Application of Challenger Life Limited

[2004] FCA 1760

FEDERAL COURT OF AUSTRALIA

Application of Challenger Life Limited [2004] FCA 1760

Life Insurance Act 1995 (Cth), ss 11, 190(1), 191(2), 191(2)(c), 191(5), 193(1), 194

THE APPLICATION OF CHALLENGER LIFE LIMITED ACN 006 381 193 AND CHALLENGER LIFE NO. 2 LIMITED ACN 072 486 938

N459 OF 2004

EMMETT J
28 MAY 2004
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N459 OF 2004

THE APPLICATION OF CHALLENGER LIFE LIMITED ACN 006 381 193 AND CHALLENGER LIFE NO. 2 LIMITED ACN 072 486 938 APPLICANT
JUDGE:	EMMETT J
DATE OF ORDER:	28 MAY 2004
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.Pursuant to section 191(5) of the Life Insurance Act 1995 ('the Act'), the need for compliance by the applicants with paragraph (2)(c) of section 191 of the Act be dispensed with in so far as that paragraph requires the giving to policy-owners of Challenger Life Limited ('CLL') whose current addresses are not recorded with CLL an approved summary of the Scheme the subject of this application.

2.Pursuant to section 194 of the Act, the Scheme for the transfer and amalgamation of the life insurance business of CLL with the life insurance business of Challenger Life No. 2 Limited, a copy of which is annexed hereto, be confirmed.

3.The contents of paragraph 3 of the affidavit of David Millington Goodsall sworn on 27 May 2004 not be published.

4.The original affidavit of David Millington Goodsall sworn 27 May 2004 be returned to the applicants.

5.The applicants pay the Australian Prudential Regulation Authority's costs of this proceeding.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N459 OF 2004

THE APPLICATION OF CHALLENGER LIFE LIMITED ACN 006 381 193 AND CHALLENGER LIFE NO. 2 LIMITED ACN 072 486 938
APPLICANTS

JUDGE:	EMMETT J
DATE:	28 MAY 2004
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. Each of the applicants is engaged in life insurance business as that term is defined in s 11 of the Life Insurance Act 1995 (Cth) (‘the Act’). The second applicant, Challenger Life Number 2 Limited (‘CLL2’), is a wholly-owned subsidiary of the first applicant, Challenger Life Limited (‘CLL’).

2. It is proposed that the whole of the life business of CLL be transferred to CLL2. Section 190(1) of the Act provides that no part of the life insurance business of a life company may be transferred to a another life company or amalgamated with the business of another life company except under a scheme confirmed by the Court. Section 193(1) provides that a company that is a party or proposed party to an agreement or deed by which the transfer or amalgamation provided for by a scheme is to be carried out may apply to the Court for confirmation of the scheme. Section 194 of the Act then provides that the Court may confirm a scheme with or without modification or refuse to confirm the scheme. Section 191 sets out certain pre-requisites for the application for confirmation of a scheme.

3. Section 191(2) provides that an application for confirmation of a scheme may not be made unless:

   (a)a copy of the scheme and any actuarial report on which the scheme is based have been given to the Australian Prudential Regulation Authority (APRA), in accordance with the regulations; and

   (b)notice of intention to make the application has been published by the applicant in accordance with the regulations; and

   (c)an approved summary of the scheme has been given to every affected policy-owner. 

4. Section 191(5) provides that the Court may dispense with the need for compliance with s 191(2)(c) in relation to a particular scheme if it is satisfied that because of the nature of the scheme or the circumstances attending its preparation it is not necessary that the paragraph be complied with. The proposed transfer involves the transfer of all of the policies of CLL to CLL2. A judge of the Court has already made an order under s 191(5) dispensing with the need for compliance with s 191(2)(c) in respect of the policy-holders of CLL2.

