Zurich Australian Insurance Limited, in the matter of Zurich Australian Insurance Limited (No 2) [2018] FCA 2067

Evidence 4 The following affidavits were read in support of the application for confirmation of the scheme: (a) Cathy Anne Manolios, sworn 3 October 2018; (b) Sandra O'Sullivan, sworn 8 October 2018; (c) Hilary Janette Bates, affirmed 16 October 2018; (d) Cathy Anne Manolios, sworn 13 December 2018; (e) Russell William Marsh, affirmed 13 December 2018; (f) Kaise Stephan, sworn 13 December 2018; (g) Geoffrey Michael Atkins, affirmed 12 December 2018; (h) Sandra O'Sullivan, sworn 13 December 2018; (i) Mark Kimberley, sworn 12 December 2018; (j) Vu Pham, sworn 13 December 2018; (k) Meredith Ellen Paynter, sworn 13 December 2018; and (l) Mark Kimberley, sworn 18 December 2018. 5 The affidavits referred to in (a)-(c) were also read in support of the application for dispensation.

Compliance with statutory preconditions 6 I was satisfied that the statutory preconditions for the making of an application to confirm the scheme under s 17F(1) of the Act had been complied with or dispensed with. In particular, I was satisfied that a copy of the scheme and the actuarial reports (referred to below) had been given to APRA; that APRA had approved the Scheme Summary prior to it being sent as required by the dispensation orders; and that a notice of intention to make the application had been approved by APRA and published, all in accordance with s 17C(2)(a) and (b), APRA Prudential Standard GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers and the dispensation orders.

Compliance with dispensation orders 7 Order 1 of the dispensation orders granted dispensation with respect to compliance with s 17C(2)(c) of the Act on condition that Orders 2 to 5 of the dispensation orders were complied with. Orders 2 to 5 provided a notification regime in respect of the Scheme Summary comprising mail-outs and service of the Scheme Summary; publication of the Notice of Intention; permitted inspection of the Scheme Summary at certain locations; and maintenance of a website providing links to certain documents described as the Inspection Documents. 8 I was satisfied that there had been compliance with Orders 2 to 5. So far as the mail-outs were concerned, mail was returned in respect of 62 claimants and 47 policyholders, representing approximately 7% of the mail sent. Order 2(b) required Zurich to follow its returned mail procedure in respect of material returned as undelivered as part of the mail-out process, to the extent that it was reasonably practicable for that procedure to be followed. 9 After 7 December 2018, 19 mail-out packages were returned as undelivered in respect of 10 claimants and 9 policyholders. Zurich only became aware of this undelivered mail on 13 December 2018. Zurich submitted, and I accepted, that it would have been impracticable to implement Zurich's returned mail procedure in respect of these claimants/policyholders because it would not have been feasible to attempt to identify new addresses for those intended recipients and resend the Scheme Summary to them in time for it to be received before the confirmation hearing on 18 December 2018. I note, in any event, that in respect of mail returned or treated as undelivered as at 7 December 2018 (92 packages), only three alternative mail addresses were able to be identified. This gives some indication of the likelihood of success in identifying alternative addresses for the 19 undelivered packages that were returned after that date. 10 As to Order 5 (inspection at nominated locations), I note that no person attended the nominated locations to inspect the Inspection Documents.

