Re Transamerica Life Insurance Co

HCMP 2872/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2872 OF 2012

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J U D G M E N T

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1.This is a petition presented jointly by Transamerica Life Insurance Company (“TLIC”) and Transamerica Life (Bermuda) Limited (“TLB”) on 21 December 2012 under section 24 of the Insurance Companies Ordinance (Cap 41) (“Ordinance”) seeking sanction of a scheme (“Scheme”) for the transfer of the whole of the long term business (as defined in section 2(1) of the Ordinance) (“Long Term Business”) currently carried on by TLIC’s branch in Hong Kong from TLIC to TLB.

The Companies

2.TLIC is a company incorporated under the laws of the State of Wisconsin, the U.S. on 19 April 1961 as a company limited by shares.  The company subsequently changed its domiciliary state to the State of Iowa.  Its objects are, inter alia, to transact in the U.S. (excluding the State of New York and the District of Columbia) and elsewhere life assurance business and reinsurance business.  Since 1 January 1991, the company has been using its current name.  TLIC’s paid-up capital is US$8,358,440, all of which is beneficially owned by AEGON N.V., a company organized under the laws of The Netherlands.

3.TLB is a company incorporated under the laws of Bermuda on 27 March 2005 as a company limited by shares.  Its objects are to carry on outside Bermuda from a principal place of business in Bermuda the business of long term insurance and other objects set forth in its memorandum and articles of association.  TLB’s present paid-up capital is US$40,000,000, all of which is beneficially owned by TLIC.

4.Both TLIC and TLB (together “the Companies”) are insurance companies to which Part II of the Ordinance applies.  They are registered as non-Hong Kong companies under Part XI of the Companies Ordinance (Cap. 32) and have their principal Hong Kong offices at 58^th Floor, One Island East, 18 Wetlands Road.  There is no dispute that TLIC and TLB are subject to the regulatory control of the Insurance Authority.

5.By a scheme sanctioned by the Hong Kong Court on 11 December 2006 under section 24 of the Ordinance (“2006 Scheme”), part of the Long Term Business then carried on in or from Hong Kong by Transamerica Occidental Life Insurance Company (“TOLIC”), a company domiciled in the U.S. and registered under Part XI of the Companies Ordinance (Cap. 32), was transferred to TLB. 

6.By another scheme sanctioned by the Hong Kong Court on 24 September 2008 under section 24 of the Ordinance (“2008 Scheme”), all the Long Term Business of TOLIC then carried on in or from Hong Kong was transferred to TLIC.

7.TOLIC was later merged into and with TLIC pursuant to a merger agreement dated 1 October 2008 made under and in accordance with the laws of the State of Iowa in the U.S.

8.TLIC is authorized by the Insurance Authority to carry on class A and class C of Long Term Business in or from Hong Kong subject to a restriction that TLIC is not authorized to effect new contracts of insurance in or from Hong Kong in respect of such classes, but excluding (a) contracts of reinsurance accepted in respect of class A, (b) contracts of reinsurance ceded in respect of classes A and C, and (c) contracts of insurance and reinsurance effected as a result of the exercise of an option or right under any of the insurance and reinsurance contracts included under the 2008 Scheme.

9.TLB is authorized by the Insurance Authority to carry on class A and class C of the Long Term Business in or from Hong Kong, which authorization is restricted to the specific purpose for the run-off of the closed block of such class of Long Term Business included under the 2006 Scheme, and TLB is not authorized to effect new contracts of insurance, including contracts of reinsurance accepted but excluding contracts of reinsurance ceded, in or from Hong Kong in respect of such class.  TLB is also authorized by the regulatory authorities in Singapore and Bermuda to transact life insurance business of the same class as the Transferred Policies.

10.On 1 March 2013, the Insurance Authority authorized TLB to carry on class D business and amended the restrictions on class C authorization, so that TLB is (a) only authorized for the specific purpose of the run-off of closed blocks of class C business carried on in or from Hong Kong by TOLIC and TLIC, and (b) not authorized to effect any new contracts of insurance, including contracts of reinsurance accepted by excluding contracts of reinsurance ceded, in or from Hong Kong.  The amendments are necessary to ensure that TLB has the requisite approval to carry out those policies to be transferred from TLIC to TLB under the Scheme which fall under class C.

The Scheme

11.The objects of the Scheme, as explained in the Petition and the Affidavit of Cheryl Finney, the then chief executive of TLIC and TLB, are to transfer from TLIC to TLB all the Long Term Business presently carried on by TLIC in or from Hong Kong, and obtain ancillary relief under section 25 of the Ordinance.  The purpose of the transfer is intended to provide greater efficiencies, more flexibility in the use of capital and reduce the costs in relation to operating two insurers authorized to carry on the same classes of Long Term Business in Hong Kong, as TLIC has determined that it is not economical to maintain a branch in Hong Kong.  

12.As at 31 December 2011, there were 13,088,611 ordinary life insurance policies, contracts of insurance and other Long Term Business (including contracts of reinsurance) issued or entered into by TLIC or otherwise impose on TLIC obligations the performance of which constitutes the carrying on of Long Term Business by TLIC (“TLIC Policies”).

