New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following informal opinion on December 2, 2002, representing the position of the New York State Insurance Department.

Re: Reporting transfer of ownership within holding company system

Question Presented

Is prior notification to the Superintendent or prior approval by him required for a proposed transaction whereby a holding company will make a capital contribution to its wholly owned subsidiary, a domestic life insurer, by transferring ownership of an unauthorized foreign insurer whose assets are less than one-half of one percent of the admitted assets of the domestic life insurer at last year-end?

Conclusion

Based on the facts provided, prior approval of the Superintendent pursuant to N. Y. Ins. Law § 1505(c) (McKinney 2000) would not be required. However, prior notification to the Superintendent pursuant to N. Y. Ins. Law § 1505(d) (McKinney 2000) may be required.

Facts

A domestic life insurer is a wholly owned subsidiary of a holding company. The holding company also owns another insurer not licensed in New York. The holding company wants to transfer ownership of the unauthorized foreign insurer to the domestic life insurer. After the consummation of this transaction, the domestic life insurer would have its first subsidiary and would become a parent corporation of a new subsidiary, the foreign insurer. Although the written inquiry indicated that the total assets to be transferred are "less than 1% of the total assets of the domestic insurer, it verbally modified the figure to be less than of 1% of the total assets of the domestic insurer. The holding company will finance the transfer of ownership by a capital contribution to the domestic insurer, which will pay no consideration to become the new owner.

Analysis

Article 15 of the Insurance Law sets forth the rules governing transactions between a controlled insurer and other members of the holding company system and requires domestic insurers to obtain the prior approval of the Superintendent prior to entering into certain transactions, and to notify the Superintendent of other transactions prior to entering into them.

Under the proposed transaction, the domestic insurer is a controlled insurer as defined in N.Y. Ins. Law § 1501(a)(4) (McKinney 2000) because it is an authorized insurer controlled directly by the holding company as defined in N.Y. Ins. Law § 1501(a)(3) (McKinney 2000).

N.Y. Ins. Law §§ 1505(c) and (d)(1) and (4) (McKinney 2000) provide:

(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;

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(4) any material transaction, specified by regulation, which the superintendent determines may adversely affect the interests of the insurer’s policyholders or shareholders.

Based on the facts provided, prior approval of the Superintendent pursuant to N.Y. Ins. Law § 1505(c) would not be required since the transaction involves less than five percent or more of the insurer’s admitted assets at last year-end.

However, it is not clear from the facts provided whether the proposed transaction requires prior notification to the Superintendent pursuant to N. Y. Ins. Law § 1505(d) (McKinney 2000).

N.Y. Comp. Codes R. & Regs. tit. 11, § 80-1.5(c) (1995) (Regulation 52) states that for "the purposes of section 1505(d)(4) of the Insurance Law, the following transactions between a domestic controlled insurer and any person in its holding company system are deemed to be material transactions:

(1) Any sale, purchase, exchange, loan or extension of credit, or investment involving one half of one percent or less of the insurer’s admitted assets at last year-end which, when added to the respective aggregate of any such other sales, purchases, exchanges, unpaid loans, unpaid extensions of credit, or investments made during the preceding 12 months, causes the aggregate to exceed:

(i) one half of one percent of the insurer’s admitted assets at last year-end, if the insurer is subject to article 42 of the Insurance Law; …

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(3) Any series of transactions designed to evade the provisions of this subdivision.

Based on the facts provided, there is not enough information to determine whether or not the proposed transaction would be deemed a material transaction pursuant to N. Y. Comp. Codes R. & Regs. tit. 11, § 80-1.5(c). N.Y. Ins. Law § 1505(d)(4) (McKinney 2000) requires prior notification to the Superintendent of any material transaction that the Superintendent determines may adversely affect the interests of the insurer’s policyholders or shareholders. Further, the terms of transactions within the holding company system must be fair and equitable as required under N.Y. Ins. Law § 1505(a)(1).

Under the circumstances, it was recommended that the insurer submit a notice of the proposed transaction pursuant to N.Y. Ins. Law § 1505(d).

Following the close of the proposed transaction, the parent/subsidiary relationship of the domestic life insurer and the unauthorized foreign insurer would be regulated by Article 17 of the Insurance Law as well as Department Regulation 115 (N.Y. Comp. Codes R. & Regs. tit. 11, § 81-2). N.Y. Comp. Codes R. & Regs. tit. 11, § 81-2.3(b) (1995) (Regulation 115) requires that every domestic life insurer that "acquires, directly or indirectly, control of any institution shall file a preliminary information report on form PIR… with the superintendent within 30 days of such investment or acquisition". The insurer would also be responsible for providing the information report for subsidiaries under § 81-2.4 of said Regulation.

Although N.Y. Ins. Law § 1505(f) (McKinney 2000) exempts Article 17 transactions from the prior notice and approval requirements § 1505, this exemption would not apply to the proposed transaction since it would not be subject to Article 17.

This opinion is limited to the facts as described herein. Any deviation from these facts may change the opinion.

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.