St. George Life Limited, in the matter of St. George Life Limited [2018] FCA 1206

MARKOVIC J: 1 This is an application under s 193 of the Life Insurance Act 1995 (Cth) (Act) for an order under s 194 of the Act confirming a scheme for the transfer of the life insurance business of St. George Life Limited (SGLL) to Westpac Life Insurance Services Limited (WLISL). SGLL and WLISL (collectively, Plaintiffs) are each authorised under the Act to conduct life insurance business and do so through their various statutory funds as prescribed under the Act. 2 The Plaintiffs applied for an order pursuant to s 191(5) of the Act for dispensation from the requirements of s 191(2)(c) of the Act insofar as it requires an approved summary of the scheme to be given to every affected policy owner of the Plaintiffs as well as other orders ancillary to the making of that order. After hearing submissions I made the orders sought. These are my reasons for making those orders.

background facts 3 The following facts are based substantially on the written submissions relied upon by the Plaintiffs in support of the application to dispense with the requirement of s 191(2)(c) of the Act.

SGLL 4 SGLL has been a registered life insurer since 1997. It operates two statutory funds: Statutory Fund No 1 (SF1), which contains all ordinary business other than annuity business; and Statutory Fund No 2 (SF2), which contains annuity business. SGLL was acquired by Westpac Banking Corporation (Westpac) in December 2008 as a result of the merger between Westpac and St. George Bank Limited. 5 SGLL carries on three categories of life insurance business, namely: (1) individual life risk business which comprises death, total and permanent disability (TPD), trauma and disability income cover; (2) consumer credit insurance (CCI) business which comprises death, disability and involuntary unemployment cover, with the general insurance component (being disability and involuntary unemployment cover) insured by Insurance Australia Limited (IAL); and (3) fixed term annuity business. 6 In addition SGLL: (1) has underwritten a single group CCI insurance policy, being the BankSA Flexi Cover Loan and Lifestyle Insurance Product (BankSA Group Policy), which is administered by IAL; and (2) carries on some inwards reinsurance business which includes the general insurance component of part of its CCI business that is insured by IAL. 7 While Westpac has promoted and offered the three SGLL categories of life insurance business referred to in [5] above under the "St. George", "BankSA" and "Bank of Melbourne" brands to its customers online and through its retail branches and call centres, the majority of direct marketing sales work was carried out by a third party, Aegon Insights Australia Pty Ltd (Aegon), which ceased new sales in April 2015. Previously, SGLL also distributed life insurance products through financial advisors. 8 Since November 2017 SGLL has not promoted or offered CCI products for credit cards and personal loans in branches and call centres, but these products continued to be distributed online up until 30 June 2018. As at 30 June 2018 all of SGLL's life insurance business was closed to new customers.

WLISL 9 WLISL has been a registered life insurer since 1986 and is significantly larger than SGLL. It has two active statutory funds: Statutory Fund No 1, which contains superannuation and ordinary life risk business, investment account life business and annuities; and Statutory Fund No 2, which contains investment linked superannuation and investment linked ordinary life business. 10 WLISL carries on five categories of life insurance business as follows: (1) individual life risk business which comprises death, TPD, trauma and disability income cover; (2) group life risk business which comprises death, TPD and salary continuance cover; (3) CCI business which comprises death cover; (4) fixed term and lifetime annuities; and (5) investment business comprising superannuation and ordinary investment linked and investment account products. 11 WLISL distributes its life insurance products in the Westpac network through personal advisors and a phone based advice team as well as external independent financial advisors on investment platforms and as standalone offers. WLISL is also the insurer of life insurance for the Super for Life superannuation product issued by BT Funds Management Limited and for various BT Financial Group (BTF Group) corporate superannuation products. The BTF Group is Westpac group's wealth management and insurance division. WLISL also co-issues CCI products with Westpac General Insurance Limited.