13.The TLIC Policies proposed to be transferred from TLIC to TLB under the Scheme is defined as the “Transferred Policies”, being “all policies, contracts of insurance and all other Long Term Business (including any reinsurance) whether issued or entered into by TLIC or otherwise which imposes on TLIC obligations the performance of which constitutes the carrying on of Long Term Business in or from Hong Kong by TLIC, including without limitation those policies with numbers listed in Schedule 1”.

14.As at 31 December 2011, there were 868 Transferred Policies which represented 0.00663% of TLIC Policies. As at 30 September 2012, there were 814 Transferred Policies. The total gross sum assured by the direct insurance policies (excluding annuities) was approximately US$947,898,601.  Amongst the Transferred Policies:

(1) 810 are direct insurance policies and 4 are reinsurance treaties;

(2) 33 policies entitle the holders to participate in the profits of TLIC, while the remaining 781 policies carry no rights to participate in the profits of TLIC; and

(3) 9 are under class C and the remaining 805 are within class A.

15.There is no dispute that most of the holders of the direct Transferred Policies are U.S. citizens.

16.As for TLB, as at 31 December 2011, there were 26,885 ordinary life insurance policies, contracts of insurance and other long term business (including contracts of reinsurance) whether issued or entered into by TLB or otherwise which impose on TLB obligations the performance of which constitute the carrying on of long term business by TLB (“TLB Policies”). Amongst the TLB Policies, 24,823 (or 92.33%) constitute the carrying on of Long Term Business in or from Hong Kong and are recorded on its Hong Kong register.

17.Under the Scheme, TLIC shall on the Effective Date[1] transfer assets held in its long term business fund or any sub-fund, as required to be maintained in respect of its long term business or life insurance business pursuant to the governing laws applicable in the relevant jurisdiction (“LTB Fund”) with a value not less than the greater of:

(1) the sum of the minimum amount of assets required under the Ordinance to meet the amount of its liabilities in respect of its Long Term Business carried on in or from Hong Kong and the statutory solvency margin in respect of such business; and

(2) the reserves which TLIC’s actuary determines are required as at such time to satisfy the liabilities under the Transferred Policies, having regard to the statutory solvency margin and the reasonable expectations of the holders of the Transferred Policies.

18.The above assets to be transferred from TLIC to TLB are defined as “Transferred Assets” in the Scheme.  Upon the Scheme becoming effective, the Transferred Assets shall be allocated to TLB’s LTB Fund, and all the rights and liabilities attributable to the Transferred Policies and the Transferred Assets which remain undischarged as at the Effective Date shall be allocated to and discharged out of the TLB’s LTB Fund.

19.The Scheme does not provide any right or option for the holders of the Transferred Policies to opt out of their policies. 

20.Under the Scheme, the Companies have agreed on the following arrangements to ensure that the holders of the Transferred Policies will not be adversely affected by the transfer.

21.First, TLB will file the necessary tax returns and pay the U.S. excise tax (currently at 1% per annum) at no cost to the holders of the Transferred Policies. According to the Companies, this excise tax is payable on the premia payable by the policyholders to a non-U.S. issuer.

22.Second, TLIC will issue a claims payment guarantee to each holder of the Transferred Policies whereby TLIC will agree, to the extent permitted by applicable insolvency laws, to pay directly to the holder of the Transferred Policies or to the named beneficiary the amount of a valid claim in accordance with the terms of the such Transferred Policies if TLB fails to pay such valid claim solely by reason of becoming insolvent (as defined by Bermuda law) (“Claims Payment Guarantee”).  The Claims Payment Guarantee is unlimited in time and cannot be terminated by TLIC unilaterally.

23.Third, TLIC has entered into a Tangible Net Worth Maintenance Agreement with TLB (“Maintenance Agreement”) whereby TLIC will provide capital and surplus contributions to TLB to ensure that TLB will at all times maintain its capital levels at least at the greater of:

(1) 165% of the risk based capital as determined by Standard & Poor’s in accordance with the relevant formula; and

(2) the minimum required by the regulatory authorities in all jurisdictions in which TLB operates.

24.However, although not so stated in the Scheme[2], TLIC has the right to terminate the Maintenance Agreement upon giving 30 days’ written notice to TLB, provided that:

(1) TLB is able to attain a rating from Standard & Poor’s without consideration of the support provided by the Maintenance Agreement which is the same as or better than the rating of TLB with the support of the Maintenance Agreement; or

(2) TLB is transferred or sold or its entire book of business is transferred, provided that it is sold or transferred to an entity with a rating from Standard & Poor’s which is the same as or better than TLIC’s then rating or AA whichever is lower.

25.The effect the provisos is that TLIC cannot terminate the Maintenance Agreement unless either TLB on its own achieves a rating from Standard & Poor’s which is at least as high as that of TLIC, or that TLB or its entire book of business is transferred to another entity whose rating is as least as high as that of TLIC.  As any transfer by TLB of the Transferred Policies to another entity will be subject to TLB obtaining the sanction of the Court pursuant to section 24 of the Ordinance, if there is any concern regarding the financial position of the proposed transferee, the holders of the Transferred Policies may raise their objection there and then.

26.Fourth, TLB shall maintain not less than the minimum amount of assets required under the Ordinance to meet the liabilities in respect of its Long Term Business carried on in or from Hong Kong and elsewhere, and shall maintain the specified margins of insolvency in excess of those liabilities to support such Long Term Business carried on in or from Hong Kong and elsewhere.

