As private equity and venture capital investors add insurance company investments to their portfolios, those investments may end up being more regulated than they bargained for. Although private equity investment in insurance companies is not new, the market has recently seen increased investment, particularly in relation to the life insurance industry. In an October 2020 client alert, we discussed how such investments could trigger a change in control under state insurance laws modeled after the National Association of Insurance Commissioners (NAIC) Insurance Holding Company System Regulatory Act.
A person or entity acquiring control of an insurance company must first file a Form A with that insurer’s domestic state insurance regulator and secure approval for the proposed transaction prior to completion. Under state insurance law, “control” of an insurer is presumed to exist if a person directly or indirectly owns, controls or holds with the power to vote 10% or more of the voting securities of the insurer. When analyzing control, insurance regulators don’t just look at the individual or entity that directly holds the voting securities of the insurer – they look up through the corporate chain at any individual who beneficially owns, controls or holds the power to vote 10% or more of the insurer’s voting securities.
Over the past year, however, some state insurance regulators have expressed additional concerns about private equity ownership or investment—and other complex investments—in insurance companies. Under the auspices of the NAIC, these concerns were recently addressed in a list of 13 regulatory considerations, along with specific action items designed to address them. Even for private investors holding less than 10%, which often include venture capital, additional regulatory disclosures are currently being considered.
While many venture capital and other private investors have gone out of their way to stay below the 10% threshold, the NAIC Group Solvency Issues (E) Working Group is expected to consider additional disclosures and questions that would be helpful for insurance regulators to to identify whether a person who directly or indirectly owns less than 10% of the issued and outstanding voting securities of an insurance company must nevertheless be considered to control the insurance company. This could be, for example, as a result of board or management representation or contractual arrangements. It may also include non-customary minority shareholder rights or covenants. These additional disclosures and questions about those who own more than 10% may be included in a Form A filing and/or in periodic regulatory filings, such as the annual Form B insurance holding company registration statements.
Increased federal interest
The issuance of the NAIC’s list of proposed considerations coincides with increased federal interest in private equity’s role in the insurance industry. This past summer, US Sen. Sherrod Brown, an Ohio Democrat who chairs the US Senate Banking, Housing and Urban Affairs Committee, sent letters to the Treasury Department’s Federal Insurance Office, as well as the NAIC, requesting their continued consideration. of private equity’s growing role in the insurance industry.
If you would like to know more about these recent developments, please contact your Cooley contact.