United States: For NY-Domiciled Life Insurers, 2016 Brings New Flexibility On Governance, Dividends

Legislation signed into law by Governor Cuomo in late December 2015 provides new flexibility to New York-domiciled stock life insurers on director independence as well as dividend-paying capacity.

Director Independence

Senate Bill 3012, signed into law on December 22, expands an existing exemption from independent-director requirements. Under these requirements as previously in effect codified at Section 1202(b) of New York Insurance Law (NYIL), at least one- third of the board of directors of a New York-domiciled stock life insurance corporation, as well as at least one-third of each committee of the board, must be persons who

  • are not officers or employees of the company or of any entity controlling, controlled by or under common control with the company and
  • are not beneficial owners of a controlling interest in the voting stock of the company or any such entity.

At least one such independent person must be included in any board or committee. In addition, the board must establish one or more committees, comprising exclusively of independent persons, with responsibility over audit matters, nominations and officer compensation.

Under the old Section 1202(b), an insurer that was a subsidiary of a New York-domiciled life insurer was exempted from these independence requirements if the parent insurer was compliant with such requirements. The December 2015 amendment expands the exemption to cover any insurer that is controlled by an "insurance company" (regardless of domicile), a mutual insurance holding company (MIHC) or a "publicly held corporation" that is compliant with the independence requirements. As a result, it is now easier for NY-domiciled life carriers to "piggyback" off the board independence requirements imposed on affiliates, notably an affiliate such as a publicly held parent company subject to federal securities laws and stock exchange listing requirements. The amendment thus reflects the utility of such requirements, including those under the Sarbanes-Oxley Act of 2002, in implementing a level of independence not only at the listed parent level but also throughout the enterprise. It also recognizes that most state MIHC statutes impose their own independent director requirements at the parent level when a mutual insurer is converted to a subsidiary of a new MIHC. The amendment also brings New York law into closer conformity with the National Association of Insurance Commissioners' (NAIC) model audit rule1, which includes board independence requirements.

The amendment takes immediate effect.

Dividend-Paying Capacity

New York-domiciled life insurers may also have additional dividend-paying capacity as a result of legislation amending Section 4207 of the NYIL. The amended dividend provision makes New York law somewhat more permissive on such dividends than the NAIC model,2 but it falls short of the entire amount of capacity provided for in the version of the model adopted in other key states such as California, Texas, Illinois and New Jersey.

Under the prior version of Section 4207, dividends paid by New York-domiciled stock life insurance companies could not exceed the lesser of the following without prior notice to the New York Superintendent of Financial Services and expiration of a 30-day waiting period without that official's disapproval:

  1. A 10 percent surplus to policyholders as of the immediately preceding calendar year, understood to mean December 31 of that year.
  2. A net gain from operations for the immediately preceding calendar year, not including realized capital gains (referred to herein as Adjusted Operating Gains).

Under the amended provision, which takes immediate effect, lesser of has been changed to greater of, deviating (in a manner more favorable to the insurer) from the NAIC's lesser of formulation. However, further changes to prong (B) of the formula, summarized below, have the effect of moderating this increase. Consequently, when New York is compared to other states with a greater of statutory dividend formulation (as opposed to the NAIC's lesser of), the dividend-paying capacity of a New York-domiciled life company is smaller than that of such a company domiciled elsewhere.

The amended law caps (B), Adjusted Operating Gains, at:

  1. 15 percent of the prior year's surplus to policyholders if Adjusted Operating Gains have been negative in one or more of the preceding three calendar years;
  2. otherwise, 25 percent of surplus to policyholders "as of" the immediately prior calendar year (likely referring to year-end).

The amendment also adds a provision to Section 4207 prohibiting any dividends without the Superintendent's prior approval if Adjusted Operating Gains from the prior calendar year were negative. Under the prior law, dividends that do not exceed the threshold described above involving prongs (A) and (B), commonly known as ordinary dividends, could be paid without prior notice to the Superintendent. Under the law as amended, even ordinary dividends are subject to prior notice to the Superintendent. Such notice must be made within five days after declaration and at least 10 days prior to payment. Extraordinary dividends must still be disclosed to the Superintendent at least 30 days in advance, and the Superintendent may disapprove such an extraordinary dividend within the 30-day period. Unlike in the case of an extraordinary dividend, the statute is silent on the Superintendent's authority to disapprove or otherwise prevent the payment of an ordinary dividend.

The legislation also adds a new final paragraph to Section 4207(a), mandating that a domestic stock life insurance company's remaining surplus after distributions of dividends must be "reasonable" in relation to the company's outstanding liabilities and adequate to meet its financial needs. This requirement mirrors the NAIC model law. While the NAIC model lists various criteria by which the regulator may determine the adequacy of surplus, the New York law lacks an explicit list of factors.

Footnotes

1 NAIC Annual Financial Reporting Model Regulation (Model 205).

2 NAIC Insurance Holding Company System Regulatory Act (Model 44).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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