FEDERAL COURT OF AUSTRALIA

Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) (No 2) [2013] FCA 1329

THE COURT ORDERS THAT:

1.    Pursuant to s 17F of the Insurance Act 1973 (Cth) (the Act), the schemes for the transfer of certain parts of the inwards reinsurance and inwards retrocession business of:

(a)    IAG Re Australia Limited to the applicant, in the form of Exhibit A in the proceeding;

(b)    CGU Insurance Limited to the applicant, in the form of Exhibit B in the proceeding; and

(c)    CGU-VACC Insurance Limited to the applicant, in the form of Exhibit C in the proceeding,

(collectively, the schemes) be confirmed without modification.

2.    Pursuant to s 17F(2) of the Act, all outwards reinsurance responding to any contract transferred pursuant to the schemes, and all rights attaching to it, be, by this order, transferred to the applicant as part of the assets transferred by the schemes.

3.    Gordian pay the costs of APRA as agreed or, if agreement cannot be reached, as taxed.

4.    The orders be entered forthwith.

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

REASONS FOR JUDGMENT

1    The applicant, Gordian RunOff Limited (GRO), seeks the confirmation, with or without modification, of three schemes (the schemes) pursuant to s 17F(1) of the Insurance Act 1973 (Cth) (the Act).

Background

2    The schemes concern the transfer to GRO of certain parts of the inwards reinsurance and inwards retrocession business of IAG Re Australia Limited (IAG Re), CGU Insurance Limited (CGU) and CGU-VACC Insurance Limited (CGU-VACC).

3    IAG Re, CGU and CGU-VACC are subsidiaries of Insurance Australia Group Limited and are authorised by the Australian Prudential Regulation Authority (APRA) to carry on new and renewal insurance business in Australia under the Act.

4    GRO is authorised by APRA to carry on a run-off insurance business in Australia under the Act. GRO is a wholly-owned subsidiary of Enstar Australia Holdings Pty Limited (EAH). Since 2008, Enstar Australia Limited (EA), another subsidiary of EAH, has managed GRO’s portfolio.

5    On 23 September 2013, I made orders dispensing with compliance with s 17C(2)(c) of the Act (which provides that an application for confirmation of a scheme may not be made unless an approved summary of the scheme has been given to every affected policyholder) on condition that certain other steps be taken to bring the schemes to the attention of all known affected policyholders (the dispensation orders): Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983 (my earlier reasons).

The schemes

6    Under the schemes, each transferor (IAG Re, CGU and CGU-VACC) agrees to transfer, and GRO agrees to accept, the Transferring Business and, in particular, the Transferring Policies, with effect on and from the Transfer Date.

7    The schemes define the Transferring Business as follows:

Transferring Business means the business carried on by [IAG Re, CGU and CGU-VACC] in respect of the Transferring Policies but excluding the run-off management agreement entitled “Run-Off Management Agreement” dated 5 October 2004 entered into between CGUIAL and AIIL.

8    The schemes define the Transferring Policies as follows:

Transferring Policies means:

(a)     each of the contracts of inwards reinsurance and inwards retrocession issued to the Policyholders as listed in the Register, entered into by or on behalf of the Transferor in the capacity as reinsurer or retrocessionaire, as applicable, on or before the Sale Date; and

(b)    if not listed in the Register, any other contracts of inwards reinsurance or inwards retrocession entered into by or on behalf of the Transferor in the capacity as reinsurer or retrocessionaire, as applicable, on or before the Sale Date and which are covered by LPT, or in the event of the termination of the LPT, would have been so covered but for the termination or the application of any limits therein,

but in any event not including those contracts listed in Schedule 2 to this Scheme and not including any other intra-group contracts of inwards reinsurance or inwards retrocession entered into by [IAG Re] as reinsurer or retrocessionaire, as applicable, and any of its Related Bodies Corporate as reinsureds or retrocedants, as applicable.

For the avoidance of doubt, if a contract of inwards reinsurance or inwards retrocession is listed both in the Register and in Schedule 2, the contract shall not constitute or be treated as a Transferring Policy.

9    The Sale Date in (a) and (b) above is 3 January 2003 and the reference to the LPT in (b) above is to a loss portfolio transfer agreement, which I described, in general terms, in [4] of my earlier reasons. The LPT defines contracts reinsured by it as follows:

(a)    the contracts of reinsurance and/or retrocession referred to in the Inwards Re Report (the Initial Contracts); and

(b)    any other contracts of reinsurance or retrocession entered into by or on behalf of the Reinsured at any time prior to Completion which are of materially the same nature as the Initial Contracts and/or which might reasonably be viewed as having been within the scope or contemplation of the Inwards Re Report.

