In our report published on April 26, 2022, we discussed the New York Department of Financial Services’ (NYDFS) Circular Letter No. 5 in which it reminded the industry that acquiring less than 10% of an insurer’s voting securities does not necessarily mean that the acquirer (1) is not a “controller” and (2) does not have to submit a Form A application to the insurer’s home state or domestic regulator seeking approval for the change of control. This topic is one of several related matters that various committees, task forces and working groups of the National Association of Insurance Commissioners (NAIC) are studying and will continue to study over a multiyear period (the Project). The NAIC’s Macroprudential (E) Working Group (Working Group) is overseeing the Project. In December 2021, when the NAIC’s Financial Stability (E) Task Force and the Working Group developed a “List of  Regulatory Considerations – PE Related and Other” (List), we reportedon that development. We now report on the Working Group’s publication of regulators’ reactions to the List. (The Working Group will accept comments on the regulators’ reactions until June 13, 2022.)
The NAIC and the Working Group have continuously stressed that while many of the issues in the List arise in the context of Form A filings submitted by private equity funds (PE Funds) and subsequent related holding company act filings, the issues can also be spotted in other contexts. That said, some of the issues that seem of most concern to regulators are associated with services provided to insurers by fellow PE Fund portfolio companies, investments structured by such companies or debt obligations issued by portfolio companies. One of the regulatory considerations listed back in December 2021 was whether to define “private equity funds,” however, regulators have now decided (at least for the moment) that a definition is not needed. In any case, regulators are concerned with all owners and controllers of insurers, not just PE Funds. Anyone interested in Holding Company Act matters should pay attention to the Working Group, the progress of the Project and the inputs it will receive from a wide variety of regulators here and abroad in the coming years.
We lead off with regulator reactions to Form A filing considerations. These reactions, in the form of possible “stipulations” or conditions to Form A approvals, will provide a good indication of the direction in which regulators may be headed. However, the remaining sections of this article highlight the concerns that regulators have been expressing in recent NAIC meetings, both with respect to Form A filings and to other Holding Company Act disclosure requirements, including:
Corporate developments that current Holding Company Act filing requirements do not capture
Influence and activities of less than 10% shareholders, particularly vis-à-vis investment management agreements
Identify and understand complex, structured securities and their features
Use of “offshore reinsurance”
Whether (and when) explicit capital support for an insurer’s balance sheet is needed and from whom it can be obtained.
FORM A CHANGE OF CONTROL FILINGS
The Working Group’s latest report begins with a variety of “stipulations” that regulators have suggested could be used in connection with Form A change of control application approvals, with some of the stipulations or conditions being time limited.
Limited Duration Stipulations
Requiring risk-based capital (RBC) levels to be maintained more than company action/trend test levels
Requiring RBC reports quarterly rather than annually
Prohibiting dividends, even ordinary dividends
Requiring applicants to provide capital maintenance support, possibly in a funded trust account
Requiring insurers to disclose “material changes” (with accompanying financial projections) in items, such as operations, dividends, investments, affiliated agreements (particularly cost-sharing agreements) and reinsurance that would otherwise not be reportable or subject to prior approval or non-disapproval under existing Holding Company Act laws.
Prior approval is required for all material reinsurance agreements, even those with non-affiliates
Early notification (within 30 days) of all changes in directors and executive officers (including the filing of biographical affidavits)
Sharing all disclosure documents provided to prospective investors or to lenders involved with the acquisition of the insurer in question
Disclose all involved parties. Those with voting equity or with any economic interest in intermediate companies/entities are up to the ultimate controller to disclose
Require all of the above parties to supply financial statements.
REFERRALS TO OTHER NAIC WORKING GROUPS
As mentioned above, there are a number of NAIC committees, task forces and working groups that are contributing to the review of the 13 regulatory considerations, with some of the other bodies having already begun their work. Below are the issues being referred to each group.