Actuarial evidence 11 Two actuarial reports have been obtained: one by Geoffrey Michael Atkins, who is the director and principal of Finity Consulting Pty Limited and the Appointed Actuary to Gordian (the Atkins report); the other by Kaise Stephan, a partner in Deloitte Touche Tohmatsu and an authorised representative of Deloitte Consulting Pty Ltd (the Stephan report). The Atkins report was sought by Gordian. The Stephan report was sought by Zurich. 12 The primary conclusions of the Atkins report are: CTP insurance is a statutory class of insurance with state legislation specifying the coverage, claim procedures and numerous obligations of the insurer. Meeting its legislative obligations will satisfy Gordian's obligations to claimants, and therefore policyholders. There will be no changes to the terms and conditions of the Zurich NSW CTP policies as a result of the scheme. Policyholders, and claimants against the policies, will not face any changes in the entitlements and obligations relating to their insurance coverage. All policies have now expired. The transition of claims handling responsibilities from Zurich to Enstar Australia Limited (Enstar Australia) is underway and has been carefully planned. Enstar Australia's claims handling would not present any threat to the interests of policyholders and claimants. The primary source of financial security for the holders of Zurich NSW CTP policies is the Cavello Bay reinsurance contract, with an Australian trust fund. This contract gives a sound level of security, and there are several back-ups should it fail for any reason. Further, these arrangements ring-fence other Gordian policyholders from the potential for losses from the Zurich NSW CTP policies. The interests of the affected policyholders (the holders of the Zurich NSW CTP policies) will not be adversely affected in a material way as a consequence of the scheme. 13 The primary conclusions of the Stephan report are that after the transfer: the financial security provided to transferring policyholders will not be materially reduced; there will be no change in the contractual rights of transferring policyholders; there will be no material change in the service provided to the policyholders; there will be no material impact on non-transferring policyholders of Zurich; it is not expected that there will be any adverse deterioration in the capital position or solvency of Gordian arising from the transfer; and Gordian has sufficient claims administration ability to service the needs of the transferred policyholders. 14 In the Stephan report, Mr Stephan also expressed the following conclusion: I have concluded that the interests of the transferring CTP Portfolio policyholders, remaining post-transfer policyholders of Zurich and existing pre-transfer policyholders of Gordian are not materially adversely affected by the Transfer. With respect to the transferring CTP Portfolio policyholders, I note that it is a statutory class of insurance which limits benefit and other discretions and that staff and processes remain the same after transfer…

Contractual conditions precedent 15 The Framework Deed entered into on 23 February 2018 between Zurich, Gordian, Cavello Bay, and Enstar Group Limited (one of a suite of agreements providing for the transfer of the portfolio) identified four conditions precedent, namely: the Treasurer (or the Treasurer's delegate) providing all necessary approvals or consents required under the Insurance Acquisitions and Takeovers Act 1991 (Cth) on terms satisfactory to Gordian, acting reasonably, to permit Gordian to acquire the Transferring Assets and to assume the Transferring Liabilities, in accordance with the scheme; Gordian obtaining a licence under Part 7.1 of MACA on terms satisfactory to Gordian, acting reasonably, to permit Gordian to acquire the Transferring Assets and to assume the Transferring Liabilities, in accordance with the scheme; the Court confirming the scheme; and the Inception Date (as defined in the Reinsurance Agreement) occurring, and the Reinsurance Agreement not being terminated. 16 The evidence before me was that the contractual conditions precedent, other than Court approval (which was the subject of the confirmation application), had been satisfied.

The applicants' submission 17 The applicants submitted that the relevant statutory preconditions and the Court's orders made on 17 October 2018 had been satisfied. They submitted that there would be no change in the contractual rights of existing policyholders or claimants, and that further, existing policyholders of Gordian would not be materially adversely affected by the scheme. The contractual preconditions to the scheme had been satisfied (other than Court approval). The applicants submitted that, in these circumstances, it was appropriate that the Court make the orders sought.

