FEDERAL COURT OF AUSTRALIA

CUMIS Insurance Society Inc [2012] FCA 190

IN THE MATTER OF CUMIS Insurance Society Inc [2012] FCA ##

THE COURT ORDERS THAT:

1.    Pursuant to s 17F(1) of the Insurance Act 1973 (Cth), the scheme for the transfer of the insurance business carried on by the Australian branch of CUMIS Insurance Society Inc. to QBE Insurance (Australia) Limited, in the form of Annexure A to these orders, be confirmed without modification.

2.    The Applicant pay the costs of the Australian Prudential Regulation Authority of this motion as taxed or agreed.

3.    These orders be entered forthwith.

Note:    entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ANNEXURE A

INSURANCE ACT 1973 (PART III DIVISION 3A)

SCHEME FOR THE TRANSFER OF THE AUSTRALIAN INSURANCE BUSINESS OF CUMIS insurance society, INC. TO qbe insurance (australia) limited (THE SCHEME)

Background

A.    CUMIS Insurance Society, Inc. ARBN 000 562 121 (CUMIS) is authorised by APRA under the Insurance Act to carry on insurance business through a local branch operation in Australia. QBE Insurance (Australia) Limited ACN 003 191 035 (QIA) is also authorised by APRA to carry on insurance business in Australia.

B.    This Scheme has been prepared under Part III Division 3A of the Insurance Act to give effect to the terms of an agreement by which CUMIS and QIA have relevantly agreed that Insurance Contracts and Insurance Liabilities be transferred from CUMIS to QIA.

C.    The Actuarial Report has been prepared in connection with the Scheme.

1.    Definitions and Interpretation

1.1    Definitions

In this Scheme, unless the context requires otherwise:

Actuarial Report means the report dated 12 December 2011 prepared by Colin Brigstock and Andrew McInerney of Finity Consulting Pty Limited.

APRA means the Australian Prudential Regulation Authority.

Branch Business means the insurance business carried on by CUMIS in Australia, within the meaning of the Insurance Act, including issuing or undertaking liability under Insurance Contracts and discharging liabilities under the Insurance Contracts.

Branch Reinsurance Contracts means those outward reinsurances to which CUMIS' Australian branch is a reinsured party or under which CUMIS' Australian branch is reinsured for liabilities arising under Insurance Contracts issued or entered into by CUMIS Australian Branch prior to 1 April 2011, but shall not include:

(a)    those outward reinsurances which CUMIS has entered into as reinsured in relation to its worldwide insurance operations; or

(b)    the Quota Share Reinsurance Agreement between QIA and CUMIS dated 1 April 2011.

Claim means, in relation to any person, a claim, action, proceeding, judgment, damage, loss, cost, charge, expense or liability of whatever nature incurred by or made against the person, however arising and whether present, future or contingent, whether ascertained or unascertained and whether arising before or after the Effective Date.

Effective Date means 12.01am on 1 April 2012 or such other date agreed between the parties and ordered by the Federal Court of Australia.

Excluded Liabilities means:

(a)    taxes for which CUMIS is liable; and

(b)    expenses of closing CUMIS' Australian branch.

Insurance Act means the Insurance Act 1973 (Cth).

Insurance Contracts means all contracts of insurance and/or reinsurance issued or entered into by CUMIS as insurer/reinsurer through its Australian branch prior to the Effective Date in the conduct of its Branch Business.

Insurance Liabilities means Claims arising in relation to the Branch Business, including those which have arisen and remain unsatisfied or which may arise in the future or which are prospective or contingent and those the amount of which is not ascertained or ascertainable and includes any insurance liability described in Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation made under the Insurance Act 1973 (Cth), other than the Excluded Liabilities.

Transfer Agreement means the Transfer Agreement dated 14 December 2011 between CUMIS and QIA.

1.2    Interpretation

Headings are for convenience only and do not affect interpretation. The following rules apply in this Scheme unless the context requires otherwise.

(a)    The singular includes the plural and conversely.

(b)    If a word or phrase is defined, its other grammatical forms have a corresponding meaning.

(c)    A reference to a person, corporation, trust, partnership, unincorporated body or other entity includes any of them.

(d)    A reference to a clause or schedule is a reference to a clause of or a schedule to, this Scheme.

(e)    A reference to an agreement or document (including, without limitation, a reference to this Scheme document) is to the agreement or document as amended, varied, supplemented, novated or replaced except to the extent prohibited by this Scheme or that other agreement or document.

(f)    A reference to legislation or to a provision of legislation includes a modification or re-enactment of it, a legislative provision substituted for it and a regulation, prudential standard or statutory instrument issued under it.

(g)    includes, including and similar expressions are not intended to operate as words of limitation or imply any limitation.

(h)    A reference to writing includes a facsimile transmission and any means of reproducing words in a tangible and permanently visible form.

