Over the past few months there have been a number of insurance portfolio transfers and a winding up of a general insurer. Various judges of the Federal Court have considered aspects of the Insurance Act (Cth) 1973.
There have been two scheme transfers of insurance portfolios from Australian branches of overseas insurers to Australian subsidiaries. While objections to the transfers were raised, the Federal Court confirmed the schemes.
A locally authorised foreign general insurer, Copenhagen Re, was placed into run off in 2001. Copenhagen Re was acquired by the Enstar Group in 2009. Under the proposed scheme the insurance portfolio of the Australian branch of Copenhagen Re was to be transferred to another locally authorised general insurer, Gordian Runoff Limited. Two policyholders of Copenhagen Re contended that there would be a reduction in policyholder security following the transfer. The Court held that the mere reduction in solvency ratio (especially one of a relatively minor order of magnitude) does not represent a material disadvantage to policyholders. In addition, the Court determined that the fact that conditions attaching to Copenhagen Re’s authorisation under the Insurance Act would not continue to apply upon completion of the scheme i.e. to the transferred policies and reserves, was not a basis for not approving the scheme. This was because the same regime substantively applied to the transferee in that the conditions attaching to Copenhagen Re’s authorisation were designed to impose restrictions to provide security for local policy holders equivalent to those enjoyed by policy holders of a locally incorporated locally authorised general insurer.
Several objections were raised and disposed of in respect of the transfer of the insurance business of the Australian branch of American Home Assurance Company to Chartis Australia Insurance Limited. One objection was that a result of the scheme was to interpose two more entities between the business carried on locally and the US head office. The Court did not consider it a risk that the interposition of two further companies in the ownership structure would detrimentally affect the possibility that the ultimate holding company, the ultimate holder being the government of the United States, would be more reluctant to provide financial support for Chartis than an Australian branch. In response to an objection that the letter to policyholders did not adequately describe the reasons for the scheme it was noted the rationale for the scheme given by the transferor was appropriate and whilst the benefits to policyholders may not be ‘highly significant’, there was no detriment. Therefore there was no reason why the absence of further information meant the Court’s discretion should not be exercised in favour of the scheme.
As part of a restructure of the Munich Re group, the Federal Court confirmed two schemes for the transfer of direct and reinsurance business between Australian branch operations of related companies. While it has long been accepted that consideration must be given to policyholders whose policies are to be transferred under a scheme, it has been less clear whether the interests of other policyholders, such as those already holding policies issued by the transferee, should be taken into account. An amendment to the Insurance Act has clarified this issue - policyholders of both the transferor and the transferee must be considered. But must the interests of policyholders whose policies are not written through the Australia branch be considered? In the Munich Re judgment, the Court (while not having to decide on the issue) agreed with an earlier judgment that such a construction would be “at odds with the [Insurance] Act’s concern with Australian branches; would give rise to inconvenience; and was almost certainly not intended.”
In our March update, we discussed the appointment of a judicial manager to an insurer formerly known as Rural and General. In April, the Federal Court gave its reasons for ordering that the insurer be wound up. In doing so, Perram J exercised a discretion informed by the requirement in the Insurance Act that the course to be adopted should be the one the Court considers in the circumstances to be the most advantageous to the general interest of the policyholders while promoting financial system stability in Australia. Perram J found that continuing the insurer’s business was not in the interests of any party and certainly not the policyholders and the affairs of the insurer were sufficiently modest to assume that an order would have no systemic effect.
Perram J then had to consider whether the winding up should occur under the Insurance Act or the Corporations Act 2001 (Cth). While the Insurance Act explicitly contemplates that the winding up will occur under the Corporations Act, the Corporations Act expressly prohibits a judicial manager from making the application. Perram J found that there was no indirect amendment, rather it was an instance of implied amendment - the prohibition must be implicitly lifted because the later amendment to the Insurance Act was inconsistent with the earlier provisions of the Corporations Act.