§ 27-35-4 - Standards – Reasonableness of surplus – Extraordinary distributions.
SECTION 27-35-4
§ 27-35-4 Standards – Reasonablenessof surplus – Extraordinary distributions. – (a) Transaction with affiliates. Transactions within a holding companysystem to which an insurer subject to registration is a party shall be subjectto the following standards:
(1) The terms shall be fair and reasonable;
(2) The books, accounts, and records of each party shall beso maintained as to clearly and accurately disclose the precise nature anddetails of the transactions including any accounting information that isnecessary to support the reasonableness of the charges or fees to therespective parties;
(3) The insurer's surplus as regards policyholders followingany dividends or distributions to shareholder affiliates shall be reasonable inrelation to the insurer's outstanding liabilities and adequate to its financialneeds;
(4) The charges or fees for services performed shall bereasonable; and
(5) The expenses incurred and payment received shall beallocated to the insurer in conformity with consistently applied customaryinsurance accounting practices.
(b) Prior notification to commissioner.(1) The following transactions involving a domestic insurer and anyperson in its holding company system may not be entered into unless the insurerhas notified the commissioner in writing of its intention to enter into thetransaction at least thirty (30) days prior to entering into it, or any shorterperiod that the commissioner may permit, and the commissioner has notdisapproved it within that period:
(i) Sales, purchases, exchanges, loans, or extensions ofcredit, or investments, provided the transactions are equal to or exceed: (A)with respect to nonlife insurers, the lesser of three percent (3%) of theinsurer's admitted assets or twenty-five percent (25%) of surplus as regardspolicyholders; or (B) with respect to life insurers, three percent (3%) of theinsurer's admitted assets; each as of the 31st day of December next preceding;
(ii) Loans or extensions of credit to any person who is notan affiliate, where the insurer makes the loans or extensions of credit withthe agreement or understanding that the proceeds of the transactions, in wholeor in substantial part, are to be used to make loans or extensions of creditto, to purchase assets of, or to make investments in, any affiliate of theinsurer making the loans of extensions of credit, provided the transactions areequal to or exceed: (A) with respect to nonlife insurers, the lesser of threepercent (3%) of the insurer's admitted assets or twenty-five percent (25%) ofsurplus as regards policyholders; or (B) with respect to life insurers, threepercent (3%) of the insurer's admitted assets; each as of the 31st day ofDecember next preceding;
(iii) Reinsurance agreements or modifications to them inwhich the reinsurance premium or a change in the insurer's liabilities equalsor exceeds five percent (5%) of the insurer's surplus as regards policyholdersas of the 31st day of December next preceding, including those agreements whichmay require as consideration the transfer of assets from an insurer to anonaffiliate, if an agreement or understanding exists between the insurer andnonaffiliate that any portion of those assets will be transferred to one ormore affiliate of the insurer;
(iv) All management agreements, service contracts, guaranteesand all cost sharing arrangements; and
(v) Any material transactions, specified by regulation, whichthe commissioner determines may adversely affect the interests of the insurer'spolicyholders;
(2) Nothing contained in this chapter shall be deemed toauthorize or permit any transactions which, in the case of an insurer not amember of the same holding company system, would be contrary to law.
(c) Prohibited transactions. A domestic insurer maynot enter into transactions that are part of a plan or series of liketransactions with persons within the holding company system if the purpose ofthose separate transactions is to avoid the statutory threshold amount andavoid the review that would occur. If the commissioner determines that theseparate transactions were entered into over any twelve (12) month period forthat purpose, he or she may exercise his or her authority under § 27-35-9.
(d) Standard. The commissioner, in reviewingtransactions pursuant to subsection (b) of this section shall consider whetherthe transactions comply with the standards set forth in subsection (a) of thissection and whether they may adversely affect the interests of policyholders.
(e) Notice to commissioner. The commissioner shall benotified within thirty (30) days of any investment of the domestic insurer inany one corporation if the total investment in the corporation by the insuranceholding company system exceeds ten percent (10%) of the corporation's votingsecurities.
(f) Adequacy of surplus. For the purposes of thischapter, in determining whether an insurer's surplus as regards policyholdersis reasonable in relation to the insurer's outstanding liabilities and adequateto its financial needs, the following factors, among others, shall beconsidered:
(1) The size of the insurer as measured by its assets,capital and surplus, reserves, premium writings, insurance in force, and otherappropriate criteria;
(2) The extent to which the insurer's business is diversifiedamong the several lines of insurance;
(3) The number and size of risks insured in each line ofbusiness;
(4) The extent of the geographical dispersion of theinsurer's insured risks;
(5) The nature and extent of the insurer's reinsuranceprogram;
(6) The quality, diversification, and liquidity of theinsurer's investment portfolio;
(7) The recent past and projected future trend in the size ofthe insurer's investment portfolio;
(8) The surplus as regards policyholders maintained by othercomparable insurers;
(9) The adequacy of the insurer's reserves; and
(10) The quality and liquidity of investment in affiliates.The commissioner may treat this investment as a disallowed asset for thepurposes of determining the adequacy of surplus as regards policyholderswhenever in his or her judgment the investment warrants.
(g) Dividends and other distributions.(1) No domestic insurer subject to registration under § 27-35-3shall pay any extraordinary dividend or make any other extraordinarydistribution to its shareholders until: (i) thirty (30) days after thecommissioner has received notice of its declaration and has not within thatperiod disapproved the payment, or (ii) the commissioner shall have approvedthe payment within the thirty (30) day period;
(2) For the purposes of this section, an "extraordinarydividend or distribution" includes any dividend or distribution of cash orother property, whose fair market value together with that of other dividendsor distributions made within the preceding twelve (12) months exceeds thelesser of: (i) ten percent (10%) of the insurer's surplus as regardspolicyholders as of the thirty-first day of December next preceding, or (ii)the net gain from operations of the insurer, if the insurer is a life insurer,or the net income, if the insurer is not a life insurer, not including realizedcapital gains, for the twelve (12) month period ending the 31st day of Decembernext preceding, but shall not include pro rata distributions of any class ofthe insurer's own securities. In determining whether a dividend or distributionis extraordinary, an insurer other than a life insurer may carry forward netincome from the previous two (2) calendar years that has not already been paidout as dividends. This carry forward shall be computed by taking the net incomefrom the second and third preceding calendar years, not including realizedcapital gains, less dividends paid in the second and immediate precedingcalendar years;
(3) Notwithstanding any other provision of law, an insurermay declare an extraordinary dividend or distribution which is conditional uponthe commissioner's approval of it, and the declaration shall confer no rightsupon shareholders until: (i) the commissioner has approved the payment of thedividend or distribution or (ii) the commissioner has not disapproved thepayment within the thirty (30) day period referred to in subdivision (1) ofthis subsection.