National Association of Insurance Commissioners Private Equity Issues Working Group: NAIC Working Group Adopts Guidance for State Insurance Regulators in Considering Change of Control Approval Filings

Sullivan & Cromwell LLP - April 13, 2015

On March 29, 2015, the National Association of Insurance Commissioners (the “NAIC”) Private Equity Issues Working Group (the “PEI Working Group”) adopted a new section to be added to the NAIC’s Financial Analysis Handbook that provides a narrative guidance to state insurance regulators considering an application seeking approval to acquire control of a domestic insurance company (the “Guidance”).  The Guidance draws from many of the practices that have recently been used by states such as New York and Iowa in approving the acquisition of control of domestic insurers by private equity firms, and, in the case of New York, recently codified by regulation.  As is the case with the New York regulation, many of the issues identified in the Guidance also apply, on their face, to other acquiring parties that are not private equity firms.  The Guidance encourages regulators to undertake a thorough review of all aspects of the financial condition of the acquiring entity and to consider a broad range of potential risks presented by the acquiring entity and the entire group of affiliate insurers and non-insurers under its control, with specific emphasis on credit, market, pricing/underwriting, reserving, liquidity, operational, legal, strategic and reputational risks.  The Guidance also enumerates possible short- and long-term stipulations that regulators may request from the acquiror as a condition for approving its change of control filing, as well as post-acquisition procedures that regulators may wish to implement to ascertain whether the acquiror’s business plan is being executed as anticipated.