RE ZÜRICH LEBENSVERSICHERUNGS-GESELLSCHAFT AG (also known as ZURICH LIFE INSURANCE COMPANY LTD) AND ANOTHER

HCMP 460/2021

[2021] HKCFI 2447

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 460 OF 2021

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REASONS FOR JUDGMENT

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1.  At the hearing of the Petition presented on 8 April 2021 by the petitioners, Zürich Lebensversicherungs-Gesellschaft AG (also known as Zurich Life Insurance Company Ltd)  (“ZLIC”)  and Zurich Life Insurance (Hong Kong)  Limited (“ZLIHK”), I sanctioned a scheme to effect the transfer of the whole of the “ZLIC HK Business” (as defined in §8(1)  below)  from ZLIC to ZLIHK (“Scheme”)  under s 24 of the Insurance Ordinance (Cap 41)  (“Ordinance”)  and made other ancillary provisions for the implementation of the Scheme under s 25 of the Ordinance.  These are the reasons for my judgment. 

2.  The Petition is supported by, inter alia, the affirmations made by the appointed actuary of ZLIC and ZLIHK and the revised Report of Paul Sinnott, the independent actuary (“IA”), dated 29 March 2021 and the Erratum dated 5 May 2021 (together “IA Report”),[1] as well as his Supplementary Report dated 30 June 2021 (“Supp IA Report”)  and its Supplemental Information dated 23 July 2021 (collectively “IA Reports”).

3.  Pursuant to the directions given at the hearing on 6 May 2021, the petitioners caused the statutory notice and statutory statement to be published and served on the Insurance Authority (“Authority”)  in accordance with s 24 of the Ordinance. 

Factual background

4.  ZLIC is a Switzerland-incorporated company.  It is an insurance carrier licensed and supervised by the Swiss Financial Market Supervisory Authority (“FINMA”). It is registered as a non-Hong Kong company under Part XVI of the Companies Ordinance (Cap 622), and is authorised to carry out long term insurance business of class A (life and annuity); class C (linked long term); and class I (retirement scheme management category III)  under Part 2 of Schedule 1 to the Ordinance. 

5.  ZLIHK and ZLIC are both indirect wholly owned subsidiaries of Zurich Insurance Company Ltd (“ZIC”)  (collectively “ZIC group”).[2]  The ultimate holding company of ZIC, ZLIC and ZLIHK (and other companies within the Zurich Group)  is Zurich Insurance Group Ltd, a company whose shares are listed on the SIX Swiss Exchange.

6.  ZLIHK was incorporated in Hong Kong.  It is and has since 23 March 2020 been authorised to carry out in or from Hong Kong contracts of long term insurance falling within class A (life and annuity)  and class C (linked long term)  under Part 2 of Schedule 1 to the Ordinance. 

7.  A corporate chart of the Zurich Group is at Annex 1 to this Reasons for Judgment.

Scheme

8.  Under the Scheme:

(1)  “ZLIC HK Business” is defined as “the long term business of ZLIC carried on in or from Hong Kong comprising the carrying out of the Transferring Policies, the Transferring Assets and Transferring Liabilities, and all other business undertakings carried in or from Hong Kong in connection with, ancillary to, and for the purposes of such business.

(2)  “Transferring Policies” are any Policy forming part of Class A (Life And Annuity)  or Class C (Linked Long Term)  of long term business underwritten by ZLIC in Hong Kong, under which any liability remains outstanding as at the Transfer Date and all applications for policy renewals received by ZLIC.

(3)  “Transferring Assets” are the property, assets or investment of ZLIC as are attributable to the ZLIC HK Business and the rights, benefits and powers of ZLIC under and by virtue of (i) the contracts between it and its insurance intermediaries in relation to the ZLIC HK Business; (ii)  the Transferring Reinsurances (as defined in the Scheme); (iii)  any lease, outsourcing agreements or arrangements, IT and related contracts in respect of the ZLIC HK Business; and (iv)  any other contracts, agreements, arrangements or undertakings in respect of or concerning the ZLIC HK Business.

