that the proposed transfer will not have any material adverse impact on the interests of Nipponkoa policyholders or Sompo policyholders, or on the financial condition of Sompo as transferee. 19 In his report, Mr Perkins has stated that the financial security afforded to both groups of policyholders, as measured by the Prescribed Capital Amount Coverage Ratio (solvency ratio) of each insurer, calculated as at 31 December 2013, will reduce following the transfer from 1148% to 526% in the case of the Nipponkoa, and from 730% to 526% in the case of Sompo. However, Mr Perkins has noted that the pre-transfer capital position of each insurer is unusually high as a result of capital injections in recent times and the fact that capital has not been repatriated to Japan to NKSJ Holdings, Inc. (NKSJ), Nipponkoa's and Sompo's holding company. Following the transfer, Sompo's solvency ratio will remain relatively high compared to the solvency ratios of other direct insurers in the industry (which, as at 30 September 2013, appears to be, on average, 181%). Moreover, Sompo's projected post-transfer solvency ratio falls above its target capital range of 300% to 500%. Mr Perkins has expressed the opinion that, despite the apparent reduction in solvency coverage, Sompo will nevertheless be able to provide an adequate level of financial security to policyholders after the transfer. 20 Mr Perkins has reviewed Nipponkoa's and Sompo's quarterly returns to APRA for the period ending 31 March 2014. These are the most recently available APRA returns in relation to Sompo and Nipponkoa. The returns were not available to Mr Perkins at the time he finalised his written report. Mr Perkins has given evidence that, having regard to those returns, and in particular the solvency position of each of Sompo and Nipponkoa as set out in those returns, he has not identified any matter that causes him to change the conclusions or opinions set out in his written report. 21 In arriving at his overall conclusion, Mr Perkins also took into account the following matters concerning the interests of transferring policyholders: The preference of policyholders, in what can be considered to be a merged Australian branch business, will be the same, irrespective of whether the original insurer was Sompo or Nipponkoa. In other words, there will be no discrimination between policyholders. The transfer involves no change to the terms of the relevant policies, apart from any necessary changes to recognise the change of identity of the insurer from Nipponkoa to Sompo. In respect of policy terms, transferring policyholders will be in the same position as they were before the transfer. All relevant contracts, including reinsurance, will be transferred, providing continuity of cover for all policyholders that are presently part of Nipponkoa's Australian branch business. The impact of the transfer operationally will be limited because Sompo and Nipponkoa are jointly managed at the present time by Allianz. Therefore, there will be no changes to management, reporting lines, staff, locations or processes. Similarly, there will be no changes to product range, contact details or other customer service aspects. Claims handling and management will also continue unchanged. The merged branch will be subject to the same prudential regulation. 22 Mr Perkins' written report was reviewed by an independent actuary, Mr Atkins, who gave evidence that, in his opinion: Mr Perkins' approach to his consideration of the impact of the transfer on Nipponkoa's and Sompo's policyholders in terms of financial security (capital adequacy or solvency), policyholder and claimant entitlements, contractual rights and operational risks, was adequate and correctly addressed the interest of policyholders. Mr Perkins' conclusions were fully supported in this regard. Mr Perkins' methodology in considering capital adequacy was adequate. 23 In terms of capital adequacy, Mr Atkins made the following additional observations: Before the Transfer, each branch has a very large amount of capital in Australia relative to the minimum required. For both Nipponkoa and Sompo the minimum required capital is the dollar floor for $5 million, with the total risk charges in the APRA formula being less than this amount. After the Transfer, the required capital for the combined branch in Australia will be $6.9 million and the available capital $36.5 million. This capital adequacy situation provides an extremely strong level of security for policyholders. The coverage ratios are irrelevant when the capital base is so much above the minimum. Furthermore, all policyholders (of Nipponkoa and Sompo) will continue to enjoy the support provided by the ultimate parent company, NKSJ Holdings. 24 Mr Atkins concluded: In my opinion the actuarial report on the proposed Transfer is sound and on the basis of the information presented in that report, I concur with the opinion of Mr Perkins that there is no material detriment or disadvantage to the policyholders of Nipponkoa or Sompo from the Transfer. 25 Mr Atkins also reviewed Nipponkoa's and Sompo's quarterly returns to APRA for the period ending 31 March 2014. Mr Atkins gave evidence that, having regard to those returns, and in particular the solvency position of each of Sompo and Nipponkoa as set out in those returns, he has not identified any matter that causes him to change the conclusions or opinions he has expressed in giving his peer review.

