Question
From: (redacted)
Sent:Monday, February 04, 2008 2:40 PM
To:Verne, B. Michael
Subject:Confirming Email re Sale of Book of Insurance Business
Mike:
Thanks as always foryour helpful insight. The following memorializes the relevant aspects of ourdiscussion on January 17, 2008 concerning the sale of a book of insurancebusiness, and your informal interpretation concerning the application of theHSR Act and its rules and regulations. I would be grateful if you couldreconfirm, or revise your view, as appropriate.
1. A multinational insurance and financial services firmintends to have a U.S. based subsidiary (the "Current Carrier") sella book of insurance business to an entity that constitutes a separate HSR"person" (the "Acquiring Carrier") via a renewal rightstransaction.
2. Current Carrier, through a network of independentagents, presently underwrites insurance for a particular segment of customers,offering a number of different lines (the "Subject Business"). Underthe Current Carrier's existing arrangements with independent agents, uponexpiration of existing policies, the independent agents may arrange for renewalpolicies written on Current Carrier paper.
3.Current Carrier and Acquiring Carrierwould enter into a renewal rights agreement that would sell to AcquiringCarrier "renewal rights" relating to the Subject Business generallycomprised of (i) the rights, if any, that Current Carrier has to renew policieswritten under the Subject Business and (ii) the rights of Current Carrier undercertain of its contracts with the independent agents through which suchinsurance policies are written. In addition, Current Carrier would sell toAcquiring Carrier the goodwill associated with the renewal rights, as well asthe right to access certain customer, agent and other information necessary forAcquiring Carrier to commence writing renewed insurance policies on its ownpaper. Pursuant to that agreement and agreements ancillary thereto, when theexisting policies lapse (and assuming that Acquiring Carrier has all necessaryapprovals and arrangements with the independent agents and regulators in placeto underwrite insurance policies under the Subject Business), the independentagents would arrange for the renewals to be written on Acquiring Carrier paper(renewals are expected to begin within 18 to 24 months after the closing of thetransfer of renewal rights to Acquiring Carrier).
4.In order to accelerate the transfer ofthe economic risks and benefits associated with the Subject Business toAcquiring Carrier, Acquiring Carrier would enter into an indemnity reinsurancecontract with Current Carrier whereby Acquiring Carrier would reinsure theexisting policies written on Current Carrier paper. Under this contract, amongother things, Current Carrier will transfer to Acquiring Carrier the unearnedpremium reserves related to the reinsured insurance policies and will receive aceding commission that is based on such unearned premium reserves.
5.While the entire consideration iscontingent upon the profits generated by the reinsured business and renewalsthat are actually written on Acquiring Carrier paper, and will be paid on anannual "earn-out" basis over the five year period commencing onJanuary 1, 2011, you should assume for purposes of this analysis that the"renewal rights" and associated assets are valued in excess of theminimum HSR notification threshold.
6.Certain aspects of the management of theSubject Business, as well as certain related operational assets, will also betransferred, but from one subsidiary within the Current Carrier's"person" to a different subsidiary within the Current Carrier's"person" and for consideration that is not in excess of $59.8million.
7.There is precedent in this industry forinsurance carriers to sell a book of business by structuring the transfer ofthe book of business as a sale of renewal rights.
Itis our understanding that from an HSR standpoint, the entry of the indemnityreinsurance contract will not triggerHSR obligations. The PNO takes the position that entering into an indemnity reinsurancecontract is not an acquisition of assets, voting securities or noncorporateinterests for purposes of the HSR Act. Thus, the HSR Act cannot be implicatedby the entry of an indemnity reinsurance contract. In our call, you confirmedthat this remains the PNO's position. Please advise if I have accuratelyreflected your view.
It was not clear to us whether Acquiring Carrier'sacquisition of the "renewal rights" and associated assets such as goodwill and access to customer information relatingto the Subject Business would constitute a transfer of assets" forpurposes of the HSR Act. While you stated that this would be viewed as an assettransfer that could potentially trigger a notification obligation under the HSRAct, you stated that an exemption would be available pursuant to 16 CFR Section 802.1 as a transfer of goods or realty in the ordinary course of business. Pleaseadvise if I have accurately reflected your view.