RE SWISS REINSURANCE CO LTD AND ANOTHER

HCMP 898/2019

[2019] HKCFI 2850

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS CASE NO 898 OF 2019

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J U D G M E N T

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INTRODUCTION

1.  This is an application by the petitioners (“Ps”), namely Swiss Reinsurance Company Limited (“SRZ”) and Swiss Re Asia Pte. Ltd. (“SRAL”), for an order:

(1) sanctioning the scheme to effect the transfer of the long term business carried on in or from Hong Kong by SRZ’s Hong Kong branch (“SRZHK”) to SRAL’s Hong Kong branch (“SRALHK”) (“Scheme”) under s.24 of the Insurance Ordinance (“the Ordinance”); and

(2) ancillary provisions for implementing the Scheme under s.25 of the Ordinance.

2.  Ps have filed various affirmations and documents in support of the application, including the revised report of Paul Sinnott, Independent Actuary, dated 18 September 2019 (“Revised Report”), and the Supplementary Report dated 30 October 2019 (“Supp Report”). I would consider the application on the basis of the evidence produced by Ps, which is not disputed or challenged.

3.  By an order dated 18 July 2019 (“the First Order”), directions were given on publication and service of the Statutory Notice and Statutory Statement in compliance with s.24 of the Ordinance.

4.  By a further order dated 24 September 2019 (“the Second Order”), directions were given on:

(1) the service of documents in Annexure A to the Second Order, being (a) the letter explaining the erroneous figures supplied to the Independent Actuary (and reproduced in Table 6.7 of his Report), (b) the Independent Actuary’s confirmation that the errors do not affect his conclusions set out in his Report, and (c) the Amended Summary of the Report contained in the Statutory Statement (“the Amended Summary”) (collectively “Annexure A”); and

(2) the publication of, and providing access to, the Revised Report and the Amended Summary through inspection and posting on dedicated page in the website of Swiss Re Group (“the Group”).

5.  I am satisfied that the aforesaid directions have been complied with.

6.  Both Ms Linda Chan SC (leading Ms Natalie So) for Ps and Mr Jenkin Suen SC (leading Ms Tinny Chan) for the Insurance Authority (“the IA”) have provided me extremely helpful submissions in this application. I am grateful to them for their valuable assistance rendered to the court.

BACKGROUND

Ps

7.  Swiss Re Ltd, a listed company incorporated and based in Switzerland, is the ultimate holding company of the Group. It comprises 3 business units, viz., reinsurance, corporate solutions and life capital. Both SRZ and SRAL are companies within the Group and are wholly owned by Swiss Re Ltd.

8.  SRZ:

(1) was incorporated in Switzerland on 19 December 1863;

(2) is a reinsurance carrier, licensed and supervised by the Swiss Financial Market Supervisory Authority;

(3) carries on its business in Asia through branches operating in Australia, China, Hong Kong, India, Japan, Korea and Malaysia; and

(4) is a non-Hong Kong company and carries on its business in or from Hong Kong through SRZHK.

9.  SRZHK:

(1) is authorised to carry on reinsurance of long-term business of Class A (life and annuity), Class C (linked long term), Class D (permanent health) and Class I (retirement scheme management category III) and all classes of general reinsurance business under Part 3 of Schedule 1 of the Ordinance in or from Hong Kong;

(2) carries on Classes A and D long term reinsurance business only, comprising 131 long term reinsurance treaties with total insurance liabilities of HK$2,308 million;

(3) held 531 general reinsurance treaties and 7,886 facultative acceptances as at 31.12.2018, with total net liabilities of HK$3,296 million; and

(4) has policy holders which are primarily insurance cedants based in Hong Kong, Taiwan, and to a lesser extent, Macau. There are some small facultative reinsurance contracts written in Guam, and a few small legacy treaties written outside of the aforementioned markets.

10.  SRAL:

(1) was originally incorporated in Switzerland on 13 September 1919. It was redomiciled and registered in Singapore on 31 December 2017 and is licensed by the Monetary Authority of Singapore as a reinsurer to carry on life and general business in Singapore;

(2) is registered as a non-Hong Kong company; and

(3) has since 26 June 2019 been authorised by the IA to carry on in or from Hong Kong reinsurance of long term business of Classes A and D and all classes of general business: Certificate.

