The Office of General Counsel issued the following informal opinion on May 9, 2001, representing the position of the New York State Insurance Department.
Re: Acquisition of Interest in Insurance Holding Company
Is there any prohibition against a national bank investing in an insurance company? Would the bank or its business be subject to the New York Insurance Law?
Will the proposed investment need to be approved by the Superintendent?
Will the bank be prohibited from appointing one of its employees as a director of the holding company?
Must the management agreements, director fee agreements or other material agreements in the proposed transaction be approved by the Superintendent?
Nothing in the New York Insurance Law prohibits a national bank from investing in an insurance holding company. The bank (and its co-investor) would be subject to New York Insurance Law only insofar as its dealings with the controlled insurer are concerned.
The proposed investment need not be approved by the Superintendent. However, the bank and its co-investor must submit a filing to the Superintendent either acknowledging or disclaiming control as specified in Regulation 52, N.Y. Comp. Code R. & Regs. tit. 11, § 80-1 (1995).
The bank will not be prohibited from appointing one of its employees as a director of the holding company.
The only agreements that would be subject to oversight by the Superintendent would be agreements governing transactions with the controlled insurer.
The Inquirer represents a national bank that plans to make a side-by-side investment with another entity in a life insurance holding company. Following this investment, the bank and its co-investor will collectively own 15% of the common stock of the insurance holding company. In addition, the bank and its co-investor will have the right to designate one director of the nine-member board of directors of the holding company.
As a preliminary matter, please note that this response has taken into consideration only the applicable provisions of the New York Insurance Law. The Gramm-Leach-Bliley Act, which significantly affects the investment and subsidiary activities of national banks, may also have relevance to the questions presented.
1. Investment by the Bank
No provision of the New York State Insurance Law prohibits a national bank from having an ownership interest in an insurance company. With respect to the second part of the first question, the bank would be subject to the New York Insurance Law only if the bank were determined to control the insurer. In such a case, the bank would be subject to the New York Insurance Law with respect to its dealings with the controlled insurer. See N. Y. Ins. Law § 1505 (McKinney 2000). The bank would then also be subject to examination by the Superintendent. See N.Y.Ins. Law § 1504(b) (McKinney 2000).
Under the New York Insurance Law, it is presumed that an entity controls another if the entity possesses a ten percent or greater interest in the voting securities of another entity. N.Y. Ins. Law § 1501(a)(2) (McKinney 2000), provides, in pertinent part, as follows:
(2) "Control," including the term "controlling," "controlled by" and "under common control with," means the possession direct or indirect of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise; but no person shall be deemed to control another person solely by reason of his being an officer or director of such other person. Subject to subsection (c) hereof, control shall be presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote ten percent or more of the voting securities of any other person.
N.Y. Ins. Law § 1506 (McKinney 2000) requires any entity other than an authorized insurer to obtain the prior approval of the Superintendent if it wishes to acquire control of a domestic insurer. Thus, because the bank and its co-investor would own more than 10 % of the insurance company, they must obtain the approval of the Superintendent to make the investment. See N.Y. Ins. Law § 1506(a) (McKinney 2000) and Regulation 52, N.Y. Comp. Codes R. & Regs. tit. 11, § 80-1.6 (1995).
N.Y. Ins. Law § 1501(c) (McKinney 2000) provides that the superintendent, upon application by a person, may make a determination that such person does not or will not control another entity by the taking of some proposed action.
Thus, in the event that the bank and its co-investor are simply making an investment and do not want to control the insurer, they must make an application to the Superintendent to that effect. See N.Y.Ins. Law § 1501(c). The requirements of such an application are set forth in Regulation 52, N.Y. Comp. Code R. & Regs. tit. 11, § 80-1.3 (1995).
3. Appointment of Bank Employee as Director
The inquirer cited N.Y. Ins. Law § 1201(B)(v) as being applicable to this issue. The actual statutory citation is contained in N.Y. Ins. Law § 1201(a)(5)(B)(v) (McKinney 2000). That provision requires that of the nine directors required, at least four must not be officers or employees of the holding company or affiliate. Other than this statute, there is no other limitation or prohibition in the N.Y. Insurance Law against the bank appointing one of its employees as director of the holding company in which it and its co-investor are acquiring the 15% interest.
4. Approval of Agreements by Superintendent
In the event that the bank and its co-investor are determined to be in control of the insurer, any agreements between the controlled insurer and the bank, its co-investor, and the holding company (or any affiliates thereof) would be subject to New York Insurance Law. N.Y. Ins.Law § 1505 (McKinney 2000) sets forth the requirements for such transactions, and provides, in pertinent part, as follows:
(a) Transactions within a holding company system to which a controlled insurer is a party shall be subject to the following:
(1) the terms shall be fair and equitable;
(2) charges or fees for services performed shall be reasonable; and
(3) expenses incurred and payments received shall be allocated to the insurer on an equitable basis in conformity with customary insurance accounting practices consistently applied.
(b) The books, accounts and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the reasonableness of the charges or fees to the respective parties.
(c) The superintendent's prior approval shall be required for the following transactions between a domestic controlled insurer and any person in its holding company system: sales, purchases, exchanges, loans or extensions of credit, or investments, involving five percent or more of the insurer's admitted assets at last year-end.
(d) The following transactions between a domestic controlled insurer and any person in its holding company system may not be entered into unless the insurer has notified the superintendent in writing of its intention to enter into any such transaction at least thirty days prior thereto, or such shorter period as he may permit, and he has not disapproved it within such period:
(1) sales, purchases, exchanges, loans or extensions of credit, or investments, involving more than one-half of one percent but less than five percent of the insurer's admitted assets at last year-end;
(2) reinsurance treaties or agreements;
(3) rendering of services on a regular systematic basis; or
(4) any material transaction, specified by regulation, which the superintendent determines may adversely affect the interests of the insurer's policyholders or shareholders.
Nothing herein contained shall be deemed to authorize or permit any transaction which, in the case of a non-controlled insurer, would be otherwise contrary to law.
For further information you may contact Supervising Attorney, Michael Campanelli at the New York City Office.