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Insurance Transactions and Regulation NEW YORK WASHINGTON HOUSTON PARIS LONDON FRANKFURT BRUSSELS MILAN ROME Recent Developments and Current Trends in Insurance Transactions and Regulation YEAR IN REVIEW 2014 January 2015 To Our Clients and Friends: We are pleased to present our annual Insurance Transactions and Regulation Year in Review – 2014. In it we cover the year’s most important developments in insurance transactions and regulation, including, among other topics, developments relating to mergers and acquisitions, insurance-linked securities, alternative capital, traditional capital markets transactions, corporate governance and shareholder activism, and the regulation and taxation of insurance companies, both in the United States and internationally. 2014 was an eventful year for the insurance industry, and many of the developments of the last year could be viewed as harbingers of additional changes to the state of the industry in 2015 and future periods. The year was also an exciting one for Willkie, as we were honored and fortunate to have been able to advise on transactions that placed us #1 for insurance M&A as ranked by SNL (based on both deal value and number of deals) and #1 issuer’s counsel for insurance capital markets offerings as ranked by Thomson Reuters. Willkie was also ranked Band 1 for “Insurance – Transactional and Regulatory” by Chambers. We hope that you find this Year in Review – 2014 informative. Please contact us if you would like further information about any of the topics covered in this report. Sincerely, The Willkie Farr & Gallagher LLP Corporate Insurance and Regulatory Group Recent Developments and Current Trends in Insurance Transactions and Regulation Year in Review 2014 Table of Contents I. Review of M&A Activity in 2014 1 VI. Principal Regulatory Developments L. Other International Insurance Issues 45 A. By the Numbers 1 Affecting Insurance Companies 29 1. Solvency II Developments 45 B. Market Trends – North America A. Overview 29 a) Key 2014 Solvency II Updates 45 1. Inbound Investment from Asia 1 B. Federal Insurance Office 29 i. Omnibus II 45 2. The Life Insurance Sector 2 1. Insurance Modernization and ii. The Delegated Regulation 46 3. The Non-Life Insurance Sector 3 Global Reinsurance Market Reports 29 iii. Technical Standards 46 a) The Bermuda Reinsurance a) FIO Modernization Report 29 iv. Guidelines 46 Market 3 b) Covered Agreement on b) Equivalence and Group b) North American Activity 4 Reinsurance 30 Supervision 46 C. Market Trends – Europe 5 c) FIO Reinsurance Report 30 i. EIOPA Reports on Bermuda, D. Market Trends – Latin America 6 2. 2015 Agenda 30 Switzerland and Japan 46 II. Insurance-Linked Securities 9 3. E.U./U.S. Dialogue 30 ii. Omnibus II Equivalence A. Alternative Reinsurance Structures 9 C. Federal Stability Oversight Council 30 Transitional Provisions 47 1. Catastrophe Bond Market 10 D. International Association of Insurance 2. The Proposed New U.K. Regulatory 2. Hedge Fund Re 11 Supervisors 31 Framework on Holding Approved 3. Sidecars 11 1. U.S. Representation at IAIS 31 Persons Accountable 47 4. ILS Fund Formation 12 2. Group Supervision 32 a) Senior Insurance Managers B. Excess Reserve Financings 13 a) ComFrame 32 Regime 48 1. Summary of Deal Activity 14 b) Group Capital Standards 32 b) Governance Map 48 a) AXXX Market Remains Open 14 3. IAIS “Observer” Status 32 c) Set of Conduct Rules 48 b) Continuance of Non-Recourse E. Financial Stability Board 33 3. EIOPA Report on Results of Transactions as the Structure F. Financial Sector Assessment Program 33 2014 Insurance Stress Test 49 of Choice 14 G. Insurance Topics of General Interest 34 VII. Tax 50 c) Choice of Domicile for 1. NAIC Internal Governance and New A. Corporate Inversions 50 Captives and Limited Federal Reserve Board Advisor 34 B. Hedge Fund Re 51 Purpose Subsidiaries 14 a) NAIC Governance Consultant 34 C. Captive Insurance Companies 52 2. Utilized Structures 14 b) Personnel Changes 34 D. FATCA 53 a) Limited Purpose Subsidiaries 14 2. State Authority as Group Wide 1. Catastrophe Bond Issuers 53 b) Credit-Linked Notes vs. Supervisor 34 2. Section 953(d) Companies 53 Letters of Credit 15 3. Corporate Governance 35 3. Protected Cells/Segregated c) Funding Sources a) The Corporate Governance Account Companies 54 Beyond Banks 15 Model Act and Corporate E. FET 54 3. Regulatory Environment 15 Governance Model Regulation 36 F. Increased United Kingdom Scrutiny of a) NAIC 15 b) Model Audit Rule 36 Cross-Border Tax Planning 55 b) New York 15 c) States Continue Adopting the 1. Introduction 55 C. Embedded Value Securitization 16 ORSA Model Act 37 2. OECD BEPS Project 55 4. Credit for Reinsurance Model Law III. Developments and Trends in Longevity, a) Action Plan 55 and Regulation 37 b) Country-By-Country Reporting 55 Pension Close-outs and De-risking 5. Cyber Risk 38 Transactions 17 i. Local File 55 H. Life Insurance Topics 39 ii. Master