The Scheme

11.  The purpose of the Scheme is to effect a transfer of the long term business carried on by SRZHK in or from Hong Kong to SRALHK.

12.  The transfer is part of the strategic initiative of the Group to implement a regional restructuring whereby all the long term business and the general business currently carried on by SRZ’s branches in Hong Kong, India, Japan, Korea, Malaysia and Australia (property and casualty branch) will be transferred to and resumed by SRAL’s branches established in the same jurisdictions.

13.  As far as Hong Kong is concerned:

(1) The proposed transfer covers both long term business and general business currently carried on by SRZHK to SRALHK (“the Proposed Transfer”);

(2) A transfer agreement will be entered into between SRZ and SRAL for the Proposed Transfer (“the Transfer Agreement”);

(3) The transfer of the long term business is subject to and conditional upon obtaining the sanction of the court;

(4) The transfer of the general business is subject to and conditional upon obtaining the approval of the IA under ss.25D and 25E of the Ordinance[1]; and

(5) The Proposed Transfer will not proceed unless the Scheme is sanctioned by the court.

14.  Upon implementation of the regional restructuring in Hong Kong, Japan, Malaysia and Australia (property and casualty), which Ps anticipate will be effected by these branches on 1 January 2020:

(1) SRAL will become the regional headquarters of the reinsurance operations of the Group in Asia.

(2) SRALHK will continue its role as primary carrier for Hong Kong and other offshore markets like Taiwan, Guam and Macau.

15.  Under the Scheme:

(1) “Business” is defined as the long term business carried on in or from Hong Kong by SRZHK, which comprises the “Transferring Policies”, the “Transferring Assets” and the “Transferring Liabilities”;

(2) “Transferring Policies” are all the reinsurance policies underwritten by SRZ in respect of the Business which remain outstanding on the Transfer Date and all proposals or applications received by SRZ prior to the Transfer Date, whilst “Transferring Policyholder” refers to the holder of a Transferring Policy;

(3) “Transferring Assets” and “Transferring Liabilities” are respectively the assets and liabilities attributable to the Business;

(4) “Transfer Date” is the date on which the Scheme becomes effective, being 00:01am on such date as SRZ and SRAL may decide, which date shall be within 90 days after the date of the order of the court sanctioning the Scheme, and is expected to be 1 January 2020, subject to change as mutually agreed between the parties;

(5) On and with effect from the Transfer Date:

(a) The Transferring Assets, the Transferring Liabilities and the Transferring Policies shall all be transferred from SRZ to SRAL, and to the extent if the same are not transferred, SRZ shall do all such acts as required to transfer the same to SRAL;

(b) Any proceedings by or against SRZ shall be continued by or against SRAL in substitution for SRZ;

(c) SRAL shall establish SRAL Class A Fund and SRAL Class D Fund, and maintain both as separate accounts for its Class A and Class D long term businesses respectively, and all Transferring Assets, Transferring Liabilities and Transferring Policies belonging to, maintained in, and attributable to SRZ Class A Fund and SRZ Class D Fund shall respectively be allocated to SRAL Class A Fund and SRAL Class D Fund;

(6) On or after the Transfer Date, all amounts received or receivable by SRZ in respect of the Transferring Policies shall be payable to SRAL: clause 9;

(7) SRZ and SRAL shall bear the costs of the Scheme out of their own funds; and

(8) Save for amendments to correct manifest errors (which the IA has been notified and does not object), the Scheme may only be varied with approval of the court.

THE PRINCIPLES

16.  Sanction of the court for transfer of long term business is governed by ss.24 to 25 of the Ordinance.

17.  The legal framework governing such sanction was set out by G Lam J in Re Prudential Assurance Company Ltd [2] which, in turn, referred to the principles summarised by Evans-Lombe J in Re AXA Equity and Law Life Assurance Society Plc[3]. The essence of the legal framework is as follows:

(1) The Ordinance confers an absolute discretion on the court whether or not to sanction a scheme, and the discretion must be exercised by giving due recognition to the commercial judgment entrusted by the company’s constitution to its directors.