(4)  “Transferring Liabilities” are all liabilities of ZLIC attributable to the ZLIC HK Business including liabilities for mis-selling or non-compliance committed by ZLIC prior to the Transfer Date, and any current or pending complaints, legal proceedings or other dispute resolution proceedings made in relation to the Transferring Policies.

(5)  “Transfer Date” is the time and date on which the Scheme shall become effective, namely at 00:01 am (HKT)  on such date as the petitioners may decide, which shall be within 90 days after the Order sanctioning the Scheme is granted. 

(6)  Prior to the Transfer Date, ZLIHK shall have established the “ZLIHK Life Insurance Fund”, the “ZLIHK Shareholder’s Fund” and the “ZLIHK Linked Fund” (as defined in the Scheme).

(7)  Effective from the Transfer Date, ZLIHK shall establish the “ZLIHK Swiss Individual Fund”.

(8)  Upon the Scheme becoming effective:

(a)  the Transferring Assets, Transferring Liabilities and Transferring Policies shall be transferred from ZLIC to ZLIHK and allocated in accordance with clauses 7 – 9, 12.5 -12.9);

(b)  any proceedings by or against ZLIC in relation to the Transferring Assets, Transferring Liabilities and Transferring Policies shall be deemed to have been continued by or against ZLIHK, in substitution for ZLIC; and

(c)  all premiums, loan repayments and other amounts received or receivable by ZLIC in respect of the Transferring Policies shall be payable to ZLIHK.

(9)  A “Transfer Agreement” will be entered into between ZLIC and ZLIHK for the proposed transfer of the ZLIC HK Business (I will say something about the Transfer Agreement below).

(10)  ZLIC Hong Kong branch shall bear the costs of the Scheme out of its own funds.

(11)  Save for correcting manifest error, the Scheme can only be modified with the approval of the Court and subject to any conditions which the Authority or the Court may impose.

9.  As at 30 September 2020, the Transferring Policies comprised of 39,471 long term insurance policies in force (with gross annualised premiums of $292 million)  of which 13,746 policies are investment-linked assurance schemes.

10.  The petitioners consider the proposed transfer of the ZLIC HK Business is beneficial to them as well as the Zurich Group in that:

(1)  it will simplify ZLIC’s structure and remove the tension within ZLIC in having to comply with different regulatory regimes imposed by FINMA and the Authority in respect of the ZLIC HK Business;

(2)  it will improve the operational efficiency of ZIC group’s life insurance business and enables each territory to pursue a strategy that best fits the needs of the market, policyholders and shareholders; and

(3)  it will improve the efficiency in compliance within the ZIC group, as after the proposed transfer, ZLIHK is only subject to the regulatory regime in Hong Kong. 

Applicable principles

11.  Section 24(1)  of the Ordinance provides that where it is proposed to carry out a scheme under which the whole or part of the long term business carried on in Hong Kong by an authorized insurer is to be transferred to another insurer, the transferor company or transferee company may apply to the Court, by petition, for an order sanctioning the scheme. 

12.  Section 24(2)  states that the Court shall not determine an application unless the petition is accompanied by a report on the terms of the scheme by an IA; and the requirements of s 24(3)  have been complied with namely:

(1)  Publication of the statutory notice (s 24(3)(a));

(2)  The sending of the statutory statement (setting out the terms of the scheme, and a summary of the report(s)  of the IA)  to policyholders and every member of the insurers, except whether the Court has otherwise directed (s 24(3)(b));

(3)  Service of the petition, the report(s)  of the IA and the statutory statement on the Authority at least 21 days before the determination of the petition (s 24(3)(c)); and

(4)  That copies of the petition and the report(s)  of the IA be open to inspection at offices in Hong Kong of the insurers for a period of not less than 21 days beginning with the date of the first publication of the statutory notice (s 24(3)(d)).

13.  If the statutory conditions are satisfied, the Court may in its discretion sanction the scheme.  The approach of the Court in considering whether to sanction a scheme has been sufficiently explained by Godfrey Lam J (as he then was)  in Re Prudential Assurance Company Ltd [2014] 1 HKLRD 433 at §18 (referring to Re AXA Equity and Law Life Assurance Society Plc [2001] 2 BCLC 447, 468E-469B):

(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 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 IA, to whose report the Court will give close attention.