27.Fifth, with effect from the Effective Date, all dividends, credited rates, premium rates or charges under the Transferred Policies, insofar as they can be varied or determined at the sole discretion of TLIC, TLB shall for a period of 10 years exercise such discretion at the same level or to the same extent as TLIC.  After 10 years, TLB shall exercise its discretion using similar setting practices and methodologies to those used by TLIC in varying or determining such dividends, credited rates, premium rates or charges under the Transferred Policies.  This is to ensure that TLB shall exercise its discretion under the Transferred Policies in the same manner as TLIC.

28.Sixth, as regards any Transferred Policies which prior to the Effective Date provided the holders with a right to convert their policies into another policy of TLIC, from the Effective Date, every holder of the Transferred Policies shall be entitled to exercise the same conversion right against TLB in substitution for TLIC.  For this purpose, TLB shall offer a range of insurance policies comparable to those offered by TLIC as at the Effective Date to which a holder of the Transferred Policies would have been entitled to convert.  

29.Seventh, TLIC declares itself trustee for TLB, with effect from the Effective Date, in respect of any of the Transferred Assets which are not or not capable of being transferred to TLB by any vesting order pursuant to section 25 of the Ordinance.

30.Eighth, all costs and expenses incurred by TLIC and TLB arising from or in connection with the preparation of the Scheme and the transactions contemplated by or relating to the Scheme shall be borne by TLIC out of its assets (other than from its LTB Fund).

Statutory Requirements

31.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 insurer is to be transferred to another insurer, the transferor company or transferee company may apply to the Court of First Instance by petition for an order sanctioning the scheme. 

32.Section 24(2) of the Ordinance provides that the Court shall not determine the application unless the petition is accompanied by a report on the terms of the scheme by an independent actuary and the Court is satisfied that the requirements of notices and service prescribed by section 24(3) have been complied with (or dispensed with, if the Court so directs).

33.Under section 24(6), 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, authorized to carry on any Long Term Business to be transferred under the scheme.  

34.Section 24(5) of the Ordinance provides that on the petition, the Insurance Authority and any person (including employee of the transferor company or the transferee company) who alleges that he would be adversely affected by the carrying out of the scheme, shall be entitled to be heard.

35.The statutory requirements have been satisfied here.

36.The Petition is supported by a Report prepared by an Independent Actuary, Mr Feike Boschma, dated 21 December 2012 (“Report”). In preparing the Report, Mr Boschma has reviewed the documents and information pertaining to TLIC, TLB and the Scheme and had discussions with the management of TLIC and TLB.  In his Report, Mr Boschma has considered the likely effect of the Scheme on the holders of the Transferred Policies as well as the other policyholders of TLIC and TLB by comparing their contractual rights and reasonable expectations before and after the transfer.  Overall, it is Mr Boschma’s opinion that no group of policyholders will be materially adversely affected as a result of the transfer of the Transferred Policies and the Transferred Assets.  

37.Pursuant to the Order of Mimmie Chan J made on 11 January 2013, the notices of the petition was gazetted and published in newspapers and the statement setting out the terms of the Scheme and a summary of the Report were sent to each of the holders of the Transferred Policies and to members of TLIC and TLB.  In the case of the policyholders, a copy of the notice of the petition and the Questions and Answers about the Transfer were also provided.  Moreover, copies of the petition and the Report were made available for inspection at the offices of TLIC and TLB.

38.As stated above, on 1 March 2013, TLB obtained the approval from the Insurance Authority to amend the restriction then imposed on its authorization in respect of class C business and is now permitted to carry out those Transferred Policies which fall under class C.

Hearing

39.Out of the 814 Transferred Policies, TLIC and TLB received 242 enquiries relating to the Scheme and the proposed transfer of the Transferred Policies, which were dealt with by the staff and management of TLIC and TLB.  According to the Second Affirmation of David Goldstein, the Senior Vice President and Division General Counsel of TLIC and Chief Legal Officer of TLB, all but 4 of the enquiries have been addressed to the apparent satisfaction of the enquirers.

40.Amongst the 4 enquirers, 2 of them are policyholders while the others are from Charles Monat Associates Ltd (“CMA”), an authorized insurance broker in Hong Kong, which it is said represents a number of policyholders in the U.S. and Mr Charles S Monat (“Mr Monat”), who is a policyholder residing in Hong Kong.  Their written objections had been sent to TLIC and TLB, and the relevant correspondence were provided to the Court.  Another written objection from a policyholder who appears to be residing in Hong Kong was handed to the court on the day of the hearing.  There is no dispute that they are holders of the Transferred Policies and, therefore, have interest in the proposed transfer under the Scheme.

41.Only Mr Monat appeared at the hearing to elaborate on his grounds of objection.  He was cross-examined by Mr John Scott SC, leading counsel for TLIC and TLB.

42.Mr Boschma also gave evidence in Court.  Further questions were put by Mr Scott SC to Mr Boschma, most of which were directed to the grounds of objections raised by the opposing policyholders.  Except for the possible impact on the tax liability of U.S. policyholders as a result of the transfer of the Transferred Policies which Mr Boschma considered to be beyond his expertise, Mr Boschma confirmed that his opinion expressed in the Report remained unchanged. 