10    As I noted in [7] of my earlier reasons, the transferors and GRO are unable to identify exhaustively the contracts of reinsurance or retrocession that fall within the generally-expressed definition in (b) quoted in [9] above. Nonetheless, this does not seem to have created any insoluble problem in the day-to-day operation of the LPT. If experience is a guide, this difficulty should not create any insoluble problem after the transfer of the business to GRO.

11    For each scheme, the Transfer Date is the date on which the scheme becomes effective and binding on the relevant parties, in accordance with the confirmation orders that are now sought.

12    It is important to note that the schemes do not change the terms of any of the Transferring Policies or the obligations or rights of the parties to each Transferring Policy, other than that GRO will become the reinsurer or retrocessionaire, as applicable, in the place of each transferor.

Relevant legislation

13    Section 17F of the Act provides:

(1)    The Federal Court may:

    (a)    confirm a scheme without modification; or

(b)    confirm the scheme subject to such modifications as it thinks appropriate; or

    (c)    refuse to confirm the scheme.

(1A)    In deciding whether to confirm a scheme (with or without modifications), the Federal Court must have regard to:

(a)    the interests of the policyholders of a body corporate affected by the scheme; and

(b)    if a report relevant to all or part of the scheme has been filed with the Court under section 62ZI—that report; and

    (c)    any other matter the Court considers relevant.

(2)    The Federal Court may make such orders as it thinks fit in relation to reinsurance.

14    The term “affected policyholder” as used in s 17C of the Act means a policyholder whose policy is affected by a scheme. In substance, this means a policyholder whose policy is being transferred under the scheme: Re Insurance Australia Ltd and Another (2004) 139 FCR 450 at [19]-[24]. However, s 17F(1A) of the Act makes clear that the Court, in deciding whether to confirm a scheme, must have regard to the interests of the policyholders of a body corporate affected by the scheme. In the present case, this means that the Court must have regard not only to the interests of those policyholders whose policies are being transferred to GRO but also to the interests of GRO’s existing policyholders and those policyholders remaining with IAG Re, CGU and CGU-VACC: see Re Westport Insurance Corporation (No 2) (2009) 181 FCR 530 at [32]-[35].

15    As the terms of s 17F make clear – and s 17F(1A) in particular – the discretion conferred on the Court is a general one: see also In the matter of Reward Insurance Ltd [2004] FCA 151 at [3].

16    I note that, in the present case, s 17F(1A)(b) has no relevant application.

The actuarial report

17    An actuarial report has been provided by Warrick Evan Gard. Mr Gard is a partner of Ernst & Young and a fellow of the Institute of Actuaries of Australia. In his report, Mr Gard has expressed the opinion that the transfer for which confirmation is sought will not adversely affect the transferring or remaining policyholders of IAG Re, CGU or CGU-VACC, or the policyholders of GRO. His reasons for this opinion may be summarised as follows:

    As at 31 December 2012, the solvency coverage ratios for IAG Re, CGU and CGU-VACC were, respectively, 2.077, 1.876 and 3.337. Following the transfer, their respective solvency coverage ratios will be 2.080, 1.878 and 3.341. Given this slight improvement, and the immaterial nature of the transfer on the balance sheet of each company, the transfer will not adversely affect the security of the remaining policyholders.

    As at 31 December 2012, the solvency coverage ratio for GRO was 3.479. Following the transfer, its solvency coverage ratio will be 3.328.

    Although the transferring policyholders will be going to a smaller run-off insurer, GRO will have a similar or higher level of solvency coverage to that now available to the transferring policyholders. The interests of transferring policyholders will not be materially adversely affected by the transfer.

    Although, following the transfer, there will be a reduction in GRO’s solvency coverage ratio, this will not have a materially adverse effect on GRO’s existing policyholders from a capital perspective due to the size of GRO’s capital base and the value of liabilities being assumed. Specifically, the reduction is not significant given GRO’s overall solvency coverage, which is significantly above the target multiple of its minimum capital requirement. Mr Gard also noted that GRO’s capital position has improved since 31 December 2012.

