RE TRANSAMERICA OCCIDENTAL LIFE INSURANCE CO

HCMP 1354/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1354 OF 2008

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REASONS  FOR  JUDGMENT

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1.  This is a petition presented by Transamerica Occidental Life Insurance Co (“TOLIC”) and Transamerica Life Insurance Co (“TLIC”) under section 24 of the Insurance Companies Ordinance, Cap. 41.  They seek the sanction of the court to a scheme (“the Scheme”) involving the transfer to TLIC of the transferred policies constituting all of the long term business of TOLIC carried on by TOLIC in Hong Kong.  The main purpose of the transfer proposed by the Scheme is to give effect to the proposed merger of TOLIC into TLIC.

2.  In anticipation of the proposed merger, TLIC has applied to the Insurance Authority for authorisation to carry on classes A and C of long term business in or from Hong Kong through its Hong Kong branch.  The authorisation will be restricted to the specific purpose for the run-off of such classes of long term business under the Scheme.  TLIC will not be authorised to effect any new contracts of insurance, including contracts of reinsurance accepted but excluding contracts of reinsurance ceded and contracts of insurance and reinsurance effected as a result of the exercise of an option or right under any of the insurance contracts included under the Scheme, in or from Hong Kong in respect of such classes. 

The insurance companies and their businesses

3.  TOLIC and TLIC are insurance companies to which Part II of Cap. 41 applies.  TOLIC is authorised by the Insurance Authority to carry on classes A and C of long term business from its offices in Hong Kong. 

4.  As at 31 December 2007, TOLIC had 8,584,217 direct insurance policies in issue globally comprising long term business.  As at 31 December 2007, it had 1,032 direct long term insurance policies issued by its office in Hong Kong and recorded on its Hong Kong register and 8 reinsurance long term insurance policies issued by its office in Charlotte, North Carolina, USA and recorded on its Hong Kong register. 

5.  As at 31 December 2007, TLIC had 439,367 long term insurance policies in issue globally comprising long term insurance business.  It has not issued any policies in or from Hong Kong. 

6.  TLIC was originally incorporated under the laws of the State of Wisconsin, USA under its former name and subsequently changed its domicile to the State of Iowa.  Its authorised share capital is US$12,925,000 divided into US$10 million common stock and US$2,925,000 preferred stock, of which US$3,473,700 is issued fully paid or credited as fully paid.  The whole of the issued share capital of TLIC is beneficially owned by TOLIC and AEGON USA, Inc.  TLIC is also registered under Part XI of the Companies Ordinance, Cap. 32.

7.  TOLIC was incorporated in the State of California, USA under its former name.  It was acquired by AEGON N.V. on 20 July 1999 and redomiciled to the State of Iowa.  Its authorised share capital is US$63,793,325 divided into US$50 million common stock and US$13,793,325 preferred stock, of which US$27,594,787.50 is issued fully paid or credited as fully paid.  The issued share capital of TOLIC is beneficially owned as to 89.9% by Transamerica International Holdings, Inc. and as to 10.1% by Transamerica Corporation, each of which is a wholly owned indirect subsidiary of AEGON N.V.  TOLIC is registered under Part XI of the Companies Ordinance, Cap. 32.

8.  A decision has been taken to consolidate the businesses of TOLIC and TLIC on 1 October 2008 by a merger into a single company under the laws of the State of Iowa, to provide greater efficiencies and reduce the costs of operating separate legal entities.  Upon the merger becoming effective, TLIC will be the successor entity in the merger.  As the laws of Hong Kong make no provision for the merger of two companies, a scheme pursuant to section 24 of Cap. 41 is required to effect the merger of TOLIC’s Hong Kong business with the long term business of TLIC.  If the Scheme is not sanctioned, upon the merger of TOLIC and TLIC, TOLIC and its Hong Kong branch would cease to exist from 1 October 2008 and the holders of policies held by the Hong Kong branch of TOLIC would have to rely on Iowa law to enforce their rights against TOLIC and TLIC. 

The Hong Kong long term business of TOLIC

9.  The transferred policies in the Scheme constituting all of the long term business of TOLIC carried on in or from Hong Kong as at 11 July 2008 consisted of a total of 1,053 direct and reinsurance policies then in force.  The total gross sum assured by the transferred policies on 11 July 2008 was approximately US$1,402,884,000.  Rights for the relevant policy holders to participate in the profits of TOLIC are carried by 9 of the transferred policies and 1,044 of the transferred policies carry no right for the relevant policy holders to participate in the profits of TOLIC.  Between 18 July 2008 and 31 August 2008 (the cut-off date pursuant to the Scheme), 9 new direct policies comprising long term business were issued by TOLIC, they too will be transferred to TLIC under the Scheme.

10.  TOLIC has entered into the reinsurance arrangements with the reinsurers whereby the reinsurers have agreed to reinsure the obligations of TOLIC under the transferred policies in accordance with the terms of the reinsurance arrangements.  Insofar as such reinsurance arrangements are not transferred to TLIC pursuant to the Scheme, they will transfer from TOLIC to TLIC by operation of law upon the proposed merger of TOLIC and TLIC becoming effective.

