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Follow the rules: new filings will be required in states that enact the 2010 Model Act amendments.

The National Association of Insurance Commissioners adopted amendments to its Insurance Holding Company System Regulatory Act in December 2010.

So far, states that have enacted changes to their insurance holding company laws based on the 2010 Model Act amendments include Rhode Island (effective May 27, 2011),Texas (Sept. 1, 2011) and West Virginia (July 1, 2012).

Bills to adopt the 2010 Model Act amendments also have been introduced in several other state legislatures.

First, let's describe the new filings that will be required in states that enact the 2010 Model Act amendments that may apply if an approved controlling person of a U.S. insurer or its parent makes an additional investment by acquiring extra voting securities from another person that is disposing of 10% or more of the voting securities of the insurer.

New filings may also be required if an existing person that controls a U.S. insurer or its parent disposes of 10% or more of the voting securities of the insurer to a person that the domestic state insurance regulator exempts from having to be approved as a controlling person.

'Form A' Approval Requirement

Ever since it was first adopted by the NAIC in 1969, the Model Act has required that a person that acquires control of a U.S. insurer (a person is presumed to control a U.S. insurer if it acquires 10% or more of the voting securities of the U.S. insurer or its parent) must generally file a "Form A" application to acquire control of the insurer with the insurer's domestic state insurance regulator and obtain the approval of the regulator. However, absent any commitment delivered by the acquiring person or any condition imposed on the acquiring person by the regulator as part of its approval, if the acquiring person is approved as a controlling person, no additional Form A filing or approval has to now be required under the Model Act for the person to acquire an additional 10'% or more of the voting securities of the insurer. However, in states that enact the 2010 Model Act amendments, two additional filings and one possible additional approval may be required for such an additional investment by an approved controlling person or divestiture to a person exempt from having to be approved as a controlling person.

New Divestiture of Control Filing

The 2010 Model Act amendments added the following Section 3.A(2) to the Model Act:

"For purposes of this section, any controlling person of a domestic insurer seeking to divest its controlling interest in the domestic insurer, in any manner, shall file with the commissioner, with a copy to the insurer, confidential notice of its proposed divestiture at least 30 days prior to the cessation of control. The commissioner shall determine those instances in which the party(ies) seeking to divest or to acquire a controlling interest in an insurer, will be required to file for and obtain approval of the transaction. The information shall remain confidential until the conclusion of the transaction unless the commissioner, in his or her discretion, determines that confidential treatment will interfere with enforcement of this section. If the statement referred to in Paragraph (1) [the Form A statement] is otherwise filed, this paragraph shall not apply."

This provision was designed to require possible domestic state regulator approval for a transaction in which an existing controlling person seeks to divest itself of 100% of a U.S. insurer but no new person acquires a controlling (10'% or more of voting securities) stake.

This provision was recommended by the Pennsylvania Insurance Department after a Pennsylvania court, in April 2010, rejected the department's claim that regulatory approval was required when Kingsway Financial Services, in October 2009, disposed of 100% of the voting securities of Lincoln General Insurance Co., a Pennsylvania domestic insurer, by gifting 5% of voting securities to each of 20 charities. While this provision addresses a Kingsway-type disposition, that kind of transaction is likely to be quite rare, if it ever happens again.

Instead, this provision will also capture three kinds of disposition scenarios that actually do happen with some regularity:

* An initial public offering involving 10% or more of the voting securities of a U.S. insurer or its parent.

* The sale of 10% or more of voting securities of a U.S. insurer or its parent to an already approved controlling person.

* The sale of 10% or more of voting securities of a U.S. insurer or its parent to a person that the domestic state insurance regulator exempts from having to be approved as a controlling person.

The application of this new provision to these kinds of disposition scenarios may be an unintended consequence of the 2010 Model Act amendments.

Consider how these would apply in the latter two scenarios:

Scenario 1--a sale to an already approved controlling person.

Scenario 2--a sale to a person that the domestic state insurance regulator exempts from having to be approved as a controlling person.

Scenario 1. New Section 3.A(2) requires that a person that seeks to sell a controlling (10% or more of voting securities) stake in a U.S. insurer to a person that already is an approved controlling person of that insurer file a confidential notice of its proposed divestiture at least 30 days prior to the cessation of control with the insurer's domestic state insurance regulator. The regulator will then have the right to require that the divesting or acquiring person file for and obtain approval of the transaction. While the last sentence of Section 3.A(2) exempts the divesting person from this filing requirement if the acquiring person is not an approved controlling person and must itself file and obtain approval for its acquisition of control of the insurer under Section 3.A(1), the exemption does not apply to an already existing approved controlling person. For example, if Party A and Party B are each approved controlling persons of a U.S insurer owning 40% and 30% of the voting securities of the insurer, respectively, and Party B decides to sell its 30% stake to Party A, then, if the U.S. insurer's domestic state has enacted the 2010 Model Act amendments, Party B must make this divestiture filing under Section 3.A(2).

