Any person or company that wishes to acquire control of a US insurer is required to file an acquisition statement called a “Form A” with the insurance regulatory authority in the state where the target insurer is legally domiciled (and, in some cases, in states where the target is deemed “commercially domiciled”). The acquisition cannot be completed until the relevant insurance regulatory authority has given its approval. In cases where an insurance holding company that controls multiple insurers is being acquired, this process may require multiple Form A applications to be filed in the various states where those insurers are domiciled.

On March 29, 2015, at the national meeting of the National Association of Insurance Commissioners (NAIC), the NAIC’s Private Equity Issues (E) Working Group adopted Guidance to be included in the NAIC Financial Analysis Handbook, which is used by state insurance department examiners in reviewing “Form A” applications. The adoption of the Guidance is the culmination of a multi-year process led by the Working Group, which was charged by the NAIC with developing procedures that “regulators can use when considering ways to mitigate or monitor risks associated with private equity/hedge fund ownership or control of insurance company assets, including the development of best practices and consideration of possible changes in NAIC policy positions as deemed appropriate.”

Technically, the Guidance has been referred to the NAIC Financial Handbook (E) Working Group for inclusion in the next annual update to the NAIC Financial Analysis Handbook. That action is a mere formality, however, and will not result in any changes to the content of the Guidance.

Although the original stimulus for the NAIC to develop the Guidance was a concern about acquisitions of insurers by private equity firms and hedge funds, the Guidance will apply to all “Form A” applications filed by all potential acquirers of insurers, and not just to acquisitions by private equity firms or hedge funds. Moreover, many of the measures in the Guidelines were already part of the “toolbox” of insurance examiners who review “Form A” applications, but they have now been collected and made more explicit in the Guidelines.

Considerations for Regulatory Review of “Form A” Applications

Under the Guidance, insurance examiners who review “Form A” applications are to give attention to the following:

  • Consideration of all aspects of the financial condition of the acquiring entity. Such aspects include the acquiring group’s business model, its strategy in general and its specific strategy in purchasing the insurer, including the expected benefits to the acquirer of the proposed acquisition;
  • Consideration of the risks of the acquiring entity and the entire group of insurers and non-insurer affiliates under its control— including credit, market, pricing, underwriting, reserving, liquidity, operational, legal, strategic and reputational risks—with a particular focus on the risks associated with the acquirer’s proposed investment strategies;
  • Consideration of possible stipulations that a state regulator may require as a condition of its approval of a proposed transaction, such as (i)maintainingRisk-BasedCapital(RBC)ata specifiedamount(e.g.,450percentof CompanyctionLeel),(ii)sumittingRBC epotsonauartely,atherthanannual, asis,(iii)equiingegulatoyappovalfor theinsuertopaydiidendsduingaspecified peiod,(i)requiingacapitalmaintenance ageementorestalishmentofaprefunded tustaccount,(v)disclosingequityholdersin theacuier“upthechan”totheultimate contolingpersonand(vi)equiingpesonal financialstatementsofdirectosoftheinsuer andtheacuiingentities“upthechan”to  theultimatecontolingpersons;and
  • Consideration of certain post-acquisition measures, such as annual stress testing of the insurer and its affiliated group, or targeted examinations to ensure that the investment strategy continues to be prudent.

Potential Stipulations To Be Imposed as a Condition of “Form A” Approval

In addition, the Guidance specifies various types of stipulations that regulatory authorities can impose as a condition of granting approval for a proposed acquisition.


  • Requiring RBC to be maintained at a specified amount above Company Action Level, because capital serves as a buffer that insurers use to absorb unexpected losses and financial  shocks, better protecting policyholders;
  • Requiring quarterly RBC reports rather than annual reports, as is otherwise required by state law;
  • Prohibiting the insurer from paying any ordinary or extraordinary dividends or other distributions to shareholders unless approved by the commissioner;
  • Requiring a capital maintenance agreement from or establishment of a prefunded trust account by the acquiring entity or appropriate holding company within the group;
  • Enhancing scrutiny of operations, dividends, investments and reinsurance by requiring that material changes to the insurer’s plan of operations be filed with the commissioner (including revised projections), which, at a minimum, would include affiliate/ related party investments, dividends or reinsurance transactions to be approved prior to such change; and
  • Requiring a plan to be submitted by the group that allows all affiliated agreements and affiliated investments to be reviewed despite being below any materiality thresholds otherwise required by state law.


  • Requiring prior approval from the commissioner of material, arm’s-length, nonaffiliated reinsurance treaties or risk- sharing agreements;
  • Requiring notification within 30 days of any change in directors, executive officers, managers or persons acting in similar capacities of controlling entities, as well as biographical affidavits and such other information as shall reasonably be required by the commissioner;
  • Requiring the filing of additional information regarding the corporate structure, controlling persons and other operations of the company;
  • Requiring the filing of any offering memoranda, private placement memoranda, investor disclosure statements or other investor solicitation materials that were used related to the acquisition of control or the funding of such acquisition;
  • Requiring disclosure of equity holders (both economic and voting) in all intermediate holding companies up to the ultimate controlling person (in each case, after giving consideration to the burden on the acquiring party and weighing it against the benefit the regulator will receive from the disclosure);
  • Requiring the filing of audit reports/financial statements of each equity holder of all intermediate holding companies (in each case, after giving consideration to the burden on  the acquiring party and weighing it against the benefit the regulator will receive from the disclosure); and
  • Requiring the filing of personal financial statements for each controlling person or entity of the insurance company and the intermediate holding companies up to the ultimate controlling person company. The “controlling person” can include, for example, a person that has a management agreement with an intermediate holding company.

