Download This Version in Microsoft Word format

Bill 5002

Indicates Matter Stricken
Indicates New Matter

Indicates Matter Stricken

Indicates New Matter

AMENDED

April 22, 2004

H. 5002

S. Printed 4/22/04--H.    [SEC 4/26/04 11:38 AM]

Read the first time March 18, 2004.

TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 38-90-35 SO AS TO PROVIDE FOR CONFIDENTIALITY OF INFORMATION SUBMITTED BY A CAPTIVE INSURANCE COMPANY PURSUANT TO THE PROVISIONS OF CHAPTER 90, TITLE 38 AND TO PROVIDE EXCEPTIONS; TO AMEND SECTION 38-87-30, RELATING TO CHARTERING RISK RETENTION GROUPS, SO AS TO REQUIRE A CAPTIVE INSURANCE COMPANY TO COMPLY WITH THESE PROVISIONS; TO AMEND SECTION 38-90-10, AS AMENDED, RELATING TO DEFINITIONS USED IN CONNECTION WITH A CAPTIVE INSURANCE COMPANY, SO AS TO CHANGE THE DEFINITIONS OF "INDUSTRIAL INSURED GROUP" AND "PARENT"; TO AMEND SECTION 38-90-20, AS AMENDED, RELATING TO LICENSING A CAPTIVE INSURANCE COMPANY BY THE DIRECTOR OF INSURANCE, SO AS TO AUTHORIZE A NONPROFIT CORPORATION TO BE LICENSED AND PROVIDE CONSISTENCY WITH THE PROVISIONS OF SECTION 38-90-35 REGARDING CONFIDENTIAL MATERIALS, AND PROVIDE A PROCEDURE BY WHICH A FOREIGN OR ALIEN CAPTIVE INSURANCE COMPANY MAY BECOME A DOMESTIC CAPTIVE INSURANCE COMPANY; TO AMEND SECTION 38-90-25, RELATING TO THE AUTHORITY OF A CAPTIVE INSURANCE COMPANY TO WRITE REINSURANCE COVERING PROPERTY AND CASUALTY INSURANCE OR REINSURANCE CONTRACTS, SO AS TO PROVIDE CONSISTENCY WITH THE PROVISIONS OF SECTION 38-90-35 REGARDING CONFIDENTIAL MATERIALS; TO AMEND SECTION 38-90-40, AS AMENDED, RELATING TO THE LICENSING OF A CAPTIVE INSURANCE COMPANY BY THE DIRECTOR OF INSURANCE BASED ON THE CAPITALIZATION OF THE COMPANY, SO AS TO PROVIDE CAPITALIZATION REQUIREMENTS FOR LICENSING A NONPROFIT CORPORATION AS A CAPTIVE INSURANCE COMPANY; TO AMEND SECTION 38-90-50, AS AMENDED, RELATING TO LICENSING A CAPTIVE INSURANCE COMPANY BASED ON CERTAIN MINIMUM AMOUNTS OF FREE SURPLUS, SO AS TO CHANGE THE REQUIREMENTS FOR A SPONSORED CAPTIVE INSURANCE COMPANY; TO AMEND SECTION 38-90-60, AS AMENDED, RELATING TO INCORPORATION OPTIONS AND REQUIREMENTS OF CERTAIN CAPTIVE INSURANCE COMPANIES, SO AS TO ADD AN ADDITIONAL OPTION FOR A NONPROFIT COMPANY; TO AMEND SECTION 38-90-70, AS AMENDED, RELATING TO FILING REPORTS BY A CAPTIVE INSURANCE COMPANY, SO AS TO MAKE CERTAIN INFORMATION SUBMITTED IN A REPORT CONFIDENTIAL; TO AMEND SECTION 38-90-80, RELATING TO THE INSPECTION AND EXAMINATION OF A CAPTIVE INSURANCE COMPANY BY THE DIRECTOR OF INSURANCE, SO AS TO PROVIDE THAT CERTAIN CONFIDENTIALITY PROVISIONS DO NOT APPLY TO THE DIRECTOR IN MAKING FINAL REPORTS; TO AMEND SECTION 38-90-140, AS AMENDED, RELATING TO THE TAXATION OF A CAPTIVE INSURANCE COMPANY, SO AS TO CHANGE THE DEFINITION OF "COMMON OWNERSHIP AND CONTROL" TO INCLUDE NONPROFIT CORPORATIONS; TO AMEND SECTION 38-90-180, AS AMENDED, RELATING TO THE APPLICABILITY OF THE PROVISIONS OF CHAPTERS 26 AND 27, TITLE 38, TO INSURANCE REORGANIZATIONS, RECEIVERSHIPS, AND INJUNCTIONS TO CAPTIVE INSURANCE COMPANIES, SO AS TO MAKE THE TERMS AND CONDITIONS APPLY TO TITLE 38 INSTEAD OF CHAPTERS 26 AND 27, TITLE 38; AND TO REPEAL SECTION 38-90-170 RELATING TO APPLICABILITY OF THE TERMS AND CONDITIONS OF TITLE 38 TO INSURANCE REORGANIZATIONS, RECEIVERSHIPS, AND INJUNCTIONS TO CAPTIVE INSURANCE COMPANIES FORMED UNDER CHAPTER 90, TITLE 38.

