FEDERAL COURT OF AUSTRALIA

In the Application of Commonwealth Insurance Holdings Ltd and The Colonial Mutual Life Assurance Society Ltd [2007] FCA 1012

INSURANCE – life insurance – scheme for amalgamation of life insurance businesses – application to Court for confirmation of scheme – compliance with Life Insurance Act 1995 (Cth) and Life Insurance Regulations 1995 (Cth)

HELD – scheme confirmed without modification

Life Insurance Act 1995 (Cth) ss 3, 191, 193, 194

Life Insurance Regulations 1995 (Cth) Reg 9.02(1)

Insurance Acquisition and Takeovers Act 1991 (Cth) 

Colonial Portfolio Services Ltd v Australian Prudential Regulation Authority (2000) 11 ANZ Ins Cas 90-103; [1999] FCA 1779 applied

NuLife Insurance Ltd v Norwich Union Life Australia Ltd [2005] FCA 1635 applied

MLC Lifetime Company Ltd & Anor (No. 2) [2006] FCA 1367 applied

IN THE APPLICATION OF COMMONWEALTH INSURANCE HOLDINGS LIMITED and THE COLONIAL MUTUAL LIFE ASSURANCE SOCIETY LIMITED

NSD 942 OF 2007

EDMONDS J

5 JULY 2007

SYDNEY

THE COURT ORDERS THAT:

1.                  Pursuant to section 194 of the Life Insurance Act 1995 (Cth) (‘the Act’), the scheme for the amalgamation of the life insurance business of Commonwealth Insurance Holdings Limited with the life insurance business of The Colonial Mutual Life Assurance Society Limited, in the form of the document annexed hereto and marked ‘A’ (comprising the Scheme and the executed Scheme Deed dated 28 May 2007), be confirmed.

2.                  The applicants pay the costs of the proceedings of the Australian Prudential Regulation Authority as agreed or assessed.

3.                  These orders be entered forthwith.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

INTRODUCTION

1                     On 28 May 2007 the first applicant, Commonwealth Insurance Holdings Limited (‘CIHL’), and the second applicant, The Colonial Mutual Life Assurance Society Limited (‘CMLA’), made an application to the Court under s 193 of the Life Insurance Act 1995 (Cth) (‘the Act’) for an order under s 194 of the Act confirming a scheme (‘the Scheme’) substantially in the form annexed to the application and marked ‘A’, for the amalgamation of the whole of the life insurance business of CIHL being CIHL’s Statutory Fund No. 1 (‘SF1’) with the life insurance business of CMLA, in particular the superannuation non-participating term certain annuity sub-fund of CMLA’s Statutory Fund No. 3 (‘SF3’).

INTERLOCUTORY RELIEF

2                     On 7 June 2007, in response to CIHL’s claim for interlocutory relief, I made an order pursuant to subs 191(5) of the Act that the need for compliance with para (c) of subs 191(2) of the Act, in so far as it requires an approved summary of the Scheme to be given to owners of policies issued by CIHL for whom CIHL has no record of a current mailing address, be dispensed with.

3                     I made the order in [2] for reasons including the following:

(1)               On 2 April 2007 CIHL sent an approved summary of the Scheme, together with a covering letter to 1,592 CIHL policyholders referrable to CIHL’s SF1.  There were only three CIHL policyholders for whom CIHL had no current address details and to whom the approved summary of the Scheme was not sent.

(2)               The evidence of the return mail procedures adopted by CIHL as detailed in [36] of Ex. 2.

4                     Accordingly, I formed the view that the dispensation relief sought in respect of the three policyholders of CIHL for whom no current address was available was appropriate.

5                     On 7 June 2007 in response to CMLA’s claim for interlocutory relief, I made an order pursuant to subs 191(5) of the Act that the need for compliance with para (c) of subs 191(2) of the Act, in so far as it requires an approved summary of the Scheme to be given to owners of policies issued by CMLA referrable to CMLA’s SF3, be dispensed with.

6                     I made the order in [5] for reasons including the following:

(1)               The Scheme does not alter the policy terms or conditions of CMLA policyholders referrable to SF3.

(2)               No changes are proposed under the Scheme to the current basis of managing the business of CMLA’s SF3.

(3)               The interests of CMLA’s SF3 policyholders have been considered by the actuaries, including the independent actuary.  In short, the Scheme does not prejudice, or materially affect, CMLA’s policyholders referrable to SF3.

(4)               The Australian Prudential Regulation Authority (‘APRA’) has indicated that it has no objection to the dispensation relief sought by the applicants, and has no objection to the Scheme itself.

(5)               The applicants have widely advertised the proposed Scheme and the intended confirmation application in newspapers throughout Australia.  The notice advised policyholders where they may inspect or obtain copies of the Scheme.  The advertising programme was approved by APRA.

