RE WINTERTHUR LIFE

HCMP 734/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 734 OF 2005

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REASONS FOR JUDGMENT

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1.  This is a petition presented jointly by Winterthur Life and Winterthur Life (Hong Kong) Limited (“WLHK”) (collectively “the petitioners”) under section 24 of the Insurance Companies Ordinance, Cap. 41, seeking sanction of a scheme (“the Scheme”) for the transfer of the whole of the long term business, as defined in Cap. 41, currently carried on by Winterthur Life in Hong Kong via its branch office (“Winterthur HK”), from Winterthur Life to WLHK. I have sanctioned the Scheme at the hearing and these are the reasons for judgment.

The companies

2.  Winterthur Life is a company incorporated and registered in Switzerland. It is also registered in Hong Kong under Part XI of the Companies Ordinance, Cap. 32 as an oversea company and carries on business in Hong Kong via its branch office, Winterthur HK. It is authorised by the Insurance Authority under section 8(1) of Cap. 41 to carry on the business of effecting long term insurance contracts as principal, being contracts falling within Class A (life and annuity), Class C (linked long term insurance business) and Class I (retirement scheme management category III), as such classes are defined in Part 2 of the First Schedule to Cap. 41.

3.  Winterthur Life incorporated WLHK for the specific purpose of accepting the transferred business under the Scheme. WLHK is a wholly owned subsidiary of Winterthur Life. Like Winterthur Life, WLHK is part of the Credit Suisse Group. At the time of the presentation of the petition, WLHK has an authorised share capital of HK$200 million, divided into 200 million ordinary shares of HK$1.00 each, all of which have been issued at par and are registered in the name of Winterthur Life. To date, WLHK has not carried on business, nor does it intend to do so unless and until the court approves of the Scheme when it will carry on the transferred business as successor to Winterthur HK.

4.  On the effective date of the Scheme, WLHK will become the insurer under the transferred policies in place of Winterthur HK. The only other changes to the transferred policies are to change the place of payment from Switzerland to Hong Kong and to change the governing law of the transferred policies from the law of Switzerland to the law of Hong Kong. Under the Scheme, the current policyholders of Winterthur HK are not entitled to opt out of the transfer or to a return of their premiums or to any form of compensation.

5.  An authorised insurer is permitted to transfer a long term insurance business carried on in Hong Kong pursuant to the requirements laid down in sections 24 and 25 of Cap. 41.

The rationale for the transfer of business

6.  There are three principal reasons for the transfer of the long term business to WLHK:

(1)	The transferred business is distinct from Winterthur Life’s other business activities in the Asia Pacific region and has always been carried out by Winterthur Life separately from these other business activities.
(2)	The transferred business has grown, in terms of business volume (gross written premiums and assets under management) and staff employed to a size and maturity where it is more appropriate to carry out such business via a separate company with its own dedicated board of directors and management.
(3)	Winterthur Life wishes to be able to take advantage of the preferential access conditions to the life insurance market in Mainland China afforded to Hong Kong companies under the Mainland-Hong Kong Closer Economic Partnership Arrangement (known as “CEPA”) now or in the future.

7.  The proposal to transfer the long term business of Winterthur HK so that it is carried on by a Hong Kong subsidiary is a matter of commercial judgment for the management of Winterthur Life. That said, the management is of the view that the Scheme will also benefit policyholders of Winterthur HK for these reasons:

(1)	As an authorised insurer incorporated in Hong Kong, WLHK will fall within the application of the Guidance Note on the Corporate Governance of Authorised Insurers issued by the Insurance Authority (known as “GN 10”). GN 10 requires WLHK to implement good corporate governance measures including the following:
	(a)	to maintain a board of directors comprising not less than five directors charged with fulfilling the roles and responsibilities of the board summarised in GN 10;
	(b)	to appoint an independent non-executive director providing an independent perspective to, and a broader outlook on, WLHK’s decision making and to enable the WLHK board to ensure the appropriate checks and balances are in place against the influence of management and the controller;
	(c)	to establish and maintain the required committees of the WLHK board including audit, underwriting, investment, claims settlement and reinsurance committees;
	(d)	to ensure a sound internal control system is in place; and
	(e)	to maintain the client service standards recommended by GN 10.
(2)	WLHK will, pursuant to section 15(1)(b) of Cap. 41, appoint a local actuary, being an actuary who resides and works in Hong Kong and who therefore has experience of the local insurance market in Hong Kong and the factors affecting that market.
(3)	The formation of the WLHK board and the allocations of roles and responsibilities within the WLHK board as required by GN 10 will improve the reporting lines between WLHK and Winterthur Life in Switzerland.

