Question
(redacted)
July 27, 2005
By Email
B. Michael Verne
Premerger Notification Office
Federal Trade Commission
Room 303
6th and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Hart-Scott-Rodino Reporting Obligations
Wewanted to follow up with you on the recent telephone conversation that we hadregarding the treatment of a transaction under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended (the "HSRAct").
TheTransaction
Aswe discussed, parties are entering into a transaction whereby a purchaser isacquiring the individual and group annuity business and individual lifebusiness of an insurance company (the "Business"). The transactionwill be effected through several agreements, including an Asset PurchaseAgreement and an Indemnity Reinsurance Agreement.
Underthe Asset Purchase Agreement, the purchaser will acquire certain assetsrelating to the Business, namely, certain contracts (but not insurancecontracts), books and records (such as administrative records, claim records,marketing compliance records, policy files, sales records, filed and recordsrelating to regulatory matters, reinsurance records, underwriting records andaccounting records), intangible assets (such as telephone numbers), permittedinvestments (reflecting reserves underlying the obligations undertaken underthe Reinsurance Agreement), proprietary intellectual property and proprietarycomputer programs. The purchaser will also assume certain liabilities relatingto the transferred assets. The value of the investments reflecting the reservesbeing transferred is approximately $1.7 billion, the value of which does notexceed the expected value of the obligations being undertaken pursuant to theReinsurance Agreement.
Asconsideration for entering into the transaction, under the Asset PurchaseAgreement, the purchaser will be obligated to pay the seller in cash an amountfor the transferred assets, reimbursement of commissions relating to certainpolicies that are the subject to the Reinsurance Agreement, the discountedpresent value of the expected profit streams of the Business, and an interestrate adjustment to reflect interest rate variations effecting the discountedpresent value of the expected profit streams of the Business. The amount is tobe determined by a formula set forth in the Asset Purchase Agreement.
Analysis
We understandthat the Premerger Notification Office has historically taken the view thatindemnity reinsurance transactions are not reportable events under the HSR Act because such transactions are neither the purchase nor saleof assets, voting securities or non-corporate interests. Accordingly, in thiscase, consideration allocated to entering into the Reinsurance Agreement (ifany) would not be included in determining whether the size-of-transaction testis met.
Wealso understand that the transfer of investments reflecting reserves inconnection with a transaction of this nature is not a reportable event underthe HSR Act unless the investments reflectingthe reserves are comprised of the types of assets (or voting securities) thatwould otherwise be separately reportable under the HSR Act. For example, investments reflecting reserves that constitutecash, mortgages and bonds would not be subject to the reporting obligations ofthe HSR Act; investments reflecting reservesthat constitute voting securities would be subject to the reportingrequirements of the HSR Act if the size-of-person andsize-of-transaction tests were met and no exemption was otherwise available.
Inthis case, the parties will need to determine whether any of the investmentsreflecting the reserves could be subject to the HSRAct's reporting obligations most likely as a secondary acquisition. Inaddition, since the value of the non-exempt assets of the Business beingacquired pursuant to the Asset Purchase Agreement is undetermined, the HSR Act's regulations require that that the fair market value of theassets (and assumed liabilities) be determined in good faith by the board ofdirectors of the ultimate parent entity of the purchaser or by an entitydelegated that function by such board. The determination would need to be madewithin 60 calendar days prior to the closing (if no HSR filing is required) or within 60 calendar days prior to the dateof filing of an HSR filing if one is required.
Webelieve that this letter accurately reflects our prior conversation. Should youhave any questions or require any additional information, please contact us. Asalways, we appreciate your assistance.
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