14VAC5-260 Rules Governing Insurance Holding Companies

REGULATIONS

Vol. 26 Iss. 2 - September 28, 2009

TITLE 14. INSURANCE

STATE CORPORATION COMMISSION

Chapter 260

Final Regulation

REGISTRAR'S NOTICE: The State Corporation Commission is exempt from the Administrative Process Act in accordance with § 2.2-4002 A 2 of the Code of Virginia, which exempts courts, any agency of the Supreme Court, and any agency that by the Constitution is expressly granted any of the powers of a court of record.

Title of Regulation: 14VAC5-260. Rules Governing Insurance Holding Companies (amending 14VAC5-260-40, 14VAC5-260-60, 14VAC5-260-70, 14VAC5-260-90).

Statutory Authority: §§ 12.1-13 and 38.2-223 of the Code of Virginia.

Effective Date: September 30, 2009.

Agency Contact: Raquel C. Pino-Moreno, Principal Insurance Analyst, Bureau of Insurance, State Corporation Commission, 1300 East Main Street, P.O. Box 1157, Richmond, VA 23218, telephone [phone], FAX (804) 371-9511, or email [e-mail].

Summary:

The purpose of the revisions to the rules and forms is to amend the language regarding declaration of dividends and disclaimer of affiliation. Additionally, a reference to electronic filing and clarification that dividends and distributions are to be paid out of earned surplus unless the commission approves otherwise has been added. These revisions are necessary as a result of Chapter 717 of the 2009 Acts of Assembly, which amended § 38.2-1329 of the Code of Virginia.

AT RICHMOND, SEPTEMBER 4, 2009

COMMONWEALTH OF VIRGINIA

At the relation of the

STATE CORPORATION COMMISSION

CASE NO. INS-2009-00146

Ex Parte: In the matter of
Adopting Revisions to the Rules
Governing Insurance Holding
Companies

ORDER ADOPTING RULES

By Order to Take Notice entered June 25, 2009, all interested persons were ordered to take notice that subsequent to August 14, 2009, the State Corporation Commission ("Commission") would consider the entry of an order adopting revisions to the rules entitled Rules Governing Insurance Holding Companies ("Rules"), proposed by the Bureau of Insurance ("Bureau") which amend the Rules at 14 VAC 5-260-40, 14 VAC 5-260-60, 14 VAC 5-260-70, and 14 VAC 5-260-90, unless on or before August 14, 2009, any person objecting to the adoption of the proposed revisions to the Rules filed a request for a hearing with the Clerk of the Commission ("Clerk").

The Order to Take Notice also required all interested persons to file their comments in support of or in opposition to the proposed revisions to the Rules on or before August 14, 2009.

There were no comments on the proposed revisions to the Rules filed with the Clerk. There was no request for a hearing filed with the Clerk.

The Bureau does not recommend further changes to the proposed revisions to the Rules, and further recommends that the revisions to the Rules be adopted as proposed.

THE COMMISSION, having considered the Bureau's recommendation, is of the opinion that the attached revisions to the Rules should be adopted.

Accordingly, IT IS ORDERED THAT:

(1) The revisions to the Rules Governing Insurance Holding Companies at 14 VAC 5‑260-40, 14 VAC 5-260-60, 14 VAC 5-260-70, and 14 VAC 5-260-90 which are attached hereto and made a part hereof, should be, and they are hereby, ADOPTED to be effective September 30, 2009.

(2) AN ATTESTED COPY hereof, together with a copy of the proposed revised Rules, shall be sent by the Clerk of the Commission to the Bureau in care of Deputy Commissioner Douglas C. Stolte, who forthwith shall give further notice of the proposed adoption of the revised Rules by mailing a copy of this Order, together with the proposed revised Rules, to all licensed insurers, burial societies, fraternal benefit societies, health maintenance organizations, and certain interested parties designated by the Bureau.

(3) The Commission's Division of Information Resources forthwith shall cause a copy of this Order, together with the attached rules, to be forwarded to the Virginia Registrar of Regulations for appropriate publication in the Virginia Register of Regulations.

