Editor: Please describe your practice area.
Rabinowitz: I focus exclusively on transactional and regulatory matters for insurance and other financial services entities. My practice spans numerous types of corporate transactional activity involving the insurance sector and related state and federal regulatory issues.
Editor: Tell us about your role in merger and acquisition matters, particularly how the regulatory aspects intersect with deal execution.
Rabinowitz: My involvement with merger and acquisition work involves a number of different components. Typically in an M&A deal involving insurance companies, there are structuring considerations that raise regulatory issues. For instance, in addition to the usual deal structures like stock purchase or corporate merger, you have other kinds of options in insurance matters, like reinsurance transactions or renewal rights.
Another aspect that I work on in terms of deal execution is making sure that diligence questions are properly looked at and properly asked, and that provisions in the deal document like representations and warranties relating to the insurance business are appropriately crafted and qualified.
In any insurance M&A deal, there are likely to be regulatory filings and approvals that need to be completed. I am responsible for analyzing these early on in the deal, and depending on whom I represent in the deal, preparing the relevant filings and then navigating them through the various insurance departments. This can be complex because the laws are different from state to state. Their laws relate not just to the fitness of owners of insurance companies, but also considerations relating to market share and solvency.
Editor: How do insurance companies use securitization-type techniques, and what have you seen in this space?
Rabinowitz: Securitization and the whole area of insurance-linked securities have generated a lot of deal activity for a variety of reasons. Securitization techniques can be used to generate medium-term financing (such as by the use of funding agreements or GICs by life companies) or secure contingent capital.
Another way in which insurance companies have used securitization is securitizing insurance liabilities using catastrophe bonds or, on the life side, so-called XXX or AXXX financings. These are techniques that involve laying off certain kinds of insurance risks and insurance liabilities to capital markets or other non-industry investors that are prepared to bear those risks and provide the capital to absorb losses. Another thing that we’re seeing, particularly in the life insurance space, are transactions in which existing proprietary investments can be pooled and otherwise altered and securitized to create new investment characteristics in order to satisfy capital, diversification or other corporate objectives. We’re seeing many novel uses of securitization and have been involved in some novel structures. Our broad experience in securitization deals, along with familiarity with the insurance sector and its regulatory requirements, is a real asset for our clients.
Editor: What current regulatory developments do you find insurance companies focusing on?
Rabinowitz: Right now insurance companies in this country are focused very intently on ERM, or Enterprise Risk Management, and ORSA, or Own Risk and Solvency Assessment requirements, that have been adopted within the last three to four years by the National Association of Insurance Commissioners (NAIC). These are now in the process of being adopted legislatively or by regulatory action in the various states.
These new requirements generally involve requiring insurance companies to look at their risks in a somewhat new and more holistic way than insurance regulators have historically required. The traditional way of examining risks, known as Risk-Based Capital (RBC), which is still in effect, is very quantitative and less subjective. The new techniques associated with ERM and ORSA look at insurance company families rather than just individual insurance entities and require a more qualitative rather than a quantitative look at the kinds of risks to which an insurance company may be exposed, including by virtue of its corporate affiliations.
Those are among the most important developments being looked at by insurance companies. Other topics of regulatory consequence that are occupying insurers' time include new laws regarding credit for reinsurance (which refers to the amount of credit that you can claim on your balance sheet for laying off risk to a reinsurer), as well as new laws regarding supervisory colleges and related holding company matters and, for life companies, principle-based reserving.
Editor: Tell us about your role in connection with public and private offerings of securities.
Rabinowitz: I have worked on a number of security offerings and other financings for companies in the insurance space and related financial services. These include traditional registered public offerings of securities, 144A, Reg. D, and Reg. S offerings as well as private placements.
My role in these, in addition to focusing on the usual ‘33 and ‘34 Act considerations, involves making sure that appropriate attention has been given to the fact that the issuer is an insurance company. That can affect everything from disclosure and due diligence to regulatory matters and even execution, if any regulatory filing or approval is required. Being able to properly handle industry-specific topics in a securities offering is critical.
Editor: What is alternative risk transfer?
Rabinowitz: Alternative risk transfer generally refers to a whole host of techniques, which I touched on earlier, in which insurance risks and insurance liabilities are absorbed not by insurance companies, but by other sources of capital. For instance, a typical insurance company reinsurance arrangement would involve an insurance company identifying some of its risks in its portfolio and paying another insurance company, namely a reinsurer, to assume those risks. In alternative risk transfer, the role of the reinsurer can be essentially replaced by a private non-insurance company, by capital market investors or by some other source of capital.
Editor: What is the significance of insurance liquidation and rehabilitation statutes, and how do they come into play in your practice?
