Re Axa China Region Insurance Co (Bermuda) Ltd and Another

HCMP 1271/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1271 OF 2015

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REASONS FOR DECISION

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Application

1.I have before me a petition issued by AXA China Region Insurance Company (Bermuda) Limited (“AXA CRIB”) and Principal Insurance Company (Hong Kong) Limited (“PIC”) seeking orders pursuant to section 24 of the Insurance Companies Ordinance, Cap 41 (“Ordinance”) sanctioning scheme to transfer from AXA CRIB to PIC the whole class G (retirement scheme management category I) and class H (retirement scheme management category II) long-term business carried on by AXA Crib in or from Hong Kong (“Scheme”) and an order pursuant to section 25 of the Ordinance providing for the implementation of the Scheme.

2.Section 24 of the Ordinance requires that any proposed transfer of long-term business, as defined in the Ordinance, must be sanctioned by the Court.  The section contains various requirements that must be met before this is possible.  The principal requirements are that the petition is accompanied by a report on the terms of the scheme by an independent actuary and that information concerning the Scheme is provided to those interested in it.  Section 25 of the Ordinance provides for the Court to make orders regulating the method of the transfer of long‑term business.

Background

3.AXA CRIB was incorporated in Bermuda on 18 April 1968 with its principal business activity being carrying on long term business. AXA CRIB is regulated in Bermuda by the Bermuda Monetary Authority (“BMA”) and is licensed as a class E insurance company under the Bermuda Insurance Act 1978 (“Act”). AXA CRIB is part of the AXA Group and is wholly-owned by AXA S.A. through intermediate shareholders. AXA S.A. is a public company under French law (Société Anonyme), incorporated in Paris, France, with consolidated shareholders’ equity of €65.2 billion, for the year ended 31 December 2014.

4.AXA CRIB is registered in Hong Kong as a non‑Hong Kong company under the Companies Ordinance, Cap 622.  AXA CRIB is an authorized insurer under the Ordinance with authorization to carry on long‑term business of class A (life and annuity), class C (linked long term), class D (permanent health), class G (retirement scheme management category I), class H (retirement scheme management category II) and class I (retirement scheme management category III), as set out in Part 2 of the First Schedule of the Ordinance, in or from Hong Kong. AXA CRIB is also authorised under the Ordinance to carry on the general business of classes 1 to 4, 7 to 10, 13, 15 to 17, as set out in Part 3 of the First Schedule of the Ordinance, in or from Hong Kong.

5.AXA CRIB owns and operates retirement fund businesses in Hong Kong, which includes the following mandatory provident fund (“MPF”) plan and non-MPF plans:

MPF plans:

(i) AXA MPF – Smart Plan (the “Smart Plan”)

Non-MPF plans:

(ii) AXA Central Provident Fund (the “AXA CPF”)

(iii) Hong Kong Council of Social Service Provident Fund and Life Insurance Plan (the “HKCSS PF”)

(iv) AXA China Region Agents Provident Fund (the “AXA Agents PF (CRI)”)

(v) AXA China Region Insurance Company (Bermuda) Limited Agents Provident Fund (the “AXA Agents PF (CRIB)”)

(vi) AXA China Region Insurance Company (Bermuda) Limited Staff Provident Fund (the “AXA Staff PF”)

(vii) Astec Provident Fund (the “Astec PF”)

(viii) ATV Provident Fund Scheme (the “ATV PF”)

[(i) is referred to as the “MPF Plan”, and (ii) to (viii) are referred to as the “Non-MPF Plans”]

6.All the MPF Plan and Non-MPF Plans are trust based, governed by Hong Kong laws, and are regulated by the Mandatory Provident Fund Schemes Authority (“MPFA”) and the Securities and Futures Commission (“SFC”). The trustee of the plans in (i) and (iii) to (vii) is AXA China Region Trustees Limited (“AXA CRT”). The trustee of the plan in (ii) is AXA China Region (Bermuda) Limited (“AXA CRB”). The trustees of the ATV PF in (viii) are persons nominated by the plan employer (“ATV Trustees”) and are non-AXA trustees. AXA CRIB owns, directly or indirectly through intermediate shareholders, all the issued share capital of AXA CRT and AXA CRB. Each of the MPF Plan and Non‑MPF Plans invests in one or more of the class G and class H policies issued by AXA CRIB.

7.As at 21 May 2015, the class G and class H long term business of AXA CRIB (the “Business”) in Hong Kong consists of 39 class G and class H policies, as detailed in the Schedule attached to the Scheme in Annexure 1 (the “Transferring Policies”, as defined in the Scheme). Each Transferring Policy is an investment held under a MPF Plan or a Non‑MPF Plan.