(2) The court is concerned with whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.

(3) The above is a primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme, with what would be the result if the scheme were to be implemented. The Ordinance assigns an important role to the independent actuary, whose report the court will give close attention: s.24(2) of the Ordinance.

(4) The court will also pay close attention to any views expressed by the IA, which is expected to be able to express informed opinions on whether policyholders would be adversely affected.

(5) The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected. It is not the court’s function to produce what is, in its view, the best possible scheme.

(6) As such, that individual policyholders or groups thereof may be adversely affected does not mean the scheme has to be rejected. Similarly, the details of the scheme are not a matter for the court provided that the whole scheme is found to be fair.

18.  In addition to the above, s.24(2) of the Ordinance provides that the court shall not determine a petition unless (a) it is accompanied by a report by an independent actuary; and (b) the court is satisfied that the various notice requirements of s.24(3) have been complied with, which include:

(1) A Statutory Notice having been published, giving the address at which the petition and the independent actuary’s report are available (s.24(3)(a));

(2) A Statutory Statement, setting out terms of the scheme and a summary of the independent actuary report, having been sent to each of the long term policy holders of the insurers concerned, and every member of the same unless the court directs otherwise (s.24(3)(b));

(3) Copies of the petition, the independent actuary’s report and the Statutory Statement having been served on the IA (s.24(3)(c)); and

(4) Copies of the petition and the Independent Actuary’s report having been open to inspection (s.24(3)(d)).

19.  Under s.25 of the Ordinance, the court may make provision for, inter alia, the transfer to the transferee company of the undertaking, property and liabilities of the transferor company, the continuation by or against the transferee company of any legal proceedings pending by or against the transferor company, and other incidental and consequential matters necessary to secure that the scheme is fully and effectively carried out.

FULFILLMENT OF STATUTORY REQUIREMENTS

20.  Having examined the evidence, I am satisfied that the statutory requirements under s.24 of the Ordinance have been fulfilled.

21.  As to the requirement under s.24(2), the petition is supported by the Revised Report prepared by the Independent Actuary. The Independent Actuary has also prepared the Supp Report, which provides an updated assessment of the likely effects of the Scheme on the financial security and benefit expectation of Transferring Policyholders and to address other areas for which information was not available at the time his report was prepared.

22.  As to the requirement under s.24(3)(a), in accordance with the First Order, the Statutory Notice was published on 26 July 2019 in Gazette in both English and Chinese, in South China Morning post in English, and in Sing Tao Daily in Chinese.

23.  In relation to the requirement under s.24(3)(b), in the hearing on 18 July 2019, Ps sought an order that sending the statutory statement specified in that subsection in English and Chinese to (a) each member of SRZ and SRAL and (b) each holder of the Transferring Policies would be sufficient for the purpose of satisfying the requirement in s.24(3)(b), and there would be no need to send the statutory statement to all other policy long term holders of SRZ and SRAL, ie those holders whose policies/treaties fall outside the Business and would not be transferred under the Scheme (“Non-Transferring Policyholders”). The reasons in support of Ps’ position are as follows:

(1) The Business to be transferred from SRZ to SRAL under Scheme is confined to the Transferring Policies (and their corresponding Transferring Assets and Transferring Liabilities) carried on by SRZHK branch.

(2) The insurance policies/treaties held by the Non-Transferring Policyholders are the business carried on by (a) SRZ through other (ie non-Hong Kong) branches operating in other jurisdictions and (b) SRAL. Their policies/treaties will not be transferred under the Scheme.

(3) The IA has opined that there is no material adverse impact on the benefit expectation and financial security of the Non-Transferring Policyholders.

(4) As at 31 December 2018, the assets and liabilities attributable to SRZ’s and SRAL’s (excluding Korea) Hong Kong business represented less than 1% and around 20% of their respective total portfolios.

(5) As the policies/treaties held by the Non-Transferring Policyholders will not be transferred under the Scheme, sending the statutory statement to such Policyholders will only create unnecessary confusion.

