United States: Insurance Regulators Propose New Guidelines for Reviewing Acquisitions

On July 21, 2016, a working group of the nation's main insurance regulatory standard-setting body proposed factors to guide regulators when reviewing insurance company mergers and acquisitions. The proposed guidance offers clues as to how insurance regulators approach acquisitions of insurers for purposes of granting statutory approvals and is "required reading" for anyone considering a purchase of a U.S. insurance company.
 
In particular, the guidance underscores points of regulatory emphasis and scrutiny that may not be obvious based on a mere reading of the applicable statutes and regulations, including details relating to corporate ownership, transaction structure, source of funds and corporate affiliations.
 
By way of background, the National Association of Insurance Commissioners (NAIC), which comprises all of the state insurance commissioners and provides support and resources to state insurance departments, provides in its model Insurance Holding Company Act that any acquisition of an insurer is subject to the prior approval of the domiciliary regulator. The model act or an equivalent has been adopted in all states, and as a result each state requires an acquirer of an insurance company domiciled in that state to apply for and obtain its regulator's approval. Approval is sought by means of a filing known as a "Form A," which must include certain required disclosures and exhibits. In addition, filing a Form A may trigger a public hearing requirement. A Form A is an extensive document and can be the subject of rigorous (and protracted) review before approval is granted.
 
In last week's development, the National Treatment and Coordination Working Group of the NAIC's Financial Condition ("E") Committee issued a proposed set of "best practices" (exposure draft available here) that regulators would be urged to follow in reviewing Form As. The proposal is subject to a public comment period and further NAIC action. Not all of these are new concepts by any means, but some do suggest new points of focus for the NAIC in acquisitions of insurance companies.
 
The best practices guidelines are divided into nine general categories, each with a list of specific factors that regulators should consider when evaluating a prospective acquirer's Form A. The categories are as follows: 

  1. Initial Review — includes factors relating to initial administrative procedures such as identifying relevant parties and contact persons, determining how to treat confidential information and assigning insurance department staff to the review process.
     
  2. Background, Identity and Risk Profile of Acquiring Persons — includes factors such as reviewing the acquirer's ownership structure, determining the ultimate controlling person of the acquirer and reviewing the audited financials of the acquirer and, if applicable, the acquirer's public filings, particularly 10-Qs and 10-Ks.
     
  3. Communication and Record Maintenance — includes factors such as classifying confidential information, contacting other applicable regulators and considering any information provided by third-party external sources.
     
  4. Transaction Review — includes factors with respect to reviewing the transaction structure and the transaction documents.
     
  5. Purchase Consideration — relates to the purchase consideration, including the fairness of the consideration and particular attention to debt used in financing the acquisition.
     
  6. Insurance Operations — relates to the intended post-acquisition operations of the target company, including operational changes post-acquisition, plans for the target's management and key employees and suitability of any new affiliated and non-affiliated material agreements.
     
  7. Market Impact — includes factors relating to the market impact and anticompetitive effect of the acquisition and the imposition of tailored conditions subsequent or undertakings in order to address competitive market concerns.
     
  8. Post-Approval Considerations — includes factors relating to the closing of the transaction.
     
  9. Post-Acquisition Considerations — includes factors regarding the post-closing period, including receipt of notification of the final purchase price and any adjustments, the receipt of the amended Insurance Holding Company System Registration statement from the acquired company and compliance with any conditions subsequent or undertakings imposed on the acquirer as part of the approval.

An acquirer should be particularly sensitive to the following factors in the best practices guidelines that reflect new emphases by the NAIC or recent regulatory trends:

  • The guidelines direct regulators to review the source of funds in determining the insurer's new ultimate controlling parent. Accordingly, the acquirer should be prepared to clearly articulate the source of funds to be used for the purchase consideration, including the use of any debt financing (and any resulting leverage this would create). If funding sources do not align with the legal entities participating in the acquisition, this may be a point of focus.  
  • More generally regarding the source of funds, categories 2, 4 and 5 of the guidelines include suggestions that regulators explore in detail the source of all funds to be used in the transaction, including the treatment of "minority interests," and satisfy themselves on the "equivalency" of consideration. This aligns with our experience involving Form As even where a transaction is capital-neutral or capital-accretive to the target insurer, and even where no debt or other leverage is involved. Insurance regulators can be expected to look closely at the purchase price that the seller is receiving even though this may bear only secondary relevance (if any) to the future operations of the insurer or the fitness of its management.   
  • The guidelines also call for regulators to scrutinize complex ownership structures for "hidden ownership." While the guidelines do not clarify what is meant by hidden ownership, it has been our experience that regulators are becoming increasingly concerned, in the case of closely held parties, with interlocking or affiliate relationships between shareholders who otherwise would hold less than 10% ownership of the acquirer or the target company (10% being the presumptive threshold of "control" for Holding Company Act purposes).  
  • The guidelines direct regulators to review, if applicable, "SEC disclosures by board members of publicly traded UCPs" (that is, companies that would become new ultimate controlling persons of the insurer). Therefore, acquirers that are public companies should take particular care that disclosures presented in the Form A application and supplementary materials are consistent with all Section 16 filings made with the SEC (e.g., statements of director/officer ownership of securities) and other SEC disclosures on directors and officers included in such materials as proxy statements, 10-Ks and 10-Qs.  
  • In a nod to the 2010 amendments to the Holding Company Act that emphasized enterprise risk, and the Risk Management and Own Risk and Solvency Assessment Model Act adopted shortly thereafter, the guidelines recommend that, when multiple domiciles are involved in the transaction, regulators contact other regulators reviewing the proposed acquisition, including the lead state regulator.  
  • The guidelines also suggest that regulators review "board resolutions, power points and related board minutes concerning the Form A transaction." Although in our experience up until now regulators typically do not request such documents, the guidelines suggest that this may change, so acquirers should consider carefully how the deal is presented in internal written materials, including during the period of deal development and negotiation.  
  • The guidelines direct regulators to examine Form D filings (relating to proposed material affiliate transactions) for post-closing arrangements. This is relevant particularly where an acquirer plans to include the target in the acquirer's existing inter-affiliate cost allocation agreements, tax-sharing agreements, reinsurance pools and other related party arrangements. Where possible, these proposed inter-affiliate contracts involving the target insurer should be submitted prior to closing, so that they can take effect at closing. The guidelines suggest that a Form D of this sort can be reviewed by the regulator in connection with its review of a Form A.  
  • The emphasis on market impact in category 7 seems very timely considering the regulatory obstacles (both at the state insurance regulatory and federal antitrust levels) facing the pending Anthem-Cigna and Aetna-Humana mergers.

Interested parties should submit comments on these guidelines to the working group by Aug. 19, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions