Federal Court of Australia

Aioi Nissay Dowa Insurance Co Ltd, in the matter of Aioi Nissay Dowa Insurance Co Ltd [2023] FCA 697

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 17F of the Insurance Act 1973 (Cth), the Scheme for the transfer of the insurance business carried on by the Applicant to Aioi Nissay Dowa Insurance Company Australia Pty Ltd be confirmed in the form of Annexure A to these orders.

2.    The Transfer Effective Date for the purposes of the commencement of the Scheme shall be 12.01 am on 30 June 2023.

3.    The legal costs of the Australian Prudential Regulation Authority be paid by the Applicant, to be assessed if not agreed to by the parties.

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

ANNEXURE A

REASONS FOR JUDGMENT

JACKMAN J

1    This is an application seeking orders pursuant to s 17F of the Insurance Act 1973 (Cth) (the Act) for confirmation of a scheme (the Scheme) for the transfer of the insurance business of the Australian branch of Aioi Nissay Dowa Insurance Co Ltd (the Applicant) to its wholly owned subsidiary, Aioi Nissay Dowa Insurance Company Australia Pty Ltd (ADICA). On 15 May 2023, I granted dispensation from the need to comply with s 17C(2)(c) of the Act on certain terms.

2    The Applicant is a foreign company registered in Australia and is authorised by APRA to carry on insurance business in Australia for the purpose of discharging liabilities that arose under policies entered into on or before 31 December 2013. The Applicant is a subsidiary of MS&AD Insurance Group Holdings Inc, which is listed on the Tokyo Stock Exchange. ADICA is an Australian proprietary company and an APRA-regulated general insurer. Its business includes underwriting general insurance products for the Toyota Insurance, Lexus Insurance and PowerTorque Insurance brands. The Scheme has been proposed as part of an internal reorganisation, with a view to revoking the Applicant’s run-off authorisation upon the completion of the transfer of the business of the Applicant’s Australian branch.

3    The evidence includes an independent actuarial report by Mr Donald Johnstone which addresses the effect of the proposed transfer on the insurance business from the Applicant to ADICA (Actuarial Report).

4    The Applicant’s business in Australia consists of a portfolio of insurance policies underwritten by the Applicant (or its predecessors) between 1984 and 31 December 2013. Nineteen types of policy products were offered by the Applicant including motor vehicle insurance and public liability insurance, and over 300,000 policies were underwritten up to 31 December 2013. The Applicant ceased to write new policies from 1 January 2014 and has been in run-off since 1 January 2015. At the run-off date of 1 January 2015, the Applicant’s Australian branch had 2,520 open claims. As at 22 March 2023, it had only 8 open claims. From 1 January 2014, policyholders of the Applicant with renewable policies were invited to take out policies with ADICA, and over 60,000 policies have been renewed with ADICA.

5    ADICA was established in 2008 to act as the corporate agent for the Applicant and to manage its Australian business. ADICA started writing new policies from 1 January 2014 and continues to manage the Applicant’s business in Australia. ADICA uses the same personnel to manage its own general insurance business and the Applicant’s business, including managing claims. It also uses the same policy administration, claims management systems, telephone numbers, email addresses, post office box and registered office address for its and the Applicant’s business and this will not change following implementation of the proposed Scheme.

6    Section 17F(1A) of the Act sets out the factors to which the Court must have regard in deciding whether to confirm a scheme. They are:

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.

7    A critical factor on an application of this kind is whether implementation of the scheme will materially detrimentally affect policyholders: Re Westport Insurance Corporation (No 2) [2009] FCA 1598; (2009) 181 FCR 530 at [32] (Lindgren J). Although an “affected policyholder” is defined in s 17C as the holder of a policy being transferred under the scheme, it is well accepted that the Court is to look to the interests of the relevant policyholders of both the transferor and transferee insurers and consider whether implementation of the scheme will detrimentally affect them in a material way: Re Australian Branch of Great Lakes Insurance SE (trading as Great Lakes Australia) (No 2) [2020] FCA 1266 at [13] (Allsop CJ). A prime consideration is the nature of the actual and potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer: Great Lakes at [13]; Re Reward Insurance Ltd [2004] FCA 151 at [3] (Heerey J).