The independent actuary’s report

8.  Pursuant to section 24(2), the petitioners submitted with the petition a report on the terms of the Scheme by an independent actuary. This was the report dated 6 April 2005 prepared by Mr. Mark Saunders of Towers, Perrin, Forster & Crosby Inc, trading as Tillinghast. Winterthur HK and the Insurance Authority agreed the terms of reference of the independent actuary’s review of the Scheme. Among other things, he was required to conduct an independent review for the purpose of considering the impact of the Scheme on current policyholders of Winterthur HK, with particular reference to the impact on the security of policyholder benefits and the reasonable benefit expectations of policyholders.

9.  In summary, the independent actuary is of the opinion that the Scheme should not materially adversely affect the benefit expectations and should not materially adversely affect the security of current policyholders of Winterthur HK when assessed against his adopted benchmark for adequate security and that the level of service for these policyholders should not be adversely affected by the Scheme.

10.  Pursuant to the requirement of section 24(3) and the order I made on 11 May 2005 on the summons for directions, copies of a covering letter from the petitioners to policyholders, a statement setting out the terms of the Scheme and containing a summary of the independent actuary’s report sufficient to indicate the opinion of the same on the likely effects of the Scheme on policyholders, questions and answers providing the policyholders with additional information on the Scheme were sent to all the policyholders as per their addresses identified from the database of Winterthur HK. Further, the full versions of the Scheme and the independent actuary’s report have been posted on the website of Winterthur HK.

The Insurance Authority’s approval

11.  The Insurance Authority has been kept informed of the intended transfer of business and a number of changes have been made to the draft documents to meet the points made by the Insurance Authority. By a letter dated 21 April 2005, WLHK was informed by the Insurance Authority that an approval in principle has been given to authorize WLHK under section 8 of Cap. 41 to carry on Classes A, C and I of the long term business in or from Hong Kong, subject to the compliance of the conditions set out therein. On 15 June 2005, the Insurance Authority wrote to WLHK confirming that the conditions set out in the approval in principle letter have been complied with and that it will formally authorise WLHK to carry on the aforesaid classes of long term business in or from Hong Kong after the Scheme has been sanctioned by the court.

12.  The Insurance Authority appeared by counsel at the hearing and confirmed it has no objection to the Scheme, having taken into consideration the independent actuary’s report.

Compliance with the statutory requirements

13.  I am satisfied that all statutory requirements in section 24 have been complied with. The notices required by statute have been published in the Gazette, an English language newspaper and a Chinese language newspaper. Arrangements were made to ensure that copies of the petition and the independent actuary’s report were open for inspection at the offices of the petitioners.

The objections received

14.  Out of more than 40,000 policyholders of Winterthur HK, 217 have contacted Winterthur HK up to 14 June 2005 with regard to the Scheme. Almost all of the enquiries have been made by telephone and have been dealt with by Winterthur HK over the telephone by giving the answers set out in the questions and answers document sent to the policyholders earlier. The principal concerns have been the reasons of Winterthur Life for wanting to transfer the long term business to WLHK and the extent to which the rights and benefits of policyholders may be affected by the transfer.

15.  Five written objections to the Scheme have been received by letter and two policyholders have made inquiries by their insurance brokers by e-mail. In each case, the petitioners’ solicitors have responded in writing addressing each of the objections and inquiries. One policyholder has filed an affirmation opposing sanction of the Scheme. Shortly before the hearing, two further written objections were received. Due to the lateness of these objections, the petitioners’ solicitors have not responded to them by letter.