(6) Given the large number of Non-Transferring Policyholders outside of Hong Kong, it would be an administrative burden to require Ps to send the statutory statement to these Non-Transferring Policyholders.

24.  I accepted Ps’ submissions and granted the order sought by Ps in that hearing. In compliance with the First Order made on 18 July 2019, the statutory statement in English and Chinese has been sent to Ps’ members and the Transferring Policyholders.

25.  To rectify the errors in Table 6.7 of the Report, which had been reproduced in the statutory statement and sent to Ps’ members, the Transferring Policyholders and the IA:

(1) Ps obtained the Second Order so as to bring the errors to their attention; and

(2) On 27 July 2019, Annexure A was sent to Ps’ members and the Transferring Policyholders in accordance with the Second Order.

26.  No new prospective policy holder (ie direct ceding insurers) has applied to SRZ for a new reinsurance contracts from 18 July 2019 (ie the date of First Order) up till 31 October 2019. As a result, neither the statutory statement nor Annexure A has been sent to any prospective policyholder of SRZ as required by the First Order and the Second Order.

27.  In respect of the requirement under s.24(3)(c), in accordance with the First Order, copies of the statutory statement, the petition, and the Independent Actuary’s report were served on the IA on 29 July 2019. Annexure A and the Revised Report were served on the IA on 15 October 2019 in compliance with the Second Order. Further, a copy of the Supp Report was served on the IA on 31 October 2019.

28.  As to the requirement under s.24(3)(d), in accordance with the First Order, copies of the statutory statements, the petition, the Scheme and the Independent Actuary’s report were open for inspection at Ps’ offices from 26 July 2019 to 16 August 2019. Pursuant to the Second Order, copies of the Revised Report and Amended Summary were open for inspection from 27 September 2019 to 18 October 2019.

29.  As to the requirement under s.24(4), Ps have since 26 July 2019:

(1) Made available copies of the petition and Independent Actuary’s Report for any person who asks for the same, which will continue until the court sanctions the Scheme; and

(2) Posted the statutory statements, the petition, the Scheme and the Independent Actuary’s report at the designated webpage, which will be maintained until the court sanctions the Scheme.

(3) Pursuant to the Second Order, the Revised Report and the Amended Summary have been made available and posted at the designated webpage in the like manner.

30.  SRAL (the transferee of the Business) is authorised to carry on the long term business to be transferred under the Scheme, as required under s.24(6). The IA has issued an intervention requirement which restricts SRAL’s ability to commence any long term business in or from Hong Kong without its written permission, Ps expect that the requisite consent will be given on or prior to the Transfer Date. The IA does not suggest otherwise. I am of the view that the requirement under s.24(6) has been satisfied.

31.  Since the statutory requirements have been fulfilled, I proceed to consider whether I should exercise my discretion to sanction the Scheme.

EXERCISE OF DISCRETION

32.  On the question of discretion, Ms Chan SC has fairly reminded me that the court should consider the contractual rights and reasonable expectations of Transferring Policyholders before the Scheme is implemented, and compare that with the likely effect and result on such rights and expectations if the Scheme is implemented especially where, as here, the purpose of the scheme is to advance a commercial purpose of the transferor (and transferee) with no corresponding benefit to the transferring policyholders[4].

Opinion of Independent Actuary

33.  In preparing his Reports, the Independent Actuary has considered the effects of the Scheme on the Transferring Policyholders, the holders of non-transferring policies of SRZ (“Non-Transferring SRZ Policyholders”) and holders of existing policies of SRAL (“Existing SRAL Policyholders”). He has had access to key documents and has held discussions with various representatives of Ps.

34.  The Independent Actuary has considered the following issues:

(1) The effect on the benefit expectations of Transferring Policyholders;

(2) The effect of the Scheme on the financial security of Transferring Policyholders;

(3) The other considerations for Transferring Policyholders, including the levels of service provided and the safeguards in the Scheme;

(4) The impact on the Non-Transferring SRZ Policyholders;

(5) The impact on the Existing SRAL Policyholders; and

(6) The Policyholder Communications.

