Question
October 27, 2005
BY OVERNIGHT COURIER
Mr. B. Michael Verne
Premerger Notification Office
Federal Trade Commission
Room 303
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Purchase of Assets and Renewal Rights
Dear Mr. Verne:
I am writing this letter to confirm oral advice you provided to the undersignedin a telephone conversation earlier today regarding the applicability to thefollowing transaction of the notification requirements under theHart-Scott-Rodino Antitrust Improvement Act of 1976 (the "Act") and theFederal Trade Commission's implementing regulations (the "Rules").
Company A ("Seller") and Company B ("Purchaser") areinsurance companies engaged in the underwriting, claims handling and relatedadministration of property and casualty insurance policies, each of which meetsthe size of the parties jurisdictional requirements under the Act.
Seller and Purchaser are contemplating entering into a transaction wherebyPurchaser will purchase from Seller certain software, fixtures and other assets(the "Purchased Assets") used in connection with the administrationof a book of property and casualty insurance policies issued by the Seller (the"Policies"). In connection with the purchase of the Purchased Assets,Seller and Purchaser will enter into a transition and administrative servicesagreement pursuant to which Purchaser will act as a third party administratorservicing and administering the Policies on behalf of the Seller. In addition,as part of the transaction involving the Purchased Assets, Purchaser and Sellerwill enter into a renewal rights agreement whereby Seller will agree thatPurchaser will have the exclusive right to offer new and/or renewal policies toSeller's policyholders upon expiration of their Policies as well as to otherclients of the Seller's producers and general agents. Such renewal rights willpermit the Purchaser to solicit the policyholders of the existing Policies andoffer to sell them a new or replacement insurance policy (written byPurchaser), while Seller would agree not to renew the existing Policies orsolicit its policyholders to offer a replacement policy written by Seller uponexpiration of the Policies. In this transaction, the Purchaser will not assumethrough reinsurance any liabilities under the in-force Policies of the Seller.
The parties currently expect the consideration to be paid for the PurchasedAssets to be less than $53.1 million (and the parties believe that suchpurchase price reflects the fair market value of the
Purchased Assets). However, the aggregate consideration to be paid by Purchaserto Seller for both the Purchased Assets and the renewal rights to the Policiesis expected to exceed $53.1 million.
We note that the foregoing transaction is similar to an indemnity reinsurancetransaction, which the FTC staff has consistently advised to be exempt from thefiling requirements of the Act.1 As with an indemnity reinsurancetransaction, no present interest is being acquired in the subject Policies bythe Purchaser, e.g., in the present transaction, the Purchaser has onlyacquired the right to solicit the policyholders of the Policies to renew theirPolicies with policies issued by Purchaser upon their expiration .2 Moreover,in indemnity reinsurance transactions in which the reinsuring company administersthe reinsured policies, it is not uncommon for the reinsuring company to seekto replace the reinsured policies with new policies when the original policiesexpire.
Based on the foregoing, you have advised that the payments made for the renewalrights described above should not be included in determining the size of thetransaction, because there is no assurance that the policyholders would in factrenew the policies with the Purchaser. Accordingly, the contemplatedacquisition is not reportable, because without the inclusion of the paymentsassociated with the renewal rights, the transaction does not exceed the current$53.1 million size of the transaction threshold.
Please contact me as soon as possible if the analysis set forth herein does notaccurately reflect the informal advice you provided in our telephoneconversation. I understand that you will write your comments on this letter andthat it will subsequently be publicly available through requests under theFreedom of Information Act. Thank you for your assistance with this matter.
Footnote
1 See e.g.,Letter to B. Michael Verne dated December 17, 2002 Re: Indemnity reinsurance, available at http://-,vww.ftc.gov/bc/hsr/informal/opinions/021201Lhtm or through a Freedom ofInformation Act request.
2 In fact,no assurance is being provided by Seller that the policyholders will in factreplace any Policy with a policy issued by Purchaser as the policyholders,directly or indirectly through their brothers, may very well acquire newpolicies from competitors of Seller and Purchaser. Of course, Seller andPurchaser hope that a substantial portion of the policyholders will elect toreplace their Policies with policies issued by Purchaser.