PROVIDENCE, R.I.—A Rhode Island judge has approved a commutation plan allowing a still-solvent reinsurer to wind up its business quickly without a lengthy runoff or liquidation. The ruling represents approval of the first law in the United States that authorizes such plans, according to an attorney in the case.

A majority of creditors approved a commutation plan in November for Providence, R.I.-based GTE Reinsurance Co. Ltd.

However, units of Stamford, Conn.-based Odyssey Re Holdings Corp., which objected to the valuation ascribed to their claims, sued and sought to have state law that authorized the plan declared unconstitutional.

Gaining popularity in U.K.

The 2002 law, the Voluntary Restructuring of Solvent Insurers Act, borrowed language from the U.K. Companies Act.

Such schemes have gained popularity in the United Kingdom and elsewhere as a tool to run off and restructure solvent and insolvent insurers. The Rhode Island statute, though, is the only one of its kind in the United States that allows a solvent insurer to liquidate its obligations in a runoff, Gary S. Lee, a partner with law firm Morrison & Forester L.L.P in New York, said.

He represented the Rhode Island Department of Business Regulation's insurance division in defending the statute.

Judge’s opinion

In his ruling, Providence County Superior Court Judge Mark A. Silverstein said the “Odyssey insureds assert that the Restructuring Act and commutation plan substantially impact their contract rights because the central purpose of the Odyssey (reinsurance) treaties—shifting risk from one party to the other—is completely abrogated in exchange for a potentially insufficient sum of money. The court, however, does not agree,” the judge ruled Monday in In Re GTE Reinsurance Co. Ltd.

“Put simply, the Odyssey insureds contracted for the payment of money, and under the commutation plan, that is exactly the benefit they will receive,” the judge ruled. The court “does not believe that an actuarially based estimated payout of the Odyssey insureds’ present and future claims substantially impairs their contractual rights or their reasonable contractual expectations.

“This is particularly true where, as here, the Odyssey insureds have failed to establish beyond a reasonable doubt that the actuarial-based payout will, as a matter of fact, be less than their recovery if GTE Re remained in runoff.”

Statute’s advantage

Mr. Lee said the advantage to creditors under the statute is, “they all get treated the same,” with none getting a better deal than any other.

An Odyssey Re spokesman could not be reached.

GTE Re was formed in Bermuda in 1976 as a wholly owned subsidiary of GTE Corp., although after a series of mergers, Verizon Communications Inc. now is its ultimate parent.