(i)    A reference to time is to Sydney time.

1.3    References to CUMIS

A reference to CUMIS in this Scheme shall be taken as a reference to CUMIS Insurance Society, Inc. acting through its Australian branch.

2.    Transfer of Business

On the Effective Date, CUMIS transfers to QIA the Branch Business and, in particular:

(a)    the Insurance Contracts;

(b)    the Insurance Liabilities; and

(c)    the right, title and interest of CUMIS' Australian Branch in the Branch Reinsurance Contracts,

and such transfer includes all right, title, interest, benefit and powers that have arisen, or may in the future arise and any liabilities that have, or may in the future arise under any of the above, including as against any policyholder or third party arising under or by virtue of any Insurance Contract, including but not limited to any claims by way of subrogation, contribution, outstanding premium and any other recoveries related directly or indirectly to any Insurance Contracts, in accordance with the terms of the Transfer Agreement.

3.    Consideration for the transfer of CUMIS' Australian insurance business

In consideration of QIA's acceptance of the Insurance Contracts and assumption of the Insurance Liabilities and QIA's provision of the indemnity referred to in clause 4(d) of this Scheme, CUMIS shall pay to QIA the sum of $1 on or before the Effective Date.

4.    Transfer of liability

On and from the Effective Date:

(a)    CUMIS transfers to QIA and QIA accepts and assumes responsibility for all Insurance Liabilities in connection with the Branch Business;

(b)    CUMIS transfers to QIA and QIA accepts the transfer of the Insurance Contracts, and QIA assumes and takes over all Claims under or in connection with the Insurance Contracts;

(c)    QIA will become the insurer in place of CUMIS under the Insurance Contracts; and

(d)    QIA indemnifies and shall keep CUMIS indemnified from and against any and all Claims under or in connection with the Insurance Contracts.

5.    Effective Date

The transfer of the Branch Business from CUMIS to QIA, and the assumption of the Insurance Contracts and Insurance Liabilities by QIA, pursuant to this Scheme take effect on and from the Effective Date such that QIA will be entitled to all benefits and rights in respect of the Insurance Contracts, and will assume all of the obligations in respect of the Insurance Contracts and Insurance Liabilities as at, from and including the Effective Date.

6.    Implementation

CUMIS and QIA will each do all acts and things and execute all documents necessary or desirable to give effect to the provisions of the Transfer Agreement and this Scheme and the transactions contemplated by them.

7.    Proceedings

Any legal proceedings by or against CUMIS in respect of or in connection with any Insurance Contract or Insurance Liability will be continued by or against QIA, as the case may be.

8.    Costs of Scheme

Any stamp duty and other costs and expenses incurred in connection with the Scheme will not be paid or charged to policyholders, but will be met by CUMIS and QIA out of shareholder funds as set out in the Transfer Agreement.

9.    Prudential Standards

QIA will comply under the Insurance Act with applicable Prudential Standards of APRA after the Effective Date insofar as is relevant to the Branch Business.

10.    Effect of Scheme on Policyholders

(a)    The Scheme will not change the terms of any Insurance Contract, or affect any Claim in respect of any Insurance Contract, other than that QIA will become the insurer in place of CUMIS.

(b)    Policyholders will continue to have the same rights and obligations under or in respect of any Insurance Contract or Claim but with QIA as the insurer. The Scheme and Transfer Agreement will also reflect the change in insurer as follows:

(i)    all outstanding Claims-related rights and liabilities of CUMIS in respect of the Insurance Contracts will be transferred to QIA such that any Claims arising under or in connection with any Insurance Contract must be made against QIA;

(ii)    all premiums and other amounts payable to or recoverable by CUMIS under the Insurance Contracts will be payable to and recoverable by QIA instead of CUMIS;

(iii)    QIA will be entitled to enforce all rights and remedies which but for the Scheme would have been enforceable by CUMIS under or in respect of the Insurance Contracts; and

(iv)    any policyholder under an Insurance Contract or other person who has a Claim on or obligation to CUMIS under or in respect of an Insurance Contract will have the same Claim on or obligation to QIA in substitution for his or her Claim on or obligation to CUMIS irrespective of when such Claim or obligation arose.

(c)    Policyholders are not required to take any action before or as a result of the Scheme.

(d)    In the event of any inconsistency between the summary set out in this clause 10 and any other provision of this Scheme or the Transfer Agreement, the other provision shall prevail to the extent of the inconsistency.

IN THE MATTER OF CUMIS Insurance Society Inc [2012] FCA ##

REASONS FOR JUDGMENT

1    This is an application under Division 3A of Part III of the Insurance Act 1973 (Cth) (the “Áct”) for confirmation of a scheme under which the insurance business carried on by the Australian branch of CUMIS Insurance Society Inc. (“CUMIS”) will be transferred to QBE Insurance (Australia) Limited (“QBE”).