Reinsurance 26 Prior to 1 April 2010, all reinsurance of Nipponkoa's Australian branch business was ceded to CGU Australia. That reinsurance has been commuted. Since 1 April 2010, the reinsurance of Nipponkoa's Australian branch business has been ceded to a number of reinsurers. These reinsurers have been asked to execute novation deeds in relation to the transfer of the reinsurance contracts to Sompo. At the time of the hearing, a number of the reinsurers had executed the novation deeds submitted to them. Others indicated that they were considering Sompo's request. Only one reinsurer has not responded at all. I should record that, as at 31 December 2013, the difference between Nipponkoa's total insurance liabilities gross of reinsurance and its total insurance liabilities net of reinsurance was a relatively modest sum compared to Sompo's considerable available capital in excess of the prescribed capital amount.

Formal requirements 27 A combined reading of s 17C(2) of the Act and Prudential Standard GPS 410 (GPS 410) shows that a number of steps must be taken before an application for confirmation may be made. Those steps have been summarised in written submissions provided by Sompo. The submissions include references to the evidence adduced at the hearing. I will not detail the evidence in that regard. I will, however, cause a copy of the submissions to be placed on the Court file. I am satisfied that the relevant steps have been undertaken in accordance with s 17C(2) and GPS 410. 28 I am also satisfied that Sompo has complied with Order 2 made on 8 April 2014, providing for service of the scheme summary, approved by APRA, to be served on affected policyholders. There is, however, one matter to which I should refer. 29 Order 2 proceeded on the basis that holders of Nippon Express policies who had reported a claim in the period after 1 April 2010 had been included in the list comprising Annexure PTT1 to Mr Tuinauvai's affidavit of 7 April 2014. It now appears, however, that the list was incomplete in that it did not include those policyholders. As a consequence, a separate list comprising those policyholders was prepared. The evidence before me is that, on 21 May 2014, the approved summary of the scheme was sent by prepaid mail to the policyholders identified in Annexure PTT1 and the policyholders identified in the separate list that was subsequently prepared. Furthermore, an additional claim under a Nippon Express policy was made after Annexure PTT1 was prepared. On 10 June 2014, a copy of the approved summary was sent by prepaid post to that policyholder. 30 The approved summary contained a contact telephone number for policyholders to ring should they have any questions concerning the scheme or the information in the approved summary. The evidence is that three calls were received. Two were inquiries about what policy had been held by the particular policyholder. The other inquirer asked whether the approved summary had anything to do with his motor policy renewal, which was taking place at the same time. 31 No affected policyholder has expressed any objection to the scheme. Further in that regard, no request was received to inspect the scheme documents or to request a copy of the scheme at any of the locations appointed for the public inspection of the scheme documents during the inspection period. Indeed, no contact from any affected policyholder was made at those locations during that period. 32 No person has come forward to oppose the scheme.

