PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:
Proposed Action:
Amendment of Subart 80-1 (Regulation 52) of Title 11 NYCRR.
Statutory authority:
Financial Services Law, sections 202 and 302; and Insurance Law, sections 301, 1504 and 1506
Subject:
Holding Companies.
Purpose:
To help ensure that acquisitions do not financially harm domestic insurers and are not likely to be hazardous to policyholders.
Substance of proposed rule (Full text is posted at the following State website:www.dfs.ny.gov):
Section 80-1.6, “Item 1. Insurer and method of acquisition,” is amended to require the applicant to provide the insurer’s National Association of Insurance Commissioners company code and to delete the word “brief” before “description of how control is to be acquired.”
Section 80-1.6, “Item 2. Identity and background of applicant,” “Item 3. Financial Statements,” and “Item 6. Interest in the securities of the insurer” are amended to clarify that an applicant must provide certain information with respect to individuals identified pursuant to this section’s “Note B”.
Section 80-1.6, “Note B” is amended to explicitly add limited partnerships, limited liability partnerships, and limited liability companies to the list of applicants that must provide information to the Superintendent of Financial Services (“Superintendent”).
Section 80-1.6, “Item 4. Nature, source and amount of consideration” is amended to provide that if any part of the funds or other consideration used or to be used in effecting the acquisition of control is represented or is to be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, or trading securities, or otherwise effecting the acquisition of control, then the applicant must furnish a description of the transaction, the names of the parties thereto, and copies of all agreements relating thereto, including any offering memoranda, private placement memoranda, any investor disclosure statements, or any other investor solicitation materials.
Section 80-1.6, “Item 5. Objectives in acquisition of control” (“Item 5”) is amended to state that an applicant “shall submit” a detailed plan of operations, including five-year financial projections, rather than stating that the Superintendent “may require” the submission of a detailed plan of operations. Item 5 is also amended to require an applicant to describe any plans or proposals that the applicant or any person identified pursuant to “Note B” of this section may have for the next five years to liquidate the insurer, to sell its assets to or merge it with any other persons, to declare any dividends, to change the insurer’s investment portfolio, or to make any other change in its business operations or corporate structure. The plans or proposals cannot be modified or amended without the Superintendent’s prior written approval.
Item 5 is amended to require an applicant to submit a detailed plan of operations relating to the insurer, and to submit new five-year projections under the plan of operations if, within five years of the date of acquisition of control, the insurer enters into any reinsurance treaty or agreement with, or any transaction investing with, lending to, or for the purchase of assets from, or any transaction encumbering its assets to, or for the benefit of the applicant or any person controlling, controlled by or under common control with the applicant. If the Superintendent determines that the new projections show that the insurer will not have adequate capital, then the insurer must obtain additional capital in an amount and of a quality sufficient to remedy the deficiency as determined by the Superintendent.
Item 5 is amended to provide that, with respect to a life insurer, the Superintendent may require that the applicant, or any holding company within the insurer’s holding company system, establish a trust account that substantially conforms to the requirements of 11 NYCRR 126 (Insurance Regulation 114) in an amount and for a duration to be determined by the Superintendent, if the Superintendent determines that, absent such action, the acquisition is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders.
Section 80-1.6, “Item 9. Material to be filed as exhibits” is amended to require an applicant to file copies of all investor solicitation materials and any operating, management, partnership, or limited partnership agreements with the Superintendent.
Text of proposed rule and any required statements and analyses may be obtained from:
Eugene Benger, New York State Department of Financial Services, One State Street, New York, NY 10004, (212) 480-2317, email: eugene.benger@dfs.ny.gov
Data, views or arguments may be submitted to:
Same as above.
Public comment will be received until:
45 days after publication of this notice.
This rule was not under consideration at the time this agency submitted its Regulatory Agenda for publication in the Register.
Regulatory Impact Statement
1. Statutory authority: Financial Services Law Sections 202 and 302 and Insurance Law Sections 301, 1504 and 1506.
Financial Services Law Section 202 establishes the office of the Superintendent of Financial Services (“Superintendent”).
Financial Services Law Section 302 and Insurance Law Section 301, in material part, authorize the Superintendent to effectuate any power accorded to the Superintendent by the Financial Services Law, Insurance Law, or any other applicable law, and to prescribe regulations interpreting the Insurance Law, the Financial Services Law, or any other applicable law.