Capital and solvency margin of TLIC

11.  Upon being authorised by the Insurance Authority to carry on classes A and C long term business in or from Hong Kong on the restricted basis described above, TLIC has agreed with the Authority that it will at all times either maintain in Hong Kong assets having a value equal to not less than the sum of the basic reserves and the statutory margin of solvency required under the Insurance Companies (Margin of Solvency) Regulation, Cap. 41F, in respect of that long term business in Hong Kong; or maintain assets having a value equal to not less than the sum of the basic reserves and the statutory solvency margin in respect of its long term business carried on in or from Hong Kong, and procure the issue and maintenance by a Hong Kong licensed bank of a letter of credit in favour of the Insurance Authority, having a value not less than such sum.  I understand the Insurance Authority has approved the letter of credit procured for this purpose.

12.  The assets of TOLIC include assets valued at US$91.1 million as at 31 December 2007, which are held pursuant to section 22A of Cap. 41 in respect of the liabilities and capital of its long term business in Hong Kong.  After the merger, the assets and liabilities of TOLIC and TLIC will be combined.  Hence, the liabilities of TOLIC will not be materially increased or diminished by reason of the transfer of policies.  The same consideration applies to the liabilities of TLIC.  So the interests of creditors of both entities should not be prejudiced.

Report of the independent actuary

13.  Pursuant to section 24(2) of Cap. 41, an independent actuary, Mr. Feike Boschma, has prepared a detailed report on the terms of the Scheme dated 18 July 2008 and made an affidavit to supplement his report.  In his opinion, overall no group of policyholders would be materially adversely affected as a result of the merger and transfer of business.  He noted there are good commercial reasons for implementing the Scheme and considered that the clauses assuring the protection for transferring policyholders in the Scheme, the undertakings provided by TOLIC and TLIC, and the agreements made between them are appropriate and sufficient to ensure the protection of the rights and interests of the transferring policyholders, the non-transferring policyholders of TOLIC and the policyholders of TLIC prior to the transfer.

Orders on summons for directions

14.  At the hearing of the summons for directions on 23 July 2008, an order was made that the setting out of the terms of the Scheme in the statement to be sent to each of the policyholders of TOLIC and TLIC pursuant to section 24(3)(b) be dispensed with and that a summary of the terms of the Scheme be set out in the said statement in lieu.  As the terms of the Scheme are lengthy and complex, it would be onerous and expensive to print and distribute such documentation.  I consider it appropriate to direct that the terms of the Scheme need not be set out verbatim and that a summary of such terms would suffice.  Besides, a copy of the Scheme was to be made available for inspection at the offices of the petitioners and on the website maintained by them for not less than 21 days from the date of first publication of the notice of the petition.  Copies of the petition and the independent actuary’s report were also to be made available for inspection pursuant to section 24(3)(d), at the offices of the petitioners.  

15.  Direction was given for the publication of a notice pursuant to section 24(3)(a) in the Gazette and two newspapers.  I ordered that the circulation of the statement required by section 24(3)(b) be limited to the holder of policies issued by the Hong Kong branch of TOLIC as identified in the petition, and only policyholders whose names appeared on the Hong Kong register of policyholders maintained by either of the petitioners were to be sent the statement. 

16.  The directions have been duly complied with.  Save that TLIC has not been authorised to carry on the long term business to be transferred to it under the Scheme, all the conditions precedent to the determination of an application under section 24 of Cap. 41 have been complied with, as confirmed by the Insurance Authority.  It is provided in section 24(6) that the court shall not make an order sanctioning the scheme unless it is satisfied that the transferee company “is, or immediately after the making of the order, will be” authorised to carry on any long term business to be transferred under the scheme.  The Insurance Authority has issued a letter to TLIC dated 18 September 2008 stating that approval in principle has been given to its application and “formal authorisation” for it to carry on the long term business will be given after the Scheme has been sanctioned by the court.  Mr. Fawls has confirmed that the Insurance Authority will issue a certificate of authorisation to TLIC once a sealed copy of the order sanctioning the Scheme is received.  I am satisfied that authorisation is sufficiently immediate for the purpose of section 24(6). 

Objection

17.  The Insurance Authority has no objection to the Scheme.  The only objection came from a policyholder of TOLIC, Mr. Jonathan Ross.  He appeared at the hearing of the petition and submitted that the actuary engaged by the petitioners to prepare a report to comply with the requirements of section 24(2) is not sufficiently independent. 

18.  Mr. Boschma has disclosed in his report that he was an employee of AEGON in the Netherlands from March 1980 to September 1986 and is entitled to a pension from AEGON Nederland N.V. (which is a subsidiary of AEGON N.V.) when he reaches retirement age in ten years’ time.  He joined Crespoint Limited (“Crespoint”) in November 1998.  Crespoint provides actuarial consulting services in both life insurance and general insurance and Mr. Boschma is its managing director.  Neither he nor Crespoint had a relationship with TOLIC or TLIC prior to his undertaking the work of reviewing and analysing the Scheme, nor has he done any consultancy work for any AEGON entity since 1986.  TOLIC was acquired by AEGON N.V. in July 1999, long after Mr. Boschma ceased to be employed by AEGON.  There is no sufficient basis to impugn his independence in providing the report required by statute.

Exercise of the discretion

19.  The courts of Hong Kong have followed the approach of English courts in an application of this nature and the relevant principles are set out in Re Winterthur Life [2005] 3 HKC 34 at 41C to 42D, paragraph 17.  Applying those principles, and giving due recognition to the commercial judgment of the management of the petitioners and the views of the independent actuary, I am satisfied that the Scheme is fair as a whole and that it is appropriate to exercise my discretion in favour of the petitioners in giving sanction.  I have therefore sanctioned the Scheme and made an order in terms of the draft submitted.