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Insurance Restructuring Options Take a Giant Leap Forward

Allstate Insurance Co. filed the first division plans in Illinois, and their subsequent approval was a significant step forward for the insurance industry to expand the application of restructuring mechanisms.
  • Luann Petrellis
  • February 2022
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On March 19, 2021, in a landmark transaction, the Illinois director of insurance approved eight plans of division filed by Allstate Insurance Co. to restructure its insurance operations. This undertaking is the first of its kind and represents a significant step forward for the insurance industry to expand the application of restructuring mechanisms. Allstate's extensive due diligence and the rigorous review by the Illinois Department of Insurance went above and beyond the statutory requirements to ensure the success of this unprecedented transaction and to adequately protect policyholders and claimants.

Since 2000, the EU, U.K. and other advanced jurisdictions have allowed insurers and reinsurers to restructure business operations and achieve legal finality using an insurance restructuring mechanism known as the Part VII transfer. Until recently, the U.S. had no similar mechanism and the insurance market was restricted to using sale, reinsurance or loss portfolio transfers to effect a transfer or restructuring of business operations. Beginning in 2015, certain states passed insurance restructuring laws similar to the Part VII transfer that have opened the door for insurers to restructure their operations more efficiently and effectively.

On Nov. 27, 2018, Illinois adopted a promising new insurance restructuring mechanism in the form of a “business division” amendment to the state's insurance code known as the IL Division Law. The law is applicable to any domestic stock entity transacting any of the kinds of insurance permitted under the Illinois insurance code and permits a domestic company to divide into two or more resulting companies pursuant to a “plan of division” that must be approved by the director.

The chart below shows the key steps of Allstate's division transactions.

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The IL 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 legacy or in-force policies, and enabling more efficient capital allocation within an insurance group. Insurers are now able to restructure their business and operations into separate insurers, either for operational efficiencies or for sale to a third party. Other states such as Connecticut, Iowa, Michigan, Colorado and Georgia have passed similar laws.

The Allstate Division–a Landmark Transaction

On Feb. 2, 2021, pursuant to the IL Division Law, Allstate Insurance Co. filed the first plans of division with the IL department of insurance. The plans involved eight insurance company subsidiaries under the Allstate, Esurance and Encompass brands (known as the “dividing companies”), with each filing a plan of division with the director.

The IL 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 legacy or in-force policies, and enabling more efficient capital allocation within an insurance group.

The eight plans of division allocated certain portions of each company's inactive Michigan automobile insurance business to eight new insurance companies created in the division process (“new companies”). Once the divisions were approved, the allocated liabilities and assets became the obligations of the new companies by operation of law and were no longer the responsibility of the dividing companies. Ultimately, the eight new companies merged into three newly formed Illinois domestic insurers pursuant to the Illinois Merger Law, so that there was one surviving insurer for each of the Allstate, Esurance and Encompass brands (the merger companies).

Allstate's division transaction involved both financial and operational considerations and is a good example of how this restructuring mechanism can achieve administrative, operational and capital efficiencies. The stated purpose of Allstate's plans of division was 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.

Keys to Success

Allstate's early engagement with the department and extensive pre-planning for this restructuring transaction were key to the success of this 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.

Because of my extensive experience in restructuring legislation, well in advance of the filing of plans of division, I was engaged by the department as project manager for the Allstate division transactions. In addition to a project manager, the department engaged legal counsel to represent the department at the hearing and actuarial experts to support its financial review. All parties worked together to complete the project and obtain necessary approvals within Allstate's requested timeline.

The department's rigorous 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 modeling and projections

Allstate conducted its own internal analysis to determine the capital adequacy of the merger companies. Allstate used several tools and methodologies, including Allstate's estimate of required capital using Best's Capital Adequacy Ratio framework; the NAIC risk-based capital ratio; and a peer company review.

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Transparency also was important to the successful execution of the transaction. Although not required by the IL Division Law, Allstate requested a public hearing and provided notice to various stakeholders, including policyholders and claimants. The public hearing 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. No party filed an objection to the transactions that were ultimately approved by the director based on the hearing officer's findings of fact and conclusions of law.

The Allstate division transactions were achieved by Allstate and the IL DOI working together with their consultants and representatives 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.

The Allstate division 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 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.


Best's Review contributor Luann Petrellis is an independent consultant who drafted legislation in Rhode Island and Oklahoma that provides for insurance business transfers and also assisted in drafting the NCOIL IBT model law. She can be reached at lpetrellis@outlook.com.



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