35.  In the Opinion of the Independent Actuary:

(1) The Scheme will not have a materially adverse effect on the reasonable expectations of the policyholders of Ps and in particular, the Transferring Policyholders with regard to benefits and levels of service.

(2) The Scheme will not have a materially adverse effect on the financial security of the policyholders of Ps in particular, the Transferring Policyholders.

(3) The Scheme provides sufficient safeguards to ensure that the Scheme operates as presented.

36.  As regards benefit expectations of Transferring Policyholders:

(1) The Independent Actuary has no reason to believe there will be a materially adverse impact on the policy terms and conditions of Transferring Policyholders, which will not be changed as a result of the Scheme.

(2) The Independent Actuary has reviewed the reinsurance treaty terms and conditions on a meaningful and material sample basis. He confirmed that there are no terms and conditions which will cause a materially adverse impact following the change in the jurisdiction of the parent company of the branches upon implementation of the Scheme.

(3) As such, the Scheme will not have a materially adverse effect on the reasonable benefit expectations of the Transferring Policyholders.

37.  As regards the financial security of Transferring Policyholders:

(1) The Independent Actuary has reviewed the capitalisation policies of Swiss Re Ltd and SRZ and the capitalisation guidelines of SRAL and SRZHK, and notes that they require SRZ and SRAL to maintain, as their “target capital”, an amount in excess of the required regulatory capital with a volatility buffer. If the “target capital” falls below the requisite level, SRZ and SRAL will look to their parent companies for capital injection. In light of these capitalisation guidelines, SRZ and SRAL will continue to obtain financial support from their respective parents.

(2) The Independent Actuary has reviewed the retrocession arrangements for SRZ and SRAL to protect them from any adverse developments under their business. As SRZ is required to reimburse SRAL in the event of certain adverse insurance events, the Independent Actuary does not expect the risks originating from the businesses of SRAL branches will materially adversely affect the financial security of the Transferring Policyholders.

(3) The Independent Actuary has reviewed the long term and general business portfolio of SRZ and notes that it is more diversified and has broader geographical coverage than those of SRAL. As SRAL has a lower risk exposure comparing to SRZ and majority of the risk in the general business is retroceded back to SRZ, he has not identified any potential areas of concern that may have a materially adverse impact on the financial security of the Transferring Policyholders.

(4) SRZ and SRAL have the same policies and practices on reserves.

(5) The solvency ratio of SRAL under HKIO basis, after the Scheme, is 319%, which is much higher than SRZ’s pre-Scheme ratio (156%).

(6) The SST ratio of SRAL after the Scheme is 158%, which is lower than SRZ’s pre-Scheme ratio (218%). Despite this, the SST ratio of 158% suggests SRAL’s financial strength is more than sufficient to comply with its internal capital requirement and sufficient to withstand the 1 in 100 years extreme scenarios under the SST regime.

(7) SRZ and SRAL have the same financial strength rating as the Group, according to Standard & Poor (AA-), Moody’s (Aa3) and A.M. Best (A+).

(8) SRZ and SRAL adopt the same policies in its risk management and governance.

(9) The regulatory framework applicable to SRZ (Switzerland) and SRAL (Singapore) are both high according to IMF report. The IA exercises regulatory control over the Hong Kong branch of SRZ and SRAL. No policyholder protection scheme available in Switzerland, Singapore or Hong Kong.

(10) The Independent Actuary concludes that the Transferring Policyholders will continue to be protected by SRZ’s financial strength after the Scheme, through support from (a) capitalisation policies; and (b) intra-Group retrocession, if SRAL faces financial difficulties. Hence, the Scheme is unlikely to expose the Transferring Policyholders to new risks of significance, and there will be no materially adverse impact on the Transferring Policyholders’ financial security after the Scheme.

38.  As to other considerations for Transferring Policyholders:

(1) Swiss Re Ltd remains the ultimate parent of the Group after the restructuring, and all the Group policies continue to apply.

(2) Policyholder services will continue to be provided by the same team, as the relevant employment contracts and outsourcing agreements will be transferred to SRALHK. SRALHK will also continue to adhere to the Group’s Claims Guidelines, Underwriting Standards, and the Business Unit Continuity Plan, and will have similar investment guidelines as SRZHK.

