By On October 15th, 2020, the Oklahoma County District Court entered a Judgment and Order approving the first ever Insurance Business Transfer (“IBT”) in the United States.1 Much has been written and debated about the fledgling IBT process in the U.S.; concerns have been raised; perceived risks have been articulated, but now that a transaction has actually been completed, it is possible to review the IBT process in practice rather than in theory.
The Oklahoma Insurance Business Transfer Act (“IBTA”) came into force on November 1st, 2018. The legislation is similar to the UK Part VII Transfer mechanism and allows a court-approved statutory novation without the requirement of policyholder and reinsurer consent. Under the statute, approvals are required from the regulators of the assuming carrier and the transferring carrier, an independent expert needs to opine on the transaction, policyholders and other constituents need to receive notice and ultimately, the District Court in Oklahoma needs to sign off on the transaction. As such, there are significant checks and balances to protect the interests of policyholders, arguably more than when an insurance company is sold or merged.
The IBT involves two wholly owned subsidiaries of Enstar,2 Yosemite Insurance Company (“Yosemite”) and Providence Washington Insurance Company (“PWIC”). PWIC is the second oldest active insurance company in the U.S., having been formed in 1799, domiciled in Rhode Island. Yosemite was incorporated in 1964 in California and subsequently re-domesticated to Indiana. Enstar acquired the company in 2018 and re-domesticated it to Oklahoma in anticipation of the IBTA. Both companies operate under Enstar’s shared services model, with all operations carried out by its U.S. service company. The officers and directors of both companies are identical.
Under the IBT, all the business of PWIC has been transferred to Yosemite, with a few exceptions. In advance of the IBT process, Yosemite and PWIC entered into a “Net Retained Lines Reinsurance” agreement, whereby Yosemite reinsured all the reserves of PWIC, net of third-party reinsurance. Commentators have noted that the transaction is inter-company, and as such somewhat simpler than a transaction between unaffiliated parties. In principle this is correct, given that there are no changes to the corporate governance and administrative structures. However, simplification in this area was counterbalanced by the complexity of the book to be transferred. As noted later, the age and diverse nature of the books of business within PWIC led to the expenditure of a great deal of time and effort in producing a communications plan acceptable to the regulators, independent expert and the court.
On acquisition, Yosemite was licensed in 46 states. To provide comfort to regulators and to address concerns relating to guaranty fund coverage, licenses were obtained in a further two states and the District of Columbia. The outliers are the states of New York and Massachusetts, where the regulators have so far declined to issue a license to a company in run-off. As such, a decision was made to have the IBT Plan effective for policyholders in New York and Massachusetts only on receipt of licenses from the respective states. Another wrinkle was a block of business known as the “Unigard block.” The Unigard block arose from a transaction in the early 90s, whereby the business is wholly reinsured and managed by a third-party reinsurer, similar to how old liabilities are handled when companies are sold as shell companies. Ideally we would like to have included this block in the IBT, but it became clear that it would have been a monumental task to notify all the policyholders managed by a third party and outside the control of Enstar, and would most likely have caused considerable delay to the process.
The IBT Process
- First steps
Preliminary discussions were held with both the Oklahoma Insurance Department (“OID”) and the Rhode Island Department of Business Regulations (“RIDBR”) in mid-2018 to outline the transaction and obtain their views on its feasibility. Thereafter, an RFP of audit / actuarial firms was conducted to produce a shortlist of independent experts. Although we approached six firms, perceived conflicts can be a significant issue in identifying a candidate, where the companies are part of a larger holding group and for which another division of the audit/actuarial firm may have performed services. In the UK, the independent expert is deemed to be an individual and not the firm itself. Following discussions with the OID, we were able to produce a shortlist of three individuals to serve as independent expert (“IE”). OID agreed to Stephen DiCenso of Milliman to fulfil the role. We then spent a time negotiating a tri-partite retainer agreement with OID and Milliman. Although the IE is paid by the companies, he/she reports to the OID, and maintaining true independence is a critical factor.
In parallel with the appointment of the IE, an IBT Plan was drafted for submission to the regulators and the court. The IBT Plan outlines the transaction structure and identifies the various materials that are required to be presented under the IBTA. As there is no mandated form for the IBT Plan, we created one modelled on the Form A application used for the acquisition of insurance companies.
- The Independent Expert Report
The Independent Expert Report is a critical element of the IBT process. The IE needs to opine that the IBT will not have a “material adverse effect on policyholders”. Under the IBTA, the IE is required to opine on several areas, including financial solvency, policyholder administration, corporate governance, as well as the transaction documents. Over a period of weeks, significant amounts of information, including financial and actuarial were provided to the IE to support his analysis.