Scenario 2. Section 3.E(2) of the Model Act authorizes the domestic state insurance regulator to, by order, exempt an acquisition from Section 3 (the section that contains the acquisition of control filing and approval requirements). Prior to the 2010 Model Act Amendments, such an exemption might have been sought by the acquiring person from the Section 3.A(1) Form A filing and approval requirements. Under the 2010 Model Act amendments, even if such a Form A exemption is obtained by the acquiring person, the new Section 3.A(2) will still require the divesting person to file a confidential notice of its proposed divestiture at least 30 days prior to the cessation of control with the insurer's domestic state insurance regulator. The regulator will then have the right to require that the divesting or acquiring person file for and obtain approval of the transaction even though the acquiring person has been exempted from seeking regulatory approval for the transaction. While the last sentence of Section 3.A(2) exempts the divesting person from this filing requirement if the acquiring person is not an approved controlling person and must itself file and obtain approval for its acquisition of control of the insurer under Section 3.A(1), that sentence does not apply to an exempt acquiring person since the exempt acquiring person has been excused from the requirements of Section 3.A(1). For example, if Party A is an approved controlling person of a U.S insurer owning 100% of the voting securities of the insurer and Party A decides to sell a 15'/0 stake to Party B, then, if the U.S. insurer's domestic state has enacted the 2010 Model Act amendments, even if Party B (the acquiring person) obtains an order exempting it from the Form A filing and approval requirements, Party A (the divesting person) must still make this divestiture filing under Section 3.A(2). One way to avoid this result is for Party A and B to jointly file a request for the divesting person to be exempted from the Section 3.A(2) divestiture filing requirement and the acquiring person to be exempted from the Section 3.A(1) Form A filing and approval requirement.

One can only hope that the domestic state insurance regulator will determine that no filing and approval for the divestiture is required by the divesting or acquiring person under either of these scenarios since the acquiring person is already an approved controlling person or has, by order of the regulator, been made exempt from the Form A filing and approval requirements.

Pre-Acquisition Notification

The 2010 Model Act amendments also added the following Section 3.A(3) to the Model Act:

"With respect to a transaction subject to this section, the acquiring person must also file a preacquisition notification with the commissioner; which shall contain the information set forth in Section 3.1C(1).A failure to file the notification may be subject to penalties specified in Section 3.1 E(3)."

The pre-acquisition notification is a filing on Form E that discloses any potential anti-competitive market concentration that may result from the proposed transaction. Because this new Section 3.A(3) applies with respect to a "transaction" subject to "this section" (Section 3), it applies to a divestiture transaction under new Section 3.A(2). The application of Section 3.A(3) to a Scenario 1 or 2 divestiture transaction is as follows:

Scenario 1. Party B seeks to sell its 30% stake to Party A, an approved controlling person with an existing 40% stake. Since Party A is already an approved controlling person, such a divestiture alone should never result in additional market concentration. However, since a filing is required, consideration might be given to the acquiring person filing a letter stating as much in lieu of filing an actual Form E pre-acquisition notification. It's expected that this is also an unintended consequence of Section 3.A(3) but one that imposes a technical but purposeless filing burden on the acquiring person in the scenario above.

Scenario 2. Party A decides to sell a 15% stake (from its 100% stake) to Party B. If Party B obtains an exemption under Section 3.E(2) from both Section 3.A(1) Form A filing and approval requirements and the Section 3.A(3) divestiture related Form E filing, then the exemption should excuse Party B from both of these obligations since the exemption would apply to all requirements of Section 3.

It used to be enough for U.S. insurance regulatory practitioners to have to think about insurance regulatory filings and approvals when a person acquires control of a U.S. insurer. Because of the 2010 Model Act amendments, practitioners now have to think about regulatory filings required to be made in connection with divestitures of controlling interests in U.S. insurers, even in situations in which no one would think that a regulatory filing or approval might be required-a transfer of a controlling interest to an already approved controlling person and a sale to a person that the domestic state insurance regulator exempts from having to be approved as a controlling person. It will be important for practitioners to monitor the states that enact the 2010 Model Act amendments to be sure that any divesting and acquiring persons comply with the requirements of new Model Act Section 3.A(2) and Section 3.A(3).

Key Points

* What Happened: The National Association of Insurance Commissioners adopted amendments to its Insurance Holding Company System Regulatory Act in December 2010. So far, three states have enacted changes to their insurance holding company laws based on the 2010 Model Act amendments.

* The Significance: In states that enact the 2010 Model Act amendments, two additional filings and one possible additional approval may be required.

* Watch For: Practitioners to monitor the states that enact the 2010 Model Act amendments to be sure that any divesting and acquiring persons comply with the requirements of new Model Act Section 3.A(2) and Section 3.A(3).

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Contributors: John Dembeck and Michael D. Devins are Counsel in the New York office of Dembeck Devins Debevoise & Plimpton LLP and are members of the firm's Insurance Industry Group. They may be reached at jdembeck@debevoise.com and mddevins@debevoise.com
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Title Annotation:Regulatory/Law: 20 Model Act; Insurance Holding Company System Regulatory Act
Comment:Follow the rules: new filings will be required in states that enact the 2010 Model Act amendments.(Regulatory/Law: 20 Model Act)(Insurance Holding Company System Regulatory Act )
Author:Dembeck, John; Devins, Michael D.
Publication:Best's Review
Geographic Code:1USA
Date:Apr 1, 2012
Words:2106
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