On April 19, 2022, the New York Department of Financial Services (“NY DFS”) issued Insurance Circular Letter No. 5 (2022) (the “Letter”).  The Letter, entitled “Acquisitions of Control and Disclaimers of Control”, was addressed to all New York domiciled insurers and other interested parties.  The purpose of the Letter is to remind insurance industry participants of the requirements outlined under New York Insurance Code (“NY Ins. Code”) § 1506, which requires NY DFS approval in connection with a change of control of an insurer.

Under NY Ins. Code § 1501, “control” is defined 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…or otherwise; but no person shall be deemed to control another person solely by reason of his being an officer or director of such person…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.”  NY Ins. Code § 1501(a)(2).  Under NY Ins. Code § 1506, no person “other than an authorized insurer, shall acquire control of any domestic insurer, whether by purchase of its securities or otherwise, unless: it receives the superintendent’s prior approval.”  NY Ins. Code § 1506(a)(2).

The Letter addresses what the NY DFS views as a recent trend of investors seeking to avoid such filing and approval requirements by acquiring less than 10% of an insurer’s voting securities.  The Letter emphasizes that “‘control’ under Insurance Law § 1506(a)(2) depends on all the facts and circumstances” and that there is no “safe harbor for acquisitions below the 10% threshold, which may still result in a control determination.”  The Letter further cautions that “a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer.”

The Letter urges parties contemplating investments or other transactions which might result in control of a New York insurer to informally engage with the NY DFS as early in the process as possible so that the NY DFS can review the transaction and the parties’ position.  If the NY DFS determines that a change in control has occurred, the parties must either submit an application to the NY DFS for approval or attempt to disclaim control pursuant to NY Ins. Code § 1501(c).  The NY DFS advises a lack of engagement could result in delays, and even adverse consequences, if the NY DFS determines that the parties have not complied with the requirements of Article 15 of the NY Ins. Code.

The text of the Letter can be found here.