LifeHealthPro: AIG on the Verge of Federal Regulation

AIG, because of pending transactions and the Dodd-Frank Act, may soon become the first insurance holding company ever regulated by the federal government.

According to an article by Arthur D. Postal at LifeHealthPro.com, American International Group, better known as AIG, is "on the verge of becoming the first insurance holding company ever regulated by the federal government."

The Treasury Department is launching a public offering of $18 billion of AIG stock.

A few days ago, the United States Treasury Department announced that it is preparing to launch a public offering of $18 billion of AIG stock. At the same time, AIG announced that it plans to purchase up to $5 billion of that stock, according to the LifeHealthPro article.

Assuming the U.S. divests enough stock such that it no longer holds a majority interest in AIG, industry observers speculate that the Federal Reserve Board will step in and regulate AIG as a thrift holding company under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The decline of U.S. ownership below 50 percent would trigger federal regulation, according to a bevy of securities analysts and industry lawyers, some of whom formerly worked at the Federal Reserve Board.[1]

The LifeHealthPro article quotes Ray Schoen of Washington Analysis, a securities analytical firm, as suggesting that "the company is poised to face real regulatory supervision of its non-insurance financial business for the first time in its history."

AIG may face new restrictions on dividend payments, share buybacks, minimum leverage and risk-based capital.

Schoen also indicated that, because of the new federal regulation, AIG may face "a litany of new restrictions... including minimum leverage and risk-based capital requirements, as well as restrictions on dividend payments and share buybacks."

Robert Benmosche, President and CEO of AIG, suggested in early August that it was preparing for federal regulation as well as state regulation moving forward.

According to Benmosche and the analysts, AIG will be subject to federal regulation both because it owns a savings and loan holding company based in Wilton, Conn. now regulated by the Fed, and/or through its designation by the Financial Stability Oversight Council as systemically significant.[2]

Schoen also suggests that AIG may be required to separate its financial activities from its non-financial activities, with new restrictions between the two holding companies.

Read the full article:

AIG on the Verge of Federal RegulationArthur D. Postal | LifeHealthPro.com September 10, 2012

1. AIG on the Verge of Federal Regulation, Arthur D. Postal, LifeHealthPro.com, September 8, 2012.
1. AIG on the Verge..., id.

Prior Approval and Affiliate Examination Authority: NAIC Expands Regulatory Authority under the Model Insurance Holding Company System Regulatory Act

The NAIC has adopted amendments to its model Insurance Company System Regulatory Act that, if adopted by state legislatures, would expand state insurance regulatory authority to examine the affiliates within an insurance holding company system, require prior notice of divestiture of a controlling interest of an insurer in a insurance holding company system and require prior approval of reinsurance pooling agreements.

As noted in a previous article, the National Association of Insurance Commissioners ("NAIC") adopted substantial amendments to its model Insurance Holding Company System Regulatory Act and its Insurance Holding Company System Model Regulation (collectively, the "Model Law") in December of 2010. The amendments, if adopted by the individual state legislatures, would broaden the authority of state insurance regulatory authorities and impose additional requirements on insurers, controlling persons and affiliates within insurance holding company systems such as requiring the annual filing of a Form F "enterprise risk" report.[1]

The amendments authorize state insurance regulators to require annual filing of financial statements of all affiliates within an insurer's holding company system.

Additionally, the amendments to the Model Law authorize the state insurance regulator to require annual filing of the financial statements of all affiliates within an insurer's insurance holding company system. In the event that an insurer is ordered by the state regulatory authority to produce information not in the insurer's possession, the insurer can be penalized and fined under the amended Model Law if it cannot provide a valid reason why it is unable to produce such information. Further, the state insurance regulator may compel the production of information via subpoena or court order.[2]

Significantly, the amended Model Law expands a state insurance regulator's examination authority to include any or all of an insurer's affiliates within the insurance holding company system in order to ascertain the financial condition of the insurer. This includes an examination of any "enterprise risk" to the insurer by the ultimate controlling party, or by any entity or entities within the insurance holding company system, or by the insurance holding company system on a consolidated basis.

Prior notice to the state regulator is required before divestiture of a controlling interest in an insurer.

