Connecticut’s Act Authorizing Domestic Insurance Companies to Divide (Public Act No. 17-2, the Division Statute) took effect on October 1, 2017. The Division Statute permits a Connecticut domestic insurance company (a dividing insurer) to divide into two or more insurance companies (the resulting insurers) and allocate the assets and liabilities of the dividing insurer among the resulting insurers. Conceptually, the Division Statute is intended to act as the reverse of a merger, in that the dividing insurer separates into two or more resulting insurers, with the resulting insurers succeeding to the assets and liabilities allocated thereto by operation of law.

The appeal of the statute is that it presents a method for placing blocks of insurance business into new entities, facilitating the disposition of such blocks of business through the sale of the new insurance company’s stock rather than the original company’s assets. An entity sale is preferable to a selling insurer in that it eliminates the administrative complexity, ongoing obligations, and long-term compliance and counterparty risk associated with an asset deal typically consummated via indemnity reinsurance. The Division Statute also could be beneficial in administering under-performing business in run-off or otherwise housing legacy lines of business separate from other company business.

For these potential benefits to become a reality, however, there are still a number of issues—legal, contractual, and practical—to be resolved or reconciled under the new statute by Connecticut insurance companies and their contractual counterparties. 


The Connecticut law bears resemblance to the division statute included in Pennsylvania’s Business Corporations Law (15 Pa.C.S. §§ 361 to 368), which was used by Cigna in 1996 to separate its legacy and ongoing property/casualty businesses following a downgrade, with run-off assets and liabilities allocated to a newly formed entity. That division survived legal challenges by policyholders, competitors, and reinsurers. Among other things, the challenging parties claimed that policyholders were exposed to a greater risk that insufficient assets would be available to meet policy obligations once profits from on-going businesses were separated, and that policyholder consent was required for the transfer of their policy obligations.

Unlike the Pennsylvania statute, which authorizes the division of a variety of domestic business organizations, the new Connecticut statute is limited to the division of insurance companies.

Summary and effect

The division process. In order to effect a division, a dividing insurer must file a plan of division with the Commissioner of the Connecticut Insurance Department (the Commissioner). The plan of division will set forth the details of the division and must include certain elements required by the statute, such as the name of the dividing insurer, the name and organizational documents of every resulting insurer created by the division, the manner of allocating assets and liabilities among resulting insurers, and a reasonable description of the policies, liabilities, reinsurance contracts, or other property to be allocated to each resulting insurer.

Required approvals. A plan of division must be approved in accordance with the organizational documents of the dividing insurer prior to its filing with the Commissioner.

Shareholder approval is only necessary in certain circumstances. For example, if approval is required by the dividing insurer’s organizational documents, or the plan of division or the dividing insurer will not survive the division.

If the organizational documents or any debt or other contract (other than an insurance policy) of a dividing insurer were adopted prior to October 1, 2017, generally a division will be treated under the contract in the same manner as a merger is treated (so, for instance, the required approvals for a merger would be what is required for a division, and if a merger is an event of default, a division would be as well).

Once approved internally, the plan of division must then be approved by the Commissioner (and subject to a public hearing if deemed to be in the public interest), who will ensure that the interest of any policyholder or shareholder will be adequately protected. If approved, the Commissioner will issue the dividing insurer a certificate of approval that sets forth certain proscribed aspects of the division.

Policyholder consent is not required for a division to be effective. Accordingly, a Connecticut insurer could use the Division Statute to effectively transfer a block of insurance policies to a new insurance company and dispose of the new company without any involvement of policyholders.

Practical considerations

Need for merger. The Division Statute provides that the Commissioner will not approve a plan of division unless the Commissioner issues to each resulting insurer created thereby a license to transact business in Connecticut. Presumably, however, the business allocated to any new insurer will not be limited to policies issued in Connecticut, so the new insurer would need to be licensed or otherwise authorized to conduct insurance business in each other state in which the allocated policies were issued or delivered—a time-consuming task, especially with seasoning requirements in many jurisdictions.

As a practical matter, then, any such new insurer will need to be immediately merged with an entity holding the necessary state licenses or authorizations for the business allocated thereto. If the division is undertaken by the dividing insurer to isolate a block of legacy business, then the domestic insurer will likely need a shell company with which to merge the resulting insurer to ensure appropriate licensure. In a sale of business, the resulting insurer containing the to-be-sold business will likely need to merge into an appropriately licensed or authorized buyer. The Division Statute certainly contemplates the need for an immediate merger, noting that the Commissioner may waive the requirement that it issue a license to each resulting insurer if such resulting insurer will not survive a merger. Moreover, the Division Statute amends the Connecticut general statutes governing mergers of insurance companies to permit the formation of a domestic insurer that is formed for the sole purpose of merging or consolidating in connection with a division and to allow the Commissioner to exempt such newly formed insurers from certain statutory requirements, such as a Form A filing.

Benefits over indemnity reinsurance. Even with the added regulatory approval process, using the division process would likely be worthwhile to a selling insurer of a block of business. The clean break afforded by the division process would be, on a long-term basis, more desirable than a disposition through indemnity reinsurance.

