TCA § 56-11-106 — Transactions within a holding company system — Standards — Dividends — Management of domestic insurers and health maintenance organizations

Transactions Within a Holding Company System. Transactions within an insurance or health maintenance organization holding company system, to which an insurer or health maintenance organization subject to registration is a party, shall be subject to the following standards: The terms shall be fair and reasonable; Agreements for cost sharing services and management shall include such provisions as required by rule and regulation issued by the commissioner; Charges or fees for services performed shall be reasonable; Expenses incurred and payment received shall be allocated to the insurer or health maintenance organization in conformity with customary insurance accounting practices, or, in the case of health maintenance organizations, customary accounting practices applicable to health maintenance organizations, consistently applied; The books, accounts and records of each party to all the transactions shall be so maintained as to clearly and accurately disclose the nature and details of the transactions, including the accounting information necessary to support the reasonableness of the charges or fees to the respective parties; and The insurer's surplus as regards policyholders, or the health maintenance organization's net worth, following any dividends or distributions to shareholder affiliates shall be reasonable in relation to the insurer's, or health maintenance organization's, outstanding liabilities and adequate to meet the insurer's or health maintenance organization's financial needs. The following transactions involving a domestic insurer or a health maintenance organization and any person in its insurance or health maintenance organization 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 subdivisions (a)(2)(A)-(G), may not be entered into unless the insurer or health maintenance organization has notified the commissioner in writing of its intention to enter into the transaction at least thirty (30) days prior thereto, or a shorter period that the commissioner may permit, and the commissioner has not disapproved it within the 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 thirty (30) days after a termination of a previously filed agreement, to the commissioner for determination of the type of filing required, if any: Sales, purchases, exchanges, loans, extensions of credit, or investments; provided, that exchanges, loans, extensions of credit, or investments the transactions are equal to or exceed: With respect to nonlife insurers and health maintenance organizations, the lesser of three percent (3%) of the insurer's or health maintenance organization's admitted assets, or twenty-five percent (25%) of surplus as regards policyholders, or, with respect to health maintenance organizations, net worth as of December 31 next preceding; and With respect to life insurers, three percent (3%) of the insurer's admitted assets, each as of December 31 next preceding; Loans or extensions of credit to any person who is not an affiliate, where the insurer or health maintenance organization 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 or health maintenance organization making the loans or extensions of credit; provided, that the transactions are equal to or exceed: With respect to nonlife insurers and health maintenance organizations, the lesser of three percent (3%) of the insurer's or health maintenance organization's admitted assets, or twenty-five percent (25%) of surplus as regards policyholders, or, with respect to health maintenance organizations, net worth as of December 31 next preceding; and With respect to life insurers, three percent (3%) of the insurer's admitted assets as of December 31 next preceding; Reinsurance agreements or modifications thereto, including: All reinsurance pooling agreements; Agreements in which the reinsurance premium or a change in the insurer's or health maintenance organization's liabilities, or the 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, or, with respect to health maintenance organizations, net worth, as of December 31 next preceding, including those agreements that may require as consideration the transfer of assets from an insurer or health maintenance organization to a non-affiliate, if an agreement or understanding exists between the insurer or health maintenance organization and non-affiliate that any portion of the assets will be transferred to one (1) or more affiliates of the insurer or health maintenance organization; All management agreements, service contracts, tax allocation agreements, guarantees and all cost-sharing arrangements; Guarantees when made by a domestic insurer or health maintenance organization; 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 (0.5%) of the insurer's or health maintenance organization's admitted assets, or ten percent (10%) of surplus as regards policyholders, or with respect to health maintenance organizations, net worth, as of December 31 next preceding. Further, all guarantees which are not quantifiable as to amount are subject to the notice requirements of this subdivision (a)(2)(E); Direct or indirect acquisitions or investments in a person that controls the insurer or health maintenance organization or in an affiliate of the insurer or health maintenance organization in an amount which, together with its present holdings in such investments, exceeds two and one-half percent (2.5%) of the insurer's surplus to policyholders, or, with respect to health maintenance organizations, net worth. Direct or indirect acquisitions or investments in subsidiaries acquired pursuant to § 56-11-102 (or authorized under any other section of this title), or in non-subsidiary insurance affiliates that are subject to this part, are exempt from this requirement; and Any material transactions, specified by regulation, which the commissioner determines may adversely affect the interests of the insurer's policyholders or the health maintenance organization's enrollees or providers. Nothing in this subdivision (a)(2) shall be deemed to authorize or permit any transactions that, in the case of an insurer or health maintenance organization that is not a member of the same insurance or health maintenance organization holding company system, would be otherwise contrary to law. A domestic insurer or a health maintenance organization may not enter into transactions that are part of a plan or series of like transactions with persons within the insurance or health maintenance organization 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 the separate transactions were entered into over any twelve-month period for this purpose, the commissioner may exercise the authority under § 56-11-111. The commissioner, in reviewing transactions pursuant to subdivision (a)(2), shall consider whether the transactions comply with the standards set forth in subdivision (a)(1), and whether they may adversely affect the interests of policyholders, or, in the case of health maintenance organizations, enrollees or providers. The commissioner shall be notified within thirty (30) days of any investment of the domestic insurer or health maintenance organization in any one (1) corporation if the total investment in the corporation by the insurance holding company system or health maintenance organization holding company system exceeds ten percent (10%) of the corporation's voting securities. Dividends and Other Distributions. No domestic insurer and no health maintenance organization shall pay an extraordinary dividend or make any other extraordinary distribution to its shareholders until: Thirty (30) days after the commissioner has received notice of the declaration thereof and has not within the period disapproved the payment; or The commissioner shall have approved the payment within the thirty-day period. 