NAIC refines work plan to review Holding Company Act filings

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In our report published on April 26, 2022, we discussed the New York Department of Financial Services (NYDFS) Circular Letter No. 5 in which it reminded the industry that the acquisition of less than 10% of securities with an insurer’s voting right does not necessarily mean that the acquirer (1) is not a “monitor” and (2) does not have to submit a Form A request to the home state of the insurer. insurer or national regulator requesting approval of the change of control. This topic is one of many related issues that various National Association of Insurance Commissioners (NAIC) committees, task forces, and task forces are studying and will continue to study over a period of years (the Draft). The NAIC’s Macroprudential Task Force (E) (Task Force) oversees the project. In December 2021, when the NAIC Financial Stability (E) Task Force and Task Force developed a “list of [13] Regulatory Considerations – PE-Related and Other” (list) we reported on this development. We now report on the Working Group’s publication of regulators’ reactions to the List. (The working group will accept feedback on regulator reactions until June 13, 2022.)

IN DEPTH


INTRODUCTION

The NAIC and the task force have consistently pointed out that while many of the issues on the list arise in the context of Form A filings submitted by private equity funds (PE funds) and subsequent filings of related holding companies, problems can also be spotted in other contexts. That said, some of the issues that appear to be of most concern to regulators are associated with services provided to insurers by other PE Fund portfolio companies, structured investments by those companies, or debt securities issued by portfolio companies. One of the regulatory considerations listed in December 2021 was whether to define “private equity funds”, however, regulators have now decided (at least for now) that a definition is not necessary. . In any case, regulators are concerned with all owners and supervisors of insurers, not just PE funds. Anyone interested in holding company law issues should pay attention to the working group, the progress of the project and the input it will receive from a wide variety of regulatory bodies here and at abroad in the years to come.

We begin with reactions from regulators to Form A filing considerations. These reactions, in the form of possible “stipulations” or conditions to Form A approvals, will provide a good indication of the direction in which regulators may be heading. . However, the remaining sections of this article highlight concerns expressed by regulators at recent NAIC meetings, both with respect to Form A filings and other corporate law disclosure requirements. holding company, in particular:

CHANGE OF CONTROL DEPOSITS FORM

The task force’s latest report begins with a variety of “stipulations” that regulators have suggested could be used as part of Form A change of control request approvals, with some of the stipulations or conditions being time-limited.

Time-limited provisions

  • Require insurers to disclose “material changes” (along with financial projections) in items such as operations, dividends, investments, affiliation agreements (especially cost-sharing agreements) and reinsurance which would otherwise not be reportable or subject to prior approval or non-disapproval under the existing laws of the Holding Companies Act.

Continuing stipulations

REFERRAL TO OTHER NAIC WORKING GROUPS

As mentioned above, a number of NAIC committees, task forces, and task forces are contributing to the review of the 13 regulatory considerations, with some of the other bodies having already begun their work. Below are the questions sent to each group.

Group Solvency Matters Working Group (E)

  • Develop an optimal disclosure protocol that covers otherwise unresolved credit issues (for exampledig deeper into the acquirer’s motivations/objectives, understand the sources of returns or profits expected from the acquirer, investigate the ability of the acquirer to provide capital support)

  • Identify sources of expertise for regulators in all states to draw upon as needed (candidates footing the bill for these assignments) regarding “complex transactions, particularly in understanding non-U.S. affiliations and when evaluating multiple Complex Form A applications”

Risk-Based Supervision Working Group (E)

  • Create protocols to identify and evaluate securities/investments developed by affiliates of monitors or affiliates of portfolio companies of a PE fund, with respect to conflicts of interest and hidden or excessive fees

The Statutory Accounting Principles Working Group (E) and the Risk-Based Supervision Working Group (E)

  • Develop codes to identify and facilitate the disclosure of related party investments, particularly structured securities (for exampleloan-backed bonds (CLOs)) where a related party may originate one or more of the bonds included in the CLO held by the insurer

  • For CLOs, consider another referral—to the NAIC Exam Oversight (E) Task Force—to determine ways to obtain more details about investments in CLOs, including obtaining copies of disclosures provided to potential investors

  • With respect to structured securities generally, whether issued or structured by related or unrelated parties, the task force will rely on the expertise provided by the NAIC’s Office of Capital Markets and its office of assessment of securities to increase monitoring/analytical capabilities, including the use of rating agency reports to investigate potential credit, complexity and illiquidity risks as well as lack of transparency. In addition, regulators plan to study:

    • Adequacy of governance and controls of insurers regarding investment and monitoring of investments in complex securities

    • Improved regulatory tools and insurer disclosures (as part of a Schedule D redesign project) to “automate” the screening of investments in complex securities

    • Reliance on ratings from rating agencies, monitoring over the next few years as the project continues.

DISCLAIMER

The working group noted NYDFS Circular Letter #5 and confirmed that copies had been sent to all working group members. The Working Group is particularly interested in disclaimers filed by entities that manage assets/investments. Regulators will use the information contained in Appendix Y, Part 3, new for 2021, to identify any person/entity that owns 10% or more of the voting securities of an insurer. and will seek ways to identify persons/entities of interest who hold less than 10% of the voting securities of an insurer.

“OFFSHORE REINSURERS”

Members of the task force said they did not understand why insurers are turning to offshore reinsurers, captives and ancillary entities. They plan to meet with industry participants and offshore regulators to understand the drivers and answer the following questions:

RETIREMENT RISK TRANSFERS

The task force will consult with the U.S. Department of Labor and work with a number of other bodies within the NAIC, including the Life Actuarial Task Force (A), the Statutory Accounting Principles Task Force (E), and the Life Risk-Based Capital (E) Task Force, to (1) better understand the role that more complex investments play in these large transactions, (2) assess the application of the task force’s previously outlined actuarial guideline life actuarial (A) to pension risk transfers and (3) to investigate whether better information on pension risk transfers is needed. The task force will also continue to monitor the work of the Longevity Risk Transfer subgroup of the Life Venture Capital (E) Task Force.

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