8    The Actuarial Report considers the capital adequacy ratio of ADICA based on its unaudited financial results as at 31 December 2022. In summary:

(a)    as at 31 December 2022, ADICA had adjusted net assets in Australia of $83.5m. Its prescribed capital requirement (PCR) was $28.5m, giving it a PCR Coverage of 293%, which is well above the target solvency of 150%;

(b)    as at 31 December 2022, ADICA’s forecast capital position as at 31 December 2023, 31 December 2024 and 31 December 2025 was such that it was projected to have capital in excess of $75m at each of those dates and PCR ratios comfortably exceeding 200%, being well above target solvency of 150% of its PCR;

(c)    although the impact of the proposed transfer is not included in those forecasts, it is expected to be inconsequential to ADICA, as the actuary has estimated the applicant’s net insurance liability as at 31 December 2022 to be only $79,715; and

(d)    the current magnitude of ADICA’s assets, liabilities and capital is much larger than that of the Australian branch of the Applicant.

9    The actuary has concluded that:

(a)    both ADICA and the Applicant are in a very solid financial position;

(b)    the transfer of the run-off portfolio from the Applicant to ADICA is not expected to have any material consequences for existing and former policyholders of the Applicant;

(c)    the proposed transfer is also not expected to have any material consequences for policyholders of ADICA or its parent company; and

(d)    there is no reason to believe that the transfer will have a materially adverse effect on the Applicant’s policyholders or ADICA’s policyholders from a financial perspective.

10    ADICA is currently the manager of the Applicant’s business in Australia, including the administration and processing of claims. Following the implementation of the proposed scheme, the administrative procedures used by ADICA to manage the Applicant’s business and the contact details for policyholders to make claims will remain the same. Policyholders with further claims will be assisted by the same team of personnel from ADICA who have been managing their insurance business to date.

11    As indicated above, as at 22 March 2023, the Applicant had only eight open claims. The actuary has opined that there is no reason to believe that the proposed transfer will make any difference to the claimants.

12    All contracts of insurance which are subject to the proposed scheme are to be transferred from the Applicant to ADICA without any change to their terms and conditions other than the substitution of ADICA for the Applicant as the insurer. Accordingly, there will be no adverse impact on policy terms and conditions as a result of the transfer.

13    As to the Applicant’s reinsurance arrangements, Mr Johnstone is not aware of any outstanding reinsurance recoveries and no recoveries are anticipated on any open or potential future claims. Accordingly, Mr Johnstone considers any impact of reinsurance contracts either being transferred or not transferred to ADICA to be immaterial. The Applicant has drawn to the Court’s attention at APRA’s request that APRA’s practice is normally to require reinsurance arrangements with unauthorised foreign reinsurers to be novated with effect, if any, from the effective date of a scheme. This is because it cannot be assured that the transfer of such arrangements will necessarily be enforceable in foreign jurisdictions without the agreements being novated. In the present case, APRA has not required novations because of the very low value of open claims and the expectation that there will be nil recoveries in relation to reinsurance.

14    In conclusion, the actuary has formed the view that the proposed transfer will not have a materially adverse impact on the policyholders of the Applicant, ADICA or their parent company. Further, APRA does not object to the proposed Scheme and supports the orders sought by the Applicant. APRA has been involved in the oversight of the Scheme and appeared at both the dispensation hearing and the confirmation hearing. As APRA is the government regulator charged with ensuring that insurance businesses are conducted in a way which protects the legitimate interests of policyholders, APRA’s non-objection is a matter from which the Court can draw significant comfort: Re Sompo Japan Insurance Inc [2014] FCA 677 at [41] (Yates J); Re ACE Insurance Ltd (No 2) [2016] FCA 1258 at [44] (Gleeson J).

15    The Applicant has not been notified by any policyholder that they propose to attend the confirmation hearing and oppose the Scheme. There was no appearance by any policyholder at the confirmation hearing. The lack of any objection to the Scheme by affected policyholders, in circumstances where they have been given an adequate opportunity to do so, is a matter in favour of confirmation of the Scheme: Re ACE Insurance (No 2) at [46] (recording a submission by the applicant which appears to have been accepted).

16    There are two conditions precedent to the Scheme set out in cl 2 of the Scheme. The first is that the Scheme is confirmed by the Federal Court of Australia and, if made on conditions, on such conditions as are acceptable to the parties. The second condition is the making of a go-ahead decision under s 41 of the Insurance Acquisitions and Takeovers Act 1991 (Cth), and there is evidence that that condition has been satisfied.

17    The evidence shows that all the steps required to be taken before an application for confirmation is made have been met, as laid down by s 17C(2) of the Act and as supplemented by APRA’s prudential standards (relevantly, Prudential Standard GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers). In addition, the steps set out in the dispensation orders of 15 May 2023 for the Applicant to take as a condition of dispensation from compliance with s 17C(2)(c) of the Act have been complied with.

18    There is no aspect of the application which departs from existing practice. In all the circumstances, it is appropriate for the Court to exercise its discretion to approve the scheme pursuant to s 17F of the Act.

Associate:

Dated:    23 June 2023