8.PIC was incorporated in Hong Kong on 11 July 1996.  PIC is wholly‑owned by Principal Financial Group, Inc. through intermediate shareholders. Principal Financial Group, Inc. is a publicly listed company incorporated in the U.S., with consolidated shareholders’ equity of US$10.184 billion as of the financial year ended on 31 December 2014.

9.PIC is an authorized insurer under the Ordinance with authorization to carry on long-term business of class A (life and annuity), class G (retirement scheme management category I) and class H (retirement scheme management category II), as set out in Part 2 of the First Schedule of the Ordinance, in or from Hong Kong. The registered office of PIC in Hong Kong is Unit 1001‑03, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. As at 21 May 2015, PIC has 13 class G policies issued to the trustees (“PIC Related Trustees”) of certain MPF plans and non-MPF plans in Hong Kong (“PIC Related Plans”).  PIC does not have any in force class A or class H policies.

10.On 7 November 2014, AXA CRIB and Principal International (Asia) Limited, among others, entered into a sale and purchase agreement (“Sale and Purchase Agreement”) in relation to the disposal of AXA CRIB’s retirement fund businesses in Hong Kong. The disposal includes, inter alia, (i) the sale of AXA CRT and AXA CRB; and (ii) the transfer of all the Business, including the Transferring Policies under the MPF Plan and Non‑MPF Plans, from AXA CRIB to PIC.

11.As PIC has only class G business in force and the proposed transfer from AXA CRIB to PIC includes both class G and class H businesses, it is expected that the proposed transfer will add scale to PIC’s existing pension business while capitalizing on PIC’s expertise in retirement products. Further, combining the class G and class H businesses of PIC and AXA CRIB is anticipated to offer economies of scale, and enhance operational efficiencies and service standards of PIC which is focused on retirement business.

12.The proposed transfer of the Business (including the Transferring Policies) falls within section 24(1) of the Ordinance.  Pursuant to section 24(1) of the Ordinance, the Scheme for the transfer is devised; and the transfer under the Scheme is conditional on the sanction of the Court.

13.The Scheme provides for, inter alia, the transfer by AXA CRIB to PIC of the Transferring Policies, and the Transferring Assets, Transferring Liabilities, Residual Assets and Residual Liabilities (as defined in the Scheme) related thereto.

Approval of the Scheme

14.As AXA CRIB is incorporated and registered as an insurer in Bermuda, the transfer of the Business is also conditional on the approval or non‑objection of the BMA and the sanction of the Supreme Court of Bermuda (“Bermuda Court”).  An application is being made by AXA CRIB and PIC to the Bermuda Court for an order sanctioning the Scheme pursuant to section 25 of the Act.

15.It is proposed by AXA CRIB and PIC that:

(i) the Business (including the Transferring Policies) shall be transferred from AXA CRIB to PIC in accordance with the terms of the Scheme and subject to the order of this Court made pursuant to section 24 of the Ordinance and the order made by the Bermuda Court pursuant to section 25 of the Act; and

(ii) by the order of this Court, provisions be made pursuant to section 25(1) of the Ordinance for the transfer to PIC, in accordance with the terms of the Scheme, of the property and liabilities of AXA CRIB in respect of the Business.

16.The transfer contemplated under the Scheme will not proceed unless the approvals of the MPFA and the SFC are obtained in Hong Kong (which is required only in respect of the transfer of the Transferring Policy issued under the Smart Plan), the approval or non-objection of the BMA is obtained in Bermuda, and the Scheme is sanctioned by this Court and the Bermuda Court. As at the date hereof, the approval of the BMA has been obtained.

17.Pursuant to section 24(2) of the Ordinance, an independent actuary, Paul Sinnott (“Independent Actuary”), a Fellow of the Institute and Faculty of Actuaries (United Kingdom), has prepared a report on the likely effects of the Scheme on the long term policy holders of the Transferring Policies and non‑transferring policies of AXA CRIB and the existing policy holders of PIC (the “Independent Actuary’s Report”).

18.In the Independent Actuary's view that :

(1) the Scheme will have no adverse effect on the reasonable benefit and expectations of the transferring policyholders of AXA CRIB, the non-transferring policyholders of AXA CRIB or the existing policyholders of PIC.

(2) the Scheme will have no adverse effect on the financial security of the non-transferring policyholders of AXA CRIB.

(3) the Scheme will have no material adverse effect on the financial security of the transferring policyholders of AXA CRIB and the existing policyholders of PIC.

(4) the Independent Actuary is satisfied that the Scheme provides sufficient safeguards to ensure the Scheme operates as presented.

