On February 2nd Allstate Insurance Company filed the first plans of division in the U.S. market to restructure its insurance operations representing a significant step forward for the insurance industry to expand the application of restructuring mechanisms. The Allstate plans of division were filed with the Illinois Department of Insurance (the “Department”) pursuant to the Illinois Domestic Stock Company Division Law. The plans involve eight insurance company subsidiaries under the Allstate, Esurance, and Encompass brands, (the “Dividing Companies”) with each filing a plan of division with the Illinois Director of Insurance (“Director”). The Division Law enables insurers to allocate assets and liabilities for a host of purposes, including exiting one line of business to focus on another, promoting efficiency and effectiveness in managing run-off blocks of in-force policies, and enabling more efficient capital allocation within an insurance group. Illinois is one of a number of states to have passed a similar division law.
The eight plans of division seek to allocate certain portions of each company’s inactive Michigan automobile insurance business (the “Specified Policies”) to eight (8) new insurance companies created in the division process (“New Companies”). The Division Law provides that, once the division is approved and becomes effective, these allocated liabilities become the obligations of the New Companies by operation of law and will no longer be the responsibility of the Dividing Companies. Likewise, the assets allocated to the individual New Companies in the plans of division, will, upon the effectiveness of the divisions, become assets of the individual New Companies.
Immediately following the divisions, the eight New Companies merged into three newly formed Illinois domestic insurers pursuant to the Illinois Merger Law, so that there will be one surviving insurer for each of the Allstate, Esurance and Encompass brands (the “Merger Companies”) Following the mergers all the assets, liabilities, contracts, and required surplus associated with the Specified Business allocated to the New Companies pass by operation of law to the Merger Companies. Upon the closing of the Proposed Restructuring, the Merger Companies will continue to be wholly owned, indirect subsidiaries of Allstate, which will be the ultimate controlling person of each of the Merger Companies (the “Proposed Restructuring”).
Set forth below is a chart that shows the various steps of Allstate’s Proposed Restructuring.
The stated purpose of Allstate’s plans of division is to allow the Dividing Companies to more efficiently allocate capital between Allstate’s inactive Michigan auto business and its active Michigan auto business, thereby improving Allstate’s competitiveness in the Michigan automobile insurance market, while maintaining sufficient reserves and capital and its high level of service for all policyholders and claimants. Also, in 2019, the state of Michigan passed legislation reforming the state’s personal injury protection (“PIP”) mandate, thus affecting Michigan automobile coverage, including the Specified Policies. The reforms eliminated the state-mandated, unlimited PIP coverage. As a result, the Proposed Restructuring enabled Allstate to separate inactive policies that were effective before the PIP reform from the prospective active Michigan automobile policies.
Allstate began working on the Proposed Restructuring in 2019. Early engagement with the Department was key to a successful transaction. Allstate worked closely with the Department providing detailed information regarding the business to be divided, the assets to be allocated to support the business, how the companies were to be capitalized, and how policyholder considerations were to be addressed. All parties worked together to complete the project and obtain necessary approvals within Allstate’s requested timeline.
The Department’s review focused on policyholder and claimant protection and prudent financial analyses. The key areas considered under the financial evaluation scope included:
- Capital adequacy
- Loss reserves
- Financial modelling and projections
The Illinois Department engaged a Project Manager experienced in restructuring legislation to manage the project to completion. The Department also engaged Stephen Schwab and Carl Poedtke of DLA Piper as outside counsel. To support the financial review, the Department retained Risk & Regulatory Consulting (“RRC”) as its independent actuarial consultant to focus on reserves and capital. RRC conducted an independent reserve analysis and evaluated the initial capital levels of the Merger Companies.
Allstate conducted its own internal analysis to determine the capital adequacy of the Merger Companies. Allstate utilized several tools and methodologies, including: (1) Allstate’s estimate of required capital using A.M. Best’s BCAR framework; (2) the NAIC RBC ratio; and (3) a peer company review.
In addition to Allstate’s internal analyses, Allstate retained outside consultants including A.M. Best, a rating agency, to provide an independent rating analysis and a preliminary credit assessment for the Merger Company group. Allstate also retained Lazard, a financial advisory and asset management firm, to analyze the capital adequacy of the Merger Companies. As part of its mandate, Lazard was charged with preparing a report analyzing the business and financial condition of the Merger Companies and assessing this information against certain financial aspects of the Division Law’s requirements. Specifically, Lazard analyzed pro forma financial metrics as provided by Allstate. Lazard also performed a peer benchmarking analysis, comparing key pro forma financial metrics of the Merger Companies to public information regarding selected comparable companies. After consideration of all findings presented, the Department concluded that the initial capital levels were reasonable.