5. As will appear, there is also an application to the Court for dispensing with the need for compliance with that paragraph in relation to policy-holders of CLL whose current addresses are not recorded with CLL.  CLL has until recently conducted its business in statutory funds.  There are eight statutory funds numbered, not unusually, 1 to 8.  All business is non-participating.  Different types of business are conducted in different statutory funds. 

6. CLL2 is a wholly-owned subsidiary of CLL as an investment of the shareholders' fund of CLL, distinct from its CLL statutory funds.  CLL2 transacts life business in Australia in only one fund.  It has three funds; two of which were established in March in anticipation of the proposed transfer of business.  The extant life insurance business in Australia of CLL2 is presently in its Statutory Fund 2. 

7. It is proposed that the three statutory funds of CLL2 will conduct business as follows:

   • Statutory Fund 1 as a new fund for guaranteed business;
   • Statutory Fund 2 as a fixed rate allocated pension, lifetime insurance, and term certain annuity business; and
   • Statutory Fund 3 as a new fund for unit linked business.  The business of CLL2 is also non-participating in the sense that no participating policy-holders are entitled to share in the profits of a statutory fund. 

8. There is evidence before the Court of the financial position of both companies as at 31 December 2003.  The evidence indicates that so far as CLL is concerned, it has total assets of $955,876,000 with net policy liabilities of $123,502,000 and other liabilities of $55,317,000, giving it net assets of $777,057,000.  The position of CLL2 may be summarised as having net assets of $521,411,000 derived from assets totalling $2,322,945,000 and net policy liabilities of $1,802,813,000 and other liabilities of a negative of $1,279,000.  Both companies, it is clear, are presently in a healthy position.  Other evidence before the Court indicates that each company has excess assets on a solvency basis and that each of the eight funds of CLL and the existing fund of CLL2 also each have excess assets on a solvency basis.

9. Under the agreement that has been entered into between CLL and CLL2 of 30 March 2004, scheme policies and other liabilities of all CLL statutory funds and assets equal to the policy liabilities and other liabilities will be transferred to one of the CLL2 statutory funds.  Simultaneously, a capital injection will be made from CLL to CLL2.  Contemporaneously with the transfer, net assets of the statutory funds of CLL will be subscribed as share capital in CLL2 and transferred to the corresponding statutory fund in CLL2.  That is designed to ensure that the capital and retained earnings supporting the business in the statutory funds of CLL will be the same after the transfer to CLL2.  In addition, a further injection of capital equal to the net assets of the CLL shareholders’ fund, other than its investment in CLL2, will be made from CLL into the CLL2 shareholders’ fund. 

10. Apart from some lifetime mortality risk, all annuity business in CLL Fund 6 is currently re-insured with CLL Fund No. 2, being the fund that currently has business in it.  That fund effectively carries the risk for the CLL Fund 6 business, although some assets remain in the CLL Fund 6 to support ongoing re-insurance premiums.  Under the proposed scheme, all business in the CLL Fund 6 will be transferred to the CLL2 Fund 2.  The majority of the lifetime mortality risk of the CLL Fund 6 is currently re-insured with Munich Re-insurance Company of Australasia Limited (‘Munich Re’).

11. As the business of CLL Fund 6 is being transferred to CLL2 Fund 2, the re-insurance arrangement will be terminated on the transfer of the business under the scheme.  The net result is that the liabilities currently re-insured with Fund 2 in CLL2 will remain there as all the assets supporting the liabilities.  Some 90 per cent of the risk under the CLL Fund 6 is the subject of re-insurance with CLL2 Fund 2.  CLL has also an arrangement with Munich Re to the effect that if the scheme is approved, Munich Re will agree to the transfer of the re-insurance contract between it and CLL to CLL2.

12. It is contemplated that where the business of CLL is managed in separate investment funds, they will be maintained in the equivalent statutory funds of CLL2.  Those funds are presently closed to new business and are in run-off and over time will become too small to manage efficiently.  It is proposed that if in the future, in the opinion of the CLL2 appointed actuary, it is no longer viable to maintain separate investment funds, investment funds will be merged as determined by the appointed actuary.