19.For the purposes of section 24(3)(b) it is necessary for the Petitioners to send to every person concerned with the Scheme a statement setting out the terms of the Scheme and a summary of the report compiled by the Independent Actuary on the likely effects of it on the long‑term policyholders of AXA CRIB and PIC.  Consistent with this at the hearing of the summons for directions on 5 June 2015 I made orders requiring AXA CRIB and PIC to publish a statutory notice in a number of newspapers and also send a copy of a statement in a form that I had approved to each member of AXA CRIB and PIC and holders of the relevant group of policies. In addition and as required by section 24(3)(c) of the Ordinance serve a copy of the statutory statement, the Petition and the Scheme and the report prepared by the Independent Actuary on the Insurance Authority.

20.These orders have been complied with. At the hearing of the Petition before me today no policyholder has raised any objection to the Scheme.

21.The Insurance Authority has been represented by counsel, Aaron Lam.  The Insurance Authority has provided its comments on the Scheme and is satisfied that they have been properly taken into account in the final revised version of it. The Insurance Authority also has the advantage of having its own actuary who has been able to check the Independent Actuary's report who has no adverse comments on it or on the Independent Actuary's conclusions.

22.As a matter of jurisdiction, the Court must be satisfied, before sanctioning the transfer of long term business, that the transferee insurer is, or would upon the making of the order, be authorized to carry on any long term business to be transferred under the scheme: section 24(6).  This requirement is satisfied as PIC is authorized to carry on long term business of class A, class G and class H businesses in or from Hong Kong.  It is then a matter of statutory discretion as to whether the Court will sanction the scheme.

23.The applicable principles for the exercise of the Court’s discretion are explained by Kwan J (as she then was) in Re Winterthur Life [2005] 4 HKLRD 313.  These principles have been consistently applied by the Court in subsequent cases including: Re Sun Life Financial (Hong Kong) Ltd [2006] 4 HKLRD 369 (per Kwan J), Re Transamerica Occidental Life Insurance Company, HCMP 2132/2006, 3 January 2007 (per Poon J), Re AXA (Hong Kong) Life Insurance Company Limited, HCMP 1647 of 2012, 16 October 2012 (per Barma J as he then was), Re The Prudential Assurance Co Limited, HCMP 2027/2013, 2 December 2013 (per G Lam J).

24.The principles can be summarized as follows:

(1) The Ordinance confers on the Court a completely unfettered discretion.

(2) Thoughunfettered, the Court should exercise the discretion according to principles which give due recognition to the commercial judgment entrusted by the company’s constitution to its board of directors.

(3) Whilst in the first instance the Court is concerned with whether a policyholder, employee or other person would be “adversely affected” by the scheme in the sense that it appears likely to leave him worse off than if there had been no scheme, it does not follow that any scheme which leaves someone adversely affected must be rejected.

(4) In the end, the question is whether the scheme as a whole is fair as between the interests of the different classes of persons who are affected.

(5) The Court does not have to be satisfied that no better scheme could be devised. A board might have a choice of several possible schemes, but the choice is a matter for the board.

(6) What is true of choices as between different schemes is also true of the details within a scheme. The Court cannot sanction the scheme subject to the making of amendments: it must be either confirmed or rejected (although the Court can indicate reasons for rejection).

(7) The Ordinance assigns important roles to the independent actuary and to the Insurance Authority. The question of whether policyholders would be adversely affected by the scheme is largely actuarial and involves a comparison of their security and reasonable expectations with regard to benefits and levels of service without the scheme with what it would be if the scheme were implemented. The Insurance Authority can be expected to have the necessary material to express an informed opinion.

25.As I have already indicated I am satisfied that the order made on the summons for directions to ensure that the statutory requirements for the necessary statements to be served on all interested parties has been satisfied.

26.I am satisfied on the evidence before me that no policy holder, employee or other person is likely to be adversely affected by the Scheme. The Scheme deals fairly as between the interests of different classes of persons who are affected by it. I am satisfied that the disposal of AXA CRIB's retirement fund businesses in Hong Kong to PIC is a genuine commercial transaction and that there is no reason to question the judgment of the directors of the two Petitioners in agreeing to the transfer of the relevant business.  As I have already explained the Insurance Authority has no objection to the Scheme.  In practice, because of its knowledge of the business and inhouse expertise, it is well placed to form a valuable and considered view on the attributes of the Scheme and the Court can properly, in my view, be guided by the Insurance Authority’s views.

27.I have been presented with a form of order which has been agreed by the Petitioners and Insurance Authority. Subject to a few minor changes which I have raised with counsel I will make an order in the terms of the draft.

Mr Russell Coleman SC, instructed by Baker & McKenzie, for the 1^st and 2^nd petitioners

Mr Aaron Lam, Government Counsel of Department of Justice, for the Insurance Authority