Wesfarmers Federation Insurance Limited ABN 18 009 027 221, in the matter of Wesfarmers Federation Insurance Limited ABN 18 009 027 221
[2009] FCA 381
•18 March 2009
FEDERAL COURT OF AUSTRALIA
Wesfarmers Federation Insurance Limited ABN 18 009 027 221, in the matter of Wesfarmers Federation Insurance Limited ABN 18 009 027 221 [2009] FCA 381
Insurance Act 1973 (Cth)
IN THE MATTER OF WESFARMERS FEDERATION INSURANCE LIMITED
ABN 18 009 027 221 and ANOR)NSD 1903 of 2008
EMMETT J
18 MARCH 2009
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 1903 of 2008
IN THE MATTER WESFARMERS FEDERATION INSURANCE LIMITED ABN 18 009 027 221
WESFARMERS FEDERATION INSURANCE LIMITED ABN 18 009 027 221
First PlaintiffWESFARMERS GENERAL INSURANCE LIMITED (FORMERLY LUMLEY GENERAL INSURANCE LIMITED) ABN 24 000 036 279)
Second Plaintiff
JUDGE:
EMMETT J
DATE OF ORDER:
18 MARCH 2009
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The undertaking given by Senior Counsel for Lumley Insurance Group Limited ABN 70 004 222 566 (LIGL) to the Court on behalf of LIGL that it will procure the provision of sufficient capital to the Second Plaintiff as is necessary to ensure that the Second Plaintiff achieves a Solvency Ratio as at the end of the quarter during which the Transfer Date occurs or such other implementation date as the Court may nominate of 1.5 or greater. 'Solvency Ratio', for the purposes of this undertaking, shall mean the Capital Base (as defined in Prudential Standard GPS 110 Capital Adequacy) divided by the Minimum Capital Requirement (as defined in Prudential Standard GPS 110 Capital Adequacy) as measured as Solvency Coverage in item 15 of Reporting Form GRF 110.0 Minimum Capital Requirement.
THE COURT ORDERS THAT:
2.Pursuant to section 17F(1) of the Insurance Act 1973 (Cth) the scheme for the transfer of insurance business of the First Plaintiff to the Second Plaintiff annexed hereto and marked 'A' is confirmed.
3.The Order in paragraph 1 is made on the following conditions:
(a)In accordance with paragraph 2.7 of the scheme, Lumley Insurance Group Limited ABN 70 004 222 566 (LIGL) is required, on the Transfer Date (as described in the scheme), to:
(i)accept the payment of dividends from the First Plaintiff equal in value to the retained earnings of the First Plaintiff and to accept the return of capital from the First Plaintiff equal in value to the First Plaintiff's shareholders’ equity; and
(ii)immediately following the events described in paragraph 1.1(a)(i) above subscribe for shares in the Second Plaintiff equal in value to the sum of the First Plaintiff's retained earnings and shareholders’ equity.
(b)The scheme will have no operation unless LIGL performs the requirements described in paragraph 2(a)(i) and paragraph 2(a)(ii).
4.The Second Plaintiff shall, on or before the date which is 20 Business Days after the end of the quarter in which the scheme is implemented or such later date as is otherwise agreed with the Australian Prudential Regulation Authority (APRA), give notice to APRA of the matters upon which it relies to demonstrate that the Second Plaintiff has achieved a Solvency Ratio of 1.5 or greater as at the end of the quarter during which the scheme is implemented. 'Solvency Ratio', for the purposes of this Order, shall mean the Capital Base (as defined in Prudential Standard GPS 110 Capital Adequacy) divided by the Minimum Capital Requirement (as defined in Prudential Standard GPS 110 Capital Adequacy) as measured as "Solvency Coverage" in item 15 of Reporting Form GRF 110.0 Minimum Capital Requirement.
5.The Second Plaintiff shall, not later than 10 Business Days after the scheme is implemented or such later date as is otherwise agreed with APRA, give notice to APRA of the matters upon which it relies to demonstrate that the conditions contained in Order 2 have been satisfied.
6.Liberty be reserved to the Plaintiffs and each of them to apply for any consequential orders as may be considered necessary or desirable under Part III, Division 3A of the Insurance Act.
7.These orders be entered forthwith.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 1903 of 2008
IN THE MATTER WESFARMERS FEDERATION INSURANCE LIMITED ABN 18 009 027 221
WESFARMERS FEDERATION INSURANCE LIMITED
ABN 18 009 027 221
First PlaintiffWESFARMERS GENERAL INSURANCE LIMITED (FORMERLY LUMLEY GENERAL INSURANCE LIMITED) ABN 24 000 036 279)
Second Plaintiff
JUDGE:
EMMETT J
DATE:
18 MARCH 2009
PLACE:
SYDNEY
REASONS FOR JUDGMENT
The Plaintiffs, Wesfarmers Federation Insurance Limited (Wesfarmers) and Wesfarmers General Insurance Limited (Lumley), are wholly owned subsidiaries of Lumley Insurance Group Limited (LIG). They are members of the insurance division of Wesfarmers Limited, of which LIG is a subsidiary. The two Plaintiffs engage in similar business insurance businesses in Australia. They have applied to the Court for confirmation under the Insurance Act 1973 (Cth) (the Act) of a scheme whereby the insurance business of Wesfarmers will be transferred to Lumley (the Scheme).