Rabinowitz: The most important thing for people to recognize about these kinds of laws is that insurance companies are not eligible to be debtors under the federal bankruptcy laws. So, when an insurance company becomes distressed or insolvent, the remedy for the insurance regulator is to petition a state court to commence a liquidation or rehabilitation proceeding and place the company in receivership. This results in the regulator, as receiver, essentially succeeding to all of the property and rights of the insurance company. Depending on the nature of the proceeding, the regulator will either proceed to liquidate it through the court proceeding or rehabilitate it by finding new sources of capital that will restore it as a going concern. The fact that an insurance company is not bankruptcy-code eligible and instead is subject to insurance insolvency laws has a knock-on effect in all kinds of insurance transactions: M&A, securities issuances, securitization, structured finance and reinsurance. It changes how you view stress scenarios in all these sorts of deals.
Editor: Tell us about your role in advising with respect to the overlapping regulatory regimes, where a single company straddles multiple industries and jurisdictions.
Rabinowitz: This to me is one of the most interesting things I get to work on, and it’s definitely the leading edge of insurance regulatory thought and regulatory activity. This problem has existed in some way, shape or form for decades because in a single holding company structure you could have insurance companies domiciled in more than one state. That can lead to conflicts or interaction among the states because their approaches are not always aligned or predictable. However, in the past, these issues have usually been fairly confined, and state regulators have found ways to coexist with one another within the same holding company system. What we see now is that the states are receiving enhanced powers and enhanced discretion to look at holding companies and therefore are being compelled to work with other state regulators, and also increasingly non-U.S. regulatory bodies, that deal with the same holding company system.
By the same token, what we’ve seen with Dodd-Frank is that for certain kinds of insurance companies, whether they’re systemically important insurance companies or insurance companies that happen to be affiliated with savings and loans or other kinds of depository institutions, the federal government has gotten involved in imposing capital standards on them that are likely to be quite different from the traditional capital standards used for insurance companies. This is causing friction or misalignment between the states and the federal government on how to impose capital requirements. When you add the international overlay of international standard-setting and regulatory regimes such as Solvency II and ComFrame to U.S. components such as Dodd-Frank and the NAIC measures on ERM and ORSA, you get a much more complicated patchwork of interlocking laws and requirements than we’ve ever had. This leads to insurance companies having to form more creative and thoughtful judgments about how to navigate these requirements than ever before. One way in which we add value to our clients is to help them cope with this growing complexity.
Editor: How did Dodd-Frank change the insurance landscape, if at all?
Rabinowitz: Dodd-Frank did a couple of things in the insurance sector that are significant. It relaxed some of the rules regarding reinsurance and the specialty type of insurance called surplus lines. Essentially, what it did in both of these areas was to eliminate much of the extraterritorial nature of state requirements so that states are less able to impose their laws on out-of-state insurance companies. In effect, what the federal government did in Dodd-Frank was preempt many of the state requirements that were in tension with each other.
Dodd-Frank also created the Federal Insurance Office, which is not a regulator, but rather a monitoring body, tasked with monitoring various aspects of the nation’s insurance market and the efficacy of its regulatory function. Its initial report on the state of the insurance regulatory system made some bold calls for reform and uniformity that are more extensive than anything the federal government has done in the past. The other thing Dodd-Frank does is impose capital standards on certain non-bank systemically important companies, which can be insurance companies. As I alluded to before, this has caused some ambiguities, which are the subject of some pending bills in Congress, but until those laws are passed, there will continue to be some uncertainty regarding the application of capital standards.
Editor: What trends do you see on the horizon?
Rabinowitz: On the regulatory side, we’ll continue in a kind of evolution as states adopt the new ERM and ORSA frameworks and begin to form habits in imposing them on insurers they regulate. At the same time, they’re going to also be living with new vehicles for regulatory oversight such as supervisory colleges, so altogether there will be a number of “questions of first impression” that companies and regulators face together regarding process, procedure, administration of these kinds of regulatory entities and the like. The precedents that get set in the next two to three years on how holding companies are regulated post-Lehman may shape the contours of regulation for many years to come.
On the business side, in property-casualty, the big continuing theme is the tremendous amount of capital in the system and the persistent soft-pricing cycle. It seems as though capital seeking to be exposed to risks, and risks in need of capital, will locate each other in the global economy, whether that is via traditional reinsurance, cat bonds, sidecars, funds, other types of ILS or alternative risk transfer. So the traditional reinsurance market is competing with the alternatives that are out there.
For life companies, the focus on reserves for life products, and related questions of how insurers can relieve the capital strain associated with the reserve requirements, are in full bloom at the NAIC and key state insurance departments such as New York and California. In a world of capital requirements, insurers will always seek the lowest cost of capital available for the risks that they’re bearing, and regulators are increasingly keen to make sure that this doesn’t, in their view, result in structures that frustrate these very requirements.