KRS 304.37-030: Standards for insurance holding company system -- Factors to be

considered -- Prohibited transactions.

(1) Material transactions by registered insurers with their affiliates 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

provisions as required by administrative regulations promulgated by the

commissioner;

(c) Charges or fees for services performed shall be reasonable;

(d) Expenses incurr ed and payment received shall be allocated to the insurer in

conformity with consistently applied accounting practices;

(e) The books, accounts, and records of each party shall be maintained to clearly

and accurately disclose the precise nature and details of the transactions; 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) (a) 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 subsection, which are

subject to any mat eriality standards contained in this subsection, shall not be

entered into unless the insurer has notified the commissioner in writing of its

intention to enter into the transaction at least thirty (30) days prior to the

transaction, or a shorter period as the commissioner may permit, and the

commissioner has not disapproved it within that time. 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 repor ted,

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:

1. Sales, purchases, exchanges, loans, or extensions of credit, guarantees,

or investments, if the transactions are equal to or exceed, with respect to

non-life insurers, the lesser of three percent (3%) of the insurer's

admitted assets or twenty -five percent (25%) of surplus as regards

policyholders, or with respect to life insurers, three percent ( 3%) of the

insurer's admitted assets, each as of December 31 next preceding;

2. Loans or extensions of credit to any person who is not an affiliate, if the

insurer makes the loans or extensions of credit with the agreement or

understanding that the proceed s 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 if the transactions are

equal to or exceed, with respect to non -life insurers, the lesser of three

percent (3%) of the insurer's admitted assets or twenty -five percent

(25%) of surplus as regards policyholders, or, with respect to life

insurers, three percent (3%) of the insurer 's admitted assets, each as of

December 31 next preceding;

3. Reinsurance agreements or modifications including:

a. All reinsurance pooling agreements; and

b. 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 liability in any of the next three (3) years,

equals or exceeds five percent (5%) 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 the assets will be transferred to one (1) or more

affiliates of the insurer;

4. All management agreements, service contracts, and all cost sharing

arrangements;

5. 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 (0.5%) of the insurer's admitted assets or ten percent (10%)

of surplus, regarding policyholders as of the thirty-first day of December

of the preceding year. All guarantees whi ch are not quantifiable as to

amount shall be subject to the notice requirements of this paragraph;

6. 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 holding in investments, exceeds two and one -half

percent (2.5%) of the insurer's surplus to policyholders. Direct or

indirect acquisitions or investments in subsidiaries acquired pursuant to

KRS 304.37 -110, authorized under this subtitle, or in nonsubsidiary

insurance affiliates that are subject to the provisions of this subtitle are

exempt from this requirement; and

7. Any material transactions, specified by regulation, which the

commissioner determines may adversely affect the interests of the

insurer's policyholders.

(b) This subsection shall not 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 shall not enter into t ransactions which are part of a plan or

series of like transactions with persons within the holding company system if

the purpose of those separate transactions is to avoid the statutory threshold

amount and thus avoid the review that would otherwise occur . If the

commissioner determines that the separate transactions were entered into over

any twelve (12) month period for avoidance purposes, the commissioner may

exercise his or her authority under KRS 304.99-151.

(d) The commissioner, in reviewing transactions pursuant to this subsection, shall

consider whether the transactions comply with the standards set forth in

subsection (1) of this section and whether they may adversely affect the

interests of policyholders.

(e) The commissioner shall be notified wit hin thirty (30) days of any investment

of the domestic insurer in any one (1) corporation if the total investment in the

corporation by the insurance holding company exceeds ten percent (10%) of

the corporation's voting securities.

(3) (a) Notwithstanding the control of a domestic insurer by any person, the officers

and directors of the insurer shall not be relieved of any obligation or liability

to which they would otherwise be subject by law, and the insurer shall be

managed so as to assure its separate o perating identity consistent with this

chapter.

(b) Nothing in this section precludes a domestic insurer 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 arr angements which meet

the standards of subsection (1) of this section.

(4) The following factors, among others, shall be considered 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:

(a) The size of the insurer as measured by its assets, capital and surplus, reserves,

premium writings, insurance in force, and other appropriate criteria;

(b) The extent to which the insurer's business is di versified among the several

lines of insurance;

(c) The number and size of risks insured in each line of business;

(d) The extent of the geographical dispersion of the insurer's insured risks;

(e) The nature and extent of the insurer's reinsurance program;

(f) The quality, diversification, and liquidity of the insurer's investment portfolio;

(g) The recent past and projected future trend in the size of the insurer's surplus as

regards policyholders;

(h) The surplus as regards policyholders maintained by other comparable insurers;

(i) The adequacy of the insurer's reserves; and

(j) The quality and liquidity of investments in subsidiaries. The commissioner

may treat any investment as a disallowed asset for purposes of determining the

adequacy of surplus as reg ards policyholders if in his or her judgment the

investment warrants.

(5) No insurer subject to registration under KRS 304.37 -020 shall pay any

extraordinary dividend or make any other extraordinary distribution to its

stockholders 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 (30) day period.

For purposes of this section, an extraordinar y dividend or distribution is any

dividend or distribution which, together with other dividends or distribution made

within the preceding twelve (12) months, exceeds the lesser of (a) ten percent (10%)

of the insurer's surplus as regards policyholders as o f December 31 next preceding,

or (b) the net gain from operations of the insurer company, if the insurer is a life

insurer, or the net income, if the insurer is not a life insurer, for the twelve (12)

month period ending December 31 next preceding, but sha ll not include pro rata

distribution 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, a nd the declaration

shall confer no rights upon stockholders until the commissioner has approved the

payment of the dividend or distribution or until the commissioner has not

disapproved the payment within the thirty (30) day period referred to in this section.