(6)               Details of the Scheme have been placed on the Comminsure website.  Copies of the Scheme have been sent to policyholders upon request, free of charge.

7                     Accordingly, I formed the view that the dispensation relief sought in respect of CMLA’s SF3 policyholders was appropriate.

THE SUBSTANTIVE APPLICATION

Introduction

8                     CIHL and CMLA are both registered life insurance companies.  CMLA is a subsidiary of CIHL and CIHL is ultimately owned by the Commonwealth Bank of Australia.

9                     CIHL operates through a single statutory fund, SF1, and its portfolio of non-participating term certain annuity policies is closed to new business.  CMLA operates six statutory funds, including its annuity business conducted through SF3, which in turn has a number of sub-funds.  CMLA’s SF3 is open to new business.

10                  Once confirmed, the Scheme is intended to take effect from 11.59 p.m. on 30 June 2007 (‘the Transfer Date’).

The Court’s Discretion

11                  Under s 194 of the Act, the Court has a discretion to confirm the Scheme, with or without modification, or to refuse to confirm it.

12                  Whilst the Court’s discretion is broad, it is not unfettered, and must be exercised on the evidence and having regard to the objects of the Act, principally, the protection of the interests of policyholders and prospective policyholders (s 3(1) of the Act).  See Colonial Portfolio Services Ltd v Australian Prudential Regulation Authority (2000) 11 ANZ Ins Cas 90-103; [1999] FCA 1779 at [4] and [29].

13                  There are two aspects to the protection of the interests of policyholders:

1.                  First, there are the procedural aspects in which the Court is concerned to see that the process undertaken has been properly executed in accordance with the requirements of the Act and the Life Insurance Regulations 1995 (Cth) (‘the Regulations’); and

2.                  Second, there is a substantive aspect in which the Court is concerned to see that the Scheme will not be prejudicial to the interests of policyholders and that policyholders are properly safeguarded, i.e., there is not likely to be any material detriment to policyholders affected by the Scheme (see NuLife Insurance Ltd v Norwich Union Life Australia Ltd [2005] FCA 1635 at [24] per Emmett J; MLC Lifetime Company Ltd & Anor (No. 2) [2006] FCA 1367 at [5] per Bennett J; Colonial Portfolio at [25] per Mathews J)

14                  The question of whether policyholders would be adversely affected by the Scheme is largely actuarial and involves a comparison of their security and reasonable expectations without the Scheme with what they would be if the Scheme were implemented.

Procedural Requirements

15                  The affidavit evidence in relation to compliance with the necessary procedural requirements establishes the following matters:

(1)               That a copy of the Scheme and the actuarial report of Ms Jennifer Lang (the appointed actuary of CIHL and CMLA), being the report on which the Scheme was founded, and the report of Mr Clive Aaron (the independent actuary), were given to APRA on 5 and 13 March 2007 respectively, in compliance with subs 191(2)(a) of the Act.

(2)               That notice of the intention to make this application, in the form approved by APRA, was published on 2 April 2007 in the Gazette and in newspapers, approved by APRA, circulating in each State and Territory in which there is a register of life policies for the applicants, in compliance with subs 191(2)(b) of the Act and Reg 9.02(1) of the Regulations.

(3)               A correction notice, in the form approved by APRA, was published in Tasmanian newspapers on 13 April 2007.

(4)               That for a period of 15 days after publication of the notice, the Scheme was open to inspection on each of these registries by any policyholder of the applicants.

(5)               No persons attended at the advertised locations to inspect a copy of the Scheme, and only one person requested a copy of the Scheme by letter.

(6)               Two telephone calls were received by the call centre established by the applicants to answer queries relating to the Scheme and one call was received by Freehills, the applicants’ solicitors.

(7)               Two persons made an email request for a copy of the Scheme and were sent a copy as requested.

(8)               No person has advised Freehills that they intend to object to the Scheme.

(9)               That an approved summary of the Scheme has been given to every affected policy owner other than those in respect of whom dispensation with a need for compliance with subs 191(2)(c) of the Act was given by the Court on 7 June 2007, namely:

(i)                  Those policyholders of CIHL for whom CIHL has no record of a current address (being three policyholders); and

(ii)                Those policyholders of CMLA whose policies are referrable to CMLA’s SF3.

Substantive Matters

The Scheme

16                  The Scheme comprises the Scheme and a scheme deed between CIHL and CMLA dated 28 May 2007 (‘the Scheme Deed’), to which details of the Scheme are annexed.

