New York Insurance Regulator Targets Private Equity Investments | Goodwin

The Goodwin Insurtech team recently published an article highlighting the tendency of insurance regulators to focus on privately-funded insurers and key regulatory considerations applicable to such investments. As noted, given the stringent disclosure requirements to vet insurance investors, any potential expansion of these requirements could cause some investors to shy away from investment opportunities. Nonetheless, the New York State Department of Financial Services (“NYSDFS”) has now released guidance that puts renewed pressure on the industry and could significantly alter the future of insurance transactions in New York.

On April 19, 2022, the NYSDFS issued Assurance Circular No. 5 (2022) (the “Circular Letter”), titled “Acquisitions of Control and Disclaimers of Control”, in response to the recent trend by investors to structure investments in New York insurers such as an acquisition of less than 10% of the insurers’ voting securities, based on the expectation that an investment below that level would avoid the filing and approval requirements imposed by New York Insurance Law.

Specifically, under Section 1506 of the New York Insurance Act, “no person other than a licensed insurer shall acquire control of a national insurer, whether by purchase of its securities or otherwise, unless it receives the prior approval of the Superintendent. In turn, “control” is defined in section 1501(a)(2) of the New York Insurance Act as “the possession, direct or indirect, of the power to direct or cause to be directed the management and a person’s policies, whether through ownership of voting securities, by contract…or otherwise… control is presumed to exist if a person owns, controls or holds, directly or indirectly, ten percent or more of the voting securities of any other person.

While many investors have treated the 10% threshold as determinative of whether a particular transaction requires NYSDFS approval, the circular letter warns that a “determination of ‘control’ under Insurance Law § 1501(a)(2) depends on all the facts and circumstances” and that the presumption of control “does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a decision of control”. Furthermore, the circular letter notes that the right to appoint an administrator of an insurer may, combined with other factors, lead to a control decision. The circular letter even goes so far as to state that “a controlling relationship may arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer.

The Circular Letter urges parties contemplating transactions that may raise potential control issues (including, but not limited to, transactions involving the acquisition of an insurer’s voting securities or the allocation of a seat on the board of directors) to engage with the NYSDFS as soon as possible, even if the parties believe that such a transaction does not exceed the “control” threshold, in order to allow sufficient time for the NYSDFS to examine. Accordingly, many other transactions may require notification and approval by the NYSDFS.

In our view, the NYSDFS position is likely to generate significant controversy in the insurance industry, as many investors may find the absence of clear rules unworkable, and the potential for delays and increased regulatory scrutiny may cause some investors to turn away from investment opportunities. . Still, if one thing is clear, it’s that the circular letter brings renewed opacity and pressure to the industry and could significantly change the way insurance deals are structured in New York, especially for alternative investors.

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