Amend Title To Conform

Be it enacted by the General Assembly of the State of South Carolina:

SECTION    1.    Chapter 90, Title 38 of the 1976 Code is amended by adding:

"Section 38-90-35.    Information submitted pursuant to the provisions of this chapter is confidential and may not be made public by the director or an agent or employee of the director without the written consent of the company, except that:

(1)    information may be discoverable by a party in a civil action or contested case to which the submitting captive insurance company is a party, upon a showing by the party seeking to discover the information that:

(a)    the information sought is relevant to and necessary for the furtherance of the action or case;

(b)    the information sought is unavailable from other nonconfidential sources; or

(c)    a subpoena issued by a judicial or administrative law officer of competent jurisdiction has been submitted to the director; and

(2)    the director may disclose the information to the public officer having jurisdiction over the regulation of insurance in another state if:

(a)    the public official agrees in writing to maintain the confidentiality of the information; and

(b)    the laws of the state in which the public official serves require the information to be confidential."

SECTION    2.    Section 38-87-30(A) of the 1976 Code is amended to read:

"(A)    A risk retention group must, pursuant to the provisions of this title, must be chartered and licensed to write only liability insurance under this chapter and, except as provided elsewhere in this chapter, or Chapter 90 for a risk retention group licensed as a captive insurance company, shall comply with all of the laws, regulations, and requirements applicable to such these insurers chartered and licensed in this State and with Section 38-87-40 to the extent such these requirements are not a limitation on laws, regulations, or requirements of this State."

SECTION    3.    Section 38-90-10(18) and (20) of the 1976 Code, as last amended by Act 73 of 2003, is further amended to read:

"(18)    'Industrial insured group' means a group that meets either of the following criteria:

(a)    a group of industrial insureds that collectively:

(i)    own, control, or hold with power to vote all of the outstanding voting securities of an industrial insured captive insurance company incorporated as a stock insurer or limited liability company; or

(ii)    have complete voting control over an industrial insured captive insurance company incorporated as a mutual insurer; or

(b)    a group which is created under the Liability Risk Retention Act of 1986 15 U.S.C. Section 3901, et seq., as amended, and Chapter 87, Title 38, as a corporation or other limited liability association taxable as a stock insurance company or a mutual insurer under this title.

(20)    'Parent' means any corporation, limited liability company, partnership, or individual that directly or indirectly owns, controls, or holds with power to vote more than fifty percent of the outstanding voting securities interests of a captive insurance company."

