23-63-515. Standards — Definition.

23-63-515. Standards — Definition. (a)(1) Material transactions by insurers registered with the Insurance Commissioner under § 23-63-514 with their affiliates shall be subject to the following standards: (A) The terms shall be fair and reasonable; (B) The books, accounts, and records of every party shall be so maintained as to clearly and accurately disclose the precise nature and details of the transactions, including such accounting information as is necessary to support the reasonableness of the charges or fees to the respective parties; (C) The insurer's surplus as regards policyholders following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs; (D) The charges or fees for services performed shall be reasonable; (E) The expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied; and (F) The commissioner by rule may establish additional requirements for a cost-sharing service agreement or a management agreement. (2)(A) A domestic insurer subject to this subchapter and a person in its holding company system may not enter into a transaction, as described in subdivision (a)(2)(B) of this section, unless the insurer notifies the commissioner in writing of its intention at least thirty (30) days before, or less, as the commissioner may permit, and the commissioner does not disapprove of the transaction within such a period. (B) A transaction that requires prior notice to the commissioner by a domestic insurer includes: (i) Sales, purchases, exchanges, loans or extensions of credit, guarantees, or investments, provided the transactions are equal to or exceed as of December 31 next-preceding: (a) With respect to nonlife insurers, the lesser of three percent (3%) of the insurer's admitted assets or twenty-five percent (25%) of surplus as regards policyholders; and (b) With respect to life insurers, three percent (3%) of the insurer's admitted assets; (ii) Loans or extensions of credit to any person who is not an affiliate when the insurer makes the loans or extensions of credit with the agreement or understanding that the proceeds of the transactions, in whole or in substantial part, are to be used to make loans or extensions of credit to, to purchase assets of, or to make investments in any affiliate of the insurer making the loans or extensions of credit, provided that the transactions are equal to or exceed as of December 31 next-preceding: (a) With respect to nonlife insurers, the lesser of three percent (3%) of the insurer's admitted assets or twenty-five percent (25%) of surplus as regards policyholders; and (b) With respect to life insurers, three percent (3%) of the insurer's admitted assets; (iii) Reinsurance agreements or modifications thereto, including: (a) All reinsurance pooling agreements; and (b) Agreements in which the reinsurance premium, a change in the insurer's liabilities, any projected reinsurance premium, or a change in the insurer's liabilities in any of the next three (3) years equals or exceeds five percent (5%) of the insurer's surplus as regards policyholders, as of December 31 next-preceding, including those agreements that may require as consideration the transfer of assets from an insurer to a nonaffiliate, if an agreement or understanding exists between the insurer and nonaffiliate that any portion of the assets will be transferred to one (1) or more affiliates of the insurer; (iv) All management agreements, service contracts, tax allocation agreements, and all cost-sharing arrangements; (v) Any material transactions specified by regulation that the commissioner determines may adversely affect the interests of the insurer's policyholders; and (vi)(a) Any amendment or modification of an affiliate agreement that is subject to the materiality standards under subdivision (a)(1) of this section, including the reason for the amendment or modification and the financial impact on the domestic insurer. (b) A domestic insurer shall notify the commissioner within thirty (30) days after a termination of a previously filed agreement in a format that is acceptable to the commissioner, to determine if further reporting or filing is required. (3) A domestic insurer subject to this subchapter may not enter into transactions which are part of a plan or series of like transactions with persons within the holding company system if the purpose of those separate transactions is to avoid the threshold amount and thus avoid the review that would otherwise occur. If the commissioner determines that those separate transactions were entered into over any twelve-month period for such a purpose, the commissioner may exercise his or her authority under § 23-63-522. (4) In reviewing transactions pursuant to subdivision (a)(2) of this section, the commissioner shall consider whether the transactions comply with the standards set forth in subdivision (a)(1) of this section and whether they may adversely affect the interests of policyholders. (5) The commissioner shall be notified within thirty (30) days of any investment of a domestic insurer subject to this subchapter in any one (1) corporation if the total investment in such a corporation by the insurance holding company system exceeds ten percent (10%) of the corporation's voting securities. (b) For purposes of this subchapter, in determining whether an insurer's surplus as regards policyholders is reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs, the following factors, among others, shall be considered: (1) The size of the insurer as measured by its assets, capital and surplus, reserves, premium writings, insurance in force, and other appropriate criteria; (2) The extent to which the insurer's business is diversified among the several lines of insurance; (3) The number and size of risks insured in each line of business; (4) The extent of the geographical dispersion of the insurer's insured risks; (5) The nature and extent of the insurer's reinsurance program; (6) The quality, diversification, and liquidity of the insurer's investment portfolio; (7) The recent, past, and projected future trend in the size of the insurer's surplus as regards policyholders; (8) The surplus as regards policyholders maintained by other comparable insurers; (9) The adequacy of the insurer's reserves; and (10) The quality and liquidity of investments in subsidiaries made pursuant to § 23-63-505. The commissioner may treat any investment as a disallowed asset for purposes of determining the adequacy of surplus as regards policyholders whenever in his or her judgment the investment so warrants. (c) No insurer subject to registration under § 23-63-514 shall pay any extraordinary dividend or make any other extraordinary distribution to its stockholders until: (1) Thirty (30) days after the commissioner has received notice of the declaration thereof and within that period has not disapproved the payment; or (2) The commissioner shall have approved the payment within the thirty-day period. (d)(1) As used in this section, “extraordinary dividend or distribution” means any dividend or distribution of cash or other property whose fair market value, together with that of the other dividends or distributions made within the preceding twelve (12) months, exceeds the greater of: (A) Ten percent (10%) of the insurer's surplus with regard to policyholders as of the December 31 preceding the payment of the dividend or distribution; or (B) 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 realized capital gains for the twelve-month period ending on the preceding December 31 but shall not include pro rata distributions of any class of the insurer's own securities. (2)(A) In determining whether a dividend or distribution is extraordinary, an insurer other than a life insurer may carry forward net income from the previous two (2) calendar years that has not already been paid out as a dividend. (B) The carry forward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediately preceding calendar years. (e) Notwithstanding any other provisions of law, an insurer may declare an extraordinary dividend or distribution which is conditional upon the commissioner's approval, and the declaration shall confer no rights upon stockholders until: (1) The commissioner has approved the payment of the dividend or distribution; or (2) The commissioner has not disapproved the payment within the thirty-day period referred to in subsection (c) of this section. (f) Notwithstanding any other provisions of law, an insurer may declare and pay, subject to the provisions of this section, an extraordinary dividend or distribution from its gross paid-in and contributed surplus, provided that: (1) The dividend or distribution shall be made only upon a determination by the board of directors of the insurer that the assets of the insurer are in excess of the needs of its business; and (2) Each dividend or distribution, when made, shall be identified as a distribution from gross paid-in and contributed surplus, and the amount per share shall be disclosed to the shareholders receiving the dividend or distribution concurrently with its distribution.