- Communications Plan
As mentioned above, PWIC has been in existence and underwriting various lines for over two hundred years, until it went into run-off in 2004. Additionally, a number of other insurance companies including Seaton Insurance Company, have been merged into PWIC over the years. This has resulted in a diverse mix of business written over a long period of time, including long tail commercial lines of business, such as workers’ compensation, and commercial multi-peril and other liability containing asbestos and environmental exposures, as well as shorter tail personal lines such as homeowners and auto coverages. In addition, some assumed reinsurance is included in the portfolio. The diverse nature and age of the book meant that a great deal of research and analysis needed to take place to prepare a communications plan acceptable to the regulators, independent expert and the court, identifying which policyholders should be directly notified, and which would only receive indirect notice through newspaper notices and other means. The IBTA only provides minimal guidance on policyholder notice. Imagine trying to mail notice to policyholders back to 1799!
Although not specifically required in the IBTA, we decided to document the communications plan. A communications plan is one of the most critical pieces of the IBT process. It is essential to demonstrate to the court that all relevant policyholders have received notice where possible and have had the opportunity to object to the transaction. In legal parlance, the affected parties must receive “Due Process”. Lack of “Due Process” is one of the very limited grounds where the enforceability of the order of the Oklahoma court could be contested in another state, and as such an essential element of the process. Given the importance, and the diverse nature of the business, many months were spent finalizing the communications plan.
An analysis of the business was undertaken and, policyholders were either categorized as “inactive”, or “active”. “Inactive policyholders” comprised those former policyholders which did not have open claims, or where the assertion of a claim in the future is extremely unlikely. Inactive policyholders received notice by way of Publication Notice. “Active policyholders” comprised those with open claims or other circumstances as set out in the communications plan, specifically long tail lines of business. “Active policyholders” received notice by mailing to the last known address in our records. In some instances, this included policies underwritten as far back as the 1950’s. In instances where no address was available for commercial insureds, internet searches and an investigator were used to identify addresses where possible. Ultimately, approximately 60,000 policyholder addresses were identified for mailing. In addition, notices were prepared for mailing to agents and brokers, all state insurance regulators, all state guaranty funds and reinsurers.3
- Regulatory Approvals
The IBT process requires not only the approval of the Oklahoma Insurance Commissioner, but also the non-disapproval of the regulator of the transferring company, in this instance, RIDBR. Discussions were held with both regulators and draft documents provided prior to the formal application filings. In addition to receiving a copy of the draft expert report, RIDBR also commissioned a further independent actuarial study before issuing their letter of non-disapproval. Once the RIDBR letter had been received, the formal filing was made with OID. As OID had previously reviewed all the draft documents, the Commissioner’s Order was received less than two weeks later, on November 26th, 2019.
- The Court Process
Once the regulatory approvals have been obtained, the court process can begin. Originally, we had planned to hire outside counsel in Oklahoma for solely the court appearances and manage the remainder in house. However, as we moved further into the IBT process, we recognized that it is important to involve local counsel early, to assist in drafting the documents (especially the communications plan), with an eye to the court process in Oklahoma.4
As soon as the OID approval was obtained, the IBT application was filed at the District Court of Oklahoma County, in Oklahoma City. Because this was the first such case ever filed, counsel delivered a copy of the court filing to the assigned judge and discussed the process with her. Although not required by the IBTA, we requested a scheduling hearing. This was a good opportunity to agree a timetable for the court process with the judge, such as notification and filing deadlines. In addition, we were able to have the judge review the communications plan at an early stage, so as to avoid the situation of the court having issues with it at the final hearing, potentially delaying any final order. A Scheduling Order was agreed, and a final hearing date set for May 13th, 2020 with various interim pre-trial deadlines in between.
Notices were mailed between January 8th and January 15th, 2020. Given the volume of recipients noted above, this task was outsourced. Newspaper notices were also published in the Providence Journal and the Wall Street Journal on January 15th, 2020. Under the IBTA, interested parties have 60 days to raise any objections to the court. The deadline was set at March 17th, 2020. And then Covid-19 struck! On March 15th, the Oklahoma courts shut down, and all deadlines were stayed, in this instance until May 18th, 2020. The Final Hearing date was also deferred.
After the notices were mailed out, an initial flurry of queries were received regarding the IBT. Most queries related to an ignorance of the existence of the relevant insurance policy, which was unsurprising given the age of the books. In many instances, we were approached by the relatives of long deceased policyholders, querying whether there were any life insurance proceeds to collect. With the exception of three comment letters (discussed below), no objections were received from any policyholder or other interested party. Contrast this situation with various state novation laws that require positive consent of policyholders, and one sees the benefit of the IBT process where, as is most often the case, policyholders are completely disinterested about their old insurance policies.
