Insurance Company Redomestication (Part II)

This is the second installment of 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 this part, we discuss some preliminary steps that companies should take when considering redomestication and provide an overview of the first stage of the redomestication process. 

Analysis and Planning

At the outset of the process, a company considering redomestication should clearly define the benefits it expects to achieve by redomesticating.  Following that, the company should conduct an in-depth analysis of the states that appear to offer the greatest potential for achieving those benefits.

Domicile selection analysis should be undertaken primarily by the company’s tax and finance areas with assistance from legal counsel.  The company should also consider using outside professionals who can offer more extensive research and data as well as lend a national perspective.  It is generally recommended that consideration be given primarily to low-tax states that have also adopted the NAIC’s Redomestication Model Bill.  States that have not adopted the NAIC Model may still allow the redomestication to proceed, but the process may be more complicated, costly, and much less advantageous to the company.   The standard process in non-Model states involves the establishment of a new company in the new state and a subsequent merger of the current company into the new one.   While this may seem to be only a semantic or technical difference, it may negatively impact the company’s ability to do business in other states.   The new company, if not part of a larger well-established group of companies, may be treated by other states as an entirely new company. This means that the company could be forced to effectively or literally reapply for admission in the states where it currently does business and be subject to seasoning requirements in states where it intends to apply for licenses in the near future.

In addition to current lower premium tax rates, the company should consider a state’sfinance2 historical tax trends.   Has the state increased or decreased its tax rate(s) in recent years? Have recent decreases been offset by new or different assessments or burdens? Does the state impose income taxes in addition to premium taxes or are premium taxes in lieu of all other taxes? Are there bills pending in the legislature that would raise the tax or impose new taxes that could minimize or reduce the company’s anticipated retaliatory tax savings?

In addition to the tax analysis, the company should consider other factors that may subtract from the benefits of becoming domiciled in the new state. For instance, does the new state have any burdensome reporting requirements unique to domestic companies? Does the state impose overly restrictive limitations on the investments of domiciled companies (thereby raising the possibility that the company may have to divest itself of some assets in order to redomesticate)? Will the new state allow the company to offer the same products it offers now? Will an examination be conducted in conjunction with the redomestication and how frequently will the state examine the company going forward? Is the state insurance department responsive and generally easy to work with, or are the regulators inaccessible, unresponsive, or unreasonable? Here again, an outside perspective is useful.

Finally, the company will need to determine the extent to which some physical presence, local investment, or both, may be required by the new state.   This will be determined largely through discussions with insurance department officials and, in some states, representatives from state economic development agencies.   Investment in the state, or the establishment of some local presence, is generally considered a quid pro quo for the new state’s assumption of the role of primary regulator for the company.  It is not unlikely, therefore, that the company will be expected to establish an office in the new state with some staff.  Some states also require that the company have or place at least one state resident on its board of directors. In most cases, redomesticating companies establish small to moderately sized claims offices, underwriting offices, or in-house legal offices. In other cases, companies may find it advantageous to establish larger offices such as consumer service centers or call centers. Coupled with appropriate tax incentives as well as the prospect of access to a favorable labor market, the establishment of some operations in the new state may prove to be a positive investment for the company.

The Redomestication Process: Current State Requirements

US Map - Design Used for Redomestication (2)Once a new state of domicile has been selected, it will be necessary for the board of directors and, in some states, shareholders and/or policyholders to approve the redomestication. Further, the company will need to secure the approval of both the new state’s commissioner as well as the commissioner of the company’s current state of domicile.  Most states require that the company file a formal application setting forth the reasons for redomesticating to the new state and any anticipated changes to the company’s plan of operations as a result. As mentioned earlier, states that have not adopted the NAIC’s Model Bill on Redomestication may require the merger of the existing company into a new company established in the new state. Regardless of the method required, the company should be prepared to show the commissioner of the current state that the redomestication will not be contrary to the best interests of current policyholders in the state. Finally, if the company intends to continue writing business in the current state after redomestication, it will be required to surrender its current license for reissue as a foreign insurer and, as necessary, to obtain authorization from the current state’s secretary of state to do business in the state as a foreign corporation.

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.♦

Still to Come…Part III – New State Requirements, Other Licensed State Requirements, Alternatives to Redomestication

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  1. Pingback: The Lawson Firm | Insurance and Reinsurance Update – July 2015

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