43.The Insurance Authority, through Mr Louie Wong’s skeleton submissions, indicated that having considered the relevant documents in particular the Report, it has no objection to the Scheme.  The Insurance Authority observed that most of the objections and concerns raised by the policyholders (as discussed below) are of similar nature to the objections raised in Re Winterhur Life (supra), Re Transamerica Occidental Life Insurance Company (supra) and Re AXA (supra), and confirmed that these objections or concerns did not cause it to change his view on the Scheme.

Applicable Principles

44.The approach of the Court in considering a petition under section 24 of the Ordinance was explained by Kwan J (as she then was) in Re Winterthur Life [2005] 4 HKLRD 313, which has since been consistently applied by the court in Re Sun Life Financial (Hong Kong) Ltd [2006] 4 HKLRD 369 (per Kwan J), Re CIGNA Worldwide Insurance Company, HCMP 1039 of 2006, 8 September 2006 (per Kwan J), Re Transamerica Occidental Life Insurance Company, HCMP 2132 of 2006, 3 January 2007 (per Poon J) and Re AXA (Hong Kong) Life Insurance Company Limited, HCMP 1647 of 2012, 16 October 2012 (per Barma J (as he then was)).

45.In Re Winterthur Life, Kwan J said (at §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.’”

46.It is important to bear in mind that a scheme under s.24 of the Ordinance, once sanctioned by the Court, will become binding on the transferor company, the transferee company and the policyholders affected by the transfer.  So far as the policyholders are concerned, there will be a change in the identity of the insurer and other consequential changes in the rights and obligations as between the insurer and the policyholders.  Other than that, one would expect the terms of the policies would not be changed by such a scheme, particularly when the policyholders do not have any right or option to opt out of the scheme.  This is in my mind a matter of some import as unlike a scheme under s.166 of the Companies Ordinance, which requires the agreement of a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members (as the case may be) present and voting at a court-convened meeting before the court will consider whether to sanction the scheme, there is no such requirement under s.24 of the Ordinance.  Indeed, it is clear that the consent of the policyholders is not a statutory requirement prescribed in s.24 of the Ordinance.  Nor is it a pertinent consideration when the court considers whether the scheme is one which should be sanctioned.  

47.As the cases discussed in paragraphs 44 and 45 above demonstrate, the function of the Court is to see if any person will be adversely affected by the carrying out of the scheme, and whether the scheme as a whole is fair as between the interests of the different classes of persons affected.  I venture to suggest that where, as here, the purpose of the scheme is to advance a commercial purpose or benefit for the transferor company and there is no corresponding benefit to the policyholders, the court would be particularly vigilant in considering the contractual rights and reasonable expectations of policyholders 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, and due regard would be given to the objections raised by the policyholders and the opinion of the independent actuary.

48.With the above principles in mind, I turn to consider the objections raised by some of the policyholders.

The Objections Raised

49.Written objections were raised by the following policyholders:

(1) Ms Diane Powers who, in her email dated 20 February 2013 to TLIC and TLB, stated that she “strongly object” to the transfer of her policy and the change in identity of the insurer.

(2) Mr Gideon Asher raised his objections in a letter dated 18 February 2013 to the Court and another letter dated 6 March 2013 to TLIC.  In his letters, Mr Asher, on behalf of himself and his sisters who it is said hold various universal life insurance policies issued by TLIC, stated that:

(a)  the transfer would only benefit TLIC but has little, if any, benefit to the policyholders;

(b)  notwithstanding the Maintenance Agreement, there is a significant reduction in the level of financial support provided to policyholders as TLIC has “paid-up capital” of US$8.4 billion, but TLB’s paid-up capital is only US$40 million;

(c)  Mr Boschma’s opinion on the Scheme is “weak” in that in respect of the financial security, the future expectations of the policies with discretionary elements and the allocation of costs and other rights, he opined that there is no material adverse impact on the policyholders. In so stating, he must have considered that the Scheme would adversely affect the rights of the policyholders albeit not material.

(d)  TLB admittedly has higher per policy expense than TLIC. Although TLIC and TLB currently use combined data to calculate the discretionary benefits and the per policy expense ratio, which will continue for a period of 10 years under the Scheme, there is no commitment that such practice will continue after 10 years.  Moreover, in view of TLIC’s size, it is likely that its investment managers will receive more exclusive investment opportunities as well as better pricing on asset trades than other insurers.  The policyholders are therefore “exposed to the investment policies and decisions of TLB, as well as the higher per policy operating expenses”.

(e)  The policies were purchased on the basis that they were issued by a U.S. issuer.  There is no reason why the policyholders should be forced to assume “the risk of regulatory and tax changes related to insurance policies issued by a Bermudan insurance company”.  Apart from the reference to the 1% excise tax, the Scheme is silent on whether there are other expenses that the policyholders may need to bear now or in the future.

(f)  Many of the contractual protections provided by TLIC and TLB are limited in time.  There is no provision “to deal with the potential for future changes in regulation, tax, or other law that would adversely affect policyholders relative to their position if the transfer did not take place”.

(g)  In light of the above, TLIC should provide “a blanket indemnification to TLB and its policyholders against possible future changes in regulation and tax treatment that would result in less favourable treatment of the Transferred Policies than would have been the case if they remained at TLIC” so as to maintain the current risk profile of the policyholders.  