- Comment Letters
Two comment letters were received from the guaranty fund associations, NCIGF5 and NOLHGA.6 The basic premise of the comments was that where there was guaranty fund coverage before an IBT, the IBT should not “reduce, eliminate or in any way impact [guarantee fund] coverage.” Conversely, where there was no guaranty fund coverage before the IBT, the IBT should not “create, expand or in any way impact guaranty fund coverage.”7 Additionally, NOLGHA requested that the Court “ensure that the process of approving any IBT Plan will result in an assuming insurer which will remain solvent and able to fulfil its obligations to policyholders.”8 After considering the comments, the Court did not find any reason not to approve the IBT Plan or any evidence that the “implementation of the IBT Plan will materially adversely affect the policyholders, claimant, or other entities associated with the Subject Business.”9 The Court also found “no evidence or argument … that the implementation of the IBT Plan will have any adverse impact on the guaranty association coverage of the Subject Business in Oklahoma or any other state.”10
A further comment letter was received from the Arizona Department of Insurance. Arizona described the differences in the Oklahoma statute from its own reinsurance assumption laws11, and the fact that in a transaction proposed under the Arizona statutes, in addition to extended notice periods, policyholders would have the option to refuse the transfer. The court noted that Arizona did not claim that any policyholder would be “adversely affected” by the IBT, and that no Arizona policyholder had indeed raised an objection. As such, it did not see any basis to “separately consider the transfer and novation of any Arizona policy apart from the entirety of the Subject Business pursuant to the IBT Plan.”12
The Final Hearing
The Final Hearing was held on October 15th, 2020. Evidence was presented by me (as corporate representative) and Steve DiCenso (the IE) by Zoom link and by Andy Schallhorn and Commissioner Mulready of the OID, in person. After the evidence was presented, the Judge reviewed the draft order and signed it effective October 15th, 2020, approving the first ever Insurance Business Transfer in the U.S.
The Court’s Order specifically concluded as a matter of law that the approval of the IBT Plan “will not impair any contractual rights or obligations regarding the Subject Business. Therefore, neither the Oklahoma Constitution’s Contracts Clause nor the U.S. Constitution’s Contracts Clause are infringed by this Court’s action.”13
The Court’s Order also concluded that “Pursuant to the U.S. Constitution’s Full Faith and Credit Clause and federal legislation, this Court’s findings of facts, conclusions of law, order and judgment “shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of “Oklahoma.”14
Being the first transaction of its kind in the U.S., the implementation of the PWIC – Yosemite IBT has been a long and very involved process. Now that the groundwork has been laid down, subsequent IBTs should hopefully be easier and quicker. There is still a great deal to be done to legitimize the IBT process. Industry has now embraced the process as a viable restructuring tool, but the regulatory community is continuing to study the idea. Regulators should be comforted to see that the process is not detrimental to policyholders, given the significant checks and balances that are included in the process. Some proposed IBTs may not be appropriate, but as with the approval of insurance company acquisitions, the regulators should be able to weed these out at the very outset of the process, and if not, there is the ability for affected parties to raise objections before the court.
There is still work that needs to be done regarding some of the state guaranty fund laws as well as the licensing requirements for insurance companies no longer underwriting business, an area which was probably not envisaged when licensing laws and regulations were originally drafted. However, now that an IBT has been completed, and more in the pipeline, regulators and other interested parties can focus on the merits of an individual transaction rather than the theory of an IBT, as has occurred in the past. The UK Part VII Transfer mechanism has been in effect for around 20 years, with over 300 successful transactions to date. Hopefully the first IBT in the U.S. will spur similar success in the years to come.
Robert Redpath is the US Legal Director of Enstar (US) Inc.
1 Judgment and Order of Approval and Implementation of the Insurance Business Transfer Plan filed in District Court Oklahoma County October 15, 2020 (the “IBT Order”).
2 Enstar Group Limited (“EGL”) is the ultimate indirect parent.
3 See Exhibit E of the IBT Plan for more detailed information.
4 John Sparks and Michael Ridgeway of Odom & Sparks, PLLC.
5 National Conference of Insurance Guaranty Funds.
6 National Organization of Life and Health Insurance Guaranty Associations.
7 See IBT Order para 20.
8 See IBT Order para 23.
9 See IBT Order paras 28 – 29.
10 See IBT Order para 30.
11 Arizona Revised Statutes §20-736.
12 See IBT Order para 35.
13 See IBT Order para 47, citing Okla. Const. art. 2, § 15 and U.S. Const. art. I, § 10.
14 See IBT Order para 47, citing U.S. Const. art. IV, § 1. and 28 U.S.C. § 1738.
John Sparks and Michael Ridgeway of Odom & Sparks, PLLC assisted with this article.