Insurance Company Redomestication (Part III)

This is the final installment in our series on insurance company redomestication.  In the first part of this series, we examined some of the reasons why companies may consider redomesticating.  In the second part, we discussed some preliminary steps that companies should take when considering redomestication.  We also provided an overview of the initial stages of the redomestication process.  This final part summarizes the final stages of the redomestication process and discusses some alternatives to redomestication that companies may wish to consider.

The Redomestication Process: New State Requirements

Once acceptable terms of redomestication have been worked out between the company and officials in the new state, the company will generally be required to file the Primary Uniform Certificate of Authority Application (Primary UCAA) along with a restated charter, one or more resolutions authorizing redomestication, and the company’s latest regulatory exam.   If an examination of the company has not been performed in the last three to five years, the new state may conduct an examination as part of the application process.

In general, the company should be prepared to provide a comprehensive plan of operation complete with business projections and detailed summaries of how it is prepared to operate in compliance with the new state’s requirements for domestic insurers.  This will include compliance with the state’s minimum solvency requirements, rules on allowable investments, record-keeping requirements and, where required, disaster-recovery requirements.  If the company is not already licensed and operating in the new state at the time it applies for redomestication, it will be required to file all products for approval.   It is recommended that the company’s license in the new state of domicile include all lines that the company may wishUS Map - Design Used for Redomestication (2) to write elsewhere – even if the company has no immediate intention to write that line in the new state.   Since most states require state of domicile authority for a line as a pre-requisite for authorization to write the line in that state, having the broadest license possible in the new state will enable future expansion into other states.  Finally, as part of the application process, the company will be required to obtain and file the current state’s approval of the redomestication.  It is important to coordinate the timing of the current state and new state approvals to avoid any legal gaps or overlaps.

The Redomestication Process: Other Licensed States 

It is important to notify all states in which the company is currently licensed of the planned redomestication as soon as possible prior to the effective date of the redomestication.  Some states take the position that, for application of the reduced retaliatory tax, the redomestication will not be recognized until the state has received proper notification.

In general, an insurer’s redomestication to a new state will have no effect upon the company’s certificate of authority, agent appointments and licenses, or product filings in states where it is currently licensed as a foreign insurer.   All policies issued will continue to remain in effect, although the commissioner may order endorsements at his or her discretion.  In most cases, any required policy language changes should be minimal.

Alternatives to Redomestication

Redomestication is a significant undertaking and, as discussed earlier, the company should only go forward after careful analysis.  Also, to reiterate an earlier point, low premium tax states are generally hesitant to allow redomestication solely for the purposes of allowing the company to gain tax advantages.   There must be some expected benefit to the state as a result of the redomestication, either in the form of direct investment or indirectly through the prospect of increased jobs.  If this quid pro quo is not expected to result in a net advantage to the company, then alternatives to redomestication should be considered.

finance3One way to take advantage of the lower premium tax rate offered by some states would be to create a new subsidiary or purchase an existing shell company in the state.  In most cases these alternatives would not be subject to the same level of regulatory scrutiny as a redomestication unless the company presently intends to transfer existing business in the state to the new subsidiary.   Assuming the company will be able to initiate new business writings through the new subsidiary in a relatively short amount of time, the company’s overall exposure to retaliatory taxes will, of course, also decrease over time.  These options are more long-term, however, and do not offer the more immediate tax relief of a complete redomestication.  Also, the company will have to commit significant capital to the new company initially and as writings increase.

As a side note, when establishing or purchasing the new company, it is generally recommended that the company be a wholly owned subsidiary of the existing company.  This will facilitate licensing the new subsidiary in the states where the current company is licensed by making it exempt from seasoning requirements.

If the company has an existing subsidiary in a low premium tax state, the company should consider writing more business through it and perhaps moving existing business to it as well in order to lower its exposure to retaliatory taxes. Whether the business is moved by way of an assumption transaction or by non-renewal, however, approval of the existing state will likely be required.   Also, before moving business to an existing company, it may be necessary to increase that company’s capital to assure that key ratios are maintained at state-required levels.

A final option for lowering the company’s retaliatory tax exposure would be to urge legislators in the home state to enact a retaliatory tax credit.  This would enable the company to take a credit against premium taxes in its home state for retaliatory taxes paid to other states.  This option is more viable for companies that write the bulk of their business in their home state.  For companies with widely diverse nationwide premium writings, or writings mainly outside of their home state, a tax credit against premiums in the home state will have very little substantive effect.

The Lawson Firm, LLC provides comprehensive legal services to insurers of all sizes including advice and assistance with redomestication, state licensing, tax reduction strategies, and compliance. For companies considering redomestication, the firm provides comprehensive redomestication services including current and historical tax data for all states, planning and analysis, domicile selection analysis, document preparation, state filing, and regulatory approval. Please feel free contact me to discuss your company’s needs in this area:  Scott Lawson, E: slawson@lawsonfirm.net, P: +1 (440) 666-9735.♦

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