(3)    CMA, on behalf of Mr Monat and “a substantial number of affected policy holders” which are said to be its clients, in its 2 letters dated 20 February 2013 and 7 March 2013 raised the following objections:

(a)  The policyholders purchased their policies with a view to enjoy the benefits of a U.S. domestic policy.

(b)  After the transfer, the policyholders will no longer have a U.S. policy to use as collateral security in the U.S.

(c)  Under the Transferred Policies the holders have the right to convert their policies into other policies issued by TLIC at the same rate as the original policies.  After the transfer, the holders will only have the right to convert their policies into other products issued and made available by TLB.  Historically, TLB’s products are more expensive than TLIC’s products.  There is no guarantee provided by TLIC and TLB that the products made available for conversion will be at least as favourable as those made available to TLIC’s policyholders.

(d)  It is not clear that if the 1% excise tax would be payable upon the policyholders exercising their right to convert into TLB’s products, and whether such tax would be paid by TLB.

(e)  The policyholders are concerned about the solvency and credit worthiness, reliability and claims paying ability of the entity responsible for their policies.  Also, if TLB are to on-sell the Transferred Policies, the policyholders will be “completely deprived of any guarantee from TLIC”.

(f)  Mr Monat at the hearing also expressed his concern that the policyholders may thenceforth be deprived of their right to litigate in the U.S. in the event that they have dispute with the issuer as they may be forced to litigate in Bermuda.

(4)    Lastly, Mr Richard Latker in his letter handed to the Court immediately before the hearing, stated that he objected to the Scheme on the grounds that:

(a)   The practical effect of the Scheme is to remove the aggrieved policyholders’ option to appeal to the U.S. regulators for relief, and to require the policyholders to litigate in Bermuda which it is said is “practically inaccessible jurisdiction for the typical individual policy holder”.

(b)   Bermuda “has long served as a sort of dumping ground for financial liabilities”.  If TLB goes into liquidation after the transfer, it will have greater ability to avoid its obligations to the policyholders and beneficiaries.

(c)   TLIC’s premiums and pricing were set in accordance with the U.S. market which it is said will produce “significantly lower premiums than those prevailing in Hong Kong”.  The policyholders purchased their policies with the understanding that they have the right to convert their policies into other TLIC’s products based on such U.S. pricing.  After the transfer, the policyholders will only have the right to convert into TLB’s products which may be more limited and more expensive than the products of TLIC.

50.Before considering the merit of the objections raised, I will deal with a criticism made by Mr Scott SC against those policyholders who did not attend the hearing to elaborate on their objections.  Mr Scott SC said that these policyholders did not even dare to come to court to make good their objections.  I do not think that the criticism is right or justified.  This is because in the notice sent to the holders of the Transferred Policies, it was expressly stated that “[a]ny policy holder of TLIC or TLB or other person who dissents from the proposed Scheme but does not decide to appear on the Hearing of the Petition should give not less than seven clear days’ prior notice in writing of such dissent with the grounds thereof to TLIC or TLB as applicable”.  No doubt this was suggested by TLIC and TLB (fairly, in my view) to facilitate the policyholders to raise their objections should they wish to do so.  Having told the policyholders that they could raise their objections in writing, I do not think it is open to the Companies to criticise the non-appearance of any opposing policyholders, or to suggest that the court should give less weight to their objections as Mr Scott SC seems to suggest.

51.I turn to the substance of the objections.

Transfer without Consent of Policyholders

52.All dissenting policyholders object to the transfer.  However, as noted above, the transfer of Long Term Business is permissible under s.24 of the Ordinance subject to the compliance with the statutory requirements and the sanction of the court.  The consent of the policyholders is not required.  So long as the Court is satisfied that the regulatory controls and requirements imposed by the Ordinance are met and the contractual rights and reasonable expectations of the policyholders are not adversely affected, the management of the transferor company and transferee company is entitled to dispose of its assets and make provision for its liabilities as they think fit (see Re Winterhur, §22).

53.I therefore do not consider that the objection of the policyholders per se constitutes a separate ground of objection to the Scheme.

Financial Security of Policyholders

54.As regards the concern that TLB’s financial position is not as strong as TLIC or that the financial security of the policyholders may be adversely affected by the transfer, this is a matter which has been considered and addressed by Mr Boschma at length in the Report.

55.Mr Boschma considered that the financial security of the policyholders will not be materially adversely affected by the transfer in view of the following matters:

(1) According to TLB’s financial statements and financial projections, the assets held by TLB immediately after the transfer should be sufficient to support TLB for at least 5 years, and TLB will have sufficient assets to support the basic reserves, 150% of the statutory solvency margin and still have excess assets.

(2) As regards the Hong Kong business, TLB will retain and follow the existing reinsurance strategy of TLIC. It is expected that all existing reinsurance arrangements that cover the Transferred Policies and the Transferred Assets will be transferred to TLB.

56.Moreover, although TLB plans to expand its international business, it is expected that the expansion will be financed from TLB’s own resources and possibly, capital injection from TLIC.  For this purpose, TLIC has committed to ensure that TLB has sufficient capital through the Maintenance Agreement as well as the letter of undertaking given to the Insurance Authority, whereby it undertook to provide financial support to TLB (a) to pre-finance the capital requirements resulting from the growth of TLB’s business, and (b) to maintain TLB’s solvency position of 150% of the required margin of solvency applicable in Hong Kong (“Letter of Undertaking”).

