In our Second Quarter 2014 Bulletin, we reviewed the efforts of the NAIC Private Equity Issues (E) Working Group (the “PEI Working Group”) to draft changes to the NAIC’s Financial Analysis Handbook to provide additional guidance for state insurance examiners who review “Form A” applications for acquisitions of control of insurers.  The PEI Working Group has held two subsequent meetings, an in-person meeting at the NAIC Summer National Meeting on August 7, 2014, and a telephonic meeting on October 23, 2014. At the October 23, 2014 meeting, the PEI Working Group approved a number of revisions to its original exposure draft in response to comments from members of the working group and comments from Athene Holding Ltd. Those revisions can be found here.

A number of the revisions to the draft pertain to the types of stipulations that regulators can impose when they conclude that a proposed acquisition would not otherwise satisfy the statutory criteria for Form A approval, and to the types of post-acquisition procedures that regulators may wish to follow in order to ascertain whether the proposed acquisition and the acquirer’s business plan are being executed as anticipated. The following is a list of those possible stipulations and procedures as they appear in the PEI Working Group’s revised draft:

Stipulation for a Limited Period of Time

  • Requiring RBC to be maintained at a specified amount above company action level, because capital serves as a buffer that insurers use to absorb unexpected losses and financial shocks—better protecting policyholders;
  • Requiring quarterly RBC reports rather than annual reports as otherwise required by state law;
  • Prohibiting the insurer from paying any ordinary or extraordinary dividends or other distributions to shareholders unless approved by the Commissioner;
  • Requiring a capital maintenance agreement from or establishment of a prefunded trust account by the acquiring entity or appropriate holding company within the group;
  • Enhancing scrutiny of operations, dividends, investments and reinsurance by requiring material changes in plans of operations to be filed with the Commissioner (including revised projections), which, at a minimum, would include affiliate/related party investments, dividends or reinsurance transactions to be approved prior to such change; and
  • Requiring a plan to be submitted by the group that allows all affiliated agreements and affiliated investments to be reviewed despite being below any materiality thresholds otherwise required by state law.

Continuing Stipulations

  • Requiring prior Commissioner approval of material arm’s-length, nonaffiliated reinsurance treaties or risk-sharing agreements;
  • Requiring notification within 30 days of any change in directors, executive officers, managers or persons acting in similar capacities of controlling entities, and biographical affidavits and such other information as shall reasonably be required by the Commissioner;
  • Requiring the filing of additional information regarding the corporate structure, controlling persons and other operations of the company;
  • Requiring the filing of any offering memoranda, private placement memoranda, any investor disclosure statements or any other investor solicitation materials that were used related to the acquisition of control or the funding of such acquisition;
  • Requiring disclosure of equity holders (both economic and voting) in all intermediate holding companies from the insurance company up to the ultimate controlling person or individual, but considering the burden on the acquiring party against the benefit to be received by the disclosure;
  • Requiring the filing of audit reports/financial statements of each equity holder of all intermediate holding companies, but considering the burden on the acquiring party against the benefit to be received by the disclosure; and
  • Requiring the filing of personal financial statements for each controlling person or entity
    of the insurance company and the intermediate holding companies up to the ultimate controlling person company. Controlling person could include for example, a person that has a management agreement with an intermediate holding company.

Post-Acquisition Procedures

  • Examining the insurer and its affiliates to ensure that the investment strategy continues to provides a prudent approach for investing policyholder funds or does not create excessive contagion risk;
  • Requiring ongoing annual stress testing of the insurer and the group in accordance with existing laws and regulations. This includes stress testing not only the investments but also the policyholder liabilities to ensure that the assets and liabilities continue to be properly matched;
  • Periodically reviewing of the investment management and other affiliated agreements, including reviewing the equity firm fees and fee structure charged or to be charged to the insurer, if any, as well as arrangements with intercompany broker to ensure that they continue to be fair and reasonable and examine the flow of funds related to such agreements;
  • Coordinating a meeting with multiple regulators and even all states to the extent there is a need for all regulators to better understand the business plan and operations of the group; and
  • Coordinating an examination with another regulator of nonaffiliated insurers where the direct writer has ceded a material portion of their risk to a separately controlled insurer.

The PEI Working Group will consider adopting the draft guidance at its November 17, 2014 session during the NAIC Fall National Meeting. The first half of that session will be devoted to a presentation by Igor Rozenblit, Co-Chair of the Private Funds Unit at the US Securities and Exchange Commission, so that the working group can take the SEC’s perspective into account before finalizing its draft.