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As private equity and venture capital investors add investments in insurance companies to their portfolios, those investments may become more regulated than they anticipated. While private equity investing in insurance companies is nothing new, the market has recently seen increasing investment, particularly in relation to the life insurance industry. In an October 2020 Client Alert, we discussed how such investments can trigger a change of control under state insurance laws, which are modeled after the National Association of Insurance Commissioners (NAIC) Insurance Holding Company Regulatory Act.
An individual or entity gaining control of an insurance company must first file a Form A with that insurer’s domestic governmental insurance regulator and obtain approval for the proposed transaction prior to consummation. Under state insurance law, “control” of an insurer is deemed to exist when a person directly or indirectly owns, controls, or has voting rights of 10% or more of the insurer’s voting securities. When analyzing control, insurance regulators don’t just look at the person or entity that directly holds the insurer’s voting securities – they look up the entire chain of companies, right up to every person who beneficially owns, controls or has voting rights holding 10% or more of the voting securities of the insurer.
Over the past year, however, some state insurance regulators have raised additional concerns about private equity interests or investments — and other complex investments — in insurance companies. Under the auspices of the NAIC, these concerns were recently discussed in a list of 13 regulatory considerations, along with specific action points designed to address them. Additional regulatory disclosures are also being considered for retail investors holding less than 10%, which often includes venture capital.
While many venture capital and other private investors have been scrambling to stay below the 10% threshold, the NAIC Group Solvency Issues (E) Working Group is expected to review additional disclosures and questions that would be helpful for insurance regulators in identifying one Person directly or indirectly owning it fewer than 10% of an insurance company’s issued and outstanding voting securities should still be considered to control the insurance company. This could be the case, for example, due to board or management representation or contractual agreements. It could also involve unusual rights or arrangements by minority shareholders. These additional disclosures and questions about those who own more than 10% may be included in a Form A filing and/or periodic regulatory filings such as B. Annual Form B registration statements for insurance holding companies.
Increased federal interest
The release of the NAIC’s list of proposed considerations coincides with increased federal interest in the role of private equity in the insurance industry. Last summer, US Senator Sherrod Brown, an Ohio Democrat and chairman of the US Senate Committee on Banking, Housing and Urban Affairs, sent letters to the Treasury Department’s Federal Insurance Office and the NAIC asking for their continued review of the growing role of private equity in the insurance industry.
The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.
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