Property

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Property Casualty 2008Compliance Conference
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Acquisitions and Other Holding Company
Transactions
Doug Slape Kim Trinkaus Chief Analyst
Holding Company Analyst Financial
Analysis Financial Analysis Financial
Program Financial Program
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Topics of Discussion

• Overview
• Standards for Review of a Holding Company
  Transaction
• Holding Company Regulatory References
• Types of Transactions
• Reasons for Delay in Approvals
• Current and Future Developments
• Questions

Topics of Discussion
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Overview

• Financial Analysis Division is one of five
  activities within the Financial Program
• The analysts in the division perform financial
  analysis, review of reinsurance transactions and
  review of holding company transactions
• Each Texas domestic insurance company or
  commercially domiciled company including health
  maintenance organizations (HMOs) is assigned a
  Financial Analyst and a Holding Company Analyst
• Effective September 1, 2005, Senate Bill 1284
  made HMOs subject to the Holding Company Act

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Overview continued

• A Financial Analyst is responsible for reviewing
  the Annual and Quarterly Statements, CPA Audits,
  MDAs, as well as assisting the Holding Company
  Analyst regarding the financial impact of
  proposed transactions
• A Holding Company Analysts primary
  responsibility is the review and analysis of
  various transactions to ensure that each meets
  the requirements of the Texas Insurance Code
  (TIC), the Texas Administrative Code (TAC), and
  Statements of Statutory Accounting Principles
  (SSAP)

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Standards for Review of a HoldingCompany
Transaction
Standards for transactions with affiliates found
in TIC 823.101 are

• Must be a material transaction
• Terms shall be fair and equitable
• Charges/fees for services shall be reasonable
• Accurate books and records must be maintained
• Expenses incurred and payments received shall be
  allocated on an equitable basis or in conformity
  with customary insurance accounting principles
• The Companys Policyholder Surplus shall be
  reasonable in relation to its outstanding
  liabilities and financial needs

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Holding Company Regulatory References
Texas Insurance Code

• 823.102 and 823.103 relating to Materiality
• A transaction that involves more than the lesser
  of ½ of 1 of assets or 5 of surplus as of the
  preceding year
• 823.107 relating to Dividends
• 823.253 relating to General Standards for
  Investments in Affiliates
• 803 relating to Location of Books and Records
  outside of Texas
• 805 relating to Transactions with Officers,
  Directors and Shareholders

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Holding Company Regulatory References continued

• Texas Administrative Code

• 7.7 relating to Surplus Debentures
• 7.203 relating to Registration of Insurers
• 7.204 relating to Filings requiring
  Commissioners Approval
• 7.205 and 7.209 relating to Form A
• 7.210 relating to Form B
• 7.211 relating to Disclaimers
• 7.212 relating to Extraordinary Dividends

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Holding Company Regulatory References continued

• Statements of Statutory Accounting Principles
  (SSAP)

• SSAP 25 and 96, Thresholds for Affiliated
  Transactions
• SSAP 40, Investments in Property
• SSAP 41, Surplus Debenture Notes
• SSAP 88, Valuation Alternatives for Subsidiaries
• SSAPs 61, 62, 68, and 75, Goodwill

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Types of Transactions

• Acquisitions of control, Exemptions from change
  in control, and Disclaimers
• Transactions with Texas domiciled affiliates (or
  commercially domiciled companies doing 30 or
  more business in Texas)
• Form B Registration Statements
• Transactions with Officers, Directors and
  Shareholders
• Dividends and Distributions
• Applications to move books and records outside
  the State of Texas
• Surplus Debentures

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Types of Transactions continued

• Total number of transactions processed during
  Fiscal Years (FY) 2005 -- 2007

FY 2005 760 FY 2006 804 FY 2007 844
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Types of Transactions continued

• Acquisitions of control and Exemptions from
  change in control and Disclaimers

• Acquisitions are commonly referred to as Form As
• Largest and most complex transactions received
• Can involve multi-state approval
• Work closely with NAIC to coordinate review among
  other states
• Working Group set up by NAIC, headed by lead
  state, to track progress of transaction, address
  any concerns, and review of the Form A

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Types of Transactions continued

