July 3, 2022

Volume XII, Number 184

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New York Says Less than 10% Ownership of an Insurance Company Is Not a Safe Harbor

On April 19, 2022, the New York Department of Financial Services (NYDFS) issued Circular Letter No. 5, reminding owners and potential purchasers of shares of insurance companies that acquiring less than 10% of the company’s voting securities is not necessarily a safe harbor from requiring regulatory prior approval. Other indicia of control, such as the ability to appoint board members and the terms and conditions of the proposed transaction, can result in NYDFS determining that the person “controls” the insurer and is therefore required to obtain approval before purchasing the shares and gaining such control.

Every state requires prior approval or qualifying for an exemption before any person can obtain control of an insurer domiciled in a particular state. Control is presumed upon, but is not limited to, the direct or indirect acquisition of 10% or more of the voting securities of an insurance company. The National Association of Insurance Commissioners’ (NAIC) Insurance Holding Company System Regulatory Model Act (which every state has adopted in similar form) defines control as follows:

The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent (10%) or more of the voting securities of any other person. This presumption may be rebutted by a showing made in the manner provided by [the Act] that control does not exist in fact. The commissioner may determine…that control exists in fact, notwithstanding the absence of a presumption to that effect.

Our experience leads us to believe that the fact NYDFS felt compelled to issue this circular at this time suggests that it may have recently reviewed a number of filings or otherwise became aware that applicants attempted to avoid or limit certain disclosures by using a complex ownership structure that limited ownership to below 10% but allowed the acquirer to obtain effective control over the insurer. Clearly the NYDFS believes that the purpose of the Insurance Holding Company Act is to require a regulatory filing and disclosure upon a change of control, and thus the purpose of the circular is to remind people of that fact and to caution them not to rely on the presumption of control at 10% ownership as a safe harbor or as a hard and fast rule.

New York is not alone in looking at this issue, as we reported in December 2021 when the NAIC’s Financial Stability Task Force and Macroprudential Working Group developed a “List of Regulatory Considerations – PE Related and Other,” which has since been adopted by the Financial Stability Task Force. Private equity and venture capital investors who would prefer to limit disclosure of certain information should keep this in mind when structuring an insurance transaction in New York and elsewhere.

© 2022 McDermott Will & EmeryNational Law Review, Volume XII, Number 117
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About this Author

Andrea Best Insurance Regulatory Compliance Attorney McDermott Will Emery Law Firm UK
Partner

Andrea T. Best* advises clients on insurance regulatory compliance throughout the United States. She works with insurers, reinsurers, intermediaries, brokers, trade associations and others in the insurance market.

Andrea actively monitors state insurance-related legislative and regulatory developments and works extensively with London, Bermuda and European insurance market participants regarding non-admitted insurance and reinsurance transactions in the United States, including regulatory advice on structuring insurtech, and on sharing economy and gig economy insurance programs in...

+44 20 7577 6950
Dan Brown Insurance Attorney McDermott Will & Emery San Francisco, CA
Partner

Dan Brown represents insurance companies, start-ups, agents, brokers and other stakeholders in all aspects of the admitted, exempt and surplus lines insurance markets in the United States.

Dan advises alien or foreign insurers on how to comply with various state laws in placing business; early-stage and developed insurtech entities on regulatory and corporate issues; insureds on exempt and specialty lines; producers on licensing, placement and premium tax issues, including digitization of the process; and insureds on coverage and placement issues. He advises London market...

628-218-3820
H. Michael Byrne Insurance Lawyer McDermott Will & Emery Law Firm
Partner

H. Michael (Mike) Byrne has extensive experience in complex insurance transactions, regulation and InsurTech matters. He advises US and international insurers and reinsurers, investors, producers and technology companies on a broad range of matters, including obtaining regulatory approvals for M&A, change of control and affiliate transactions; forming, licensing and structuring business operations; drafting and negotiating agreements; M&A involving producers and service providers; and developing and obtaining approvals for unique products. He delivers practical and business-focused...

1 212 547 5388
Thomas M. Dawson Corporate & Insurance Attorney McDermott Will & Emery New York, NY
Partner

Thomas M. Dawson represents US and non-US insurers on regulatory, licensing and corporate matters.

Tom advises industry participants on a wide variety of regulatory and transactional matters, including cybersecurity compliance, insurtech ventures and Holding Company Act filings. He has helped clients form, acquire and invest in US insurers, reinsurers and intermediaries. He counsels non-insurers on advertising, licensing and marketing generally, and provides regulatory compliance advice to service contract issuers and other specialty product providers.

Tom has guided non-US...

212-547-5419
Michael R. Halsband Insurance Attorney McDermott Law Firm New York
Partner

Michael R. Halsband has more than 25 years of leadership experience in the insurance and reinsurance industry, including in investment banking and capital markets. He is the global leader of the Firm’s Insurance Transactions and Regulation Group.

His wide-ranging experience includes insurance broker and carrier M&A, new company formation, capital raises and new product development (principally for InsurTech startups); complex structured (re)insurance transactions; insurance-linked securities (ILS); distressed portfolio run-off administration...

212-547-5401
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