Group Solvency Issues (E) Working Group
Develop an optimal disclosure protocol that covers otherwise unaddressed solvency concerns (e.g., drilling deeper into the motivations/purposes of the acquirer, understanding the acquirer’s expected sources of returns or profits, inquiring into the acquirer’s ability to provide capital support)
Train regulators in states that may not have a high volume of Form A applications to review
Identify sources of expertise for regulators in all states to utilize as needed (with applicants footing the bill for such assignments) concerning “complex transaction, especially to understand non-U.S. affiliations and when assessing multiple complex Form A applications”
Focus on persons/entities that do not have 10% or more ownership of voting securities, including:
Non-customary minority shareholder rights
Investment management agreement provisions, such as costly termination provisions or excessive control over investment decisions
Gather “detailed examples to address the complexity and creativity involved” in Form A applications
Consider ways to “better target…pertinent agreements to assess…” the impact of less than 10% owners
Consider enhanced Form B (annual holding company group registration) filings.
Risk-Focused Surveillance (E) Working Group
Work on affiliate agreements and Form D (material transactions with affiliates) filings (which the group is already doing)
Focus on investment management agreement termination provisions on subadvisors (as well as any additional fees)
Create protocols to identify and evaluate securities/investments developed by affiliates of controllers or affiliates of a PE Fund’s portfolio companies, with respect to conflicts of interest and hidden or excessive fees
Evaluate whether to involve the NAIC’s Valuation of Securities (E) Task Force
Examine surplus notes, particularly those with floating interest rates; possibly liaison with the NAIC’s Statutory Accounting Principles (E) Working Group
Make capital support agreements stronger and focus on ensuring that such agreements are executed with proper parties, particularly for life and annuity issues where liabilities are long term
Consider PE Fund acquirers (and others) that may have little or limited experience in operating insurers, as well as possible overreliance on third-party service providers and:
More Form A disclosures
Compare with EU practices
Consider providing more guidance to financial examiners.
Both the Statutory Accounting Principles (E) Working Group and the Risk-Focused Surveillance (E) Working Group
Develop codes to identify and facilitate the disclosure of related-party investments, particularly structured securities (e.g., collateralized loan obligations (CLOs)) where a related party may have originated one or more of the obligations included in the CLO held by the insurer
For CLOs, contemplate another referral—to the NAIC’s Examination Oversight (E) Task Force—to ascertain ways and means to obtain more detail about CLO investments, including obtaining copies of disclosures provided to potential investors
With respect to structured securities in general—whether issued or structured by related parties or not—the Working Group will draw upon expertise provided by the NAIC’s Capital Markets Bureau and its Securities Valuation Office to increase monitoring/analytic capabilities, including the use of rating agency reports to study potential credit, complexity and illiquidity risks as well as lack of transparency. Additionally, regulators plan to study:
Adequacy of insurer governance and controls with respect to investing and monitoring investments in complex securities
Improvement of regulatory tools and insurer disclosures (pursuant to a project to revamp Schedule D) to “automate” screening for investments in complex securities
Reliance on rating agency ratings, monitoring over the next several years as the project continues.
DISCLAIMERS OF AFFILIATION
The Working Group noted the NYDFS’ Circular Letter No. 5 and confirmed that copies had been sent to all members of the Working Group. The Working Group is particularly interested in disclaimers filed by entities that manage assets/investments. Regulators will use the information contained in the new-for-2021 Schedule Y, Part 3 to identify any disclaiming person/entity holding 10% or more of an insurer’s voting securities and will pursue ways and means to identify persons/entities of interest that hold less than 10% of an insurer’s voting securities.
Members of the Working Group have made known that they do not understand why insurers turn to offshore reinsurers, captives and sidecar entities. They plan to meet with industry participants and offshore regulators to understand the drivers and to answer the following questions:
Do US regulatory requirements mean that insurers are holding “excess reserves”?
Are there other drivers?
PENSION RISK TRANSFERS
The Working Group will be consulting with the US Department of Labor and working with a number of other bodies within the NAIC, including the Life Actuarial (A) Task Force, Statutory Accounting Principles (E) Working Group and the Life Risk-Based Capital (E) Working Group, to (1) better understand the role that more complex investments play in these large transactions, (2) evaluate the application of Life Actuarial (A) Task Force’s already exposed Actuarial Guideline to pension risk transfers and (3) study whether better disclosures regarding pension risk transfers are required. The Working Group will also continue to follow the work of the Longevity Risk Transfer subgroup of the Life Risk-Based Capital (E) Working Group.