• Total number of Form As reviewed during Fiscal
  Years 2004 2006
• FY 2005 22
• FY 2006 20
• FY 2007 20
• Total purchase price for the above Form As --
  15.7 billion

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Types of Transactions continued
Form As continued

• Important Issues regarding the Form A review
• Projections may cause delay in the approval
  process
• Analysts may have to request actual projections,
  revised projections, more complete projections,
  justifications

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Types of Transactions continued
Form As continued

• Important Issues regarding the Form A review
• Fingerprint cards are now required as part of the
  background check
• TEX. ADMIN. CODE. Rule 1.503 and TEX. ADMIN.
  CODE. 7.209
• Cards are required for the applicant if an
  individual, or the chief executive officer,
  president, secretary, treasurer, chief financial
  officer, treasurer and controller of the
  applicant if not an individual

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Types of Transactions continued
Form As continued

• Fingerprint cards are now required as part of the
  background check
• Electronic Processing (Fast Pass)
• Speeds the process up greatly
• Locations are limited http//www.tdi.state.tx.us/f
  orms/form11.html
• Schedule a fingerprint appointment by visiting
  www.identix.com/iis
• Fee of 44.20 paid to vendor at the time of
  processing
• Manual Card Submission
• Consider submitting two cards for each individual
  to minimize delays if the first card is rejected
• Check payable to DPS in the amount of 34.25 for
  each card submitted

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Types of Transactions continued
Form As continued

• Exemptions
• Reorganizations within the Holding Company, or
  increased ownership from present owners
• A Pre- and Post- Organization Chart should be
  submitted with this type of filing, together with
  a reason for the restructuring
• Disclaimers
• Increased ownerships by a shareholder, or over
  10 of investments by financial institutions
• Most do not exceed 15 and have filed 13G with
  the SEC

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Types of Transactions continued

• Texas Domiciled or Commercially Domiciled Insurers

• The most common type of holding company
  transaction is an affiliated agreement, which
  includes
• Production of business
• Underwriting
• Management or administrative services
• Data processing
• Personal or professional Services
• Investment advisory or asset management
• Cost allocation or reimbursement
• Third party administrator
• Consolidated tax allocation

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Types of Transactions continued
Texas Domiciled or Commercially Domiciled Insurers

• These types of contracts should contain, at a
  minimum, the following
• components
• Parties involved
• Types of duties and services
• Compensation
• Accounting and settlement periods
• Effective date
• Governing law, which includes Texas
• Termination provisions
• Other provisions can include hold-harmless,
  assignment, arbitration, and for consolidated tax
  agreements, the indemnification language required
  by TAC 7.204 (a) (2) (E)

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Types of Transactions continued
Texas Domiciled or Commercially Domiciled Insurers

• Common Issues with Transactions
• Missing filing fee
• Submit the Transaction Fee Transmittal Form (FIN
  483) with the filing
• http//www.tdi.state.tx.us/forms/finanalysis/fin48
  3cashier.pdf
• Fee is reduced 50 for insurers with gross
  premium receipts of less than 450,000 based on
  preceding annual statement
• See Texas Administrative Code 7.1301 for
  regulatory fees

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Types of Transactions continued
Texas Domiciled or Commercially Domiciled Insurers

• Common Issues with Transactions
• The most common missing component of contracts is
  an accounting and settlement provision
• Must provide evidence to justify that fees,
  relating to services provided, are fair and
  equitable

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Types of Transactions continued

• Texas Domiciled or Commercially Domiciled Insurers

The total number of management/service agreements
processed by our Holding Company Analysts during
Fiscal Years 2005 2007 FY 2005 64 FY 2006
57 FY 2007 62
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Types of Transactions continued
Form B Registration Statements

• Statements are filed on an annual basis, and
  include
• Organizational Chart with ownership identity,
  affiliates and percent of ownership of each
• Transactions with affiliates that are ongoing, or
  have occurred during the year
• Include the HCS (Holding Co Section) Number that
  approved the transaction

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Types of Transactions continued
Form B Registration Statements

• Statements are filed on an annual basis, and
  include
• Biographical affidavits on officers and directors
  of the ultimate controlling person
• Pending litigation against the Company or its
  officers
• Financial statements of the ultimate controlling
  person
• Must be notarized
• Form Bs are considered confidential