(4) The Commission's Division of Information Resources shall make available this Order and the adopted rules on the Commission's website: http://www.scc.virginia.gov/case.

(5) The Bureau shall file with the Clerk of the Commission an affidavit of compliance with the notice requirements of Ordering Paragraph (2) above.

14VAC5-260-40. Acquisition of control; approval of applications.

A. A person filing an application or statement pursuant to § 38.2-1323 A, or any related provision of §§ 38.2-1324 through 38.2-1328, of the Act shall furnish the required information designated on Form A of this chapter.

1. Where applicable and required by Form A, Form E shall also be filed.

2. Whenever an application includes information in the format required by Form E, the commission may require an opinion of an economist as to the competitive impact of the proposed acquisition.

B. When the person being acquired controls a domestic insurer, the person shall, for purposes of completing a Form A application, be deemed to be a "domestic insurer."

1. The name of the domestic subsidiary insurer should be indicated on the cover page as follows:

"ABC Insurance Company, a subsidiary of XYZ Holding Company"; and

2. References to "the insurer" contained in Form A shall refer to both the domestic subsidiary insurer and the person being acquired.

C. The applicant shall promptly advise the commission of any changes in the information so furnished on Form A, or any attachments thereto, arising subsequent to the date upon which the information was furnished, but prior to the commission's disposition of the application and consummation of the acquisition of control.

1. Within two business days after the person filing the application learns of the change, an amendment setting forth the change, together with copies of all documents and other material relevant to the change, shall be filed with the commission. The filing shall be made with the clerk of the commission. Except where the applicant is also the insurer, the applicant shall show on each such filing that a copy has also been sent to the insurer.

2. A failure to file complete and accurate information as required by this chapter is grounds for a denial by the commission pursuant to § 38.2-1326.

3. As used in this section and for purposes of all Form A filings, "material change" includes any change in the identity of executive officers or any party to a merger or a liquidating transaction.

D. Where "control" is derived from a management agreement, including any other agreement between a domestic insurer and another person other than a contract for goods or nonmanagement services, any termination of the agreement or any substitution of persons under the agreement shall be deemed a change of control requiring notice and application to the commission pursuant to § 38.2-1323 of the Act.

E. A person seeking to merge with or acquire a domestic insurer may apply to the commission for an order exempting the person from the provisions of §§ 38.2-1323 through 38.2-1327 if the merger or acquisition meets the standards for exemption provided in § 38.2-1328.

1. The application shall be in writing and shall be filed with the clerk of the commission. Filing instructions are the same as for a Form A filing. See Section III of the Form A Instructions for information regarding number of copies and, signature requirements [ , ] and electronic filing. The applicant shall identify the parties to the merger or acquisition and shall state (i) the purpose of the merger or acquisition, (ii) the method of merger or acquisition, and (iii) why the person believes the exemption criteria of § 38.2-1328 will be met.

2. Within 30 days after the application for exemption is filed with the clerk of the commission, the commission shall enter an order granting the exemption or giving notice of a hearing to determine the merits of the application.

F. Any hearing held to consider an application filed pursuant to the provisions of this section and § 38.2-1323 of the Act shall be held pursuant to § 38.2-1326 and shall begin, unless waived by the insurer, within 40 days of the date the application is filed with the commission. An application shall be deemed filed upon receipt by the commission of all material required by this section or § 38.2-1324 of the Act.

14VAC5-260-60. Annual registration of insurers; registration statement filings and amendments.

A. An insurer required to file a registration statement pursuant to § 38.2-1329 of the Act shall furnish the required information in the format designated on Form B of this chapter.

1. The initial registration statement shall be filed with the commission within 15 days after the insurer becomes subject to registration under § 38.2-1329 of the Act.

2. Annually thereafter by April 30 of each year, for the previous calendar year, the registrant shall file a completely restated up-to-date registration statement in the format designated on Form B, with amendments consolidated therein. Each registration statement shall contain a summary outlining all items in the current registration statement representing changes from the prior registration statement. The summary shall be prepared in the format designated on Form C, as specified in the instructions of that form, which is a part of this chapter.