File 55 IV. Capital Markets 19 1. Special Purpose Vehicles/Captives 39 iii. Country-By-Country A. Equity Offerings 19 2. Private Equity/Hedge Fund Reporting 55 B. Surplus Notes 19 Investments in Life Insurers 41 c) Definition of a Dependent Agent C. Preferred Equity 20 3. Principle-Based Reserving for Permanent Establishment 56 D. Investment Grade Debt 20 Life Insurers 41 3. U.K. Diverted Profits Tax 56 E. Funding Agreement-Backed Notes 21 I. Property/Casualty Insurance Topics 41 a) A New Tax 56 F. SEC Disclosures 22 1. Congress Fails to Reauthorize TRIA b) Two Branches 57 1. Captive Reinsurance Arrangements 22 Prior to Its Expiration on December 31, c) Avoided PE – Section 2 57 2. Statutory Disclosures and 2014; New TRIA Authorization d) Freestanding Effective Tax Dividend Restrictions 23 Passed in January 2015 41 Mismatch Outcome – 2. Mortgage Insurance 42 V. Developments in Corporate Governance Section 3 57 J. New York Corner 43 and Shareholder Activism 24 e) Geographical Scope of the 1. Holding Company Act/Regulations 43 A. Overview 24 Section 2 DPT Charge and the 2. Regulations on ERM and ORSA 43 B. Shareholder Proposals in 2014 24 Sales Threshold Exemption 58 a) New York’s ERM Report C. Proxy Access 25 f) Investment Manager Exemption Requirement 43 D. Say on Pay and Director Elections 26 (“IME”) and Independent Broker b) New York’s ORSA E. Proxy Fights 26 Exemption 58 Requirement 44 F. U.K. Corporate Governance Code 2014 27 g) HMRC Guidance 58 3. New Force-Placed Insurance h) Critical Response 59 Regulation to Become Effective in 4. Going Forward 59 February 2015 44 K. 2015 Forecasting 44 Appendix A - Insurance Regulatory Glossary 60 Recent Developments and Current Trends in Insurance Transactions and Regulation Year in Review 2014 I. Review of M&A Activity in 2014 B. Market Trends – North America I. Review of M&A Activity in 2014 1. Inbound Investment from Asia A. By the Numbers Over the last several years, the direction of insurance transactions between Western companies and companies Powered by a late-year surge in M&A activity in the in Asia have largely flowed one-way, with Western non-life insurance sector, 2014 saw an increase in companies diversifying by investing in Asian insurance M&A activity in North America and Bermuda, both in assets. While this trend continued in 2014,2 transactions terms of the number of deals announced and in total between the two regions have also begun to flow in the transaction value. A total of 75 life and property opposite direction, as several insurance companies based casualty (“P&C”) insurance M&A transactions in in the Asia-Pacific region have emerged as buyers of North America and Bermuda were announced in 2014, insurance company assets in mature markets, including representing over $21 billion in aggregate transaction North America. value,1 up from 62 transactions representing an aggregate of approximately $7 billion in transaction The most significant of these transactions—and indeed the value announced in 2013. Twenty life insurance M&A largest and most significant life insurance transaction in North transactions in North America and Bermuda were America in 2014—is Dai-ichi Life Insurance Company’s $5.7 announced in 2014 ($12.6 billion transaction value), billion acquisition of Protective Life Corporation.* Dai-ichi, compared to 16 transactions announced in 2013 ($2.9 which is the second largest private life insurance company billion transaction value). Fifty-five P&C insurance in Japan and one of the top 20 global life insurers, has M&A transactions were announced in 2014 ($8.4 stated that it plans for Protective Life to serve as its platform 1 billion transaction value), compared to 46 transactions for future growth in the United States. This transaction announced in 2013 ($4.14 billion transaction value). represents Dai-ichi’s initial entrance into the United States Nearly half of the aggregate transaction value relating market. The Dai-ichi deal follows the acquisition in 2014 by to P&C insurance M&A transactions in North America another Japanese insurer, Sompo Japan Insurance Inc., of and Bermuda is attributable to transactions announced Guernsey-based Canopius Group Ltd. in the fourth quarter of 2014. Chinese insurers appear to have similar aspirations. In The largest transaction in the industry in 2014 occurred in August, Fosun International entered into a definitive Europe, where U.K. insurers Aviva and Friends Life agreed agreement to acquire a 20% stake in United States P&C to a £5.6 billion ($8.8 billion) business combination that insurer Ironshore Inc. for $464 million, and promptly will create the largest life insurer in the United Kingdom. followed that with an announcement in December The general insurance sector saw less activity in Europe that it had entered into a definitive agreement to buy in 2014, although early 2015 provided the most significant Meadowbrook Insurance Group Inc.
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