Insurance Circular Letter No. 5 (2022)

April 19, 2022

STATUTORY REFERENCES: N.Y. Insurance Law §§ 1501, 1505, 1506 and 1510

The New York State Department of Financial Services (“Department”) has become aware that several potential investors in New York domestic insurers have structured their investments as an acquisition of less than 10% of the insurers’ voting securities, at least in part, based on the expectation that an investment below that level would avoid filing and approval requirements imposed under New York Insurance Law (“Insurance Law”) § 1506. Similarly, transactions have been structured to limit an investor’s board representation to a single board seat, which, by itself, does not create a presumption of control. As discussed below, an acquiror of less than 10% of an insurer’s voting securities, or with the right to appoint a single board member, may still be deemed to control the insurer based on all the facts and circumstances, including the terms and conditions of the proposed transaction. The Department wishes to remind industry participants of the requirements of the Insurance Law and the Department’s expectations given the apparent misconception in the marketplace and the recent increase in insurance company transactions.

A determination of “control” under Insurance Law § 1501(a)(2) depends on all the facts and circumstances. Control is presumed under § 1501(a)(2) if a person, directly or indirectly, owns, controls, or holds with the power to vote, 10% or more of an insurer’s voting securities. However, this presumption does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a control determination. In addition, while § 1501(a)(2) makes clear that any director of an insurer, or any person with the right to appoint such a director, is not presumed to control the insurer, these facts may, in combination with other factors, lead to a control determination.

The statute makes clear that a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer. Section 1501(a)(2) defines “control” in relevant part as “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 (except a commercial contract for goods or non-management services) or otherwise…”. Furthermore, § 1501(b) provides that the Superintendent of Financial Services (the “Superintendent”) may find a controlling relationship if a person “exercises directly or indirectly either alone or pursuant to an agreement with one or more other persons such a controlling influence over the management or policies of an authorized insurer as to make it necessary or appropriate in the public interest or for the protection of the insurer’s policyholders or shareholders that the person be deemed to control the insurer.”

The Department urges parties contemplating a transaction that raises potential control issues (including, but not limited to, transactions involving the acquisition of an insurer’s voting securities by, the grant of a board seat to, or a new contractual relationship with, a transaction counterparty, or any combination of these factors) to engage with the Department as early in the transaction structuring process as practicable, even if the parties believe that such transaction will not give rise to a control relationship, to give the Department a reasonable opportunity to review the transaction and the parties’ position. The Department encourages this informal engagement to avoid delay and other adverse consequences (including penalties under Insurance Law § 1510(a)) should the Superintendent reach a different conclusion. If, notwithstanding the parties’ position, the Superintendent determines that the transaction would result in a change of control, the parties must either submit an application under § 1506 or request a determination of non-control pursuant to § 1501(c).

Please direct questions regarding this circular letter to [email protected].

Very truly yours,

My Chi To
Executive Deputy Superintendent for Insurance