(a) Transactions within an insurance holding company system. — (1) Transactions within an insurance holding company system to which an insurer subject to registration is a party shall be subject to the following standards:
a. The terms shall be fair and reasonable;
b. Agreements for cost-sharing services and management shall include such provisions as required by regulation issued by the Commissioner.
c. Charges or fees for services performed shall be reasonable;
d. Expenses incurred and payment received shall be allocated to the insurer in conformity with customary insurance accounting practices consistently applied;
e. 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; and
f. 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.
(2) 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)(2)a. through e. of this section, may not be entered into unless the insurer has notified the Commissioner in writing of its intention to enter into such transaction at least 30 days prior thereto, or such shorter period as the Commissioner may permit, and the Commissioner has not disapproved it within such 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, guarantees, or investments, provided such transactions are equal to or exceed:
1. With respect to nonlife insurers, the lesser of 3 percent of the insurer's admitted assets or 25 percent of surplus as regards policyholders;
2. With respect to life insurers, 3 percent of the insurer's admitted assets,
Each as of December 31 next preceding;
b. Loans or extensions of credit to any person who is not an affiliate, where the insurer makes such loans or extensions of credit with the agreement or understanding that the proceeds of such 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 such loans or extensions of credit provided such transactions are equal to or exceed:
1. With respect to nonlife insurers, the lesser of 3 percent of the insurer's admitted assets or 25 percent of surplus as regards policyholders;
2. With respect to life insurers, 3 percent of the insurer's admitted assets, as of December 31 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 3 years, equals or exceeds 5 percent of the insurer's surplus as regards policyholders, as of December 31 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 such assets will be transferred to 1 or more affiliates of the insurer;
d. All management agreements, service contracts, tax allocation agreements, and all cost-sharing arrangements; and
e. Any material transactions, specified by regulation, which the Commissioner determines may adversely affect the interests of the insurer's policyholders.
Nothing herein contained shall be deemed to authorize or permit any transactions which, in the case of an insurer not a member of the same insurance holding company system, would be otherwise contrary to law.
(3) 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 such purpose, the Commissioner may exercise the authority under § 5010 of this title.
(4) The Commissioner, in reviewing transactions pursuant to paragraph (a)(2) of this section shall consider whether the transactions comply with the standards set forth in paragraph (a)(1) of this section and whether they may adversely affect the interests of policyholders.
(5) The Commissioner shall be notified within 30 days of any investment of the domestic insurer in any 1 corporation if the total investment in such corporation by the insurance holding company system exceeds 10 percent of such corporation's voting securities.
(b) Dividends and other distributions. — Except as otherwise provided by law, a domestic insurer may not declare or pay a dividend or other distribution from any source other than earned surplus without the Commissioner's prior approval. For purposes of this section, “earned surplus” means an amount equal to the unassigned funds of an insurer as set forth in the most recent annual statement of the insurer submitted to the Commissioner including all or part of the surplus arising from unrealized capital gains or revaluation of assets.
No domestic insurer shall pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until:
(1) Thirty days after the Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment; or
(2) The Commissioner shall have approved such payment within such 30-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 12 months exceeds the greater of:
(1) Ten percent of such insurer's surplus as regards policyholders as of December 31 next preceding; or
(2) The net gain from operations of such insurer, if such insurer is a life insurer, or the net income, if such insurer is not a life insurer, not including realized capital gains, for the 12-month period ending December 31 next preceding, but shall not include pro rata distributions of any class of the insurer's own securities.
Notwithstanding any other provision of law, an insurer may declare an extraordinary dividend or distribution which is conditional upon the Commissioner's approval thereof, and such declaration shall confer no rights upon shareholders until:
(1) The Commissioner has approved the payment of such a dividend or distribution; or
(2) The Commissioner has not disapproved such payment within the 30-day period referred to above.
(c) Adequacy of surplus. — 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 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 in respect to the factors enumerated above;
(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 Commissioner's judgment such investment so warrants; and
(11) The quality of the insurer's earnings and the extent to which the reported earnings of the insurer include extraordinary items.
(d) Departmental practices. — The Commissioner shall review, at least 1 time each year, the dividends paid by each domestic insurer to determine whether dividends paid by the insurer are reasonable in relation to the following:
(1) The adequacy of the level or surplus as regards policyholders of the insurer remaining after the payment of dividends; and
(2) The quality of the earnings of the insurer and the extent to which the reported earnings of the insurer include extraordinary items, such as surplus relief, reinsurance transactions and reserve destrengthening.
The Commissioner may issue an order to limit or disallow the payment of ordinary dividends by a domestic insurer if the Commissioner finds the insurer to be presently or potentially financially distressed or troubled.