Lifetime Income Ltd

• Jurisdiction: New Zealand
• Judge: Ellis J
• Judgment Date: 20 April 2022
• Neutral Citation: [2022] NZHC 810
• Docket Number: CIV-2021-485-616
• Court: High Court

UNDER Part 15 of the Companies Act 1993

IN THE MATTER of an application for approval of a scheme of arrangement

Between

Lifetime Income Limited

Applicant

[2022] NZHC 810

Ellis J

CIV-2021-485-616

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA

TE WHANGANUI-A-TARA ROHE

Companies — application for approval of a scheme of arrangement — life insurer — whether the proposed compromise was fair and equitable — compliance with the applicable statutory provisions — “class intelligence” and “fairness and equity” tests — Companies Act 1993 — Insurance (Prudential Supervision) Act 2010

Counsel:

E B Moran for Applicant

L M McKeown for Interested Parties A V McArley and E C Mackay

R J B Fowler QC as Amicus Curiae

The scheme of arrangement was approved.

REASONS JUDGMENT OF Ellis J

1 Lifetime Income Limited (LIL) is a licensed insurer and variable annuity provider, established in 2014. LIL is a wholly owned subsidiary of Retirement Income Group Limited (RIG).

2 LIL has applied for orders approving a scheme of arrangement or compromise under s 236 of the Companies Act 1993. By way of summary, approval is sought to:

• (a) sell the assets in a statutory fund (SF2) and repay LIL's policyholders' respective interests in those assets; and

• (b) cancel the policies held by those policyholders.

3 The application was opposed by two of the affected policyholders. The remaining policyholders have taken no formal steps.

4 On 14 April 2022 I issued a results judgment approving the proposed scheme, with reasons to follow. These are my reasons.

RIG and LIL

5 RIG was founded in 2013 by Mr Ralph Stewart. Mr Stewart is a long-time participant in the financial services sector and has significant insurance experience. He says his intention was to create New Zealand's first variable annuity product. In 2015 this product-called Lifetime Income-was launched. Lifetime Income is managed through two wholly owned subsidiaries of RIG: LIL and Lifetime Assets Management Limited (LAM). LAM is the investment management company and LIL manages the insurance component.

6 As an investment management company, LAM is licensed by the Financial Markets Authority and is regulated under the Financial Markets Conduct Act 2013. It manages annuity customers' assets invested in the Lifetime Income Fund (LIF).

7 As an insurer, LIL is licensed by the Reserve Bank of New Zealand (the Bank) under the Insurance (Prudential Supervision) Act (IPSA). 1 The Bank is charged by s 12 of the IPSA to undertake prudential supervision of licensed insurers. 2

LIL's acquisition of the Foundation Life business

8 In November 2017 and March 2018, the Bank approved LIL's acquisition of Foundation Life (NZ) Limited's guarantee business. 3 As of 7 April 2022, the business acquired by LIL comprised:

• (a) 163 life annuity policyholders; and

• (b) 186 customers with life investment contracts.

9 There has been no opposition to the proposed scheme from anyone falling in the second (investment) class. The focus of this judgment is therefore primarily on the objection taken by two members of the first (annuity) class, Mrs McArley and Mr Mackay (who holds a joint policy with his wife, Joyce Mackay). As of 31 March 2021, the life annuity policy holders had an average age of 89 and were each paid on average approximately $572 per month (or a little less than $7,000 per year). But the policies belonging to Mrs McArley and Mr Mackay yield considerably more sizeable annuities. Mrs McArley (who is 89) receives $94,334.64 per annum. The Mackays (who are 81 and 79 respectively) receive $58,252.50 per annum.

10 These policies do not contemplate or permit cancellation by the underwriter.

The Insurance (Prudential Supervision) Act 2010 and the requirement for a statutory fund

11 The purposes of the IPSA are to promote the maintenance of a sound and efficient insurance sector and promote public confidence in the insurance sector. The way in which the Act achieves those purposes is by establishing a system for licensing insurers, imposing prudential requirements on insurers, providing for the supervision of compliance with those requirements by the Bank and conferring powers on the Bank to act in respect of insurers in financial distress or other difficulties.