(3) Claims made or unsettled before the Transfer Date will be transferred to SRALHK, and any judicial or other legal proceedings will also be continued by or against SRALHK.

(4) The Independent Actuary concludes that the various operational areas, including the level of services provided, will not have a material negative impact on the Transferring Policyholders, and should provide sufficient safeguards to ensure that the Scheme operates as presented.

39.  As to the Non-Transferring SRZ Policyholders, having considered inter alia the benefit expectations, financial security, and other considerations such as policyholder services and operational structure, the Independent Actuary is satisfied that the Scheme will not materially adversely affect their reasonable expectations with respect to benefits and levels of service, and financial security.

40.  As regards the Existing SRAL Policyholders, similarly, having considered inter alia the benefit expectations, financial security, and other considerations such as policyholder services and operational structure, the Independent Actuary is also satisfied that the Scheme will not materially adversely affect their reasonable expectations with respect to benefits and levels of service, and financial security.

41.  As regards communications with Policyholder, the Independent Actuary considers the various notifications given to Transferring Policyholders is reasonable.

42.  In the Supp Report:

(1) The Independent Actuary considers (a) the data updated to 27 September 2019, (b) the significant events subsequent to his Revised Report, and (c) any objections raised by the policyholders and known to him.

(2) These updates include, inter alia, changes in the proportion of HKD and USD business in the Business, the availability of Dynamic Solvency Testing calculations issued by the Actuarial Society of Hong Kong which projects the likely solvency of the company under a range of adverse scenarios over a 3-year projection period and a general updated financial position, especially regarding solvency positions.

(3) The Independent Actuary concludes that these developments do not affect his conclusions in the Revised Report. Specifically, there is no materially adverse impact to the financial security of the Transferring Policyholders following the implementation of the Scheme.

(4) In §2.4.3 of the Supp Report, the Independent Actuary refers to “the final approval of the two IGR[5] arrangements above [being] expected to be granted by the SRAL Board by the end of November”. Ps expect the requisite approval will be granted by SRAL Board at its meeting on 21 November 2019 and propose an undertaking in the draft order to take care of this.

43.  In his 2^nd Affirmation filed in these proceedings, the Independent Actuary provides the following updates on events after his Supp Report:

(1) SRAL sustained a loss due to the natural catastrophic events occurred in Japan in Q3 2019. This triggered a capital injection into SRAL from the Group in late October 2019 which increased its capital to above its “target capital” level (as described in §6.3.10 of Revised Report). He opines that this showed the intra-group retrocessions arrangements and capitalisation policies are working well.

(2) Despite adverse impacts from claims due to natural and man-made catastrophes, the Q3 2019 results of the Group show a 39% increase in net income, and its SST ratio is above the target level of 220%.

(3) He opines that there is no materially adverse impact to the financial security of the Transferring Policyholders, the Existing Policyholders of SRAL and Non-Transferring Policyholders of SRZ and his opinions stated in the Revised Report and Supp Report remain unchanged.

Opinions of the Appointed Actuaries

44.  The appointed actuaries of SRZ and SRAL (collectively “the Appointed Actuaries”) opine that the financial security, benefit expectations and service levels of Existing SRAL Policyholders and Transferring Policyholders will not be affected by the Proposed Transfer, and that the claims will continue to be paid as and when due and that services to all clients will remain at current levels.

45.  The Appointed Actuaries’ opinions are based, inter alia, on:

(1) The size of the portfolio to be transferred from SRZHK represents less than 1% of SRZ’s assets and liabilities, and over 3% of SRZ’s retained surplus (excluding the Korean branch);

(2) The financial strength of SRZ and SRAL;

(3) The fact that SRAL’s indirect parent company has always been and remains SRZ. This means that the overall financial position of SRZ, on a consolidated basis, is not changed by the Proposed Transfer; and

(4) The quality of management, regulation and supervision involved.