The amendments to the Model Law require that any controlling person of a domestic insurer, before it may divest itself of its controlling interest in the insurer, must file a notice of proposed divestiture with the state insurance regulatory authority. The acquiring party must also file a pre-acquisition notice. Upon receipt of the notice, the state insurance regulator has thirty (30) days in which it will determine whether the controlling person shall be required to file for and obtain approval for the proposed divestiture.[3]

The amended Model Law also requires the following:

• An annual statement that the insurer's board of directors oversees the corporate governance and internal controls of the insurer, and that the insurer's officers and senior management have approved and implemented, and continue to maintain and monitor, corporate governance and internal control procedures;


• Prior approval of amendments or modifications to any agreements with affiliates (previously approved under the Model Law) with an explanation of the reasons for the change and the financial impact on the insurer;


• Prior approval of all reinsurance pooling agreements; and


• Documents, materials or other information filed with the NAIC under the Model Law shall be confidential and privileged by law, and shall not be subject to public records requests, nor shall such be subject to subpoena or discovery, or admissible as evidence, in any private civil action.[4]

Finally, the amended Model Law includes provisions designed to allow cooperation between state insurance regulatory authorities and regulators outside of the United States with respect to insurance holding company systems that operate in other countries.

1. Top Ten Items to Watch in Insurance Regulation in 2011, Dewey & LeBoeuf, LLP, January 14, 2011.
2. NAIC Adopts Revised Holding Company System Model Act Requiring Enterprise Risk Disclosure, Anthony Roehl, Morris, Manning & Martin, LLP, March 23, 2011.
3. The NAIC model Insurance Company System Regulatory Act.
4. NAIC Adopts Revised..., Id.

Form F and Enterprise Risk: NAIC Expands Regulatory Authority under the Model Insurance Holding Company System Regulatory Act

The amended model Insurance Holding Company System Regulatory Act, if adopted by state legislatures, will significantly expand the scope of state insurance regulatory authority over insurance holding company systems, including controlling persons and affiliates.

In December of 2010, the National Association of Insurance Commissioners ("NAIC") adopted substantial amendments to its model Insurance Holding Company System Regulatory Act (the "Model Act"). The amendments significantly broaden the authority of state insurance regulatory authorities under the Model Act, and impose additional requirements on insurers, controlling persons and affiliates within insurance holding company systems.

The NAIC is seeking to add the provisions to its accreditation standards for state insurance departments.

The provisions of the Model Act are only effective if adopted by the individual state legislatures. However, the NAIC is moving to include the amendments as part of the national accreditation standards for state insurance departments, increasing the likelihood that state lawmakers will adopt the Model Act provisions.

The Model Act amendments are a response to concerns that insurance regulators previously lacked the necessary authority to oversee and intervene with respect to activities within an insurer's holding company system that might pose material risks to the insurer. Many of these concerns were inflamed by the financial difficulties recently experienced by certain affiliates of the AIG insurance holding company system.[1]

The new Form F is one of the most significant amendments to the Model Act.

One of the most significant amendments to the Model Act is the addition of a new annual reporting requirement for insurance holding company systems: the Form F. The newly created Form F requires, among other things, that the ultimate controlling person of an insurance holding company system report any "enterprise risk" within the system, including:

...any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole, including, but not limited to, anything that would cause the insurer’s Risk-Based Capital to fall into company action level . . . or would cause the insurer to be in hazardous financial condition. . .[2]

The Model Act amendments also expand the examination authority of a state insurance regulator to examine the non-insurer affiliates within an insurance holding company system in order to determine what enterprise risks could ultimately impact the insurer. [3]

The amendments move beyond the "walls" that the Model Act originally created, introducing "windows" of reporting requirements and expansion authority.

While the amendments to the Model Act expand its authority beyond providing the "walls" of protection that it was originally designed to create, the amendments stop short of authorizing direct oversight and control of insurance holding company systems like Solvency II. Instead, the amendments add "windows" of reporting requirements and examination authority with respect to controlling persons and affiliates such that insurance regulators have increased oversight of activities that could pose enterprise risks to regulated insurers.[4]

Enterprise Risk Reports must contain detailed information, including: (i) a description of the holding company’s business plan and strategies; (ii) material developments concerning risk management and internal audit findings; and (iii) rating agency and other discussions that could reflect potential "negative movement" in an insurer’s ratings.[5]

However, the question remains as to exactly what remedies that state insurance regulators will bring to bear against the so-called enterprise risks.