The proposed scheme 12 The proposed scheme involves an intra-group transfer of life insurance within the Westpac group with the SGLL life insurance business to be transferred to WLISL. SGLL and WLISL are both wholly owned subsidiaries of Westpac Financial Services Group Limited and the ultimate parent company of both companies is Westpac. 13 The businesses of both SGLL and WLISL are managed within the BTF Group. Thus SGLL and WLISL share consistent approaches to the setting of premium rates and claims handling. BTF Group staff assess and manage claims for both businesses. 14 Despite both SGLL and WLISL operating within the same corporate group and sharing some systems and processes, the evidence discloses that the management of two life insurance entities within the same group increases operational complexity and costs. Accordingly, Westpac has decided to consolidate the life insurance business of SGLL into WLISL in order to achieve operational efficiencies, an improved customer experience and the capital and costs savings which will result from having only one registered life insurer. 15 The proposed scheme gives effect to a transfer deed dated 5 July 2018 between SGLL and WLISL pursuant to which SGLL has agreed to transfer its life business to WLISL subject to the Court's confirmation. The key elements of the proposed transfer and scheme are as follows: (1) all of SGLL's life insurance policies referable to its SF1 and SF2 immediately prior to the effective time of the scheme will be transferred to WLISL's Statutory Fund No 1; (2) WLISL's Statutory Fund No 1 will receive all of SGLL's assets held in its SF1 and SF2 referable to the transferring business; (3) WLISL will assume all of the liabilities and obligations of SGLL in relation to the transferring business and be entitled to all the rights and benefits of SGLL in relation to the transferring business; (4) WLISL will become the issuer of SGLL life insurance policies and SGLL policy owners will become WLISL policy owners; (5) the rights and liabilities of SGLL policy owners will be the same as they would have been if the applications on which their policies were based had been accepted by WLISL instead of SGLL and their policies had been issued by WLISL instead of SGLL, subject only to some minor variations referred to at [16] below; (6) any person having a claim on or obligation to SGLL under or in respect of a SGLL policy will have the same claim on or obligation to WLISL irrespective of when the claim or obligation arose; and (7) the scheme is intended to take effect on 1 September 2018 or such other time that the Court determines. 16 Under the scheme there will be no change to the terms and conditions of SGLL policies other than to St. George Life Protection Choices policies issued prior to 1 December 2003. For those policies, upon consolidation with WLISL, the value of the sum insured will be indexed by the greater of the Consumer Price Index (CPI) and 3%. 17 Andrew Katon, the appointed actuary of both SGLL and WLISL, has prepared a report dated 4 July 2018 in relation to the proposed scheme in which he expressly addresses the change to St. George Life Protection Choices policies referred to in the preceding paragraph. Mr Katon is of the opinion that the change is advantageous to most policy owners as it will provide them with additional cover without medical underwriting and those SGLL policy owners who do not wish to accept the higher policy cover will be given the option to remove indexation or alternately reduce the sum insured. 18 In relation to WLISL there will be no changes to the terms and conditions of its policies as a result of the scheme. No assets or liabilities are to be transferred under the scheme to WLISL's statutory funds other than its Statutory Fund No 1. 19 All costs associated with the transfer will be paid by Westpac and not by SGLL or WLISL policy owners. Accordingly, SGLL will retain the assets and liabilities in its shareholders' fund at the time the scheme takes effect.

The effect of the proposed transfer on some operational aspects 20 Following the transfer of the SGLL policies to WLISL: (1) there will be no change to the claims management processes that will continue to be managed by BTF Group and certain third parties as is currently the case; (2) policy owner information held by SGLL will be migrated across to WLISL's policy administration system and WLISL will have direct access to other policy holder information for SGLL business that is maintained by the BTF Group and other third parties. The BTF group has put measures in place to ensure that all identified integration issues are addressed and that SGLL policy owners will not be disadvantaged as a result; and (3) the policies and practices that SGLL currently maintains in relation to matters such as, the determination of premium rates, charges and underwriting, will be continued by WLISL and will be subject to review by WLISL from time to time in a manner consistent with the process undertaken by SGLL and in compliance with WLISL's legal and regulatory obligations.

Information management of SGLL's life business 21 Scott Moffitt, the head of life insurance operations at BTF Group, gave evidence about where the data for SGLL's business is held. In summary, that data is largely held on a number of databases, including SGLL's own administration platform as well as BTF Group's and Westpac's administration platforms and systems depending on the type of business. Some policy owner data is also held externally as Aegon holds policy records for the life insurance business sold directly by it; IAL holds policy records for SGLL's CCI business for credit cards and personal loans; and policy records for the fixed term annuity business sold by independent financial advisors through investment management platforms are held by the platform administrator, Advance Asset Management Limited (Advance). 22 Under Mr Moffitt's supervision, an internal working group was established to identify those policy owners and group policy beneficiaries that will be affected by the scheme. As a result of the work undertaken, as at 11 June 2018, 114,204 affected SGLL policy owners were identified. SGLL, IAL or Aegon do not have current addresses for approximately 6,050 or 5.3% of the total number of affected SGLL policy owners.