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 twelve (12) months exceeds the greater of: Ten percent (10%) of the insurer's surplus as regards policyholders, or, with respect to health maintenance organizations, net worth, as of December 31 next preceding; or The net gain from operations of the insurer, if the insurer is a life insurer, or of the net income, if the insurer is not a life insurer, or a health maintenance organization, not including realized capital gains, for the twelve-month period ending December 31 next preceding, but shall not include pro rata distributions of any class of the insurer's or health maintenance organization's own securities. Notwithstanding any other law in this title, an insurer or health maintenance organization may declare an extraordinary dividend or distribution that is conditional upon the commissioner's approval thereof, and such a declaration shall confer no rights upon shareholders until: The commissioner has approved the payment of such a dividend or distribution; or The commissioner has not disapproved the payment within the thirty-day period referred to in subdivision (b)(1). A domestic insurer or health maintenance organization shall pay a dividend or make a distribution to its shareholders only from the insurer's or health maintenance organization's earned surplus; provided, that the insurer or health maintenance organization may pay a dividend or make a distribution not from earned surplus if the commissioner's approval is first received. As used in this subdivision (b)(4), “earned surplus” means unassigned surplus as reported in the insurer's or health maintenance organization's most recent financial statement. Management of Domestic Insurers and Health Maintenance Organizations Subject to Registration. Notwithstanding the control of a domestic insurer or any licensed health maintenance organization by any person, the officers and directors of the insurer or health maintenance organization shall not thereby be relieved of any obligation or liability to which they would otherwise be subject to by law, and the insurer or health maintenance organization shall be managed so as to assure its separate operating identity consistent with this part. Nothing in this section shall preclude a domestic insurer or any licensed health maintenance organization from having or sharing a common management or cooperative or joint use of personnel, property or services with one (1) or more other persons under arrangements meeting the standards of subdivision (a)(1). Not less than one-third (1/3) of the directors of a domestic insurer or any licensed health maintenance organization, and not less than one-third (1/3) of the members of each committee of the board of directors of any domestic insurer or health maintenance organization shall be persons who are not officers or employees of the insurer or health maintenance organization or of any entity controlling, controlled by, or under common control with the insurer or health maintenance organization and who are not beneficial owners of a controlling interest in the voting stock of the insurer or health maintenance organization or entity. At least one (1) such person must be included in any quorum for the transaction of business at any meeting of the board of directors or any committee thereof. The board of directors of a domestic insurer or any licensed health maintenance organization shall establish one (1) or more committees comprised solely of directors who are not officers or employees of the insurer or health maintenance organization or of any entity controlling, controlled by, or under common control with the insurer or health maintenance organization and who are not beneficial owners of a controlling interest in the voting stock of the insurer or health maintenance organization or any such entity. The committee or committees shall have responsibility for nominating candidates for director for election by shareholders or policyholders, evaluating the performance of officers deemed to be principal officers of the insurer or health maintenance organization and recommending to the board of directors the selection and compensation of the principal officers. Subdivisions (c)(3) and (4) shall not apply to a domestic insurer or any licensed health maintenance organization if the person controlling the insurer or health maintenance organization, such as an insurer, a health maintenance organization, a mutual insurance holding company, or a publicly held corporation, has a board of directors and committees thereof that meet the requirements of subdivisions (c)(3) and (4) with respect to such controlling entity. An insurer or health maintenance organization may make application to the commissioner for a waiver from the requirements of this subsection (c), if the insurer's or health maintenance organization's annual direct written and assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, is less than three hundred million ($300,000,000). An insurer or health maintenance organization may also make application to the commissioner for a waiver from the requirements of this subsection (c) based upon unique circumstances. The commissioner may consider various factors including, but not limited to, the type of business entity, volume of business written, availability of qualified board members, or the ownership or organizational structure of the entity. Adequacy of Surplus. For purposes of this part, 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: The size of the insurer as measured by its assets, capital and surplus, reserves, premium writings, insurance in force and other appropriate criteria; The extent to which the insurer's business is diversified among the several lines of insurance; The number and size of risks insured in each line of business; The extent of the geographical dispersion of the insurer's insured risks; The nature and extent of the insurer's reinsurance program; The quality, diversification and liquidity of the insurer's investment portfolio; The recent past and projected future trend in the size of the insurer's investment portfolio; The surplus as regards policyholders maintained by other comparable insurers; The adequacy of the insurer's reserves; and 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 commissioner's judgment the investment so warrants. Subdivisions (d)(1)(A)-(J) shall also apply to health maintenance organizations, to the extent appropriate.