(4)  The Court will also pay close attention to any views expressed by the Authority, 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.

14.  The Court will consider the contractual rights and reasonable expectations of transferring policyholders before the scheme is implemented, and compare those 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 (Re Transamerica Life Insurance Company [2013] 2 HKLRD 871 at §47).

15.  Section 25 of the Ordinance empowers the Court to make provisions 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 such incidental, consequential or supplementary matters as are necessary to secure that the scheme shall be fully and effectively carried out.

16.  Where, as here, the proposed transfer involves a change of issuer of the investment-linked assurance schemes authorized by the Securities and Futures Commission (“SFC”), prior approval of the SFC is required so that the transferee company may continue to operate the schemes after the transfer. 

Compliance with regulatory and statutory requirements

17.  On 20 May 2021, the SFC approved the change of issuer of the investment-linked assurance schemes from ZLIC HK branch to ZLIHK subject to the condition that the Scheme is sanctioned by the Court. 

18.  Each of the requirements under s 24 of the Ordinance has been satisfied by the petitioners.

19.  First, in compliance with s 24(2), the petition is supported by the IA Reports .  The Supp IA Report was prepared on the basis of updated financial information available as at 31 December 2020 and 31 March 2021, and any other relevant significant events subsequent to the date of finalisation of the IA Report. 

20.  Second, in compliance with s 24(3)(a)  and §1 of the Order, the statutory notice was published on 28 May 2021 in the Gazette (in both English and Chinese), The Standard in English, and in Sing Tao Daily in Chinese. 

21.  Third, in compliance with s 24(3)(b)  and §2 of the Order, the statutory statement was sent to (1)  ZIC and Zurich Insurance Holdings (Hong Kong)  Limited, the sole shareholder of ZLIC and ZLIHK respectively; and (2)  each of the Transferring Policyholder and ZLIHK Policyholder (as referred to in §2(2)-(6)  of the Order), at their respective last known addresses on the relevant register as at 28 February 2021.  By §2 of the Order, the sending of the statutory statement to all other long term policyholders of ZLIC (whose policies do not form part of the Transferring Policies)  was dispensed with.

22.  Fourth, in compliance with s 24(3)(c)  and §§5, 9(1)  of the Order, copies of the statutory statements, the petition, the Scheme, the IA Reports were served on the Authority on 14 July 2021. 

23.  Fifth, in compliance with s 24(3)(d)  and §6 of the Order, copies of the statutory statements, the petition, the Scheme, the IA Report were made open for inspection at the Customer Service Centres of ZLIC and ZLIHK from 28 May 2021 to 17 June 2021.  In accordance with s 24(4)  and §7 of the Order, the petitioners made available copies of the petition, the Scheme and the IA Report to the one person who requested for the same. 

24.  Lastly, the other requirements stipulated in §§3, 8 and 9(2)  of the Order have also been complied with in that:

(1)  the finalised statutory statements as well as the IA Report were exhibited to an affirmation filed on 24 June 2021; and

(2)  the petitioners posted copies of the statutory statements, the petition, the Scheme and the IA Report on their website on 28 May 2021, and maintain such posting until the substantive hearing of the petition.  The Supp IA Report was also posted on the petitioners’ website on 12 July 2021. 

Exercise of discretion

25.  I am satisfied that the proposed transfer of the ZLIC HK Business will not have any materially adverse effect on the contractual rights and reasonable expectations of Transferring Policyholders or the non-transferring policyholders of ZLIC or ZLIHK for the reasons explained below. 

26.  The proposed transfer of ZLIC HK Business from ZLIC HK branch to ZLIHK is to effect an intra-group transfer from one entity to another within Zurich Group.  The Transferring Policyholders remain protected by the strength of the Zurich Group both before and after implementation of the Scheme.

27.  In preparing his Reports on the Scheme, the IA had been provided with, and had access to, all documents he considered necessary and relevant to forming his opinion on the terms of the Scheme[3]. The IA also had unrestricted access to, and held discussions with, various representatives of the petitioners. 

