US insurers will seek to engage in IBTs and corporate divisions

New tools for legacy business to lead to burst of new deal activity in 2020.

In 2020, US insurers might take further steps to explore divesting legacy books of insurance business through two recently enacted restructuring mechanisms known as Insurance Business Transfers (“IBTs”) and corporate divisions.  

An IBT can allow the transfer and novation of legacy business from the seller to an assuming insurer without the need to obtain policyholder consent. IBTs are now permitted, in various forms and subject to different requirements and restrictions, in states such as Arizona, Oklahoma, Rhode Island and Vermont.

In a corporate division, an insurer divides into two (or more) insurance companies and, depending on the state, creates isolated blocks of business for sale to third parties. The allocation of assets and liabilities for the blocks of business divided between the resulting insurers after the corporate division occurs without policyholder consent. States that have adopted statutes allowing insurance companies to engage in corporate divisions include Arizona, Connecticut, Illinois, Michigan and Pennsylvania. In addition, the National Council of Insurance Legislators is developing an IBT model law, which might lead to wider adoption of such laws across the US. At the same time, the National Association of Insurance Commissioners is also evaluating IBTs, corporate divisions and other restructuring mechanisms for legacy insurance businesses.

Notwithstanding the potential benefits of IBTs and corporate divisions for disposing of legacy business, the new IBT and corporate division statutes have not been used to completion to date. Parties have hesitated to become pioneers for such transactions due to concerns about potential litigation from disgruntled policyholders who may attack such transactions. In November of 2019, the Commissioner of the Oklahoma Insurance Department authorized the submission of an IBT plan to the District Court of Oklahoma County for approval, which is the final step in effectuating an IBT under the Oklahoma law. If this transaction completes successfully (and does not get bogged-down in court challenges to the process—whether in Oklahoma or in other states where policyholders could potentially bring actions opposing the IBT), that would likely  spur other parties interested in utilizing IBTs and corporate divisions in 2020.  

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