The purpose of the Scheme is to reduce the complexity arising from having two authorisations under the Act. In my reasons of 11 December 2008 (see [2008] FCA 2004) for dispensing with compliance with requirements of certain provisions of the Act, I set out some of the background of the proposal and the basis upon which the Scheme was proposed. In addition to the evidence that was before me on the earlier occasion, I have now received evidence in the form of the affidavits of Paul Italiano of 16 March 2009, Scott Collings of 12 March 2009, John Ripepi of 10 March 2009, Stephen McConnell of 12 March 2009 and Robynne Shaw of 12 March 2009. Mr Italiano’s affidavit deals with much of the substantive material upon which the present application is based.
When the matter was called on for hearing today, senior counsel appeared for the Plaintiffs and the Australian Prudential Regulation Authority (APRA) was also represented. There was no other appearance. In his affidavit, Mr Italiano explains the steps that have been taken to identify current policy holders of Wesfarmers and past policy holders with claims outstanding, together with any third parties who have outstanding claims relating to a policy issued by Wesfarmers. That information was provided to the national marketing manager for the purposes of putting in place procedures for notifying those persons of the proposed Scheme. Notifications were effected through a contracted mail service provider, which sent some 122,203 letters to policy holders on 23 December 2008. On 20 January 2000, an additional 2167 letters were posted to additional policy holders, being holders of policies issued by Wesfarmers following the preparation of the initial list. Of the 122,203 letters that were posted, some 1069 were returned to Wesfarmers. The small proportion of letters returned indicates that one can be confident that the vast majority of policy holders have been notified of the Scheme.
Wesfarmers and Lumley intend that all the insurance treaties and arrangements relating to the insurance business of Wesfarmers be transferred to and vested in Lumley as valid, effective and continuing agreements between Lumley and the parties to the treaties and arrangements. Steps were put in place by Mr Italiano for a due diligence review of Wesfarmers reinsurance treaties to be carried out to identify which, if any, had the potential to be materially adversely effected by the Scheme. In accordance with instructions given to him by Mr Italiano, Mr Ripepi conducted such an investigation. Mr Ripepi concluded as follows:
(a)There were no reinsurance treaties governed by foreign law.
(b)There were no reinsurance treaties with termination or cancellation rights that would be triggered by the Scheme.
(c)There were no reinsurance treaties that contained an assignment clause that might be breached by the Scheme.
He also concluded that there were two reinsurance treaties that were silent as to governing law. Following further investigation, Mr Ripepi was satisfied that the reinsurers were domiciled in a State or Territory of Australia at the time the treaty was entered into. The risks reinsured were substantially in Australia and the treaty was entered into in Australia.
Mr Ripepi also concluded that all reinsurers identified who had entered into historical reinsurance treaties with Wesfarmers in force on and from 1 October 1990 were contacted and informed of the proposed Scheme. They were invited to notify Wesfarmers of any concerns or queries that they had in relation to the Scheme. Only one of the reinsurers responded and the matter raised was resolved on behalf of Wesfarmers. In the circumstances, one can be fairly confident that the Scheme will not have any adverse effect on the reinsurance treaties of Wesfarmers.
Some changes to the documentation have been proposed since the matter was before the Court on 11 December 2008. Mr Italiano has given evidence of communications with APRA concerning the proposed changes. APRA has indicated that it has no objection to any of the changes notified to it.
In my earlier reasons, I referred to actuarial reports indicating the effect of the Scheme and expressing opinions that the Scheme would not have any adverse effect on the financial security of policy holders either of Wesfarmers or Lumley. In December 2008, Mr Italiano instructed Mr Scott Collings, a director of Finity Consulting Pty Ltd, who is a Fellow of the Institute of Actuaries of Australia, to review the financial position of Wesfarmers and Lumley as at 31 December 2008, taking into account any events that had occurred since the date of the actuarial reports that were before the Court on the earlier occasion.
In his report to Wesfarmers of 4 February 2009, Mr Collings confirmed that he had been asked to comment on the estimated proportion of Wesfarmers’ insurance liabilities that relate to each accident year and the potential for claims in accident years prior to 1990 to have a significant effect on the solvency of Lumley, assuming the insurance business of Wesfarmers is transferred. The purpose of that report was to assist Wesfarmers in determining whether the reinsurance investigations that had been undertaken were appropriate. Mr Collings concluded that, although there was a theoretical potential for significant claims, he was of the opinion that the extent of Wesfarmers exposure to such claims was limited. In particular he noted that the estimated liabilities in respect of accident years more than 10 years old is small, that the number of claims with very long reporting delays was small and that there were no significant exposures to latent claims.