Potential Post-Acquisition Procedures

The Guidance also lists a number of procedures that insurance regulatory authorities can follow, after an acquisition is completed, in order to monitor any risks identified during the “Form A” review process and ascertain whether the acquirer’s business plan is being executed as anticipated.

  • Examining the insurer and its affiliates to ensure that the investment strategy continues to provides a prudent approach for investing policyholder funds and does not create excessive contagion risk;
  • Requiring ongoing annual stress testing of the insurer and the group in accordance with existing laws and regulations. This includes stress testing the investments as well as the policyholder liabilities to ensure that the assets and liabilities continue to be properly matched;
  • Periodically reviewing investment management and other affiliated agreements (including reviewing the reasonableness of any fees to be charged to the insurer), any arrangements with an intercompany broker and the flow of funds related to such agreements, in order to ensure that they remain fair and reasonable;
  • Coordinating a meeting with multiple regulators—potentially including the regulators from all affected states—to enable them to better understand the business plan and operations of the group; and
  • Coordinating an examination with another regulator of nonaffiliated insurers where the direct writer has ceded a material portion of their risk to a separately controlled insurer.

Similar Provisions in the Recently Amended New York Holding Company Regulation

The newly adopted NAIC Guidance takes a similar approach to the November 12, 2014 amendments to New York’s Insurance Regulation 52. Regulation 52 prescribes information to be provided by applicants seeking approval of an acquisition of control of a New York-domiciled insurer under Section 1506 of the New York Insurance Law.

According to the regulatory impact statement issued when the amendments were first proposed, the New York Department of Financial Services (NY DFS) was “concerned that private equity firms, and other investors with a similar investment horizon, focus on  maximizing their short-term financial returns rather than ensuring that long-term policyholders receive the insurance benefits for which they have paid.”

Certain provisions of the amendments relate to acquisitions of life insurers by private equity firms and appear to have been modeled on agreements reached by NY DFS with two private equity firms that acquired New York annuity companies in 2013. However, the scope of the amendments is broad, and many of the amended provisions apply to all potential acquirers of all types of New York-domiciled insurers, not just  to acquisitions by private equity firms.

Specifically, the amendments require the potential acquirer and other controlling persons to submit to NY DFS their financial statements, investor solicitation materials, and any management or operating agreements or any other agreements pursuant to which control is exercised over the applicant. The applicant and its controlling persons must also submit any plans or proposals to change the target insurer’s business operations in the five-year period following the acquisition. Such plans or proposals may not be modified or amended after the acquisition without prior written approval from NY DFS. In addition, the amendments formalize the long-standing “desk drawer” rule that an applicant must provide five years of financial projections as part of its proposed business plan for the target insurer. Furthermore, new five-year projections will need to be submitted if the insurer enters into any of the following transactions with the applicant or any person controlling, controlled by or under common control with the applicant within five years of the date of the acquisition: (i) any reinsurance treaty or agreements, (ii) any investment, loan or asset purchase transactions or (iii) any transactions encumbering the insurer’s assets to, or for the benefit of, the applicant or any person controlling, controlled by or under common control with the applicant. NY DFS may require the insurer to obtain additional capital if NY DFS determines that the insurer will not have adequate capital under the new projections.

Under the amendments, in the case of life insurer acquisitions, the applicant may be required to establish a trust account if NY DFS determines that the acquisition is likely to be hazardous or prejudicial to the insurer’s policyholders or shareholders. In making such a determination, NY DFS may consider, among other factors, whether the applicant or any person controlling, controlled by or under common control with the applicant is:

  • Registered, or required to register, with the SEC pursuant to the Investment Advisors Act of 1940, or otherwise would be required to register if the applicant had $150 million or more assets under management;
  • An investment company, as defined in the Investment Advisors Act of 1940;
  • An entity that was formed within 36 months prior to the date of the Form A filing;
  • A company primarily engaging in investing or investment management activities; or
  • An entity that holds for investment purposes a portfolio where non-publicly registered securities or holdings represent 50 percent or more of the assets of that entity.

Concluding Observations

It is worth emphasizing that although these initiatives emerged out of regulatory concerns about acquisitions of insurers by private equity firms and hedge funds, both the newly adopted Guidance for the NAIC Financial Examiner’s Handbook and the recently adopted amendments to the New York Insurance  Holding Company Regulation will apply to all “Form A” applications filed by all potential acquirers of insurers, and not just to acquisitions by private equity firms or hedge funds.