§ 27-29-5 — Transactions of Insurers with Affiliates; Adequacy of Surplus; Dividends and Other Distributions

Alabama § 27-29-5

• Jurisdiction: Alabama
• Title 27: Insurance
• Ch. 29: Insurance Holding Company Systems

Text

(a) Transactions within an insurance holding company system to which an insurer subject to registration is a party shall be subject to all of the following standards:
(1) The terms shall be fair and reasonable.
(2) Agreements for cost sharing services and management shall include such provisions as required by rule and regulation issued by the commissioner.
(3) Charges or fees for services performed shall be reasonable.
(4) Expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied.
(5) The books, accounts, and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the 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.
(6) 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.
(b)(1) The following transactions involving a domestic insurer and any person in its insurance holding company system, including amendments or modifications of affiliate agreements previously filed pursuant to this section which are subject to any materiality standards contained in paragraphs a. through g., may not be entered into unless the insurer has notified the commissioner in writing of its intention to enter into the transaction at least 30 days prior thereto, or such shorter period as the commissioner may permit, and the commissioner has not disapproved it within that period. The notice for amendments or modifications shall include the reasons for the change and the financial impact on the domestic insurer. Informal notice shall be reported, within 30 days after a termination of a previously filed agreement, to the commissioner for determination of the type of filing required, if any.
a. Sales, purchases, exchanges, loans or extensions of credit, or investments provided the transactions are equal to or exceed the following:
1. With respect to nonlife insurers, the lesser of three percent of the insurer’s admitted assets or 25 percent of surplus as regards policyholders as of the 31st day of December next preceding.
2. With respect to life insurers, three percent of the insurer’s admitted assets as of the 31st day of December next preceding.
b. Loans or extensions of credit to any person who is not an affiliate, where the insurer makes 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 the transactions are equal to or exceed the following:
1. With respect to nonlife insurers, the lesser of three percent of the insurer’s admitted assets or 25 percent of surplus as regards policyholders as of the 31st day of December next preceding.
2. With respect to life insurers, three percent of the insurer’s admitted assets as of the 31st day of December next preceding.
c. Reinsurance agreements or modifications thereto, including:
1. All reinsurance pooling agreements.
2. Agreements in which the reinsurance premium or a change in the insurer’s liabilities, or the projected reinsurance premium or a change in the insurer’s liabilities in any of the next three years, equals or exceeds five percent of the insurer’s surplus as regards policyholders, as of the 31st day of December next preceding, including those agreements which 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 or more affiliates of the insurer.
d. All management agreements, service contracts, tax allocation agreements, guarantees and all cost-sharing arrangements.
e. Guarantees when made by a domestic insurer; provided, however, that a guarantee which is quantifiable as to amount is not subject to the notice requirements of this paragraph unless it exceeds the lesser of one-half of one percent of the insurer’s admitted assets or 10 percent of surplus as regards policyholders as of the 31st day of December next preceding. Further, all guarantees which are not quantifiable as to amount are subject to the notice requirements of this paragraph.
f. Direct or indirect acquisitions or investments in a person that controls the insurer or in an affiliate of the insurer in an amount which, together with its present holdings in such investments, exceeds two and one-half percent of the insurer’s surplus to policyholders. Direct or indirect acquisitions or investments in subsidiaries acquired pursuant to Section 27-29-2, or authorized under any other section of this title, or in non-subsidiary insurance affiliates that are subject to this chapter, are exempt from this requirement.
g. Any material transactions, specified by regulation, which the commissioner determines may adversely affect the interests of the insurer’s policyholders.
(2) Nothing in this subsection shall be deemed to authorize or permit any transactions which, in the case of an insurer not a member of the same holding company system, would be otherwise contrary to law.
(c) A domestic insurer may not enter into transactions which are part of a plan or series of like transactions with persons within the insurance holding company system if the purpose of those separate transactions is to avoid the statutory threshold amount and thus avoid the review that would occur otherwise. If the commissioner determines that such separate transactions were entered into over any 12-month period for that purpose, the commissioner may exercise his or her authority under Section 27-29-10.
(d) The commissioner, in reviewing transactions pursuant to subsection (b), shall consider whether the transactions comply with the standards set forth in subsection (a) and whether they may adversely affect the interests of policyholders.
(e) The commissioner shall be notified within 30 days of any investment of the domestic insurer in any one corporation if the total investment in the corporation by the insurance holding company system exceeds 10 percent of the corporation’s voting securities.
(f) For purposes of this chapter in determining whether an insurer’s surplus as regards policyholders is reasonable in relation to the insurer’s outstanding liabilities and adequate to meet 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 investment portfolio.
(8) The surplus as regards policyholders maintained by other comparable insurers.
(9) The adequacy of the insurer’s reserves.
(10) The quality and liquidity of investments in affiliates. The commissioner may treat any such investment as a disallowed asset for purposes of determining the adequacy of surplus as regards policyholders whenever, in the judgment of the commissioner, the investment so warrants.
(g)(1)a. A domestic insurer shall not pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until 30 days after the commissioner has received notice of the declaration thereof and has not disapproved such payment within the period, or until the time the commissioner has approved the payment within the 30-day period.
b. For purposes of this section, an “extraordinary dividend or distribution” includes any dividend or distribution of cash or other property, whose fair market value together with that of other dividends or distributions made within the preceding 12 months exceeds the greater of the following:
1. Ten percent of the insurer’s surplus as regards policyholders as of the 31st day of December next preceding.
2. 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 or the pro rata distribution of any class of the insurer’s own securities, for the 12-month period ending the 31st day of December next preceding.
(2) A domestic insurer subject to registration under Section 27-29-4 shall report to the commissioner all dividends to shareholders within five business days following the declaration of the dividends and not less than 10 days prior to the payment of the dividends. This report shall also include a schedule setting forth all dividends or other distributions made within the previous 12 months.
(3) 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 calendar years that has not already been paid out as dividends. This carryforward 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 immediate preceding calendar years.
(4) Notwithstanding any other provision of law, an insurer may declare an extraordinary dividend or distribution which is conditional upon the commissioner’s approval of the dividend or distribution. The declaration shall confer no rights upon shareholders until the commissioner has approved the payment of the dividend or distribution or the commissioner has not disapproved the payment within the 30-day period as provided in subdivision (1).
(5) The commissioner shall assess such reasonable charges as he or she deems necessary for the review conducted pursuant to this section. All funds received shall be deposited in the State Treasury to the credit of the Special Examination Revolving Fund, from which the expenses incurred shall be paid.

Legislative History

(Acts 1973, No. 1042, p. 1636, §6; Acts 1994, No. 94-634, p. 1178, §2; Act 2014-324, p. 1151, §1.)