B. An insurer shall file a copy of its most current registration statement and the Form C filing, also known as a Summary of Registration Filing, in each state in which the insurer is authorized to do business, if requested by the insurance commissioner of that state.

C. Amendments to Form B.

1. An amendment to Form B shall be filed under the following conditions:

a. Within 15 days after the end of any month in which there is a material change to the information provided in the annual registration statement;

b. Within 15 days after the end of any month in which the registrant or insurer learns there is a change in control of the registrant, in which case all of Form B and Form C shall be made current;

c. Within 15 days after the end of any month in which the registrant or insurer learns there is a material change in information given in Item 5 of Form B;

d. Within 30 days after the investment in any one corporation, if the total investment in that corporation, by the insurance holding company system, exceeds 10% of that corporation's voting securities;

e. Within 15 days after the end of any month in which there is a material change in any portion of the information given in Item 6 of Form B;

f. Within 15 days after the end of any month in which there is a change of the chief executive officer, president, or more than 1/3 of the directors reported in Item 4 of Form B;

g. Within five business days following the declaration of any dividend or other distribution to an insurer's shareholder, and at least 30 days prior to payment thereof; and

h. Within 120 days after the end of each fiscal year of the ultimate controlling person of the insurance holding company system.

2. Amendments shall be filed in the Form B format. Subject to the provisions of subdivision A 2 of this section, only those items which are being amended need be reported. Each amendment shall include at the top of the cover page "Amendment No. (insert number) to Registrant Statement, brought current from (insert year)" and shall indicate as its "Date," the date of the change and not the date of the original filings. Filings made in the format of Forms A, D, E, or F may be deemed amendments filed in the Form B format when accompanied by certification under oath or affirmation that the transaction reported on Form A, D, E, or F has been consummated. If the commission's approval of the transaction is required by the Act, the certification shall state also that consummation was pursuant to terms and agreements approved by the commission.

3. As used in this section, "material transaction" has the meaning set forth in § 38.2-1322 of the Act except that, unless the commission by rule, order or regulation prescribes otherwise, no sale, purchase, exchange, loan, or extension of credit or investment shall be considered "material" unless it involves at least 0.5% of an insurer's admitted assets or 5.0% of the insurer's surplus to policyholders, as of the immediately preceding December 31. Any sale or other transaction which is one of a series of transactions occurring within a 12-month period that are sufficiently similar in nature as to be reasonably construed as a single transaction and that in the aggregate exceed the minimum limits herein provided shall be deemed a material transaction.

D. Exemptions and alternative and consolidated registrations.

1. Any insurer which is authorized to do business in this Commonwealth may file a registration statement on behalf of any affiliated insurer or insurers which are required to register under § 38.2-1329 of the Act. A registration statement may include information not required by the Act regarding any insurer in the insurance holding company system even if the insurer is not authorized to do business in this Commonwealth. In lieu of filing a registration statement on Form B, the authorized insurer may file a copy of the registration statement or similar report which it is required to file in its state of domicile, provided:

a. The statement or report contains substantially similar information required to be furnished on Form B; and

b. The filing insurer is the principal insurance company in the insurance holding company system.

2. The question of whether the filing insurer is the principal insurance company in the insurance holding company system is a question of fact and an insurer filing a registration statement or report in lieu of Form B on behalf of an affiliated insurer, shall set forth a brief statement of facts which will substantiate the filing insurer's claim that it, in fact, is the principal insurer in the insurance holding company system.

3. With the prior approval of the commission, an insurer not licensed to transact the business of insurance in this Commonwealth may follow any of the procedures which could be done by an authorized insurer under subdivision 1 of this subsection.

4. Any insurer may take advantage of the provisions of § 38.2-1329 G or § 38.2-1329 H of the Act without obtaining the prior approval of the commission. The commission, however, reserves the right to require individual filings if it deems the filings necessary in the interest of clarity, ease of administration or the public good.

