Locke Lord LLP recently represented a national platform client in connection with a unique internal reorganization and simplification of their Texas insurance company subsidiary organizational chart. The principal objective on this engagement was to eliminate a legacy Texas Lloyd’s Plan (“TLP”) entity. TLP entities are seen by some as historical relics. In some cases, an underused TLP can represent a “trap” for previously committed group capital, preventing its more effective deployment elsewhere within the group. One of the challenges of such a Lloyd’s plan entity is that the controlling holding company group does not really own the TLP. Instead it is operated though an affiliated attorney-in-fact entity and ownership is, in effect, vested with individual underwriters linked to the holding company group through trusts or other contractual commitments. When a TLP entity has outlived its usefulness, it’s non-corporate structure can become an impediment to the effective utilization of an insurance group’s capital.
Texas has no statutory mechanism to directly merge a TLP entity into an affiliated insurer, however, there are viable options which allow a group to achieve virtually the same result and to accomplish both a dissolution of the TLP entity and a redistribution of its capital and legacy liabilities.
The first option is a withdrawal and liquidation. Like other insurance entities, the Texas statutes provide a withdrawal mechanism for TLPs. A TLP may affirmatively withdraw from the Texas insurance market upon the approval of the Texas Department of Insurance (“TDI”). Such a withdrawal requires that adequate provision be made through reinsurance or other means for the payment of all liabilities of the TLP and outstanding Texas risks. As a part of a withdrawal plan, the reinsurance of the TLP's liabilities and risks (via loss portfolio transfer/assumption reinsurance or otherwise) and a related asset transfer can be accomplished between insurers within the group in order to achieve an effective liquidation of the TLP entity.
Because an affirmative market withdrawal and the associated reinsurance transactions and formal liquidation may prove to be undesirable for some insurance groups, a second option may be preferable. The second option is a TLP conversion and merger. The Texas statutes provide a mechanism to convert a TLP entity into a capital stock insurance company and, if desired, to subsequently merge the resulting stock insurance company into another stock insurance company, either Texas-domiciled or otherwise. The second step merger is optional. Additional flexibility is presented with the possibility of retaining the newly created Texas stock entity as an operating capital stock insurer or a shell company for potential sale for license value. Following conversion, the TLP entity’s corporate attorney-in-fact can also be concurrently liquidated to further clean up the corporate organizational chart.
The above options are examples of Locke Lord working within a complex statutory framework to develop a solution to an organizational problem of a unique group entity which may not fit within the operational plans for a modern insurance group structure. This TLP reorganization solution permits holding company group capital to be more effectively utilized in order to meet corporate and operational needs.