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Types of Transactions continued
Transactions with Officers, Directors and
Shareholders

• A domestic insurance company can enter into
  various types of arrangements with its officers,
  directors and shareholders, as long as they
  obtain prior approval of the Commissioner
• Most transactions fall under the same review as
  other affiliated transactions, however, a
  transaction with an officer, director or
  shareholder requires approval by a Commissioners
  Order

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Types of Transactions continued
Dividends and Distributions

• A domestic insurance company can declare either
  an ordinary dividend or an extraordinary
  dividend, if the company has experienced earnings
  for the period of December 31st of the prior year
  to the present proposed payment date
• The Department must be given notice prior to
  payment
• 10 days prior notice of an Ordinary dividend
• 30 days prior notice of an Extraordinary dividend

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Types of Transactions continued
Dividends and Distributions continued

• The Department has seen an increase in
  Extraordinary dividends filed by HMOs as a result
  of HMOs being subjected to the Holding Company
  Act
• Previously HMOs notified the Department if the
  dividend exceeded 10 of the PHS
• Now, the same dividend is considered
  Extraordinary, and requires Commissioner approval

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Types of Transactions continued
Dividends and Distributions continued

• All dividend requests should include the
  following
• HC Dividend form (found on our website) for
  Ordinary Dividends
• Form D (TAC 7.212) for Extraordinary Dividends
• Declaration date and payment date
• Amount of dividend
• Identity of shareholder
• Analysis of Surplus Form

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Types of Transactions continued
Application to Move Books and Records Outside the
State of Texas

• A domestic insurer can move any portion or all of
  its books and records outside the State of Texas,
  if it receives prior approval by the Commissioner
• Unless the domestic company maintains its own
  records, an affiliated agreement must be filed in
  connection with the application
• The accompanying agreement must contain the
  language specified in TAC 7.25

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Types of Transactions continued
Application to Move Books and Records Outside the
State of Texas

• The only non-affiliate that can maintain books
  and records must be licensed by the Department,
  and the records can only include active claim
  files.
• Closed files must be returned within 60 days of
  closing
• Any changes to addresses and locations previously
  approved need to be sent to the Department and
  usually result in amended filings

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Types of Transactions continued
Surplus Debentures

• Surplus debentures must include the surplus
  floor, which can either be a minimum of 500,000
  or the minimum surplus as stated in the agreement
• The Department is now requesting that no payments
  be made unless the surplus exceeds the greater of
  the minimum surplus floor or some percentage of
  Authorized Control Level Risk Based Capital
• The Department also reserves the right to
  disapprove any payments based on the Companys
  financial condition

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Reasons for Delay in Approvals
Approvals may be delayed for various reasons,
including

• Companies with financial or management problems
• Coordination with other areas of the Department
• Incomplete filings
• Missing or incomplete projections
• Missing provisions in agreements such as
  settlement terms
• Justification that a transaction is fair and
  equitable

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Current and Future Developments

• TAC 7.7 was recently amended
• To acknowledge that a domestic insurer may
  purchase or hold as an admitted asset, a surplus
  debenture of a non-affiliate insurer
• Must meet the requirements for rated and
  non-rated notes under the NAICs SSAP 41
• To require an affidavit containing
• Affirmation that the debenture will be funded
  within 15 days of the Commissioners approval
• Written evidence of such funding will be provided
  to the Department acknowledging the admitted
  asset provision listed above

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Current and Future Developments

• The Department is reviewing its regulations
  relating to the Holding Company Act with the
  objective of updating and re-codifying the
  requirements and to be closer to the NAIC Forms
  A-D

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Contacts and address for Holding Company Questions
Texas Department of Insurance Financial Analysis-
Mail Code 303-1A 333 Guadalupe P.O. Box
149104 Austin, Texas 78714-9104 Main Phone Number
[phone] Holding Company Analysts
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Questions
Holding Company Act in the Texas Administrative
Code http//info.sos.state.tx.us/pls/pub/readtac
ext.ViewTAC?tac_view5ti28pt1ch7schBrlY