Notice of intention to appear or object

46.  In the statutory notice issued on 26 July 2019, the public was notified of the date of hearing of the petition and the right of any person who alleges that he or she would be adversely affected by the carrying out of the Scheme may appear at the hearing. In the same notice, it was stated that:

(1) Any such person who intends to appear is required to give not less than 7 days’ prior written notice of such intention and the reasons therefor to Ps’ solicitors; and

(2) Any such person who intends to object to the Scheme but do not wish to appear at the hearing is required to give 7 days’ prior written notice of such intention and the reasons therefor to Ps’ solicitors.

47.  No notice of intention to appear or to object to the Scheme has been received by Ps or their solicitors.

Enquiries from Transferring Policyholders

48.  As of 31 October 2019, Ps received 18 enquiries from Transferring Policyholders in relation to the Statutory Statement and Annexure A. All these enquiries have been addressed by Ps.

The IA’s Position

49.  The IA accepts that it has been kept fully informed of the progress of the Proposed Transfer, the Scheme and these proceedings including the Opinion of the Independent Actuary and his Reports, the opinions of the Appointed Actuaries and the enquiries made by the Transferring Policyholders.

50.  Mr Suen SC submits that the IA has no objection to the proposed Scheme and considers it as a whole to be fair as between the interests of the different classes of persons affected. In discharge of its statutory functions and duties owed to the court, Mr Suen SC on behalf of the IA invites me to consider (a) whether the court has the power under s.24 of the Ordinance to sanction a scheme which proposes to transfer policies which (including the application of such policies) only come into existence after the sanction hearing and before the Transfer Date (“Post-Sanction Period”; the holders of such policies, “Prospective Policyholders”) and, if so, (b) whether the court should exercise its discretion to do so, including in particular any safeguards or measures which may be adopted.

51.  Mr Suen SC submits that the questions above are legitimate questions since:

(1) Pursuant to s.24(2)(b), it is a pre-condition of the court’s exercise of its power to determine the application that all requirements in s.24(3) are complied with, and this includes sending to each of the policyholders concerned a statement setting out the terms of the scheme and containing the independent actuary’s report, except where the Court of First Instance has otherwise directed. This gives rise to a potential concern that these Prospective Policyholders will not be sent such statement before the court’s exercise of its power to sanction the Scheme.

(2) Any person who alleges that he would be adversely affected by the carrying out of the scheme shall be entitled to be heard under s.24(5), for which the Ordinance provides no express exception or carve-out. There is a potential concern that the Prospective Policyholders will be deprived of their entitlement to be heard (because they only came into existence after the court’s exercise of its power to sanction the Scheme and could not exercise their right to be heard, notwithstanding the fact that they would be affected by the Scheme).

52.  With respect, I have reservation as to whether these questions are legitimate questions. The “Prospective Policyholders” as defined in Mr Suen SC’s submissions only come into existence after the sanction hearing. Looking at the plain meaning of s.24, I doubt whether s.24(3)(b) and s.24(5)(b) has any application in relation to the “Prospective Policyholders”.

53.  On the assumption that these questions have to be considered further, Mr Suen SC submits that notwithstanding these questions, the court does have jurisdiction to sanction the Scheme.

(1) In relation to s.24(3)(b), it is clear from the wording of the subsection that the requirement therein may be modified or waived by the court. Insofar as it may be suggested that the statutory statement (and Annexure A) must be sent to policyholders before the date of the sanction hearing in order for the notification requirement to be effective or meaningful, it would appear that the court does have jurisdiction to modify or waive such requirement either by substituting a direction for the same to be sent along with the reinsurance proposal (ie regardless of whether it is before or after the date of the sanction hearing) or dispensing with the requirement altogether.

(2) As to s.24(5), it would implicitly follow from the court’s power to modify or waive the notification requirement (which is essential for the effective exercise of the right to be heard under s.24(5)) that the policyholders do not have an absolute or unqualified entitlement to be heard, even though no express exception or carve-out is provided in the section. Support may be derived from the following cases:-

(a) In Re The Universal Life Assurance Society[6], Eady J held that there was no need to give notice to holders of policies issued after the date of the petition. This necessarily means such policyholders might not have knowledge of the transfer scheme and were unable to exercise their right to be heard effectively or meaningfully at the sanction hearing.