Insurance Law Section 1504, among other things, authorizes the Superintendent to obtain information concerning the operations of persons within the holding company system that may materially affect the operations, management or financial condition of the insurer.
Insurance Law Section 1506 prohibits any person, other than an authorized insurer, from acquiring control of any New York domestic insurer unless the person gives notice to the domestic insurer and receives the Superintendent’s prior approval.
2. Legislative objectives: Insurance Law Article 15 generally sets forth standards for the regulation of holding company systems, and Insurance Law Section 1506 specifically sets forth standards for the acquisition or retention of control of New York domestic insurers. The Legislature enacted Article 15 in its current form in 1969 as the result of an extensive study conducted by the Superintendent of Insurance. The study found that “[w]hen a non-insurance holding company system includes an insurance company within it, its potential for specific harm becomes greater since tempting reservoirs of liquid assets become accessible to persons without any appreciation of the security needs of the insurance enterprise, and the interests of the policyholders thus become vulnerable.” The study also found that that “the interests of the controlling persons are potentially in conflict not only with those of the policyholders and the public but with those of any other shareholders of the insurance company.”
This amendment accords with the public policy objectives that the Legislature sought to advance by enacting Article 15, including Section 1506, by reducing the possibility that any person seeking to acquire control of a New York domestic insurer has interests that conflict with the interests of policyholders, shareholders, or the public and by minimizing the potential for harm to a domestic insurer.
3. Needs and benefits: In recent years, private equity firms have acquired insurers, particularly life insurers writing fixed and indexed annuity contracts. Private equity-controlled insurers now account for nearly 30 percent of the indexed annuity market (up from seven percent one year ago) and 15 percent of the total fixed annuity market (up from four percent one year ago). These large numbers indicate a rapid growth in market share.
The Department of Financial Services (“Department”) is concerned that private equity firms, and other investors with a similar investment horizon, focus on maximizing their short term financial returns rather than ensuring that long-term policyholders receive the insurance benefits for which they have paid. These investors typically manage their investments with a much shorter time horizon (e.g., three to five years) than is typically required for prudent insurer management. They may not be long-term players in the insurance industry, and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.
Private equity firms, which are generally organized as limited liability companies, limited partnerships or limited liability partnerships, often create acquisition vehicles (also in the form of limited liability companies or partnerships) for particular transactions within a short time prior to the proposed acquisition (typically, within three years). Because such corporate forms were not as common or were not statutorily authorized when the Department first promulgated Insurance Regulation 52, they were not explicitly referenced in the rule. However, the Department considers them to be included in the term “other similar entity” as that term is used in the current rule.
This amended rule advises applicants that the Superintendent may require, among other things, that the applicant, or any holding company within the insurer’s holding company system, to establish a trust account that substantially conforms to the requirements of 11 NYCRR 126 (Insurance Regulation 114), in an amount and for a duration to be determined by the Superintendent, if the Superintendent determines that, absent such action, the acquisition is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders. Although the amended rule references the establishment of a trust only in connection with an acquisition of a life insurer, the reference to a life insurer is merely to highlight the Department’s recent findings and concerns relating to acquisitions of life insurers. The Superintendent always had, and retains, the discretion to condition an acquisition, in appropriate circumstances as needed, on the fulfillment of additional requirements, including the use of a trust or other financial backstop where a non-life insurer is being acquired. In determining whether to require the establishment of a trust account, the Superintendent may consider, among other things, whether the applicant or any person controlling, controlled by or under common control with the applicant is: (1) registered or required to register with the United States Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940, 15 U.S.C. Section 80b-3, and the regulations promulgated thereunder, 17 C.F.R. Sections 275.204(b) 1, 279.9, or would be required to register pursuant to such provisions if it had $150 million or more in assets under management; (2) an investment company, pursuant to the Investment Company Act of 1940, 15 U.S.C. Section 80a-3, but without giving effect to the exemptions set forth in 15 U.S.C. Sections 80a-3(c)(1) and (3), for companies with fewer than 100 owners, or where all owners are qualified purchasers as defined in 15 U.S.C. Section 80a-2(a)(51); (3) an entity that was formed within 36 months prior to the date of the application; (4) a company primarily engaging in investing or investment management activities; or (5) an entity that holds for investment purposes a portfolio where non-publicly registered securities or holdings represent 50% or more of the assets of that entity.