12 Section 4 sets out the principles that must be taken into account by the Bank in meeting the purposes of this Act. Those principles relevantly include:

• (a) the importance of insurance to members of the public in terms of their personal or business risk management:

  …

• (c) the importance of dealing with an insurer in financial distress or other difficulties in a manner that aims to-

  • (i) adequately protect the interests of its policyholders and the public interest; and

  • (ii) ensure that any failure, or possible failure, of the insurer does not have the potential to significantly damage the financial system or the economy of New Zealand:

• (d) the importance of recognising-

  • (i) that it is not a purpose of this Act to eliminate all risk of insurer failure; and

  • (ii) that members of the public are responsible for their own decisions relating to insurance:

• (e) the desirability of providing to the public adequate information to enable members of the public to make those decisions:

  …

• (i) the desirability of sound governance of insurers:

• (j) the desirability of effective risk management by insurers.

Statutory funds

13 The New Zealand life insurance market is unusual because there is no policyholder protection scheme that provides a safety net in the event of insurer failure. Instead, the IPSA requires all life insurers to have at least one statutory fund in respect of its life insurance business. 4 Failure to comply with the statutory fund provisions is a criminal offence punishable by a fine of up to $500,000. 5

14 Specific statutory duties are imposed on life insurers in relation to statutory funds. In investing, administering and managing the assets of a statutory fund they are required to comply with the detailed provisions of subpt 3 of pt 2 of the IPSA including, amongst other things, the obligation to see that the life insurer “gives priority to the interests of policyholders of life policies referable to the fund”, especially where there is a conflict between the interests of policyholders and shareholders. 6 Under s 106, the Bank may give notice to a life insurer who has failed to comply with subpt 2 requiring it to take specific action to remedy the default. Failure to comply can give rise to joint and several liability on the part of the directors

for resulting losses to the statutory fund. 7 Under s 108 the Bank has the power to sue the directors in the name of the life insurer

15 A life insurer can only restructure or terminate its statutory funds with the approval of the Bank. Of some relevance here is s 110, which governs termination. It provides:

110 Termination of statutory funds

• (1) A life insurer may apply to the Bank to terminate 1 or more of its statutory funds.

• (2) If the application is approved, the termination may take place in accordance with any conditions that the Bank may impose.

• (3) The conditions may include (without limitation) conditions relating to the following:

  • (a) a requirement to notify interested parties of the outcome of the application:

  • (b) matters connected with how the termination takes place, including the following:

    • (i) distribution or application of assets:

    • (ii) settling of liabilities:

    • (iii) the timing of the termination.

• (4) The Bank must not approve the application if it considers that-

  • (a) the termination will result in unfairness to the policyholders of life policies referable to the fund or funds when those policyholders are viewed as a group; or

  • (b) the life insurer is being liquidated or wound up when the application is made.

Application to LIL: the increased capital requirements

16 LIL meets the definition of a life insurer in s 6 of the IPSA because it is liable under life policies, as defined in s 84 of that Act. That definition includes contracts of insurance that provide “for the payment of an annuity for a term dependent in the

continuance of human life” (annuity policies). The interested parties in these proceedings are the holders of two such policies

17 LIL had four statutory funds, three of which have been closed. LIL's exFoundation business is separate from LIL's other business and is still supported by a specific statutory fund (SF2) required under the IPSA. 8

18 Section 19 of the IPSA makes it clear that an applicant is only entitled to be granted a licence as an insurer under the Act if the Bank is satisfied the applicant “holds and has the ability to maintain a minimum amount of capital that is specified in an applicable solvency standard”. 9 Section 21 empowers the Bank to impose conditions on a licence, including:

(c) conditions that require a life insurer to maintain solvency margins in respect of the statutory funds of the insurer in accordance with an applicable solvency standard (including requiring the insurer to maintain a minimum amount of capital in accordance with the standard):

19 Despite regular reviews by the Bank, its advisers, and LIL's own appointed actuary and auditors, in April 2020 LIL identified an issue with the solvency calculation methodology used to determine the capital required to support the variable annuity business under the applicable Solvency Standard. It became apparent that, since 2015 (when LIL was first licensed) it had been holding less capital than was considered prudent under the Standard.

20 LIL duly reported its discovery to the Bank. An exchange of correspondence and Bank directives under the IPSA ensued. In late August 2020, the Bank directed that LIL was to maintain increased solvency margins. Certain transitional solvency margins were specified for periods...