Whether insurance regulators will try to use traditional remedies such as conservation or rehabilitation of the insurer itself to remedy these potential enterprise risks is a significant concern.

To what extent the judiciary will allow state insurance regulators to exercise authority over non-insurance company affiliates within insurance holding company systems remains to be seen. The alternative remedies are those tools traditionally available to state insurance regulators, such as exercising conservation or rehabilitation authority over the insurer itself. Just such an option was proposed by at least one state insurance regulator when questions arose as to how the AIG insurance subsidiaries might be "protected" from the financial difficulties within that system. The extent to which this "solution" might actually do more harm than good is certainly up for debate.[6]

West Virginia became the first state to adopt new laws substantially similar to the Model Act amendments in April of 2011.[7] Texas became one of the first large states to adopt principal provisions of the Model Act amendments in June of 2011.[8]

1. Top Ten Items to Watch in Insurance Regulation in 2011, Dewey & LeBoeuf, LLP, January 14, 2011.
2. The Model Act, §1(F).
3. Top Ten Items to Watch..., Id.
4. Top Ten Items to Watch..., Id.
5. NAIC Adopts Final Changes to Holding Company System Model Act and Regulation, Insurance and Financial Services Update, January 6, 2011, Jeff Liebmann and Mike Goldman, Sidley Austin LLP.
6. Top Ten Items to Watch..., Id.
7. West Virginia Becomes the First State to Adopt the Amendments to the NAIC's Insurance Holding Company System Regulatory Act, Dewey & LeBoeuf, April 7, 2011.
8. Texas Adopts Key Features of NAIC's Amended Model Insurance Holding Company Act; Chadbourne & Parke, LLP, June 28, 2011.

Determination of Common Managerial Control Prompts Resignations from Insurance Company Board of Directors

Three directors and an interim CFO resign from United Insurance Holdings Corp. after the Florida Office of Insurance Regulation finds affiliated relationships with Kingsway Amigo Insurance Company.

According to Margie Manning at the Tampa Bay Business Journal, the interm chief financial officer and three members of the board of directors of United Insurance Holdings Corporation (United Holdings) have resigned in the wake of a determination by the Florida Office of Insurance Regulation (FOIR) finding an affiliation between certain insurance companies based on common managerial control.

Hassan Baqar, former interim CFO, as well as former board members Gordon Pratt, Larry Swets Jr., and James Zuhkle, all submitted their resignations after the insurance regulators at FOIR decided that a subsidiary of United Holdings, United Property & Casualty Insurance Company (United Property & Casualty) was affiliated with Kingsway Amigo Insurance Company (Kingsway) in part because Swets is the president and chief executive officer of Kingsway's parent company, Kingsway Financial Services, Inc. (Kingsway Financial), and Pratt is chairman of the board of another Kingsway affiliate.[1]

Regulators said the affiliation required United Property & Casualty to file amended statements with the Office of Insurance Regulation and prohibited any transfer of assets of United Property & Casualty to Kingsway without prior approval, the filing said.[2]

According to a filing with the United States Securities and Exchange Commission, United Insurance Management, L.C., another subsidiary of United Holdings, also terminated a management agreement witha Delaware limited liability company known as 1347 Advisors, LLC (1347 Advisors). 1347 Advisors is a subsidiary of Kingsway Financial that "provided the services of an interim Chief Financial Officer to [United Holdings] and certain strategic consulting, corporate development, corporate finance, and actuarial services...".[3]

Read the full article:

Regulators’ ruling prompts United Insurance shakeup
Margie Manning | Tampa Bay Business Journal
April 6, 2012

1. Regulators’ ruling prompts United Insurance shakeup, Margie Manning, Tampa Bay Business Journal, April 6, 2012.
2. Regulators’ ruling..., id.
3. United Insurance Holdings Corp., Form 8-K, March 30, 2012.