28.  It is the opinion of the IA that the Scheme would have no material adverse effect on the policyholders of the petitioners in particular, the Transferring Policyholders in respect of (1)  their reasonable expectations with regards to benefits and level of service, and (2)  their financial security.  The IA is also satisfied that the Scheme provides sufficient safeguards to ensure it will operate in the way proposed.

29.  Further, having taken into account the updated financial information of the petitioners and the developments taken place since the completion of the IA Report, the IA confirms, in the Supp IA Report, that his opinion remains unchanged.

30.  The IA’s findings and opinions on the Scheme may be summarized as follows.

31.  As regards the effect on the benefit expectations of Transferring Policyholders:

(1)  The petitioners confirmed that ZLIHK will follow the current dividend policy adopted for the ZLIC HK Business, and that there will not be any significant change to the existing principles and methods with respect to the relevant policies. 

(2)  ZLIHK will carry out annual dividend reviews according to the same dividend methodology used by ZLIC. 

(3)  The dividend mechanism/principles communicated to policyholders will be applied in the future. 

(4)  The petitioners also confirmed that there is no significant change of strategic asset allocation in relation to the legacy liabilities[4] of ZLIC Hong Kong Branch after the Scheme is implemented (if there is no significant change in ZLIHK’s product mix). 

(5)  ZLIC does not intend to make any significant change to existing investment strategies and internal governance currently adopted. 

32.  Taking into account the intention of ZLIHK to use (1)  the current participating business dividend setting; (2)  the universal life crediting rate principles and methodologies; and (3)  the governance for any changes to the existing approach after the Scheme becoming effective, the IA concludes that there are sufficient safeguards to ensure that the Transferring Policyholders will be treated in a similar manner before and after the Scheme. 

33.  In relation to the effect on the financial security of the Transferring Policyholders:

(1)  After implementation of the Scheme, the valuation procedure and methodology in respect of ZLIHK’s policy reserves will remain the same as that of ZLIC Hong Kong branch. 

(2)  The historical solvency position of each of the petitioners’ parent companies is similar, and their financial strength is comparable. 

(3)  The projected solvency ratio of ZLIHK (on HKIO[5] basis)  post-Scheme is higher than the current solvency ratio of ZLIC.[6]  If ZLIHK’s solvency ratio falls (or is anticipated to likely)  below 200%, it will seek assistance from the Zurich Group to raise solvency capital, or for a capital injection. 

(4)  ZLIHK issued a letter of undertaking to the Authority specifying a parental commitment to maintain its solvency ratio of at least 150% of the statutory minimum solvency margin. 

(5)  The petitioners’ management have taken appropriate steps to comply with the regulatory capital requirements. 

(6)  The IA has also not identified any areas where additional risk exposure post-Scheme is likely to prejudice the contractual entitlements of any group of policyholders.[7]  

(7)  ZLIHK confirmed that it does not intend to make any significant change to investment strategies currently adopted by ZLIC Hong Kong branch; the risk appetite statements are similar for ZLIC Hong Kong branch and ZLIHK, with no material differences in the target levels of risk measures. 

(8)  The Authority maintains regulatory and supervisory authority of the operations of ZLIC Hong Kong branch and ZLIHK at all times. 

34.  Based on the above matters, in the IA’s opinion, the Scheme is unlikely to expose the Transferring Policyholders to any new or significant risks.  The Transferring Policyholders will continue to be protected by the financial strength of the Zurich Group after the Scheme.  There is therefore no materially adverse impact on the financial security of the Transferring Policyholders upon the Scheme becoming effective.   

35.  Further, the IA considers that the Scheme will not have a material adverse impact in respect of other operational areas of the petitioners given that:

(1)  The ultimate parent company of the Zurich Group remains the same, and all Group policies continue to apply to the petitioners. 

(2)  The existing reinsurance arrangements will be retained and will remain in force under ZLIHK. 

(3)  Although there are 2 recent regulatory breaches by ZLIC Hong Kong branch which resulted in compensation payments, the amount involved is not material to ZLIC Hong Kong branch’s financial position and have been paid to the affected policyholders to the extent that they could be contacted.  The remaining payments will be transferred to ZLIHK.    

(4)  All unsettled claims and all ongoing legal proceedings will be transferred to ZLIHK. 