57.Further, the Transferred Assets will not adversely affect the security and the discretionary benefits of the holders of the Transferred Policies in that:

(1) As at 31 December 2011, TLIC’s Hong Kong business had liabilities of about US$31.4 million and the minimum solvency margin of such business was US$4.1 million.  Based on these figures, TLIC will transfer assets with a value of at least US$35.5 million to TLB (i.e. the Transferred Assets).

(2) The nature of the Transferred Assets is assured by the Scheme.  Additional protection is provided by the Maintenance Agreement, the Claims Payment Guarantee and the Letter of Undertaking.

(3) TLB’s total assets as at 31 December 2011 amounted to US$1.9 billion, and the Transferred Assets only account for less than 2% of TLB’s assets.

(4) During the first 10 years after the transfer, the nature of the Transferred Assets will have no influence on the dividends and the credited rates for Transferred Policies.  After 10 years, the influence of the Transferred Assets on dividends and credited rates will likely be immaterial given the size of the Transferred Assets relative to TLB’s total assets.

58.I agree with the opinion of Mr Boschma.  It is clear that with the Maintenance Agreement and the Letter of Undertaking provided by TLIC, the financial position of TLB will not be affected by the transfer and, more importantly, TLIC will continue to provide the requisite capital and financial support to TLB as required by its business.  

59.In this regard, I note that the financial position of TLB was and remains strong.  According to TLB’s audited financial statements, as at 31 December 2011, its assets and liabilities were US$3,572,201,000 and US$2,923,744,000 respectively, leaving a surplus of US$648,457,000. TLB’s solvency ratio was 563%, which was well over the statutory solvency margin of 150%.

60.Although TLB had paid US$150 million as dividend to TLIC in October 2012, the solvency ratio remained at 439%.  This is confirmed by Mr Louie Wong on behalf of the Insurance Authority and Mr Boschma in his evidence.

61.In his evidence, Mr Monat agreed that TLIC and TLB have good reputation and record in terms of honouring payment and discharging their obligations.  However, he said that after the collapse of AIG in 2008, which then had a rating of AAA, the policyholders had become much more cautious and would be concerned about the possibility of an issuer becoming insolvent.

62.I agree that it is reasonable for the policyholders to be concerned about the risk associated with a change of the issuer particularly when the transferee is admittedly a smaller company both in terms of assets and scale of business.  However, it seems to me that with the Direct Payment Guarantee provided by TLIC, which is unlimited in time and cannot be terminated by TLIC, the right and expectation of the policyholders in receiving payment under their policies will be adequately protected.  This is because after the transfer, the policyholders will have a direct and enforceable claim against TLIC for payment in the event that TLB has become insolvent.  

63.For the above reasons, I do not think that there is any proper basis to doubt the financial position of TLB both before and after the transfer.  Nor do I consider that the financial security of the policyholders will be adversely affected by the transfer.  

Expectation on Discretionary Dividends and Charges

64.Mr Asher, Mr Monat and Mr Latker all raised the concern that the discretionary elements under the Transferred Policies might be changed after the transfer.  Such concern has been addressed comprehensively by Mr Boschma in his Report in respect of each discretionary element under each type of policies within the Transferred Policies.

65.In his view, Mr Boschma considered that the future benefit expectations of the holders of the Transferred Policies with discretionary elements will not be materially affected by the transfer for the following reasons:

(1) The Scheme provides that for those policies with benefits, premiums or charges which can be varied at the discretion of the insurer, TLB will provide identical benefits and will charge the premiums and expenses in the same manner as TLIC for 10 years after the Effective Date.  This is done on the basis that TLIC and TLB have been and will continue to use combined data when assessing and determining the future benefits, discretionary charges and premiums for similar policies.

(2) If after 10 years TLB’s per policy expense ratio is still higher than TLIC’s expense ratio, this may have little impact on credited rates, discretionary charges and renewal premiums.

(3) The costs associated with the transfer will not be included or taken into account in determining the discretionary dividends, benefits, credited rates, premium rates or charges under or in respect of the Transferred Policies.

66.I am satisfied that with the provisions of the Scheme, which require TLB to exercise its powers to vary or determine the discretionary elements under the Transferred Policies in the same manner and at the same rate as TLIC for a period of 10 years after the transfer, there will be no impact on the rights or reasonable expectations of the policyholders in so far as they relate to discretionary dividends or charges.

67.The real concern is what will happen after 10 years.  Mr Boschma opined that if after 10 years, the per policy expense ratio of TLB is higher than that of TLIC, the rights of the policyholders may be affected albeit not to a material extent.  When asked by the court to clarify what possible impact this would have on the policyholders, Mr Boschma explained that according to Mr Davis, TLIC’s appointed actuary and TLB’s approved actuary, the discretionary elements will be determined by actuaries in the U.S. using combined data and, therefore, the discretionary dividends and charges will be the same for TLIC and TLB.  Mr Davis  expected such practice to continue after the initial 10 years as under the Scheme, TLB is obliged to use similar setting practices and methodologies to those used by TLIC in varying or determining the discretionary dividends or charges, and can only change its practices and methodologies upon taking into consideration the reasonable expectations of the holders of the Transferred Policies.  In view of the small size of the Transferred Policies relative to TLB’s Policies, it is likely that after 10 years TLB will continue to use the same methodologies to determine the discretionary elements. Mr Boschma considered the explanation given by Mr Davis to be reasonable. 