16.  Ten policyholders gave notice of their intention to attend the hearing of the petition and to oppose sanction of the Scheme. Under section 24(5), any person, including any employee of the transferor company or the transferee company, who alleges that he would be adversely affected by the carrying out of the scheme, is entitled to be heard. At the hearing, I heard submissions from five policyholders who have attended. Before I go into the grounds of opposition, I should first set out the function and approach of the court in an application for sanction under section 24.

The approach of the court

17.  Section 24 of Cap. 41 is based on the former section 49 of the Insurance Companies Act 1982 in the United Kingdom. Although this provision has been amended, the amendments do not make any material difference as regards the function and approach of the court in the exercise of its power under this provision. The leading authority in this respect is the judgment of Hoffmann J (as he then was) in Re London Life Association Ltd., 21 February 1989, unreported. The principles to be derived from that judgment have been helpfully summarised by Evans-Lombe J in Re AXA Equity and Law Life Assurance Society plc [2001] 2 BCLC 447 at 468e to 469b:

“	[6]	It seems to me that the following principles emerge from the judgment of Hoffmann J which should govern the approach of the court to applications of this type. I gratefully adopt those principles. They are:
		(1)	The 1982 Act confers an absolute discretion on the court whether or not to sanction a scheme but this is a discretion which 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 whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.
		(3)	This 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 implemented. For the purpose of this comparison the 1982 Act assigns an important role to the independent actuary to whose report the court will give close attention.
		(4)	The FSA [the Financial Services Authority; the Hong Kong equivalent is the Insurance Authority] by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the court will pay close attention to any views expressed by the FSA.
		(5)	That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.
		(6)	It is not the function of the court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the court may deem fair, it is the company's directors' choice which to pursue.
		(7)	Under the same principle the details of the scheme are not a matter for the court provided that the scheme as a whole is found to be fair. Thus the court will not amend the scheme because it thinks that individual provisions could be improved upon.
		(8)	It seems to me to follow from the above and in particular paras (2), (3) and (5) that the court, in arriving at its conclusion, should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect.”

18.  With the above guiding principles, I turn to consider the objections raised by some of the policyholders. They may be grouped under the broad headings set out below.

Rights and benefits of Winterthur HK policyholders

19.  A number of policyholders have objected to the Scheme on the basis that it will have an adverse impact on their rights and benefits.

20.  All the rights and benefits under the Winterthur HK policies will be transferred to WLHK without amendment, except for the specific changes identified in the Scheme and which I have mentioned earlier. The independent actuary has confirmed that taking account of all changes, the benefit expectations, security and level of service enjoyed by Winterthur HK policyholders will not be materially adversely affected by the Scheme.

Transfer without the consent of Winterthur HK policyholders

21.  Some of the policyholders contended that it ought not to be permitted for one party to an insurance policy to change that contract (by substituting WLHK for Winterthur Life) without the consent of the other party (the Winterthur HK policyholders).

22.  The short answer to this is that this transfer of long term business is permissible under section 24 of Cap. 41. The court has power under that provision to sanction a scheme transferring insurance policies from one authorised insurer to another, subject to certain conditions, designed to protect policyholders’ interest being met. As stated by Evans-Lombe J in Re Allied Dunbar Assurance plc [2005] EWHC 28 (Ch) at para. 28:

“Without more the management of a company or a group of companies is entitled to dispose of its assets and make provision for its liabilities in such way as that management thinks fit. In the case of insurance companies such management discretion is controlled by legislation, in this case, the Act [the provisions in the Financial Services and Markets Act 2000, which have replaced the Insurance Companies Act 1982]. However provided the regulatory controls imposed by the Act are met, management discretion remains.”

The independent actuary’s report

23.  One policyholder has raised objection on the basis that the independent actuary’s report only confirms that the transfer “should not materially adversely affect” the benefit, expectations or security of Winterthur HK policyholders, and argued that this means that the transfer may still bring about an adverse effect, leaving room for argument on its intensity and impact in terms of financial security and other related factors.