2    The details of the companies involved are fully set out in Mr Owens' written submissions, which I will mark as MFI 1. Mr Owens explains in the submissions that CUMIS is an Iowa corporation and a member of an international financial services group known as CUNA Mutual Group. CUMIS’s ultimate parent company is CMFG Life Insurance Company, which was previously known as CUNA Mutual Insurance Society.

3    CUMIS has been writing general insurance business in Australia through a branch since 1969. The requirements relating to foreign general insurers carrying on insurance business in Australia are referred to in a number of provisions of the Act and in the Prudential Standard GPS 110 Capital Adequacy. The relevant provisions are described in MFI 1, and I need not refer to them.

4    CUMIS Australian branch underwrote a range of general insurance products, the bulk of which fall into the four categories described in MFI 1.

5    In January 2011, the CUNA Mutual Group agreed to sell its Australian operations to QBE Insurance Group. The agreement provided that from 1 April 2011, QBE would reinsure a hundred per cent of the Australian branch of CUMIS’s net insurance liabilities. QBE is a member of QBE Insurance Group of Companies, a well-known Australian international insurance group based in Australia; the parent company of which is listed on the Australian stock exchange.

6    The legislative framework and the authorities and the provisions dealing with the discretion to confirm the scheme are described in MFI 1. I need not refer to them, save to say that the critical factor governing the exercise of the discretion is whether "affected policy holders" will be materially detrimentally affected by the implementation of the scheme (Re Insurance Australia Limited (2004) 139 FCR 450).

7    The position also falls to be considered in light of s 17F(1A) of the Act, which specifically requires the interests of the policy holders of the transferee company to be taken into account. This was referred to by Lindgren J in Re Westport Insurance Corporation (No 2) [2009] FCA 1598, in particular at [35].

8    Matters to be taken into account in favour of the exercise of discretion include the fact that QBE currently manages the policies and assumes all the risk under them. The effect of the scheme as is pointed out by Mr Owens is that it aligns the legal and practical position which has existed between CUMIS and QBE and the policy holder since 1 April 2011.

9    A significant factor in the exercise of the discretion is a consideration of the solvency position of the companies in the actuarial evidence to which I have been taken in detail this morning. The position is set out fully in the actuarial reports of Mr Andrew McInerney. Mr McInerney's reports take into account the APRA returns as at 30 June 2011, and include consideration of the most recent APRA returns as at December 2011. The actuarial reports show that the solvency coverage ratio enjoyed by CUMIS policy holders is, or was at the relevant date, 4.24.

10    However, as Mr McInerney observes, that figure is "somewhat illusory". In other words, the figure is inflated by the fact that CUMIS’s insurance liabilities have been fully reinsured by QBE since April 2011. Accordingly, as Mr McInerney points out, it is more meaningful to take into account the position which existed historically that is explained in a graph which is contained in Mr McInerney's report. It shows that the historical average of the solvency ratio is between 1.5 and 2. QBE’s solvency coverage ratio as at 30 June was approximately 1.31, and increased slightly to 1.34 as at December 2011.

11    It follows from this that the transferring policy holders will be transferred to QBE, which has, on the face of it, a lower solvency ratio than is presently enjoyed by CUMIS policy holders. Nevertheless, for the reasons explained by Mr McInerney, the policy holders post transfer will obtain an adequate level of protection, despite the nominal reduction in the solvency coverage ratio. Mr McInerney sets out the reasons for this, in particular, it is important to bear in mind that QBE is a much larger and more diversified insurer.

12    I was taken to the details of existing reinsurance policies entered into by CUMIS. It presently holds facultative reinsurance policies with four reinsurers. Three have indicated their agreement to novate the policies. A fourth reinsurer has not yet indicated agreement, but the position is that the fourth reinsurer, Gen Re, seems likely to do so shortly.

13    The effect of Mr McInerney's report is that even if Gen Re were not to novate the policy, this would not be a material consideration in the actuary's assessment of the impact of the scheme on CUMIS policy holders.

14    Other factors to be taken into account are that there will be no change to the policy terms and conditions of affected policy holders, apart from the substitution of QBE as insurer. Also there will be no change to claims handling procedures or "culture" as a result of the scheme.

15    APRA does not oppose the confirmation of the scheme. That is a matter to which the court gives great weight.

16    I am satisfied that all of the pre-conditions to the making of the application have been satisfied. The procedural requirements include those which were the subject of orders which I made on 14 December 2011, when I dispensed with the requirement that the applicant must give to every affected policy holder a scheme summary.

17    As I have said, I am satisfied that all of the procedural steps have been complied with. Indeed, as Mr Owens observes, this is a case in which the evidence demonstrates that CUMIS has taken additional steps to those that are required by the orders.

18    Accordingly I propose to make orders in terms of paragraphs (1) to (3) of the short minutes or order, which I will sign and date.

Associate:

Dated:    29 February 2012