proposed process for notifying Affected policy owners 23 The Plaintiffs propose to give an approved summary of the scheme (Summary) to: (1) all SGLL policy owners other than those for whom there is no record of a current mailing address; and (2) the group policy insured beneficiaries under the BankSA Group Policy, but do not propose to give the approved summary to WLISL policy owners. 24 The Plaintiffs proposed the following procedures to bring the scheme to the attention of the selected policy owners: (1) a copy of the Summary is to be mailed to the addresses of all policy owners and group policy insurer beneficiaries whose contact information is held in the systems administered by SGLL, Aegon, IAL and Advance for policies issued by SGLL referrable to its SF1 and SF2. SGLL will implement a returned mail procedure in which the relevant entity will monitor and capture returned mail and make a note on their system and check other sources for the policy owner's contact information; (2) arrange for the publication of a notice of intention to make the application to the Court for confirmation of the scheme (Notice of Intention) in several newspapers circulating in Australia, as approved by the Australian Prudential Regulation Authority (APRA), and in the Commonwealth Gazette to draw attention to the proposed scheme; (3) a copy of the scheme documents and actuarial reports will be available for inspection at certain locations in each state and territory as approved by APRA; (4) those documents mentioned at (3) above will also be available for viewing and download from four dedicated webpages from the date of publication of the Notice of Intention until the effective date of the scheme; (5) SGLL intends to provide a toll free telephone number on which BTF Group staff will be available to answer enquires by phone during business hours on weekdays from the date of publication of the Notice of Intention until the date of the confirmation hearing. The toll free number will be included in the Summary, Notice of Intention and policy owner notification letters and will also be listed on Westpac's websites at the pages that host information about the proposed scheme as indicated at (4) above; (6) SGLL will operate a dedicated email address to receive inquiries about the scheme from the date of publication of the Notice of Intention until the date of the confirmation hearing. The email address is included in the Summary; and (7) on request by a SGLL or WLISL policy owner or by an insured beneficiary under the BankSA Group Policy, a copy of the scheme, the Summary, the Notice of Intention and actuarial reports will be provided free of charge.

Apra's position 25 There has been ongoing consultation between the Plaintiffs and APRA in relation to the proposed scheme. APRA was provided with advanced drafts of the scheme document, the transfer deed, the Notice of Intention and Summary. 26 On 6 July 2018 APRA indicated their approval in relation to the proposed scheme, including approving the Summary under s 191(1) of the Act, the Notice of Intention, publication of the Notice of Intention in specified newspapers and the locations for inspection of the scheme. 27 Mr Claxton appeared on behalf of APRA at the hearing of the dispensation application and informed the Court that APRA had no objection to the making of the dispensation orders and that it was satisfied with the proposed notification process.

Relevant PRINCIPLeS 28 Section 191 of the Act provides: 191 Steps to be taken before application for confirmation (1) In this section: affected policy owner means the owner of a policy that is referable to a statutory fund affected by a scheme. approved summary means a summary approved by APRA. (2) An application for confirmation of a scheme may not be made unless: (a) a copy of the scheme and any actuarial report on which the scheme is based have been given to APRA in accordance with the regulations; and (b) notice of intention to make the application has been published by the applicant in accordance with the regulations; and (c) an approved summary of the scheme has been given to every affected policy owner. (3) Without limiting the provision that may be made by the regulations for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each company affected by the scheme, details of the place and time at which an affected policy owner may obtain a copy of the scheme. (4) An affected policy owner is entitled, on his or her request, to be provided by the company with one copy of the scheme free of charge. (5) The Court may dispense with the need for compliance with paragraph (2)(c) 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 paragraph be complied with. 29 In The application of Commonwealth Life Ltd (2003) 12 ANZ Ins Cas 90-117; [2003] FCA 501 (Commonwealth Life) at [8] Sackville J referred to the policy underlying s 191(2)(c) of the Act as follows: I think that some care needs to be taken before an order is made dispensing with the requirements of s 191(2)(c) of the Act. Clearly enough, the policy underlying the statutory requirement, when read in conjunction with s 191(2)(b), is to give every affected policyholder a summary of the scheme and, an opportunity, if he or she so desires, to make submissions to the Court in respect of any application for confirmation of the scheme. A right to be heard in relation to a proposed scheme may be of little value if a person does not know of the proposal. 30 In National Mutual Life Association of Australasia Limited, the application of National Mutual Life Association of Australasia Limited and AMP Life Limited [2016] FCA 1219 at [34] Gleeson J, while recognising that each case necessarily turns on its own facts, summarised the considerations which have been taken into account in the exercise of the discretion to make an order under s 191(5) of the Act granting dispensation to include: (1) the intra-group nature of a scheme due to the lack of, or limited, difficulty in passing on a claim that is made on the transferring insurer to the receiving insurer: see Calliden Group Limited in the matter of Calliden Group Limited [2007] FCA 2019 ("Re Calliden Group"); MMIA Pty Ltd and QBE Insurance (Australia) Limited [2008] FCA 1239 ("Re MMIA"); (2) the nature of the scheme and whether it involves changes to the contractual benefits or entitlements and security of policy owners in respect of whom dispensation is sought; (3) evidence by qualified actuaries as to whether policy owners in respect of whom dispensation is sought will be detrimentally affected by the scheme; (4) the practical difficulties and the costs involved in providing a scheme summary to policy owners in respect of whom dispensation is sought; (5) the extent to which the scheme may be brought to the attention of policy owners by means other than the scheme summary; (6) the lack of material changes to policy terms and conditions: see Re QBE; and (7) the involvement and attitude of APRA to the application: see Re Calliden Group; Re MMIA; Westport Insurance Corporation, in the matter of Westport Insurance Corporation [2009] FCA 1357; (2009) 16 ANZ Insurance Cases 61-830; American Home Assurance Company, in the matter of American Home Assurance Company [2010] FCA 1499; Re QBE. See also Macquarie Life Limited, in the matter of Macquarie Life Limited [2016] FCA 973 (Macquarie Life) at [26] (per Allsop CJ).