    There will be no materially adverse effect on claims handling. EA manages GRO’s portfolio as well as that part of the business being transferred to GRO that comprises reinsurance written from 1967 to 1977 by a pool known as Australian World Underwriters. The transferors’ shares of this pool represent a high proportion of the inwards insurance being acquired by GRO. EA has a team of competent claims managers who specialise in the management of reinsurance claims. Moreover, the cedants are insurers with sophisticated management. They are used to dealing with different reinsurers and brokers.

Other matters

18    APRA has appeared. It does not object to the schemes.

19    No policyholder has come forward to object to the schemes. In this connection, I am satisfied on the evidence before me that there has been substantial compliance with the dispensation orders providing for the giving of notice of the schemes. There are, however, two matters to be noted.

20    The first matter is that the summary of the schemes which was required to be sent to the persons identified in order 2 of the dispensation orders did state that the Transfer Deed, amongst other documents, would be available for inspection at certain identified offices in Australia as well as at the London office of Enstar Group Limited. It also stated that the Transfer Deed would be available on GRO’s website. As matters have transpired, copies of the Transfer Deed were not made available for inspection at the nominated offices or on GRO’s website.

21    GRO submits that this is without relevant consequence because making the Transfer Deed available for inspection is not a requirement of the Act or of Prudential Standard GPS 410, and was not part of the dispensation orders. Further, the evidence discloses that no person attended the nominated offices to inspect any of the documents referred to in the summary. Evidence has been given of the inquiries that were made about the schemes. None of those inquiries related to any request to inspect the Transfer Deed.

22    In these circumstances, I accept that the failure to make available copies of the Transfer Deed at the nominated offices or on GRO’s website is without relevant consequence and does not stand as a reason for not confirming the schemes.

23    The second matter is that, after the relevant documents were posted to policyholders, a new potential policyholder was identified. On further checking, it appeared that the relevant documents had already been sent to this policyholder at the identified address, albeit under that policyholder’s former corporate name. A decision was taken not to send a further copy to the policyholder concerned. I do not think that the fact that a further copy of the relevant documents was not sent to this policyholder under its current name stands as a reason for not confirming the schemes.

24    I am satisfied on the evidence that all other required procedural steps preliminary to making an order for confirmation have been taken.

An order in relation to reinsurance: s 17F(2)

25    Section 17F(2) of the Act provides that the Court may make such orders as it thinks fit in relation to reinsurance. In the present case, an order is sought that all outwards reinsurance responding to the Transferring Policies be transferred to GRO.

26    Under the LPT, Aviva International Insurance Limited (AIIL) was the reinsurer of the business to be transferred to GRO. Pursuant to the terms of a scheme under Part VII of the Financial Services and Markets Act 2000 (UK), the reinsurer under the LPT became Aviva Insurance Limited (Aviva) in about November 2011. Although Aviva presently holds the ultimate economic risk associated with the business to be transferred, other outwards reinsurance exists. The details of this outwards reinsurance were not given in evidence. When Mr Gard made his report, he assumed that the outwards reinsurance was minimal and arose only as a result of the transferors’ participation in pools. One consequence of the present transaction is that Aviva will be released from its obligations as reinsurer under the LPT, leaving only the “minimal” outwards reinsurance. In light of this, Mr Gard carried out his evaluation conservatively by assuming that no retrocession recoveries would be available for the business.

27    Notwithstanding that the outwards reinsurance for the business has been taken as being “minimal”, GRO submits that it should have the benefit of that reinsurance. Hence, it seeks the order under s 17F(2) of the Act to which I have referred.

28    Section 17F(2) of the Act is expressed in somewhat abbreviated, if not abstract, terms. GRO submits, however, that the provision contemplates an order having as its legal effect a transfer of reinsurance that is binding on the parties to the relevant contracts of reinsurance, without further act. APRA supports that construction of the provision. That construction is reflected in the rationale for such orders made in 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 (see at [58] and [59]) and American Home Assurance Company, in the matter of American Home Assurance Company (No 2) [2011] FCA 316 (see at [28] to [30]). I propose to make such an order in the present case.

Disposition

29    I have been assisted in my consideration of this matter by written submissions, which I have marked as MFI 1. I was also addressed orally at the hearing. In light of the matters to which I have referred, I am satisfied that it is appropriate, in all the circumstances, that orders should be made confirming each scheme. As foreshadowed, I will also make an order under s 17F(2) of the Act.

Associate:

Dated:    9 December 2013