The Division Law only requires a hearing if the Director deems it to be in the public interest or if requested by the Dividing Company. Allstate requested a public hearing because of the significance of this being the first division transaction undertaken in the United States and Allstate’s desire for transparency. Allstate’s division plans included a Communication Plan that provided notice to affected policyholders, guaranty funds, the Michigan regulator and other relevant stakeholders.
In addition, the Dividing Companies provided broad public notice through ads published twice in each of The Chicago Tribune and The Detroit Free Press. The IL DOI closely reviewed and approved the Communication Plan and the notice of hearing that was provided to the affected policyholders and claimants, and other stakeholders. In addition, the Hearing Officer, Judge MaryAnne Mason (ret.), reviewed and provided comments on the notice of hearing. The hearing was held virtually by Zoom and provided the opportunity for any person to submit a comment or intervene in the proceedings. Any interested person was able to attend the hearing via a Zoom link.
On March 19, 2021, based on the Hearing Officer’s Findings of Fact and Conclusions of Law, the Director issued an order approving the eight Plans of Division. The approvals of Allstate’s division plans follow closely on the heels of the approval of an Insurance Business Transfer (IBT) Plan in the Oklahoma District Court. These two transactions mark the beginning of what industry specialists believe is a new era in restructuring options available to insurance companies to more efficiently restructure their business to achieve capital, operational and administrative efficiencies. While there are differences between the Division and IBT legislation, both mechanisms allow companies to more easily segregate portfolios of business within and outside of the corporate group. A common thread underlying both the IBT and the division is the rigorous regulatory review to ensure protection of consumers.
Allstate’s Proposed Restructuring is a landmark transaction for the insurance industry to successfully implement the Illinois Division legislation in a complex transaction structure. Most importantly, the transaction was achieved by Allstate and the Illinois Department with their consultants and representatives working together to put forth a transaction structure that allowed Allstate to accomplish its corporate objectives and better position itself for the future while ensuring that the interests of policyholders and claimants were properly protected. While there may be differences in the division process depending on the specific proposed transaction, the Allstate Division provides a solid framework for the division process in Illinois and other states with similar division legislation.
[1] “In 2018, the Illinois General Assembly passed the Illinois Domestic Stock Company Division Law 215 ILCS 5/156-5/172 (“Division Law”), The Division Law permits insurers to divide and legally separate specified businesses into newly formed insurers with the assets and liabilities associated with that specified business becoming the property and legal obligations, respectively, of the new companies by operation of law.
[2] The “Dividing Companies” are: (i) Allstate Insurance Company (“AIC”); (ii) Allstate Indemnity Company; (iii) Allstate Property and Casualty Insurance Company; (iv) Allstate Fire and Casualty Insurance Company (“AFCIC”); (v) Encompass Indemnity Company; (vi) Encompass Property and Casualty Company; (vii) Esurance Insurance Company; and (viii) Esurance Property and Casualty Insurance Company. Each Dividing Company is an Illinois domestic insurer, holding a license from the IL DOI, and is licensed as a foreign insurer in Michigan.
[3] CT, MI, GA, PA, AZ
[4] In general terms, the Specified Policies are inactive policies issued to Michigan policyholders that had an outstanding claim reserve as of December 31, 2019, on a personal injury claim covered under such policies for which a reserve remained as of June 30, 2020. Allstate compiled a list of policies matching this description, and it is that list of policies that became the 5 Specified Policies as used in the Plans.
[5] The IL DOI engaged Luann Petrellis as Project Manager.
Luann Petrellis is an independent consultant who was engaged by the Illinois Department to act as project manager for the Allstate Division transactions. Luann is a recognized national leader for developing insurance restructuring legislation that provides options for insurance companies to achieve operational and capital efficiencies. Luann drafted legislation in Rhode Island and Oklahoma that provides for Insurance Business Transfers and also assisted in drafting the NCOIL IBT model law. Luann can be contacted at lpetrellis@outlook.com or (610) 304-4524.