The amendment adds new requirements and advises applicants that, in determining whether an acquisition may be harmful to the people of this state, the Superintendent may require additional information or impose certain additional conditions to help ensure that an acquisition does not financially harm a New York domestic insurer and is not likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders.
In addition, the amendment clarifies that the submission to the Superintendent of a detailed plan of operations, including five-year financial projections, is mandatory because in practice, the Superintendent always has required, and applicants always have submitted, a detailed plan of operations, together with financial projections.
The amendment further provides that if, within five years of the date of acquisition of control, the insurer enters into any reinsurance treaty or agreement with, or any transaction for the purchase of assets from, or encumbering its assets to or for the benefit of, the applicant or any person controlling, controlled by or under common control with the applicant, then the insurer must submit new five-year projections under the plan of operations. If the Superintendent determines that the new projections show that the insurer will not have adequate capital, then the insurer must obtain additional capital in an amount and of a quality sufficient to remedy the deficiency as determined by the Superintendent.
4. Costs: This amendment may impose compliance costs on a person, such as a private equity firm, seeking to acquire control of a New York domestic insurer, because it requires the person to file additional information with the Superintendent. Also, compliance costs may increase because the Superintendent may require the person to submit updated financial projections if the domestic insurer enters into certain transactions with the applicant or any person controlling, controlled by or under common control with the applicant, and the establishment of a trust account if the Superintendent determines that, absent such action, the acquisition is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders. Such costs are difficult to estimate and will vary depending upon a number of factors, including the specific actions required by the Superintendent to be taken, the complexity of the applicant’s organizational structure, and the number of individuals or entities that control other entities within the applicant’s organizational structure for whom the applicant must file certain additional information.
The Department may incur additional costs in connection with the implementation of this amendment, because Department staff will need to review the additional material submitted with applications for acquisition of control. However, because the Department typically does not receive more than twenty applications per year, any additional costs incurred should be minimal.
This amendment does not impose compliance costs on state or local governments.
5. Local government mandates: This amendment does not impose any requirement upon a county, city, town, village, school district, fire district, or other special district.
6. Paperwork: The amendment requires a person, such as a private equity firm, seeking to acquire control of a New York domestic insurer to file certain additional information with the Superintendent as part of its application, such as copies of operating, management, or partnership agreements, and investor solicitation materials. In addition, the Superintendent may require, among other things, updated financial projections if the domestic insurer enters into certain transactions with the applicant or any person controlling, controlled by or under common control with the applicant.
7. Duplication: This amendment will not duplicate, overlap, or conflict with any existing state or federal rules or other legal requirements.
8. Alternatives: In 2009, the Federal Deposit Insurance Corporation (“FDIC”) issued a “Final Statement of Policy on Qualifications for Failed Bank Acquisitions” (the “Statement”), which provides guidance to private capital investors interested in acquiring or investing in failed insured depository institutions. Although this amendment does not address acquisitions of “failed” insurers, the Department believes that the Statement is an appropriate analog, because the Statement and this amendment seek to address the same concern, namely, acquisitions by persons who may not be long-term players in the industry and whose focus may result in an incentive to boost short-term returns at the expense of the institution’s or insurer’s long-term obligations.
The Department reviewed the Statement and incorporated, with modifications, certain aspects of the Statement into this amendment. For example, the Statement provides that the resulting depository institution must maintain a ratio of Tier 1 common equity to total assets of at least ten percent for a period of three years from the time of acquisition, after which the depository institution must maintain no lower level of capital adequacy than “well capitalized” during the remaining period of ownership by the investors.
This amendment similarly advises an applicant seeking to acquire a domestic insurer that the Superintendent may require that the applicant establish (either directly or through any holding company within the insurer’s holding company system) a financial backstop, in the form of a trust account, to provide financial support for the benefit of the insurer in an amount and for a duration to be determined by the Superintendent. In light of the growth in private equity-controlled insurers, particularly life insurers writing fixed and indexed annuities, and the Department’s concern that private equity firms and other investors with a short-term investment horizon are focused on maximizing short term financial returns, this amendment advises applicants of the criteria that the Superintendent may consider in determining whether the establishment of a trust account is required to ensure that the acquisition is not likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders.
