April 26, 2022

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

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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.

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