Who are the affected policy owners? 31 Section 191(2)(c) requires an approved summary of the scheme to be given to "every affected policy owner". Thus dispensation is only required in relation to "affected policy owners" as defined in s 191(1) of the Act, namely, owners of policies referable to a statutory fund affected by a scheme. 32 The Plaintiffs submitted that, although the issue is not free from doubt, applications for dispensation under s 191(5) of the Act have been made on the basis or assumption that policy owners of the receiving fund are "affected policy owners" and that there are many cases where unqualified dispensation has been granted under the Act to policy owners referable to the receiving fund who experience no change in their relationship with their insurer, where the relevant statutory fund remains intact and the actuarial evidence is to the effect that the interests of those policy owners are not prejudiced by the scheme: see for example BT Life Limited; In the matter of BT Life Limited [2011] FCA 1100 at [7] and [19]-[20] (BT Life); Commonwealth Life at [8]-[14]. 33 In this case the Plaintiffs proceeded on the same basis. That is, they sought an order pursuant to s 191(5) of the Act for dispensation in relation to policy owners referable to WLISL's Statutory Fund No 1. 34 On the other hand, the policy owners referable to WLISL's Statutory Fund No 2 are not subject to the scheme and are not affected by the scheme. As Mr Katon notes in his report, no assets or liabilities are to be transferred to any of WLISL's statutory funds other than its Statutory Fund No 1. It follows that these policy owners are not "affected policy owners" for the purpose of s 191(2)(c) of the Act and no dispensation was required in relation to them: see Macquarie Life at [23]-[25]. 35 The final category of policy holders identified by the Plaintiffs to consider are those who have the benefit of insurance or hold rights of insurance in an underlying sense but are not persons to whom policies are issued or who own policies. These persons are not "affected policy owners" for the purpose of s 191(2)(c) of the Act: see Macquarie Life at [22] and [27]. Notwithstanding that, as set out at [23] above, the Plaintiffs intend to provide a copy of the Summary to the underlying insured beneficiaries of the BankSA Group Policy.

grounds for dispensation 36 The grounds for seeking dispensation relate to the nature of the scheme and the circumstances attending to its preparation.