24.  A similar objection was raised in Re Allied Dunbar Assurance plc, supra. and was rejected at para. 20. I take a similar view that the report, which was couched in professional language, does not indicate any lack of confidence in the opinion given. On a fair reading of the report, the independent actuary has identified and considered a number of issues that Winterthur HK policyholders might be concerned would materially adversely impact on their security and concluded that they will not.

25.  Another policyholder has suggested that the independent actuary may not be independent and requested the court to appoint another actuary to provide a report. As no or no valid basis was given for his suggestion, I see no reason to doubt the independence of the actuary.

Enquiries to be made of the Insurance Authority

26.  One policyholder has requested the court to make enquiries of the Insurance Authority and direct the latter to provide a report giving an analysis on the impact of the Scheme on the policyholders and that a copy of this report is to be made available to the objecting policyholders to facilitate their making submissions in opposition.

27.  Under section 24(5), the Insurance Authority is entitled to be heard on any petition under this provision. It is up to the Insurance Authority to make such submissions or provide such evidence as it thinks appropriate. Here, the Insurance Authority has been consulted by the petitioners throughout the statutory procedure and made an informed decision to raise no objection to the transfer. I see no basis for requesting a report from the Insurance Authority in this situation.

The financial position of WLHK

28.  Several policyholders have objected on the basis that they purchased their policy from Winterthur Life because it was a financially sound insurance company and part of the Credit Suisse Group and do not wish their policies to be transferred to any other subsidiary.

29.  The petitioners have made these points in reply:

(1)	WLHK is a wholly owned subsidiary of Winterthur Life and is also part of the Credit Suisse Group.
(2)	The Insurance Authority has issued WLHK with an approval in principle to carry on life insurance business in Hong Kong in the necessary classes of business. For such approval to be issued, the Insurance Authority has to be satisfied that WLHK complies with the same statutory financial requirements as those currently satisfied by Winterthur Life in order to maintain its authorisation to carry on these types of insurance business in Hong Kong, including the statutory minimum margin of solvency (“the Statutory Solvency Margin”). As stressed in the independent actuary’s report, no amount of capital can provide absolute security to policyholders in all foreseeable circumstances. The Insurance Authority, in its regulation and supervision of the insurance industry in Hong Kong for the protection of policyholders, has adopted a guideline of 150% of the Statutory Solvency Margin as the benchmark for adequate security for policyholders of ongoing life insurance business in Hong Kong.
(3)	Winterthur Life has consulted with the Insurance Authority throughout the statutory procedure for the court’s sanction of the Scheme and WLHK’s application to become an authorised life insurer in Hong Kong in its own right. The Insurance Authority has confirmed that it requires WLHK to have a solvency margin of 150% of the Statutory Solvency Margin and no more.
(4)	As stated in the independent actuary’s report, had the Scheme taken place as at 31 December 2004, WLHK would have had a solvency margin of 298%. In May 2005, Winterthur Life injected a further HK$120 million as part of the Scheme, thus further strengthening the solvency position to 463% had the Scheme taken place as at 31 December 2004.

30.  I ought to give significant weight to the opinion of the independent actuary, who has taken this issue into account and concluded that the security of the policyholders will not be materially adversely affected by the Scheme in excess of the 150% of the Statutory Solvency Margin recommended by the Insurance Authority. I also attach great weight to the fact that the Insurance Authority, which can be expected to have the necessary material and expertise to form an informed opinion on whether the policyholders are likely to be adversely affected, has confirmed that WLHK is required to have a solvency margin of 150% of the Statutory Solvency Margin and no more. It does not appear to me that the Scheme, taken as a whole, is unfair to the policyholders of Winterthur HK.

