INSURERS: Holding Company Act Affiliate Transaction Reporting and Prior Approvals - Changes in the Law
State of California Department of Insurance
45 Fremont Street
San Francisco, CA 94105
To: All California Domiciled and Commercially Domiciled Insurers; and Other Interested Parties
Date: October 31, 1996
Notice: Bulletin 96-9
Subject: Holding Company Act Affiliate Transaction Reporting and Prior Approvals -- Changes in the Law
The purpose of this notice is to advise insurers submitting filings, notices, registration statements and amendments thereto, reports of material transactions, notices of transactions needing prior approval, exemption requests, and related information, that effective January 1, 1997 the requirements set forth in California Insurance Code (CIC) Sections 1215.4, 1215.5 and 1215.13 will have substantially changed as a result of the passage of AB 2538 (Stats. 1996, Chapter 820). The changes bring the California Insurance Company Holding Company Act's provisions regarding affiliate transactions into closer conformity with the NAIC Model Act and thereby,in most instances, will result in far fewer filings for insurers.
Aggregation calculations will no longer be a part of the determination as to whether a transaction is material or extraordinary [previously in CIC Section 1215.4 (c) (1) & (2)]. The definition of material and related requirements continues to be found in amended CIC Section 1215.4. However, the threshold for a material transaction will change to a single measure, "one-half of 1 percent of admitted assets as of the preceding December 31st" [See new CIC Section 1215.4(d)], from the greater of one-half of 1 percent of admitted assets or 5 percent of an insurer's policyholder's surplus as of the preceding December 31st. Note that the definition of and requirements for what were known as material transactions of an extraordinary type (needing prior approval) have been moved to CIC Section 1215.5. The transactions are now considered "prior notice" filings for which fees are required [See new CIC Sections 1215.5(b)(1) through (7)]. Specifically, an insurer may not enter into specified affiliate transactions unless it has notified the commissioner in writing of its intention to enter into a transaction at least 30 days prior thereto, or a shorter period if the commissioner permits, and the transaction has not been disapproved by the commissioner. The thresholds for prior notice transactions are the lesser of 3 percent of an insurer's admitted assets or 25% of policyholder's surplus as of the preceding December 31st for non-life insurers, and 3 percent of an insurer's admitted assets as of the preceding December 31st for life insurers. Previously, the CIC Section 1215.4(c)(2) threshold for extraordinary material transactions was the lesser of 5 percent of admitted assets or 25% percent of policyholder's surplus for all insurers. While an insurer is no longer required to aggregate transactions over a 12-month period for the purpose of calculating material and prior notice thresholds, you should note that new CIC Section 1215.5(c) prohibits an insurer from entering into transactions that are part of a plan or series of transactions structured to avoid a statutory threshold amount and, thus, a review by the commissioner. If the commissioner determines that separate transactions were entered into to avoid review, he/she may impose penalties pursuant to CIC Section 1215.10, which include late filing fees, civil forfeiture, and other administrative and criminal sanctions.
Reporting and prior notice of extensions of credit has been added [See new CIC Sections 1215.4(b)(3)(A) and 1215.5(b)(1)].
Reporting and prior notice of all management agreements, service agreements and cost sharing arrangements has been added [See new CIC Sections 1215.4(b)(3)(E) and 1215.5(b)(4)]. Note that CIC Section 1215.4 requires the reporting of inforce agreements in the annual registration and CIC Section 1215.5(b)(4) requires prior notice of proposed new agreements and amendments to existing agreements.
Reporting and prior notice requirements of affiliate reinsurance agreements have been added. [See new Sections 1215.4(b)(3)(F) and 1215.5(b)(3)].
A clearer requirement of when affiliate guarantees and investments in affiliates require prior notice has been added [See new CIC Sections 1215.5(b)(5) and 1215.5(b)(6), respectively].
The determination of when an insurer is commercially domiciled pursuant CIC to Section 1215.13 will now be based upon the insurer writing more business in California than in its state of domicile and the insurer's total premiums written in California equaling or exceeding 33% of total premiums written everywhere in the United States (previously the percentage was 20%). This change should result in far fewer insurers being considered "commercially domiciled" for the purposes of the California Holding Company Act.
- The annual filing of the registration statement is due by April 30 each year [See amended CIC Section 1215.4(a)].
The NAIC form of registration statement is to be used [See amended CIC Section 1215.4(b)].
Each affiliate is to be identified [See amended CIC Section 1215.4(b)(2)].
Consolidated tax allocation agreements are to be reported [See new CIC Section 1215.4(b)(3)(H)].
- Pledges of insurer's stock, or of its subsidiary's and/or controlling affiliate's stock are to be reported [See new CIC Section 1215.4(b)(4)].
Generally, the provisions regarding the reporting of ordinary dividends and prior approval of extraordinary dividends have not changed, but have been moved to CIC Sections 1215.4(f) and 1215.5(g). As stated above, CIC Section 1215.5(b)(4) sets forth the requirement that all management, service and cost sharing agreements with affiliates can only be entered into if the insurer has notified the commissioner 30 days prior to entering into the agreement and the commissioner has not disapproved. This requirement will be applied on a going forward basis; i.e., such agreements already entered into with affiliates do not need to be submitted at this time, only new agreements and amendments to existing agreements need to be submitted in accordance with CIC Sections 1215.5(b)(4). However, the commissioner has the regulatory authority to review such in-force agreements as needed.
For convenience, attached are copies of the amended CIC Sections 1215.4 and 1215.5.
Where to File:
As set forth in this Department's Notice of March 15, 1996, all registration statements, annual registration statements, amendments of registration, reports of material transactions, monthly reports of affiliate transactions, and reports of ordinary dividends should be filed online using OASIS (Online Assistance System for Insurer Submittal). Additionally, one (1) hard copy of pages requiring original signatures must be submitted to the department by mail to:
California Department of Insurance
Financial Analysis Division
300 South Spring Street, South Tower
Los Angeles, California 90013
All prior notice filings: New CIC Sections 1215.5(b)(1) through (7) and 1215.5(g), as well as disclaimers of affiliation [CIC Section 1215.4(1)] and exemption requests should be submitted to Los Angeles office
If you have any questions regarding the subject changes, please contact at the above address or (213) 346-6398.