Question
April 16, 2004
VIA FEDEX
Mr. Michael B. Verne
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Ave, NW
Washington, D.C. 20580
Re: Applicability of Hart- Scott-Rodino ("HSR") Filing Requirements
Dear Mr.Verne:
I amwriting to request confirmation that the parties to the following reinsurancetransaction (the "Proposed Transaction") will not haveto submit filings under the HSRAct or permit a waiting period to expire before closing the ProposedTransaction.
I. TheProposed Transaction.
1. On the closing date, Company A will, by entering into a 100%quota share indemnity reinsurance agreement with Company B, transfer policyliabilities (the "Transferred Policies") equal toapproximately $97,651,384 with the ultimate objective of Company B eventuallyassuming all of the Transferred Policies. The Transferred Policies will consistof approximately $63,760,849 in policy liabilities (the "DirectPolicies") that are direct obligations of Company A and approximately$33,890,535 in policy liabilities (the "Reinsured Policies")indemnity reinsured by Company A. On the closing date, Company A will alsotransfer to Company B policy reserves (the "Reserves") equalto approximately $97,651,384 on an indemnity reinsurance basis. The Reserveswill be maintained either, on a "fund's withheld" basis, in existingtrust accounts with respect to which Company A is the grantor, or in a newtrust account wherein Company B is the grantor and Company A is thebeneficiary.
2. After the closing, Company B, pursuant to an assumptionreinsurance agreement with Company A, will seek to assume all of the DirectPolicies, by obtaining regulatory and policyholder consents as may be required.When a Direct Policy is assumed by Company B, an amount of the Reserves equalto the liabilities of that Direct Policy will be released from a trust accountand remitted to Company B.
3. After the closing, Company B will also attempt to a) directlyinsure the Reinsured Policies by entering into assumption reinsuranceagreements with the cedants of Company A, or b) directly reinsure the ReinsuredPolicies by having Company A assign the indemnity reinsurance agreementscovering the Reinsured Policies to Company B. When Company A ceases to beliable on a Reinsured Policy, either by having such Reinsured Policy assumeddirectly from a cedant by Company B or by Company A assigning a reinsuranceagreement to Company B, Reserves corresponding and equal to the value of theliabilities of such Reinsured Policy will be released from the appropriatetrust account and remitted to Company B.
4. The Proposed Transaction also contains a profit-sharingcomponent which may require Company B to subsequently remit additional funds toCompany A. The amount of funds (if any) to be remitted to Company A under thisprofit sharing arrangement will depend on variables including the amount ofpremiums written and the benefits incurred in any given year. The present valueof the funds actuarially estimated to be remitted under the profit sharingarrangement is $11,000,000.
II. LegalAnal.
At its core, the Proposed Transaction consists of two andpotentially three types of transactions between Company A and Company B. First,there is an indemnity reinsurance transaction (the "IndemnityTransaction") pursuant to which the Reserves having a value ofapproximately $97,651,384 will be transferred from Company A to Company B andheld in one of several trust accounts in conjunction with the transfer fromCompany A to Company B of the Direct Policies and the Reinsured Policies havinga combined value of liabilities of approximately $97,651,384 on an indemnityreinsurance basis.
Second, there is an assumption reinsurance transaction (the "AssumptionTransaction") involving the transfer of a maximum of $63,760,849 inliabilities of the Direct Policies and an equal amount of the Reserves out oftrust accounts to Company B on an assumption reinsurance basis. The amount ofliabilities of Direct Policies and the amount of Reserves actually transferredin connection with those Direct Policies transferred will be equal since eachassumption of a Direct Policy will be matched with a transfer to Company B ofReserves in an amount equal to the liabilities of each Direct Policy soassumed. Any Direct Policy, which is not actually assumed by Company B pursuantto the Assumption Transaction, will remain indemnity reinsured by Company B.
Finally, there is the potential that there will be assignments(the "Assignment Transactions") by Company A to Company B ofthe indemnity reinsurance agreements pursuant to which Company A has indemnityreinsured its cedants in respect of the Reinsured Policies. These AssignmentTransactions will substitute Company B as the indemnity reinsures on theReinsured Policies and release Company A from all liability for the ReinsuredPolicies. Under the Assignment Transactions, a maximum of $33,890,535 inliabilities of Reinsured Policies and an equal amount of Reserves could betransferred to Company B since each assignment of a reinsurance agreement willbe matched with a transfer of Reserves out of a trust account to Company Bin anamount equal to the liabilities of Reinsured Policies reinsured under thereinsurance agreement assigned.
1. The Indemnity Transaction.
The Indemnity Transaction does not necessitate a filingunder the HSR Act. Per our discussions on March 8, 2004 and March 9, 2004 andmy correspondence of March 8, I understand that the Federal Trade Commissiondoes not view an indemnity reinsurance transaction as a reportableevent. This position is consistent with several informal opinions issued by theFederal Trade Commission.
2. The Assumption and Assignment Transactions.
Per our discussions on March 8, 2004 and March 9, 2004 and mycorrespondence of March 8, I understood that the Federal Trade Commission viewsan assumption reinsurance transaction as a reportable event if the transactionmeets the "size of transaction" test set forth under the HSR Act andthe regulations promulgated under it. The Federal Trade Commission hasestablished a formula for valuing an assumption reinsurance transaction thattreats such a transaction as a "sale of contracts." The value of anassumption reinsurance transaction equals the difference between theactuarially determined present value of the payment obligations under thetransferred policies and the asset reserves transferred by the seller to thepurchaser to cover those obligations plus the value of the "customerlists" comprised of the identities of the insured's.
In the case of the Assumption Transaction, the amount of theliabilities associated with the Direct Policies assumed will equal the Reservestransferred out of a trust account to Company B, because as each Direct Policyis actually assumed by Company B, an amount of Reserves equal to theliabilities with respect to that assumed Direct Policy will be released from atrust account and remitted to Company B. Consequently, there will be nodifference between the value of the Direct Policies' liabilities assumed andthe Reserves transferred to cover the assumed policies' liabilities.
Company A views the "customer lists" transferred inaccordance with the Proposed Transaction as having a de minimis value and inthe Proposed Transaction no consideration is ascribed to such lists. Therefore,under the formula the Federal Trade Commission uses to value assumptionreinsurance transactions, the values of the Assumption Transaction and anyAssignment Transactions will equal the de minimis value of the customer liststransferred. This de minimis value is far less than the $50,000,000 size oftransaction threshold for triggering HSR Act filing requirements and so no HSRfiling is required for the Assumption Transaction or any AssignmentTransactions.
III.Conclusion
Company A and Company B will have no filing obligations under theHSR Act for the Proposed Transaction.
Please confirm your agreement with the conclusions stated, in thisletter at your earliest possible convenience. Thank you for your assistance inthis matter.