Court approval of an insurance business transfer (IBT) between two Enstar Group Limited affiliates provides a useful proof of concept for this legacy solution in the US. IBT provides insurers with an expanding regulatory toolkit alongside sale, reinsurance, and accelerated closure. So, what new doors does the first application of the Oklahoma IBT statute open and what does it say about the direction ahead?
On October 15, 2020, the Oklahoma County District Court approved the IBT plan between two Enstar Group affiliated entities: Providence Washington Insurance Company and Yosemite Insurance Company (the ‘Enstar Plan”). The Enstar Plan and the Court Order (the ‘Order) represent the first successful use of Oklahoma’s IBT statute since that legislation was adopted in 2018. A copy of the Order is available here.
Summary of the Order
The Enstar Plan allows Providence Washington, a Rhode Island-domiciled carrier, to transfer the bulk of business to its Oklahoma-domiciled affiliate, Yosemite.
Certain of the remaining business – affecting New York and Massachusetts domiciled policyholders – will be transferred once Yosemite is licensed in those two states. It is not clear from the Order if coverage placed by Providence Washington in favor of Uniguard will be transferred at some later date as well.
In reaching its conclusions, the Court determined, among other findings, that:
Regulatory approval was obtained
In addition to approval by Oklahoma’s Commissioner Glen Mulready, as Yosemite’s insurance regulator, Providence Washington’s regulator did not object to the Enstar Plan. Rhode Island’s Insurance Superintendent Elizabeth Dwyer concluded that “Enstar’s capital maintenance agreement to Yosemite…exceeds the protection provided by the capital maintenance agreement Enstar…has in place with Providence Washington…[and] the risks are staying within the same holding company.”
No policyholder comments or objections
While given notice, no policyholder or claimant had “commented, requested to appear in writing or in person, or objected to the application of the” Oklahoma IBT statute.
No materially adverse effect
No “policyholder, claimant, person or any other entity will be “adversely affected”.
Questions and opportunities
The Order and success of this first US IBT plan is indeed significant. It opens up potential opportunities and poses questions that call for further examination:
Does the Order foretell further increased activity for Oklahoma’s IBT statute as well as Rhode island’s IBT provision?
Perhaps. In the wake of COVID-19, carriers have increased their pursuit of balance sheet solutions for historic and more recent legacy liabilities. In situations where a business transfer of a discrete portfolio will be advantageous to the carrier, then it is likely that these types of internal transfers may be pursued in addition to traditional third-party reinsurance protection.
What do the Enstar Plan and the Order tell us about the viability of business transfers of third, rather than related, party liabilities?
Clearly, the Enstar Plan and resulting Order validate the concept of a business transfer. However, we have seen examples of third-party Part VII transfers that have been disallowed because of policyholder objections. Given the absence of policyholder objections in the Enstar Plan, it is difficult to conclude that all third-party transfers will meet with the same level of acceptance and approval.
What do Superintendent Dwyer’s conclusions tell the market regarding the regulatory standard for approval of an IBT?
Superintendent Dwyer points out that the policyholders should be in a better position following the transfer than they were before the Enstar Plan was approved. It is important to bear in mind that the two carriers in the Enstar Plan are related and part of the same holding company structure. Moreover, the parent provided more protection for the assumed liabilities following transfer to Yosemite than it provided when those same risks resided on the Providence Washington balance sheet.
The NAIC is currently looking to forge a consensus on the regulatory standard for IBT approval. Regardless, internal and/or third-party reinsurance to enhance policyholder protection should be considered and cannot be undervalued when pursuing an IBT or division.
What does the Order indicate for the seven states that allow for internal insurance divisions?
We do not know why policyholders did not object to the Enstar Plan. Perhaps policyholders came to the same conclusions as Superintendent Dwyer: (a) the obligation was remaining within the same holding company structure and (b) the holding company had provided greater protection for its obligations upon transfer than existed previously.
If regulators apply the same criteria and, if and where applicable, Guaranty Fund exposure is minimized or is non-existent, then it is likely that similar business transfers – in the form of internal divisions — will be pursued.
Looking to the future
The Enstar Plan is helpful as a proof of concept for US IBTs. It is also hopeful in that it drives the insurance industry to look at the variety of available restructuring mechanisms with new eyes. In the future, when planning to transfer or divide insurance business, considerations should include:
Whether Oklahoma or Rhode Island is more appropriate for future insurance business transfer plans?
Assessing the different options
Are there other regulatory acceptable mechanisms available to accomplish the same result? When should insurers consider division or an IBT rather than sale, reinsurance, or accelerated closure?
Will the approval of the Enstar Plan encourage other states to adopt IBT or insurance division regulations?
Enhanced capital management
Given Superintendent Dwyer’s observation regarding Enstar’s enhanced capital management agreement, will internal and/or third-party reinsurance play an increased role in future regulatory and judicial review processes?
Feel free to talk to us
To discuss these topics as well as any other relating to the Enstar Plan, the Order, or insurance restructuring solutions in general, kindly contact us.