68.I agree with Mr Boschma’s view.  In light of TLB’s obligation to use similar setting practices and methodologies as those used by TLIC after the initial 10 years, I am satisfied that the expectations of the policyholders on the future benefits and charges of the Transferred Policies will not be adversely affected by the transfer.

Expectation on Investment Management and Service

69.This relates to Mr Asher’s concern that TLB may not have the same quality of investment managers and opportunities as those available to TLIC.

70.So far as the service level is concerned, Mr Boschma opined that the expected future service level for the Transferred Policies will not be affected by the Scheme as all services in or from Hong Kong for TLIC and TLB are provided by the same staff under a Consulting and Administrative Service Agreement.  The inward reinsurance sold by TLIC to SCOR S.E. in 2011 and currently handled by a subsidiary of SCOR S.E. will continue until the relevant contracts are novated or cancelled.

71.Mr Boschma considered that there will not be any adverse impact on the policyholders in relation to the Transferred Assets and the future investment management of assets backing the liabilities of the Transferred Policies.  This is because the assets of TLIC and TLB are managed by the same investment manager, and the investment objectives and fundamental policies of TLIC and TLB under their respective Investment Management Agreement made with the investment manager are the same.

72.That being the position, I do not think that Mr Asher’s concern that the policyholders may be exposed to different investment policies and decisions after the transfer is valid.  

Prices for Conversion of Policies

73.The Companies do not dispute that historically TLB’s products are more expensive than TLIC’s products.  As there is no provision under the Scheme to ensure that after the transfer the policyholders will be able to convert their policies into other policies of TLB at the same prices as those offered by TLIC, it is legitimate for Mr Monat (and, indeed, other policyholders) to be concerned that their conversion right under the policies will be adversely affected by the transfer. At the hearing, Mr Monat emphasized that his key concern is to ensure that the price for conversion into other TLB’s policies will not be higher than the prices offered by TLIC.

74.The Companies accepted that this is a valid concern and proposes an undertaking to be given by TLB to the court and the holders of the Transferred Policies in the following terms:

“TLB undertakes that the range of policies to be offered by the Hong Kong Branch of TLB to Transferred Policyholders who convert an existing policy and take out a new policy upon such conversion will be similar in range of policies offered by TLIC at the time of such conversion and the policies will be on substantially similar terms and at substantially similar premiums to the policies offered by TLIC at that time.”

75.Mr Monat accepted that with this undertaking, the Companies had improved the position as regards the conversion rights of the policyholders under the Transferred Policies.  However, Mr Monat maintained that the undertaking is “not good enough” as “substantially similar” means that the prices may not be the same.  He considered that the undertaking should use wordings such as “not higher than the prices offered by TLIC”.  

76.I accept Mr Scott SC’s submission that the use of the words “substantially similar” are necessary as TLIC and TLB are different issuers and, as such, there are bound to be differences (however immaterial) in the terms of their policies including the prices (which will be denominated in different currencies).  

77.In my view, the wordings of this undertaking are sufficient to ensure that the prices to be charged by TLB for its policies available for conversion will not be higher than those charged by TLIC such that the conversion right under the Transferred Policies will not be adversely affected.

Use of Transferred Policies as Collateral

78.This relates to Mr Monat’s concern that after the transfer, the policyholders will not be able to use a U.S. policy as collateral security in the U.S.. In this regard, the Companies have made enquiries in the U.S. and confirm that a policy issued by TLB may be as well, if not better, received by banks as collateral security for loans.  This is not challenged by Mr Monat.  I do not think the policyholders will be adversely affected by not being able to use their policies as collateral in the U.S..

Legal and Regulatory System in Bermuda

79.Mr Asher, Mr Monat and Mr Latker considered that the legal and regulatory system in the U.S. are more sophisticated than those in Bermuda, and provide better protection to the policyholders.  They were also concerned that after the transfer, the policyholders will not be able to commence litigation against TLB in the U.S. should it become necessary to do so.

80.However, as rightly pointed out by Mr Scott SC, under the Scheme, all provisions relating to governing law and forum for litigation will not be changed.  The policyholders will remain able to commence and pursue litigation  in accordance with their existing contractual rights under the Transferred Policies.  

81.As to Mr Asher’s and Mr Latker’s assertion that the regulatory and legal system in Hong Kong and Bermuda are not as sophisticated or superior as those in the U.S., it does not seem to me to be well founded.  As Mr Boschma pointed out in his evidence, Bermuda is a recognized jurisdiction for insurance companies and its regulatory system enjoys international reputation.  In fact, many substantial insurance companies such as AXA and Manulife are Bermudian companies.

82.As to Mr Latker’s alleged difficulty in obtaining payment from a Bermuda-incorporated issuer in the event that TLB becomes insolvent, it does not seem to me to be well founded.  In any event, should TLB becomes insolvent and cannot make any payment due under the Transferred Policies, the policyholders can make a direct claim against TLIC under the Direct Payment Guarantee.

