Prior to AIG’s deal with Treasury, it was shopping private sources for a needed cash infusion. The question became very real as to how quickly private sources could invest in AIG. Any investment of that magnitude would include a substantial equity interest in AIG and would automatically trigger the change of control approvals required under insurance holding company acts. We were asked this question: assuming a highly coordinated and cooperative response by state insurance regulators, how long would it take to gain the necessary regulatory approvals to invest in AIG?
Best Case
We first determined that a change of control of all insurers in the AIG group would involve approvals from 20 states. We then examined each of these states to determine the timeline of non-waivable statutory notice periods. For example, if a state mandated a hearing and that hearing mandated 14 days’ notice, we were of the opinion that a state could not waive such notice, especially when the notice benefits the public. There were other timelines which are less clear. For example, the pre-notification periods. Some states require acquirers to provide at least 30 days’ prior notice before closing an acquisition. A few states require 60 days’ notice. There is no statutory authority for waiving such notice periods. As a matter of practice, however, states with pre-notification could take the position that the pre-notification is for the benefit of the state itself and, thus, is waivable. Even when taking the most aggressive view by: (i) using a common Form A; (ii) assuming the form will be agreed upon by all states as being in final form, (iii) filing simultaneously in all states, and (iv) all states holding a single common hearing as soon as possible and issuing an approval order immediately thereafter, it is our opinion that the earliest approval to disburse funds to rescue AIG would be twenty (20) days. Clearly, too long in this economic environment for a private rescue of a failing insurer.
Most Reasonable Case
Twenty days is the most aggressive timetable. If all of the statutory notice periods were satisfied, even with highly cooperative regulators rendering orders of approval promptly after a single mandatory hearing presided over by multiple commissioners, a rescue of a multi-state insurer such as AIG could not be done in less than 61 days. Clearly, this is unacceptable.
The Problem
These economic times may well highlight the best and the worst in state insurance regulation. It can be characterized as the “best” because state regulators are usually close to the financial condition and management of insurers domiciled in their state. Long before public disclosure of weakness, regulators generally have examiners on site reviewing the financial condition of troubled insurers. Certainly, Superintendent Dinallo gets high marks for his leadership with the NAIC AIG Task Force for an effective, concerted state regulatory response. Such concerted action has historically been limited and reserved only for the very high profile problems.
It can be considered the “worst” because even a concerted, well directed regulatory task force would be hamstrung in the face of statutory time periods which are not waivable. Currently, there seems to be no way around the problem. We know of no federal pre-emption which could be invoked, even though Treasury seems to have taken the risk in funding AIG with control even though not state approved. The fact remains, there is no federal insurance nor bankruptcy law which appears helpful.
Two Answers
There may be two ways in which to address this dilemma. The first would be a targeted federal law which would set aside McCarran-Ferguson for the limited purpose of approval of a rescue of an insurer or insurance holding company where failure to do so would be substantially harmful to policyholders or the public. The legions of proponents of McCarran-Ferguson and state regulation of insurance would be opposed to this exception as constituting a first step toward the federal regulation of insurance.
The other solution is to amend the Model Holding Company Act and seek to get changes in all state laws. A suggested form of a change to the NAIC Model Insurance Holding Company Act would be along these lines:
“Emergency Capital Infusion. If, in the opinion of the Commissioner and the [Governor or Attorney General] there exists an Emergency Condition of a domestic insurer or domestic insurance holding company, the Commissioner shall have the authority to expedite a change of control, as defined in [insert statute], including waiving any requirements for a public hearing, waiving statutory notice periods and pre-notification periods. An Emergency Condition is one in which the Commissioner is satisfied that an insurer or insurance holding company requires an immediate substantial capital infusion that results in a change of control if the insurer, failing which the policyholders would be irreparably harmed.”
Conclusion
As we work through the application of the federal Troubled Assets Relief Program (“TARP”) to insurers, it could be expected that a federal “cut through” will be devised wherein McCarran-Ferguson will be set aside for both federal and emergency private relief to be provided to troubled insurers without the application of state holding company laws.
Thomas Player is a Senior Partner in the Insurance and Reinsurance Practice. His areas of expertise include insurance and reinsurance, mergers and acquisitions, complex regulatory issues and dispute resolution. Tom received his bachelor’s degree from Furman University and his law degree from the University of Virginia.