Discretion 33 As I have noted, Sompo has provided written submissions in support of its application. In those submissions, Sompo argues that the Court should exercise its discretion to confirm the scheme for the following reasons. 34 First, Sompo submits that there is an obvious practical matter required to be taken into account in assessing the scheme. It submits that the merger of Nipponkoa and Sompo under Japanese law means that Nipponkoa's policyholders will, as a matter of Japanese law at least, be transferred to Sompo in any event. Sompo submits that this is not to deny the discretionary power of the Court to refuse to confirm the scheme. It submits, however, that the likely position under Japanese law is a relevant consideration to be taken into account. 35 The difficulty with this submission is that I have no evidence before me as to the consequences, under Japanese law, of the proposed merger on the contractual rights of affected policyholders. However, I do place weight on the fact that the proposed merger is an intra-group transaction in which, the Court is told, Nipponkoa will be extinguished. In my view, there is considerable merit in APRA's submission that the position of affected policyholders should be made clear through confirmation of the scheme. 36 Secondly, Sompo submits that the post-scheme solvency position of Sompo is an important matter and that the evidence indicates that Sompo's insurance liabilities will be well-secured post-transfer. I accept that submission. 37 However, in this connection, Sompo also submits that all policyholders will continue to enjoy the support provided by NKSJ as Sompo's parent company. It submits that its other assets, and those of NKSJ, will be available to meet Australian liabilities. 38 I do not place significant weight on that latter submission. In my view, it is one based on speculative possibilities. The overwhelmingly significant consideration is the solvency position analysed by the two actuaries by reference to assets quarantined in the Australian branches of the respective businesses and, in particular, Sompo's projected solvency position post-transfer, considered with reference to those assets. 39 Thirdly, Sompo submits that the terms of the transferring insurance contracts will not change as a consequence of the scheme, apart from the substitution of Sompo as insurer. 40 Fourthly, Sompo submits that because this is an intra-group transfer, it is not expected that there will be any change to claims handling or management. That is particularly so, given that the two branches are presently managed by a common agent. 41 Fifthly, Sompo submits that the Court will place great weight and reliance on the attitude of APRA to the scheme. Given that APRA is the government regulator charged with ensuring that the insurance businesses are conducted in such a way that the legitimate interests of policyholders are protected, the non-objection to the scheme by APRA will be a matter from which the Court can draw significant comfort. Equally, Sompo submits, the Court may take into account the extent to which affected policyholders, having been given notice of the scheme and an adequate opportunity to comment upon it, express or refrain from expressing a view in relation to the scheme. Sompo submits that the lack of objection to the scheme by affected policyholders, in circumstances where they have been given an adequate opportunity to do so, is a matter speaking in favour of confirmation of the scheme. 42 Subject to the specific matters I have commented on above, I accept these submissions. I am persuaded that the scheme should be confirmed. 43 As I have noted, Sompo also seeks an order pursuant to s 17F(2) in relation to the transfer of reinsurance. Sompo submits that orders of the kind sought have frequently been made in order to ensure that affected policyholders are not deprived of the benefit of reinsurance that existed pre-transfer in relation to their liabilities. It refers, in particular, to the orders made in Gordian RunOff Ltd (No 2) [2013] FCA 1329 at [25]-[28]; American Home Assurance Company (No 2) [2011] FCA 316 at [28]-[30]; HDI-Gerling Australia Insurance Company Pty Ltd (No 2) [2010] FCA 669 at [58]-[59]; SGIC General Insurance Ltd [2004] FCA 1639 at [28]; and Re Insurance Australia Ltd (2004) 139 FCR 450 at [80]. 44 Sompo points to Lindgren J's observation in the last-cited case that an order under s 17F(2) may not even be necessary where, as here, the scheme purports to transfer reinsurance. In that connection, his Honour observed (at [80]) that s 17G of the Act provides that a scheme, once approved, is binding "on all persons". Sompo submits that his Honour thus considered that, where a scheme purports to transfer reinsurance, the Court's confirmation of the scheme would make that transfer binding on the reinsurers. 45 Be that as it may, Sompo has sought to have the reinsurance contracts novated. As I have noted, a number of the reinsurers have already executed deeds of novation submitted to them by Sompo. The remaining reinsurers, other than one who has not yet communicated with Sompo at all, have indicated that they are considering Sompo's request. Despite Lindgren J's observations in Insurance Australia Limited, I do not think that there should be any doubt about the question of the availability of reinsurance. All reinsurers have been given notice of Sompo's intention to seek an order under s 17F(2) providing for the transfer of the reinsurance contracts to it. None have expressed any objection, or have come forward to object, to such an order being made. I am persuaded that it is appropriate that the orders sought by Sompo in this regard should be made.

Disposition 46 Orders as sought will be made. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.