Nature of the Scheme 37 The evidence before me established that the proposed transfer of business, which is via an intra-group scheme, will not result in any changes to: (1) policy terms and conditions issued by SGLL, save for the limited change to the St. George Life Protection Choices policies referred to at [16]-[17] above; (2) policy terms and conditions issued by WLISL; and (3) the claims management processes for SGLL which will continue to be managed by BTF Group and third parties as is currently the case. 38 Mr Katon's report and a report prepared by Briallen Cummings of KPMG Financial Services Consulting Pty Ltd, the independent actuary commissioned by the Plaintiffs, both express an opinion to the effect that no SGLL or WLISL policy owners will be adversely affected by the implementation of the scheme. Relevantly: (1) In his report Mr Katon summarised his conclusions as follows: … SGLL Transferring Policy Owners • The Proposed Transfer does not adversely impact the contractual benefits and rights of the transferring policy owners; • WLISL's intended basis of determining and implementing the non-contractually specified and/or discretionary aspects of the transferring policies will continue to meet the overall reasonable benefit expectations of the transferring policy owners; and • WLISL will remain in a sound financial position and the transferring policy owners' benefit security will remain adequate after the Proposed Transfer. WLISL's Statutory Fund 1 Existing Policy Owners • There will be no impact to the contractual benefits and rights, or to the reasonable benefit expectations, of the existing policy owners of WLISL's Statutory Fund 1 as a result of the Proposed Transfer; • Each of the statutory funds of WLISL and WLISL as a whole is expected to remain in a sound financial position; and the existing policy owners' benefit security will remain appropriate, with financial assets exceeding regulatory requirements, after the proposed transfer; and • There will be no material disadvantages to the existing policy owners of WLISL's Statutory Fund 1 as a result of the transfer of SGLL Policies to WLISL. (2) In her report Ms Cummings concluded: The following summarised the key conclusions set out in this report in respect of the scope, general uncertainties and assumptions described in Section 1: • In respect of the SGLL Policyholders' benefit terms and conditions, and reasonable expectations: - The proposed change to the indexation benefit for some SGLL Policyholders is not regarded as adverse to the contractual rights and benefits of the SGLL Policyholders taken as a whole. - There are no other proposed changes to SGLL Policy benefits, premium rates or fee rates as a result of the Transfer. - No adverse impact on SGLL Policyholder reasonable expectations has been identified. • In respect of the WLISL Policyholders benefit terms and conditions, and reasonable expectations: - The proposed Transfer involves no change to WLISL Policy terms or conditions and no adverse impact on WLISL Policyholder reasonable expectations. • In respect of SGLL Policyholder and WLISL Policyholder benefit security: - Upon the proposed Transfer, WLISL is expected to continue to have assets in excess of APRA's Prudential Capital Requirements as at the Transfer Date; and - The security of SGLL Policyholder and WLISL Policyholder benefits as at that date is expected to be adequate. 39 In reaching their conclusions both Mr Katon and Ms Cummings considered the impact of the proposed scheme on WLISL Statutory Fund No 1 policy owners. Relevantly, in undertaking her analysis, Ms Cummings observed that SGLL's policy liabilities as at 30 September 2017 were less than 0.3% of WLISL's policy liabilities for its Statutory Fund No 1. Mr Katon concluded, among other things, that there are no material disadvantages to existing policy owners of WLISL in consolidating the SGLL policies into it.

Circumstances attending the preparation of the scheme 40 The plaintiffs relied on the following aspects of their proposed notification process to support their application for the dispensation orders: (1) first, the proposed mail out of the Summary to policy owners for whom SGLL has a current mailing address. The evidence before me disclosed that SGLL had established that there were 114,204 affected SGLL policy owners. Of those SGLL could not identify mailing addresses for approximately 6,050 or 5.3% of affected policy owners. It is unlikely that SGLL will be able to provide a copy of the Summary to those policy owners. However, they constitute a relatively small number of policy holders when compared to the total pool. SGLL will also implement a dedicated returned mail procedure for copies of the Summary that are returned to sender (see [24(1)] above); (2) secondly, the plaintiffs intend to undertake a number of other steps in order to bring the the scheme to the attention of affected policy owners as set out at [24] above; and (3) thirdly, the cost of providing Summaries to each of the policy owners referable to WLISL's Statutory Fund No 1 is approximately $678,000, which is a not insubstantial sum. 41 Based on these matters I was satisfied that the procedure proposed for the publication and notification of the scheme would be likely to lead to notification of a very large number and, indeed, a significant majority of the affected policy owners "sufficient to bring forth, in all likelihood any objection to the scheme that is based on viable objective grounds": see National Mutual Life at [42]. Further, the projected costs of notification of the policy owners referable to WLISL Statutory Fund No 1 provide a further basis for the dispensation orders sought in relation to those policy owners: see BT Life at [18].

The attitude of APRA 42 As set out at [25]-[27] the Plaintiffs have consulted with APRA and it has provided the necessary approvals. It also appeared on the application and indicated its support for the orders sought. 43 APRA's attitude to the application is significant. It is the prudential regulator of insurance business in Australia charged with ensuring that the interests of policy owners are protected: see National Mutual Life Association at [4] and the cases cited therein.

Conclusion 44 On the basis of the matters set out above I was satisfied that, because of the nature of the scheme and the circumstances attending its preparation, it was appropriate to make the orders sought by the Plaintiffs. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.