(b) In Provident Insurance Plc v Financial Services Authority[7], the court also waived the requirement for certain classes of policyholders to be notified of the proposed transfer, such as policyholders or third party holders suspected of fraud and those with dormant claims.

54.  Mr Suen SC further submits that in the present case, the IA accepts that there are cogent justifications or factors in support of the court’s exercise of discretion to sanction the Scheme notwithstanding the apparent deprivation of the Prospective Policyholders’ rights under s.24.

(1) The court has directed in the First Order and in the Second Order that that SRZHK, when responding to prospective policyholders’ reinsurance policy applications, must provide the reinsurance proposal along with a copy of the statutory statement (and Annexure A), so that they are informed of the proposed Scheme before they decide whether they would still take out policies from SRZHK. Accordingly, the Prospective Policyholders would receive the statutory statements before they decide to take out or renew policies during the Post-Sanction Period. It may therefore be said that they made an informed decision to enter into or renew policies, ie they had prior notice that their insurer will be substituted on the Transfer Date without their consent. If they elected to do so with full knowledge of the consequence, there is perhaps little reason why they should be allowed an opportunity to oppose the Scheme retrospectively.

(2) As between 24 September 2019 (ie the date of the Second Order) and 31 October 2019, no prospective policyholders have applied to SRZHK for reinsurance policies. Ps also have not received any notice of intention to appear or to object to the Scheme as of 31 October 2019. It is unlikely that there would emerge a significant class of objecting Prospective Policyholders entering into contract with SRZHK in the Post-Sanction Period so as to overturn the court’s determination of the overall fairness of the Scheme.

(3) Based upon the Supp Report, the Independent Actuary is aware that SRZHK intends to continue to write new reinsurance business after the release of the report and up to the effective transfer date. The Independent Actuary remains of the opinion that these Prospective Policyholders would not be adversely affected, provided that their contracts do not contain any unusual clause giving rise to different benefit expectations, and there are no catastrophic events harming the financial strength of SRALHK in the Post-Sanction Period. As such, it is unlikely that any such Prospective Policyholder would allege to be adversely affected and come forward to object.

(4) The IA accepts that affording such Prospective Policyholders an opportunity to be heard after the sanction hearing may jeopardise the certainty and finality of the sanctioned scheme, thus rendering the sanction hearing otiose.

55.  Without prejudice to what I have said in paragraph 52 above, I accept these submissions.

56.  Ms Chan SC proposes to incorporate the following measures in the order to be made by this court to ensure that the prospective policyholders will be informed about the sanction of the Scheme during the post-sanction period through the following means:

(1) Ps shall post the First Order, the Second Order, the Petition, the Revised Report, the Supp Report and the Order made by this court sanctioning the Scheme at designated page on their website, and maintain the posting until the Transfer Date; and

(2) SRZ shall provide a copy of Annexure A to the Second Order together with a cover letter which provides the link to the designated page on Ps’ website.

I am of the view that these are fair and proper measures. I accept the proposal.

My ruling

57.  Based upon the actuarial evidence before the court, the Scheme does not have any material adverse effect on the Transferring Policyholders, the Non-Transferring SRZ Policyholders and the Existing SRAL Policyholders. In particular, the Independent Actuary confirms that the security and reasonable expectations of Transferring Policyholders will not be adversely affected, which is a significant consideration for the court: Re AXA (Hong Kong) Life Insurance Company Limited[8].

58.  The IA has no objection to the Scheme and is of the view that the Scheme as a whole is fair as between the interests of the different classes of persons affected.

59.  Having considered all the evidence before the court and the submissions made by counsel, I am of the view that my discretion should be exercised in favour of sanctioning the Scheme.

DISPOSITION

60.  I sanction the Scheme and make an order in terms of the draft prepared by Ps, in respect of which the IA has no adverse comment. Ps have agreed to pay costs of this application to the IA on a common fund basis. I therefore order that costs of the IA in relation to this application be borne by Ps, to be taxed on a common fund basis if not agreed.