13. The net effect of the scheme is that the total support from the shareholders’ funds of CLL will remain unchanged.  Following giving effect to the scheme, and prior to 30 June 2004, it is intended that the registration of CLL as a life company will be surrendered.  It is accepted that it will be possible for CLL and CLL2 to continue to operate as separate companies.  However, there are said to be sound reasons for merging the life insurance operations of both companies in the interests of the policy-owners of CLL and CLL2 as well as the shareholders of CLL. 

14. There are a number of benefits from the proposal.  Expense savings will be achieved through the integration of the two companies.  For example, there are several fixed overheads associated with the corporate structure of CLL such as registration fees, audit fees, management overheads and the like, which will not be required following the transfer of the life insurance business, since similar costs are already being incurred by CLL2.  Secondly, scheme policies currently invested in a number of small statutory funds will be amalgamated into larger statutory funds, thereby providing some scope for more efficient investment of money in the statutory funds.  Thirdly, separate management of the two companies will not be required, thereby freeing management resources within CLL2.

15. The policies and assets of CLL Funds 1, 5, and 7 are to be transferred to CLL2 Fund 1.  The policies and assets of CLL Funds 2, 3, 4, and 8 are to be transferred to CLL2 Fund 3.  As I have already said, the policies and assets of CLL Fund 6 are to be transferred to the existing CLL Fund 2. 

16. The terms and conditions of the CLL policies will remain unchanged apart from certain administrative amendments necessary to ensure that the statutory fund referred to in the policy document is correctly named, the name of the company is correctly specified, and that clauses of the policy documents will permit unit pricing to occur in an environment of multiple products that reside in the same statutory fund. 

17. Those administrative amendments to the wording of the policies are to be effected by the scheme.  A report of Mr David Millington Goodsall, an actuary of Ernst and Young Actuarial Business Consultants, has been prepared for the purposes of the proposed transfer.  Mr Goodsall certifies that in his opinion if the scheme is confirmed by the Court:

    (1)the security of the CLL policies will be maintained;

    (2)the reasonable benefit expectations of the CLL policy-owners will not be adversely affected;

    (3)the security of benefits and reasonable benefit expectations of CLL2 policy-owners will not be adversely affected;

    (4)CLL2 will continue to meet the capital requirements of the Act;

    (5)the amended terms and conditions of the policies are such as to preserve the accrued benefits of CLL policy-owners and are not detrimental to CLL policy-owners.

18. Mr Robert George Glading, an independent actuary, has provided an independent report on the proposed transfer.  Mr Glading has expressed the opinion that based on the documents and other data and estimates in Mr Goodsall’s actuarial report, the scheme as proposed:

    (1)properly and adequately maintains and safeguards the contractual benefits and other rights of the policy-owners of the statutory funds of CLL and CLL2;

    (2)safeguards the capital adequacy of the separate funds in CLL2 following implementation of the scheme;

    (3)does not adversely affect the reasonable expectations of the policy-owners of CLL or CLL2; and

    (4)deals equitably with the interests of the policy-owners of all the life business involved.

19. The evidence before the Court consists of some twenty four affidavits, the deponents and date of which are set out in the schedule which I have initialled and dated with today’s date. I have considered all of the evidence contained in those affidavits, and I am satisfied that the pre-requisites set out in s 191(2) of the Act have been satisfied. I am also satisfied that the scheme is one which should be confirmed by the Court.

20. I am also satisfied that it is appropriate to dispense with the need for compliance with s 191(2)(c) insofar as that paragraph would require the giving to policy-holders of CLL whose current addresses are not recorded an approved summary of the scheme, as required.

I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:

Dated:             19 January 2005

Counsel for the Applicant:	R.S. Hollo
Solicitor for the Applicant:	Minter Ellison
Solicitor for APRA:	R. Claxton
Date of Hearing:	28 May 2004
Date of Judgment:	28 May 2004