Conclusion 18 I accepted the applicants' submission. I was satisfied that the scheme should be confirmed under section 17F(1) of the Act. I add the following remarks. 19 The financial risks and benefits of the Zurich NSW CTP policies, which have been in run-off since November 2015, have been with the Enstar parties since 23 February 2018. Cavello Bay (one of the Enstar parties) has fully re-insured the portfolio with effect from 1 January 2018. As I noted in the dispensation reasons, 100% of the economic risk in respect of the portfolio has already been transferred. Zurich has ceased to have any net economic exposure to the portfolio, although it retains a gross exposure to, and remains ultimately responsible for, the portfolio as a matter of law, and in accordance with its regulatory obligations, until such time as the transfer is completed. 20 The legal transfer of the Transferring Assets should be seen as part of the last stage of a transaction that has been in process since 2017. Prior to the transaction, policyholders enjoyed the protection of a substantial, regulated company, Zurich. After the transfer, policyholders will be insured by Gordian, a relatively small Australian insurer specialising in run-off business. The financial security of policyholders will be supported by a series of mechanisms. The primary mechanism is the 100% reinsurance contract between Cavello Bay and Zurich, which will be transferred to Gordian as part of the scheme. The critical part of this mechanism is that funds to pay claims are held in trust in Australia. They are ring-fenced and protected for the holders of the Zurich NSW CTP policies. If the trust fund falls below 105% of the insurance liabilities, Cavello Bay must "top-up" the fund. 21 The back-up protections are, firstly, the financial resources of Cavello Bay, with net assets of US$1.4 billion and, secondly, the other financial resources of Gordian. As to Gordian's financial resources, Gordian's Board has determined a target Capital Adequacy Multiple (CAM) of 2.2 times the Prescribed Capital Amount (PCA). The Atkins report, speaking as at 13 November 2018, noted that, based on current estimates, $14.5 million of additional capital would be required to achieve the target CAM of 2.20. On 10 December 2018, Gordian's parent, AG Australia Ltd, made a capital injection of $20 million into Gordian to maintain Gordian's target CAM of 2.20. 22 In the Atkins report, Mr Atkins also observed that a post-scheme CAM of 2.20 (with capital injection) would be lower than Gordian's projected pre-scheme CAM of 3.07. He opined, however, that this change does not pose a concern for the financial security of policyholders or claimants because their security comes principally from the trust fund, with Gordian's capital being just one of the back-up protections. 23 I noted that Deeds of Acknowledgement had been entered into in respect of the ACT/NSW sharing deed and the Qld/NSW sharing deed referred to in [5(a)] of the dispensation reasons. By the Deeds of Acknowledgement, the parties thereto acknowledged (amongst other things) that the relevant sharing deed affecting that party was binding as if Gordian had been a party to it, in place of Zurich, at all times. 24 In coming to my conclusion that the scheme should be confirmed, I also took into account the opinions expressed in the Atkins report and the Stephan report, as summarised above. As I have already noted, these reports were provided to APRA. I also took into account the fact that neither SIRA nor APRA had raised any objection to the scheme being confirmed. In fact, SIRA had confirmed that it consented to the transfer of the Zurich NSW CTP policies to Gordian, subject to the scheme being confirmed by the Court. APRA appeared at the confirmation hearing and expressed its satisfaction that there would be no detriment to affected policyholders if the Court were to confirm the scheme, and that the orders sought by the applicants were appropriate. Further, I took into account the fact that no other person had come forward to object to the scheme being confirmed.

Transfer of special security agreement 25 The applicants also sought an order pursuant to section 17F(2) of the Act that Zurich's rights, benefits and obligations under the Specific Security Agreement between Zurich and Cavello Bay dated 23 February 2018 (the SSA) be transferred to Gordian. Pursuant to the SSA, Cavello Bay granted, in favour of Zurich, a registered charge over, or other agreed security in, various forms of security to support the reinsurance agreement between Zurich and Cavello Bay. The evidence was that the SSA complies with the requirements of APRA Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge, and APRA Prudential Standard GPS 230 Reinsurance Management. 26 The SSA was not included in the definition of Transferring Contract in the scheme, but it was an essential element of the reinsurance arrangement which Gordian required to ensure the reinsurance provided by Cavello Bay was properly secured. 27 I was satisfied that the order sought under section 17F(2) should be made.

Disposition 28 Orders, as sought, were made. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.