(5)  The same teams of operational and administrative staff will continue to service the Transferring Policyholders.  Policyholder services (such as the range of fund choices available for long term Transferring Policyholders)  will not be affected.

36.  As for the other policyholders, the IA opines that the effects of the Scheme will not bring any material adverse impact to them, whether in terms of reasonable expectations or financial security.

37.  In his Supp IA Report, the IA considers various developments including (1)  the receipt of regulatory approval in respect of ZLIHK’s underwriting of Class C business on 1 April 2021; (2)  the annual universal life crediting rates for 2020; (3)  the updated volume of the ZLIC HK Business to be transferred; (4)  the new business written by ZLIHK; (5)  the petitioners’ 2021 business plans; (6)  the updated dynamic solvency testing calculations; and (7)  the updated financial position of the petitioners as at 31 December 2020 and 31 March 2021.  The IA concludes that these developments did not affect his conclusions in the IA Report.  As the HKIO solvency ratio of ZLIHK post-Scheme will be higher than that of ZLIC as at 31 December 2020 and 31 March 2021, the financial security of the Transferring Policyholders is more favourable. 

38.  The appointed actuaries of the petitioners also expressed their opinions that the Scheme should not have a material adverse effect on the reasonable expectations with regard to benefits and levels of service, or the financial security, of existing policyholders (for ZLIHK), the non-transferring policyholders (of ZLIC), or the Transferring Policyholders. 

39.  The Authority was involved in reviewing and giving comments on the draft documents including the Scheme and the IA Reports and has been kept informed of the progress of the Scheme.  The Authority has no objection to the Scheme or the proposed order sought by the petitioners. 

40.  As at 23 July 2021, the petitioners received 228 enquiries from the Transferring Policyholders (or their representatives).  These enquiries have been addressed.  No complaint or objection has been received by the petitioners from the Transferring Policyholders. 

41.  Taking into account the above matters, I consider that a fair balance is struck between the interests of different classes of persons affected, and the Scheme is one which should be sanctioned. 

Transfer Agreement

42.  As the proposed transfer of the ZLIC HK Business will be implemented upon the Scheme becoming effective, it is not apparent why a separate Transfer Agreement will need to be entered into between ZLIC and ZLIHK and what are the terms of such Agreement as it has not been exhibited to the petitioners’ affirmations.   

43.  At the hearing, Mr Victor Dawes SC (leading Ms Natalie So), provided a copy of the final version of the Transfer Agreement to the Court, which shows that the parties intended to deal with the non-prosecution agreement reached with the regulator which will become binding upon ZLIHK.  It seems that this is not a matter which will have any material impact on the petitioners and does not affect my view on the Scheme. 

44.  In future, it would be advisable for the petitioners to sign the relevant agreement and exhibit any such agreement (or a final version thereof if and to the extent that they consider it appropriate not to sign the agreement until after the Court has sanctioned the scheme)  so that the Court can be apprised of the effect of such agreement in considering whether the Scheme is one which should be sanctioned. 

Form of Order

45.  The Court made an order in the terms set out in Annex 2 to this Reasons for Judgment.

1. Pursuant to Section 25 of the Ordinance (using the definitions in the Scheme), all other contracts, rights, obligations and commitments of ZLIC with respect to the Transferring Policies and ZLIC HK Business or otherwise relating to its undertaking, property or liabilities as specified in the Scheme shall, on and from the Transfer Date, be transferred to be vested in ZLIHK.

2. The Petitioners shall post the Order (together with Annexures 1 and 2), the Petition, the Independent Actuary’s Report dated 29 March 2021 (together with the Erratum dated 5 May 2021), the Supplementary Report dated 30 June 2021 (together with the Supplemental Information dated 23 July 2021), and this Order (together with Schedule 1)  on the website of the Petitioners at www.zurich.com.hk, and maintain that posting until the Transfer Date.

3. There be liberty to apply for the purpose of modification of the Scheme under Clause 16 of the Scheme or the purposes set out in Section 25 of the Ordinance.

4. ZLIC do pay the costs of the Insurance Authority in relation to the Petition, to be taxed on a common fund basis if not agreed.