Tax Payable by Policyholders due to Change in Issuer’s Place of Incorporation

83.There is no dispute that as a result of the transfer, the policyholders and TFB will become jointly and severally liable to pay excise tax at 1% per annum.  Under the Scheme, TFB has agreed to file the necessary tax return and pay this excise tax at no cost to the policyholders.  I agree with Mr Boschma’s opinion that with this agreement, the policyholders will not be adversely impacted by the implications of U.S. excise tax associated with the transfer.

84.However, Mr Asher remained concerned about the risk that in future, other tax, charge or levy may be imposed on them (as U.S. citizens) on the basis that their policies were issued by a Bermuda issuer instead of an U.S. issuer. 

85.The Companies confirmed that they are not aware of any proposal or suggestion that the rate of excise tax (which had remained unchanged since 1959) might be changed in foreseeable future. Nor are they aware of any possible new tax, charge or levy that would be imposed on such policyholders in the future.  Mr Boschma confirmed that this is also his understanding.

86.When asked by the Court whether the Companies would provide any protection to the policyholders against any possible increase in liability to pay any tax as a result of the transfer, Mr Scott SC submitted that the Companies would not offer any “blanket indemnification” as suggested by Mr Asher as there is nothing to suggest that the policyholders will become liable for any other tax.  Mr Boschma said that he had never seen any “blanket indemnification” provided by the issuers.  However, as Mr Boschma admitted, he did not have any involvement in rendering opinion on a scheme involving a transfer of long term business from a U.S. issuer to a Bermuda issuer.  The Insurance Authority also confirmed that in a scheme it had reviewed which involved a transfer of Long Term Business from a U.S. issuer to a Bermuda issuer, there was no “blanket indemnification” in the scheme or the court order against any possible adverse tax changes in the U.S. given by the U.S. issuer to the Bermuda transferee company or its policyholders. 

87.Mr Scott SC emphasised that it is not the function of the Court to produce what it thinks is the best possible scheme or to amend the Scheme because it thinks that individual provisions could be improved on, relying on the ratio in Re Asher at §17 and Re AXA at §28. I have no doubt that this submission is correct.  However, it does not mean that where the Companies have decided not to offer any further protection to the policyholders in respect of their potential liability for tax, the court must accept their decision and sanction the Scheme. As the authorities show, the function of the Court is to consider whether the scheme as a whole is fair as between the interests of the different classes of persons affected, and will not approve the scheme if it is unfair or otherwise inimical to the interests of the policyholders (Re AXA, §27).

88.Mr Scott SC submitted that it would be “quite impractical and commercially unrealistic to require TLIC to provide open-ended protection against unknown and unforeseeable events by way of blanket indemnity”, relying on Barma J’s (as he then was) holding in Re AXA §26(3). I do not think that Re AXA supports the submission. In §26(3), Barma J declined to accept the suggestion that the view of the independent actuary should not be relied on, as he could not necessarily accurately predict future changes in economic conditions. I do not see how the possible changes in tax liability can be equated with future changes in economic conditions. In any event, as stated above, the concern over possible tax liability on the policyholders was not a matter which Mr Boschma felt able to provide any comment.   

89.The commercial rationale of the Scheme and the benefits to the Companies are clear. It is also clear that the Scheme does not confer any benefit to the policyholders.   In the circumstances, I do not think it is fair to leave the policyholders to be exposed to the risk of having to bear any increase in tax liability by reason of their policies being issued by a non-U.S. issuer.  

90.After the hearing, TLB proposes to offer a further undertaking to the effect that it will pay the excise tax “at the rate of 1% or such other rate as may be imposed on and during the life of the relevant Transferred Policy Holders”.  I accept that with this undertaking, the policyholders will not be exposed to the risk of any subsequent increase in the excise tax which may otherwise be borne by them.

91.This leaves the other tax which may be imposed on the policyholders by reason of their policies being issued by a non-U.S. issuer.  

92.I do not think that Mr Asher’s suggestion that the Companies should provide a “blanket indemnification” to be appropriate as it has the effect of requiring the Companies to indemnify the policyholders for tax liability which is not brought about by the Scheme.  It seems to me that to protect the rights and reasonable expectation of the holders of the Transferred Policies, it would be sufficient if TLB or TLIC agrees to indemnify the policyholders for any additional tax liability by reason only of their policies having been issued by a non-U.S. issuer. With this limited indemnity, the tax liability of the policyholders will not be affected by the transfer and change of issuer.    

Conclusion

93.Subject to and upon TLIC or TLB agreeing to provide the indemnity described in paragraph 92, I would exercise my discretion to sanction the Scheme.  If however the Companies do not agree to provide any such indemnity, I will dismiss the petition.  For this purpose, I give liberty to apply to the Companies within 7 days from the date of this Judgment.

94.As for costs, TLIC agree to pay the costs of the petition including the costs of the Insurance Authority to be taxed on a common fund basis if not agreed, and I so order.

95.Mr Monat confirmed that he would not seek costs against the Companies. No other dissenting policyholders have asked for costs. I make no order for costs in respect of the dissenting policyholders. 

Mr John Scott, SC, instructed by Edwards Wildman Palmer, for the petitioners

Mr Louie Wong, SGC, of the Department of Justice, forthe Insurance Authority

Policyholders:  Mr Charles S Monat appeared in person.

Mr Richard Latker was not represented and did not appear.

Ms Diane Powers was not represented and did not appear.

Mr Gideon Asher and his sisters were not represented and did not appear.