Guidance Note - Legacy Insurance Groups Accounting and Capital Treatment for Corporate Liabilities

Summary

This guidance note from the Bermuda Monetary Authority sets out how Bermuda-regulated Legacy Insurance Groups and Insurers must seek approval for, account for, and hold capital against acquisitions of US companies (often structured as LLCs) carrying non-insurance Corporate Liabilities, such as legacy asbestos and environmental exposures. It clarifies supervisory expectations for these LLC transactions and prescribes specific accounting, capital and reporting treatment.

• Prior approval: All LLC transactions, including partial acquisitions or joint ventures, require prior approval from the BMA under the Condition of Registration on the licence before contracts are entered into.
• Pre-approval application: A detailed submission must show that Corporate Liability exposures are limited to 15% of the acquiring Legacy Group's existing total net insurance reserves as at the most recent year end, include an independent solvency or financial opinion, and a run-off plan with baseline and stress scenarios reviewed by the risk management function.
• Material change notification: If the transaction also meets the material change definition under Section 30JA(1)(e) of the Insurance Act 1978, the formal notification under Section 30JB(2) may be combined with the pre-approval application.
• Accounting treatment: LLCs must be accounted for using the equity method (net assets), reported on line 4(c) of Form 1EBS as Type 2 Equity Holdings - Other Equities, with net assets computed under GAAP as permitted by Section 17A(2) of the Act.
• Capital treatment: At initial application, Legacy Groups must submit a modelled BSCR proforma; the capital requirement is subject to a floor assuming the GAAP net asset value of the LLC is never below 15% of the value of its Corporate Liabilities.
• Ongoing reporting: A per-transaction BSCR disclosure schedule (similar to Schedule V(l)) is required, Corporate Liabilities must be assessed within the Group Solvency Self-Assessment, and corporate assets/liabilities per LLC must be disclosed in audited GAAP financial statements.

The accounting and capital treatment applies prospectively from 1 January 2024, but once in place the reporting requirements apply retroactively to all LLC transactions regardless of acquisition date. Insurers considering an LLC acquisition are advised to notify the Authority early, as different requirements may apply.

Key obligations

• Obtain prior BMA approval under the Condition of Registration before entering any contract for an LLC transaction, including partial acquisitions or joint ventures.
• Submit a pre-approval application demonstrating that exposures from Corporate Liabilities are limited to 15% of the acquiring Legacy Group's existing total net insurance reserves as at the most recent year end.
• Provide an independent or third-party solvency or financial opinion on the LLC as part of the pre-approval submission.
• Provide a run-off plan detailing management's approach to running down the Liabilities, including baseline and alternative stress scenarios and a projection of expenses/cost allocation verified by the risk management function.
• Where the transaction meets the material change definition under Section 30JA(1)(e), submit the formal notification under Section 30JB(2) alongside the pre-approval application.
• Account for the LLC using the equity method (net assets) and report the net asset value on line 4(c) of Form 1EBS as Type 2 Equity Holdings - Other Equities.
• Submit a modelled BSCR proforma at the time of initial application for review of the minimum capital factor.
• Maintain capital such that the GAAP net asset value of the LLC does not fall below 15% of the value of the Corporate Liabilities, per the capital requirement floor.
• Complete a per-transaction BSCR disclosure schedule similar to Schedule V(l) for LLC transactions.
• Assess Corporate Liabilities within the Group Solvency Self-Assessment.
• Disclose corporate assets and liabilities per LLC within audited GAAP financial statements.
• Notify the Authority early if considering acquiring an LLC.
• Submit the list of required documents in the Appendix (application, due diligence assessment, draft agreements, independent solvency opinion, run-off report, investment guidelines, board resolutions) to facilitate approval.

Applies to

Legacy Insurance Groups, Legacy Insurers, Bermuda licensed and regulated Insurers, Bermuda licensed and regulated Insurance Groups

Deadlines

• 1 January 2024: The accounting and capital treatment set out in this guidance applies prospectively from this date.
• retroactive, irrespective of acquisition date: Once reporting requirements are in place, they apply retroactively to all LLC transactions regardless of when they were acquired.