5. The state of entry of an alien insurer shall be deemed to be its state of domicile for the purpose of this chapter.

6. Any foreign insurer subject to disclosure requirements and standards adopted by statute or regulation in the jurisdiction of its domicile that are substantially similar to those contained in § 38.2-1329 of the Act, shall be exempted and excepted from registration in this Commonwealth pursuant to this section and § 38.2-1329 A of the Act; however, if requested by the commission, the insurer shall furnish to the commission a copy of the registration statement or other information filed with its state of domicile. The information shall be filed with the commission within 15 days after the commission makes its request.

7. Any insurer not otherwise exempt or excepted from § 38.2-1329 of the Code of Virginia may apply for an exemption from the requirements of this section § 38.2-1329 of the Code of Virginia by submitting a statement to the commission setting forth its reasons for being exempt.

14VAC5-260-70. Disclaimers and termination of registration.

A. A disclaimer of affiliation or a request for termination of registration claiming that a person does not, or will not upon the taking of some proposed action, control any other person (hereinafter referred to as the "subject") shall contain the following information:

1. The number of authorized, issued and outstanding voting securities of the subject;

2. With respect to the person whose control is denied and all affiliates of such person, the number and percentage of shares of the subject's voting securities which are held of record or known to be beneficially owned, and the number of such shares concerning which there is a right to acquire, directly or indirectly; and also information as to all transactions in any securities of the subject which were effected during the past six months by such persons;

3. All material relationships and bases for affiliation, including a description of all contracts and agreements, between the subject and the person whose control is denied and all affiliates of such person; and

4. A statement explaining why such person should not be considered to control the subject.

B. A request for termination of registration under § 38.2-1329 of the Act for lack of affiliation shall be deemed to have been granted unless the commission, within 30 days after receipt of the request and any additional information required by the commission, notifies the registrant otherwise. Thereafter, the subject shall be relieved of any registering or reporting requirements under § 38.2-1329 of the Act that may arise out of the subject's relationship with the person, unless and until the commission disallows the disclaimer.

1. The commission shall disallow the disclaimer only after giving all interested parties notice and opportunity to be heard.

2. Any disallowance shall be supported by specific findings of fact.

14VAC5-260-90. Dividends and other distributions.

A. Each registered insurer shall report to the commission as required under § 38.2-1329 of the Act, all dividends and other distributions to shareholders within five business days following declaration and at least 30 days prior to payment. An insurer shall not pay a dividend or other distribution until 30 days after the commission has received written notice of the declaration thereof and has not within such period disapproved such payment. The commission may approve the payment of such dividend or other distribution prior to the 30 days. Such dividends and other distributions are to be paid out of earned surplus unless the commission has provided prior written approval for such dividends or other distributions to be paid from another source. Except as provided in subsection B of this section, the report shall be filed in the format prescribed by Form F and shall include at least the following:

1. A statement stating whether the dividend or distribution is extraordinary. If the dividend or distribution is extraordinary, the insurer also shall state the date of approval, if any, obtained pursuant to § 38.2-1330.1 A of the Act, or the earliest date on which approval may be deemed;

2. Earned surplus as of the immediately preceding December 31;

3. The amount of the proposed dividend;

4. The date of declaration, date of record and date established for payment of the dividend;

5. A statement as to whether the dividend is to be in cash or other property and, if in property, a description thereof, its cost, and its fair market value together with an explanation of the basis for valuation;

6. The amounts, dates and form of payment of all dividends or distributions (including regular dividends but excluding distributions of the insurer's own securities) paid within the period of 12 consecutive months ending on the date fixed for payment of the proposed dividend for which approval is sought and commencing on the day after the same day of the same month in the last preceding year;

7. A brief statement as to the effect of the proposed dividend upon the insurer's surplus and the reasonableness of surplus in relation to the insurer's outstanding liabilities and the adequacy of surplus relative to the insurer's financial needs; and

8. A statement identifying any and all revaluations of assets.

B. If payment of an extraordinary dividend or distribution has been approved prior to its declaration, the insurer may comply with the requirements of § 38.2-1329 E of the Act by filing written confirmation under oath or affirmation that the extraordinary dividend or distribution, as approved by the commission, has been declared. Confirmation shall be filed within five business days following declaration.

