Kramer Levin Naftalis & Frankel LLP

Insurers in which a shareholder has a 10% or greater position should consider the latest guidance from state insurance regulators on variable interest entities (VIEs) and related parties. Even where an insurer and the shareholder have “disclaimed” affiliation, they are regarded as “related” parties for accounting purposes, according to revisions to Statement of Statutory Accounting Principles (SSAP) No. 25. Non-substantive amendments to the SSAP No. 25 guidance were adopted by videoconference on March 15 by the Statutory Accounting Principles Working Group (SAPWG) of the National Association of Insurance Commissioners (NAIC) in lieu of SAPWG’s customary meeting at NAIC’s Spring National Meeting. The March 15 adoption finalizes the new pronouncement on VIEs.

By way of background, under state insurance law generally, a person is deemed to “control” another person upon ownership by the former of at least 10% of the voting securities of the latter. This is a central prong of the NAIC’s Insurance Holding Company System Regulatory Act (Model #440), which has been adopted in some form in every state. The model act similarly defines an “affiliate” of a person to mean a person that controls, is controlled by or is under common control with the first person. A person holding 10% or more of the voting securities of an insurer may rebut the presumption that the person controls the insurer by demonstrating to the insurer’s domiciliary insurance regulator that the holder does not actually “control” the affairs of the insurer. (This might be the case, for instance, if there is a larger shareholder, a lack of board control or some other factor.) Such a showing is known as a “disclaimer” of affiliation and is subject to disallowance by the regulator (and under the model law is deemed approved if not so disallowed within 30 days of submission).

The March 15 SAPWG guidance clarifies that a person that holds 10% or more of an insurer’s voting securities, and files a disclaimer with respect to such position, which is then accepted by the regulator, is still a “related party” of the insurer regardless of the disclaimer for purposes of SSAP No. 25, which imposes certain requirements on transactions between related parties. “Agreements where direct or indirect non-controlling ownership interest is less than 10 percent, where the parties have structured the arrangement in this structure to avoid the 10 percent threshold,” according to the guidance, are an example of a situation in which the presumption of control may be “in doubt.” However, the disclaimer may neutralize the “affiliation” issue insofar as an accepted disclaimer results in the subject entities’ not being regarded as affiliates for purposes of other statutory accounting standards (e.g., SSAP No. 97).

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