However, certain aspects of the Statement were too restrictive and were not incorporated. For instance, the Statement prohibits an insured depository institution acquired by an investor from extending credit to the investor, its investment funds if any, and any affiliates of the investor or investment funds. This limitation was not incorporated into the amendment, because, under current law, extensions of credit above certain thresholds by the insurer to any person in the insurer’s holding company system are subject to the Superintendent’s prior approval, which provides sufficient protection.
The amendment also does not incorporate the Statement’s requirement that an institution maintain a specific capital level for a period of three years from the time of acquisition by investors. The Department believes that providing flexibility in determining the amount and duration of the trust account will enable the Superintendent to better tailor the trust requirements based on discussions with the applicants and the insurer.
9. Federal standards: The amendment does not exceed any minimum standards of the federal government for the same or similar subject areas.
10. Compliance schedule: The amendment would be effective upon publication in the State Register and apply to any person seeking to acquire control on or after such date.
Regulatory Flexibility Analysis
Small businesses: This amendment will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping, or other compliance requirements on small businesses. The basis for this finding is that the amendment is directed at a person seeking to acquire control of a New York domestic insurer. Such a person does not fall within the definition of a “small business” as found in State Administrative Procedure Act § 102(8) because a person seeking to acquire control of an insurer, such as a private equity firm, typically is not independently owned and does not have fewer than 100 employees, but rather typically is controlled by other persons.
Local governments: The amendment does not impose any impact, including any adverse impact, or reporting, recordkeeping, or other compliance requirements on any local governments. The basis for this finding is that the amendment is directed at persons and entities that are not local governments.
Rural Area Flexibility Analysis
1. Types and estimated numbers of rural areas: Persons seeking to acquire control of insurers, and insurers, affected by this amendment operate in every county in this state, including rural areas as defined in State Administrative Procedure Act (“SAPA”) § 102(10).
2. Reporting, recordkeeping and other compliance requirements; and professional services: The amendment imposes additional reporting, recordkeeping, and other compliance requirements by requiring a person, including a person in a rural area, who is seeking to acquire control of a New York domestic insurer to file certain additional information with the Superintendent of Financial Services (“Superintendent”) as part of its application, such as copies of operating, management or partnership agreements and investor solicitation materials. In addition, the Superintendent may require, among other things, updated financial projections if the domestic insurer enters into certain transactions with the applicant or any person controlling, controlled by or under common control with the applicant.
It is unlikely that a person in a rural area seeking to acquire control of an insurer would need professional services to comply with this amendment beyond the professional services the person already would be using.
3. Costs: The amendment may result in additional costs to any person, including a person in a rural area, seeking to acquire control of a New York domestic insurer, because it requires the person to file additional information with the Superintendent. Also, compliance costs may increase because this amendment advises applicants that the Superintendent may require persons who control New York domestic insurers to provide updated financial projections and/or establish a trust account. Such costs are difficult to estimate and will vary depending upon a number of factors, including the complexity of an applicant’s organizational structure and the number of individuals or entities that control other entities within the applicant’s organizational structure for whom the applicant must file certain additional information. However, any additional costs to applicants or insurers in rural areas should be the same as for applicants or insurers in non-rural areas, and the costs should not differ between public and private entities in rural areas.
4. Minimizing adverse impact: The amendment should not have an adverse impact on rural areas. The amendment affects uniformly applicants and insurers who are located in both rural and non-rural areas of New York State and seeks to protect the interests of policyholders, shareholders and the public, including those located in rural areas.
5. Rural area participation: Public and private interests in rural areas will have an opportunity to participate in the rule making process once the proposed rule is published in the State Register and posted on the website of the Department of Financial Services.
Job Impact Statement
The amendment to this rule should not adversely impact jobs or employment opportunities in New York State. It is likely to have no impact whatsoever, since the amendment advises applicants that the Superintendent of Financial Services requires the submission of certain information to ensure that anyone seeking to acquire control of a New York domestic insurer does not have interests that conflict with the interests of policyholders, shareholders, or the public and that any potential for specific harm to a domestic insurer is minimized.