C. An insurer may obtain prior approval of an extraordinary dividend or distribution, as required by § 38.2-1330.1 A of the Act, by filing a request for approval with the commission. The request for approval shall be filed in the format prescribed by Form F and shall include at least the following:

1. All the information required in subsection A of this section;

2. Statements of financial condition and earnings for the period intervening from the last annual statement filed with the commission and the end of the month preceding the month in which the request for dividend approval is submitted; and, if the date of payment or distribution is more than 60 days removed from the date of the most current financial statement submitted by the insurer, the insurer shall include also a pro forma statement as of the day after the distribution or payment of the dividend showing its effect and other known and reasonably projected adjustments to the financial condition and earnings of the insurer; and

3. A copy of the calculations determining that the proposed dividend is extraordinary. The work paper shall include the following information:

a. The amounts, dates and form of payment of all dividends or distributions (including regular dividends but excluding distributions of the insurer's own securities) paid within the period of 12 consecutive months ending on the date fixed for payment of the proposed dividend for which approval is sought, and commencing on the day after the same day of the same month in the last preceding year;

b. Surplus as regards to policyholders (total capital and surplus) as of the immediately preceding December 31;

c. If the insurer is a life insurer, the net gain from operations for the 12-month period ending the immediately preceding December 31; and

d. If the insurer is not a life insurer, the net income less realized capital gains for the 12-month period ending the immediately preceding December 31, but shall not include pro rata distributions of any class of the insurer's own securities.

4. Statements on each factor set forth in § 38.2-1330 B of the Act must be submitted in support of the request for approval of an extraordinary dividend or distribution, although these factors are not intended to be an exhaustive list. In determining the adequacy and reasonableness of an insurer's surplus no single factor is controlling. The commission, instead, will consider the net effect of all of these factors plus other factors bearing on the financial condition of the insurer. In comparing the surplus maintained by other insurers, the commission will consider the extent to which each of these factors varies from company to company and in determining the quality and liquidity of investments in subsidiaries, the commission will consider the individual subsidiary and may discount or disallow its valuation to the extent that the individual investments so warrant.

5. In addition, in order to determine the possibility of any financial effect on the insurer, the commission may request the means of funding and the purpose of the extraordinary dividend or distribution.

D. No declaration of an extraordinary dividend or distribution shall confer any rights on shareholders without the prior approval thereof pursuant to § 38.2-1330.1 C of the Act. However, an insurer may declare an extraordinary dividend or distribution which is conditioned upon the commission's approval, and the declaration shall confer no rights upon shareholders until (i) the commission has approved the payment of the dividend or distribution or (ii) the commission has not disapproved the payment within the 30-day period provided by § 38.2-1330.1 A of the Act.

NOTICE: The forms used in administering the above regulation are not being published; however, the name of each form is listed below. The forms are available for public inspection by contacting the agency contact for this regulation, or at the office of the Registrar of Regulations, General Assembly Building, 2nd Floor, Richmond, Virginia.

FORMS (14VAC5-260)

Form A, Instructions for Application for Approval of Acquisition of Control of or Merger with a Domestic Insurer Pursuant to § 38.2-1323 of the Code of Virginia (rev. 7/06) 9/09).

Form B, Instructions for Insurance Holding Company System Annual Registration Statement Pursuant to § 38.2-1329 of the Code of Virginia (rev. 7/06) 9/09).

Form C, Instructions for Summary of Registration Statement Pursuant to § 38.2-1329 of the Code of Virginia (rev. 7/06).

Form D, Instructions for Prior Notice and Application for Approval of Certain Transactions Pursuant to § 38.2-1331 of the Code of Virginia (rev. 7/06).

Form E, Instructions for an Acquisition Statement Reporting Competitive Impact Data Pursuant to § 38.2-1323 of the Code of Virginia (rev. 7/06).

Form F, Instructions for Notice of Dividends and Distributions to Shareholders Pursuant to §§ 38.2-1329 E and 38.2-1330.1 of the Code of Virginia (rev. 7/06) 9/09).

VA.R. Doc. No. R09-2019; Filed September 8, 2009, 3:05 p.m.