17                  The effect of the Scheme is that the whole of the life insurance business of CIHL’s SF1 will be amalgamated with the life insurance business of CMLA’s SF3, in particular, the superannuation non-participating term certain annuity sub-fund of CMLA’s SF3.  To this end, on the Transfer Date, CMLA will acquire all assets and assume all liabilities of CIHL’s SF1, other than current tax liabilities of SF1 to 30 June 2007 and an amount represented by the provisions set aside to meet such liabilities.

18                  Thus, on the Transfer Date CIHL’s policies will be transferred from SF1 (with net assets of $94 million as at 31 December 2006) to a significantly larger and more diverse portfolio of business of CMLA’s SF3 (net assets of $1,657 million as at 31 December 2006).

19                  The only change to CIHL’s Scheme policies is that references to CIHL will be read as references to CMLA, and references to a statutory fund of CIHL are to be read as references to CMLA’s SF3.

20                  The Scheme does not change the policy terms and conditions of existing CMLA policyholders referrable to SF3, and no changes are proposed under the Scheme to the current basis of managing the business of CMLA’s SF3.

21                  The Scheme does not affect CMLA’s other statutory funds.

22                  All costs of the Scheme will be met by CMLA’s Shareholders Fund.

Effect on Policyholders

23                  The effect of the Scheme upon policyholders of each of the applicants is dealt with in the actuarial report of Ms Lang dated March 2007 assisted by the views of two other in-house actuaries, who have considered the separate interests of policyholders of CIHL and CMLA.

24                  The actuarial report sets out the commercial background to the proposed merger of the life insurance business of CIHL with CMLA.

25                  In summary, the actuary has concluded that:

(1)               There is no change to the benefits or future expectations of the policyholders of either company.

(2)               Equity is maintained between the existing policyholders of CMLA and those being transferred from CIHL.

(3)               Adequate security of policyholder benefits should be maintained.

(4)               The amalgamation is in the interests of policyholders of both companies.

(5)               The amalgamation is in the interests of shareholders.

26                  The independent actuary, Mr Aaron, has considered the impact of the Scheme on the security and benefit expectations of policyholders and has concluded that:

(1)               The benefit expectations of CIHL and CMLA policyholders will not be adversely affected by the Scheme; and

(2)               the Scheme should not materially affect the security of CIHL and CMLA policyholders.

APRA

27                  The consent of APRA to the Scheme is not required under the Act, but APRA has indicated that it does not object to the Scheme.

Insurance Acquisition and Takeovers Act 1991 (Cth)

28                  The terms of the Scheme Deed give rise to the need for the applicants to obtain the Minister’s approval of a ‘trigger proposal’ under s 36(c) of the Insurance Acquisition and Takeovers Act 1991 (Cth) (‘the IATA’), as CMLA is acquiring greater than 15 per cent of the total book net liabilities of CIHL’s contracts of life insurance.

29                  That approval was sought on 30 May 2007.  The Assistant Treasurer’s ‘go ahead’ decision was given by letter dated 27 June 2007.

Other Matters

30                  The last audit reports for CIHL and CMLA as at 30 June 2006 demonstrate net assets as follows:

                                                            CIHL                                       CMLA

Net assets                                            $6,897 m                                 $1,298 m

31                  The financial position of both applicants continues to be reflected in the most recent management accounts to 30 April 2007 which record the following:

                                                            CIHL                                       CMLA

Net assets                                            $6,208 m                                 $1,141 m

32                  The approved actuary, Ms Lang, has confirmed that:

(1)               There have been no material changes in circumstances since preparing her actuarial report that would affect the opinions expressed in that report;

(2)               there has been no material change in circumstances in CIHL or CMLA since 31 May 2007 that would adversely affect their solvency and capital adequacy positions; and

(3)               she is not aware of any matters or events that would adversely affect those positions between the date of her second affidavit, sworn 22 June 2007, and the proposed Transfer Date in respect of the Scheme, namely, 30 June 2007.

33                  On 27 June 2007 I made an order pursuant to s 194 of the Act confirming the Scheme and in doing so took into account matters including the following matters:

(1)               There has been compliance will all legislative requirements under the Act and Regulations.

(2)               The objective of the Scheme is to integrate and consolidate the life insurance business of CIHL and CMLA, and it does so in a manner which does not change the benefits or future expectations of policyholders of either company.

(3)               Adequate security of policyholder benefits should be maintained.

(4)               The amalgamation is in the interests of policyholders of both CIHL and CMLA and is in the interests of shareholders.

(5)               APRA has independently considered the Scheme and has no objection to the present application being made to the Court for confirmation.

34                  I also made an order that the applicants pay the costs of the proceedings of APRA as agreed or assessed.

35                  Finally I directed that both orders be entered forthwith.

Associate:

Dated:         5 July 2007