In indemnity reinsurance, the ceding company remains in privity with the policyholders while passing on the policy risks to the reinsurer and, as a result, the ceding company and reinsurer are by necessity linked in a long-term relationship. That relationship includes on-going administration obligations from the buyer; periodic settlements of amounts owed by one party to the other; and agreement on establishment of certain nonguaranteed policy elements. Moreover, when the sold policies involve long-term obligations, the ceding insurer is exposed to the reinsurer’s credit risk. To protect against this exposure, parties often negotiate complex security arrangements, such as trust agreements with various collateral arrangements and triggering provisions relating to creditworthiness and credit for reinsurance.

In contrast, if the to-be-sold policies are instead allocated to a resulting insurer under the Division Statute, the seller and buyer can avoid a long-term indemnity reinsurance relationship and effect the purchase and sale of the target business in a much cleaner fashion.

Potential for litigation. Given these benefits, it is expected that the Division Statute will be utilized soon, although likely not without legal challenges. As in the Cigna case referenced earlier, affected policyholders could make a legal objection to such division on the grounds that a division is not fair to policyholders, who presumably believed they were buying policies from a particular insurance company and may have based their decision to purchase insurance on financial considerations or reputational matters specific to such insurer. Competitors, reinsurers, and even regulators in other states could make similar arguments regarding fairness and increased exposure to policyholders and counterparties due to a smaller asset business supporting the divided business.

The Cigna case involved lawsuits in multiple jurisdictions that took several years to be fully resolved, and it is possible the Division Statute will face similar hurdles.

Impact on policyholders and counterparties

The Division Statute addresses the allocation of assets, liabilities, and certain contracts. In doing so, it raises a number of questions about third-party contractual arrangements.

Obligations of resulting insurers. Following a division, a resulting insurer will have the sole responsibility for the policies and liabilities allocated to it under the plan of division, along with any new business written by the resulting insurer following the effectiveness of the division. Additionally, each resulting insurer is jointly and severally liable as tenants in common for policy and other liabilities of the dividing insurer that were not allocated to a resulting insurer in the plan of division (if the dividing insurer survives), and for the policies and other liabilities that were not allocated pursuant to the plan of division (if the dividing insurer does not survive). For example, any extracontractual obligations of a dividing insurer that are not specifically allocated to a resulting insurer could be the joint and several obligation of the resulting insurers, and any lawsuits challenging a division would be liabilities inherited jointly and severally by the resulting insurers unless specifically allocated.

Rights of counterparties; enforceability. The Division Statute also requires that a plan of division specify how existing third-party reinsurance contracts will be allocated to the resulting insurers and to provide appropriate notice to each reinsurer.

The resulting insurers will become parties to such allocated reinsurance arrangements as successors of the dividing insurers—not by “transfer” such that the contracts will transfer to the resulting insurers by operation of law, thereby avoiding any anti-assignment provisions (and thus the consent of the reinsurer) in such contracts. However, it is not clear how the allocation of contracts governed by state law other than Connecticut law would be viewed by the courts, as to the enforceability of the allocation itself as well as successor liability and deemed assignment considerations.

To the extent an allocation is enforceable, domestic insurers and reinsurers will need to consider the practical implications of allocating reinsurance contracts. For instance, if a third-party reinsurance agreement covers policies that will be allocated to more than one resulting insurer, such allocation would effectively bifurcate the existing reinsurance contract, which could alter the risk profile on which the reinsurer initially based its bargain. Consequently, reinsurers contracting with Connecticut insurers should consider contractual protections in the form of covenants not to divide or otherwise allocate liabilities under the reinsurance contract without their prior written consent.

A similar concern exists with respect to other third-party contracts, such as vendor arrangements. While the Division Statute treats resulting insurers as successors to the dividing insurer (rather than transferees or assignees), under the law of other states, such allocation could be considered an assignment for purposes of contract law, particularly for contracts not specifically addressed thereunder. So while a state other than Connecticut may recognize the right of a dividing insurer to allocate property and liabilities under Connecticut law, it could take a different view of whether such allocation is a contractual assignment under such state’s domestic law.

Fundamentally, there is uncertainty with how these third-party contractual arrangements will be viewed by both counterparties and the courts. As a result, insurers considering division should proceed with a carefully considered plan, engage significant counterparties in discussion early on, and have contingencies in place for issues that may arise. In addition, parties contracting with Connecticut insurance companies should consider what contractual rights and protections they will need to address the possibility of division.

Looking forward

The Division Statute offers a number of potential benefits relative to an indemnity reinsurance construct for the disposition of a business unit. However, because the Division Statute in particular has not yet been tested, numerous questions remain to be settled, ranging from policyholder concerns over fairness to licensure of newly created insurers, to enforcement and interpretation of contractual provisions in agreements allocated under the law, to separate account and tax considerations. The Cigna division mentioned was the subject of several claims by competitors, reinsurers, and policyholders, and the resulting litigation took several years to resolve.

The Division Statute may face similar challenges. But with appropriate planning, several of those challenges could be mitigated or resolved in advance. Also, if more states adopt similar statutes in a coordinated fashion, a more mature framework may develop to the benefit of insurers.