Mr Collings also noted that Wesfarmers mitigates the risk of significant claims by holding capital and that the amount of capital held is significantly in excess of the minimum amounts prescribed by APRA. In his report updating his actuarial opinion of 10 March 2009, Mr Collings referred to two events since 31 December 2008 that had resulted in a significant number of claims being made on general insurance companies. Those events were the Victorian bushfires of February 2009, which resulted in considerable loss of life and damage to property, and Queensland floods in January and February 2009, resulting in property damage because of flooding and heavy rains.
Mr Collings’ report considered the impact of those events on the financial position of both Wesfarmers and Lumley. In relation to the effect of the bushfires, Mr Collings concluded that the cost of the bushfires to Lumley and Wesfarmers was capped by the reinsurance treaties at some $13 million in aggregate. Only a small proportion of the Queensland flood costs were expected to be recovered from reinsurance because the total losses of Lumley and Wesfarmer for the floods would not be significant. Mr Collings’ conclusion is that, while the Victorian bushfires had resulted in a significant amount of claims being reported to Lumley and Wesfarmers, most of the claims would be paid by reinsurers rather than from the assets of Lumley or Wesfarmers. Importantly, the reinsurance limits purchased by Lumley and Wesfarmers are high in relation to the loss that has been experienced, with the consequence that the cost of claims after reinsurance is effectively capped.
Mr Collings concludes that the two events viewed in isolation result in a material reduction in the capital adequacy position of Lumley and Wesfarmers. However, despite that reduction, Mr Collings considers that each company still provides an adequate level of security to the interests of its policy holders. He concludes that the interests of policy holders should not be adversely affected in any material way as a consequence of the Scheme.
Mr Italiano also instructed Mr Stephen McConnell, the chief financial officer of the Wesfarmers Limited insurance division, to inform Standard and Poor’s Australia of the intention of Wesfarmers and Lumley to enter into the Scheme. Mr McConnell arranged for a ratings report to be provided by Standard and Poor’s. The report indicates that the proposed rationalisation, by means of the Scheme, increases the possibility of operational risk issues but that they were expected to be well managed and that key brands and customer relationships would be preserved. Standard and Poor’s also indicated that they expected minimal loss of business and franchise value arising from the rationalisation. Standard and Poor’s also indicated that they expected that, notwithstanding the proposed merger, Wesfarmers and Lumley would maintain the current financial strength rating of A-/Stable--. Standards and Poor’s concluded that a substantial deterioration in capitalisation, including any large impact events as well as a substantial loss of business due to operational or reputation issues through the consolidation process, would exert downward pressure on the rating and that the possibility of an upward rating movement was limited given the challenging environment and the niche position of Wesfarmers in the market. Nevertheless, the report expressed the view that the proposed consolidation would yield mutual benefits in the long term and was not expected to have a significant impact on operating performance in the short term.
A significant part of the business of Wesfarmers and Lumley involves workers compensation insurance in the State of Western Australia. On 27 January 2009, the Minister for Commerce of Western Australia granted approval to Lumley to operate as an approved insurance office under the relevant legislation in Western Australia. The Minister indicated that there was no objection to the transfer of Wesfarmers’ portfolio of workers compensation insurance policies to Lumley as part of the Scheme.
The Scheme will involve the transfer of employees of Wesfarmers to Lumley. Ms Robynne Shaw is the talent manager and human relations business partner of Wesfarmers. From May 2008 Ms Shaw has, at the request of Mr Italiano, been involved in the coordination of the transfer of employees from Wesfarmers to Lumley pursuant to the Scheme. Ms Shaw in her affidavit explains the steps that have been taken to consult with representatives of employees and to ensure that employees have been fully informed of the Scheme and the consequences that it will have for them. Of 338 employees who were notified of specific material, none has indicated any objection to the Scheme. There is no reason to think that the Scheme will have any adverse impact on any of the employees of Wesfarmers.
Mr Italiano has also given evidence of the approval by the boards of directors of Wesfarmers and Lumley of the Scheme. Mr Italiano has also given evidence of the steps taken for the publication of the documents relating to the Scheme. No request for inspection of the documents was made. The hearing today has been advertised in the Commonwealth Government Gazette and in newspapers circulating in capital cities and other cities in and around Australia.
The Scheme involves recapitalisation in the sense that, on the transfer date, Wesfarmers will pay dividends to LIG equal in value to its retained earnings and will return capital to LIG equal in value to shareholders equity. Immediately following those steps, LIG will subscribe for shares in Lumley equal in value to the total of the retained earnings and shareholders equity thus distributed. Those steps are part of the Scheme. Senior counsel has proffered an undertaking on behalf of Wesfarmers and Lumley that those steps will be carried out. The order sought by the Plaintiffs for confirmation of the Scheme is to be conditional upon those steps being completed.
There being no opposition to the Scheme, I am satisfied that it is appropriate to confirm the Scheme pursuant to s 17F of the Insurance Act.
I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 21 April 2009
Counsel for the Plaintiffs: M Oakes SC Solicitor for the Plaintiffs: Blake Dawson Solicitor for APRA: L Weate
Date of Hearing: 18 March 2009 Date of Judgment: 18 March 2009
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