Reduction in the solvency margin

31.  Some policyholders have objected on the basis that WLHK’s solvency margin may be less than that of Winterthur Life.

32.  A similar objection was taken in Norwich Union Linked Life Assurance Ltd & Ors. [2004] EWHC 2802 and was rejected by Lindsay J for the following reasons:

“	[15]	As to the first part of that double complaint, firstly as an insurance company is in general free in the course of its business to annihilate or diminish the excess over the RMM [the Required Minimum Margin of solvency], to that extent there is no entitlement of a policyholder to cover beyond the RMM itself or to the maintenance of an existing RMM. Secondly, the RMM, determined according to EU rules and based on calculations of assets and liabilities following FSA [Financial Services Authority] Regulations, is intended to represent a practical level of policyholder safety. One can thus reduce the excess over the RMM without materially endangering security. Thirdly, whether any particular reduction in an excess over RMM represents a material disadvantage to any policyholder is a matter for expert actuarial and accounting assessment. Here the Independent Expert whilst, as one might expect, using slightly different language as to different funds and as to guaranteed benefits or benefit expectations, has concluded that no-one sufferers by the Scheme to a material extent; there would be no discernible impact, he says, on security; there was no reason to believe that there would be any adverse affect.
	[16]	There is no reason whatsoever to mistrust the Independent Expert's conclusions. No evidence put before me queries his conclusions in an informed way. Thus, as between policyholders, it is hard to see why the Scheme should be categorised as unfair where the consequent (but possibly impermanent) improvement in respect of the RMM excess available to some policyholders is procured without there being any material disadvantage to the other policyholders.”

33.  I would adopt the same reasoning in rejecting this ground of objection. Policyholders have no entitlement to cover in excess of the Statutory Solvency Margin and certainly not to cover in excess of 150% of the Statutory Solvency Margin. An authorised insurer in Hong Kong is free to utilize or dispose of its assets maintained over and above the Statutory Solvency Margin. The independent actuary has concluded that WLHK will, on all future scenarios envisaged under the Dynamic Solvency Test, have a solvency margin in excess of 150% of the Statutory Solvency Margin and that the security of no policyholder suffers by the Scheme to a material extent.

No opt out or return of premiums

34.  Several policyholders have objected on the basis that the Scheme makes no provision for them to opt out of the transfer of their policies or for a return of premiums for those who do not agree to such a transfer.

35.  A similar complaint was rejected in para. 26 of Norwich Union Linked Life Assurance Ltd., supra. I would adopt the same reasoning. As stated by Lindsay J:

“It is no part of the Court’s duty when considering whether or not to sanction a scheme to consider whether in this particular or that its provisions might be improved. Unless failure to provide an opt-out goes to the basic question of fairness, which in my view it does not, then the complaint that no opt-out is provided is not such as to jeopardise the sanctioning of the Scheme.”

Change in governing law

36.  Several policyholders have objected to the change in the governing law of the transferred policies from Swiss law to Hong Kong law. None of them have pointed to any specific provision due to the change in governing law as would materially affect their rights and entitlement under their policies. The petitioners are not aware of any more favourable provision of Swiss law or less favourable provision under Hong Kong law.

37.  The main reason for the change in governing law is because when the Scheme becomes effective, the transferred policies will be deemed to be issued by WLHK, which is a company incorporated in Hong Kong. The management regards it more appropriate for WLHK to have its policies governed by Hong Kong law, which has a well developed common law system that protects the rights of contracting parties and provides for disputes to be resolved through the courts presided over by an independent judiciary. WLHK is not seeking to avoid any provision of Swiss law that is more favourable to policyholders or import into the policies any provision of Hong Kong law that is less favourable to policyholders. Winterthur Life considers the change in governing law to be to the advantage of Winterthur HK policyholders as it would be more difficult and costly for Hong Kong courts to resolve disputes over contracts governed by Swiss law or for such disputes to be resolved by the courts in Switzerland. The courts of Hong Kong would be the most convenient forum for the majority of the policyholders.

38.  I do not think any or any substantial unfairness has been made out in this respect.

Confidence in the management of WLHK

39.  One policyholder, who used to be an insurance agent of Winterthur Life, has objected on the basis he has no confidence in the management of WLHK, which will be the same as the management of Winterthur HK. This has been adequately addressed in the reply of the petitioners’ solicitors by letter. There is no substance in this. He has also queried the calculations produced by the management for the performance of underlying funds. I do not think this is a material consideration.

Conclusion

40.  For the above reasons, I have exercised my discretion to sanction the Scheme and approved an order in terms of the draft submitted as amended.