SECTION    4.    Section 38-90-20(B) and (C) of the 1976 Code, as last amended by Act 73 of 2003, is further amended to read:

"(B)    To conduct insurance business in this State a captive insurance company shall:

(1)    obtain from the director a license authorizing it to conduct insurance business in this State;

(2)    hold at least one board of director's meeting, or in the case of a reciprocal insurer, a subscriber's advisory committee meeting, or in the case of a limited liability company a meeting of the managing board, each year in this State;

(3)    maintain its principal place of business in this State, or in the case of a branch captive insurance company, maintain the principal place of business for its branch operations in this State; and

(4)    appoint a resident registered agent to accept service of process and to otherwise act on its behalf in this State. In the case of a captive insurance company:

(a)    formed as a corporation, a nonprofit corporation, or a limited liability company, whenever the registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the director must be an agent of the captive insurance company upon whom any process, notice, or demand may be served;

(b)    formed as a reciprocal insurer, whenever the registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the director must be an agent of the captive insurance company upon whom any process, notice, or demand may be served.

(C)(1)    Before receiving a license, a captive insurance company:

(a)    formed as a corporation or a nonprofit corporation, shall file with the director a certified copy of its charter articles of incorporation and bylaws, a statement under oath of its president and secretary showing its financial condition, and any other statements or documents required by the director;

(b)    formed as a limited liability company, shall file with the director a certified copy of its articles of organization and operating agreement, a statement under oath by its managers showing its financial condition, and any other statements or documents required by the director;

(c)    formed as a reciprocal shall:

(i)    file with the director a certified copy of the power of attorney of its attorney-in-fact, a certified copy of its subscribers' agreement, a statement under oath of its attorney-in-fact showing its financial condition, and any other statements or documents required by the director; and

(ii)    submit to the director for approval a description of the coverages, deductibles, coverage limits, and rates and any other information the director may reasonably require. If there is a subsequent material change in an item in the description, the reciprocal captive insurance company shall submit to the director for approval an appropriate revision and may not offer any additional kinds of insurance until a revision of the description is approved by the director. The reciprocal captive insurance company shall inform the director of any material change in rates within thirty days of the adoption of the change.

(2)    In addition to the information required by (C) item (1), an applicant captive insurance company shall file with the director evidence of:

(a)    the amount and liquidity of its assets relative to the risks to be assumed;

(b)    the adequacy of the expertise, experience, and character of the person or persons who will manage it;

(c)    the overall soundness of its plan of operation;

(d)    the adequacy of the loss prevention programs of its parent, member organizations, or industrial insureds as applicable; and

(e)    such other factors considered relevant by the director in ascertaining whether the proposed captive insurance company will be able to meet its policy obligations.

(3)    In addition to the information required by (C) items (1) and (C)(2) an applicant sponsored captive insurance company shall file with the director:

(a)    a business plan demonstrating how the applicant will account for the loss and expense experience of each protected cell at a level of detail found to be sufficient by the director, and how it will report the experience to the director;

(b)    a statement acknowledging that all financial records of the sponsored captive insurance company, including records pertaining to any protected cells, must be made available for inspection or examination by the director;

(c)    all contracts or sample contracts between the sponsored captive insurance company and any participants; and

(d)    evidence that expenses will be allocated to each protected cell in an equitable manner.

(4)    Information submitted pursuant to this subsection section is confidential and may not be made public by the director or an agent or employee of the director without the written consent of the company, as provided in Section 38-90-35 except that:

(a)    information may be is discoverable by a party in a civil action or contested case to which the captive insurance company that submitted the information is a party, upon a showing by the party seeking to discover the information specific finding by the court that:

(a)    the captive is a necessary party to the action and not joined only for the purposes of evading the confidentiality provisions of this chapter;

(i)(b)    the information sought is relevant, material to, and necessary for the furtherance of the action or case prosecution or defense of the claim asserted in litigation; and

(ii)(c)    the information sought is unavailable from other nonconfidential sources not available through another source; and.

(iii)    a subpoena issued by a judicial or administrative officer of competent jurisdiction has been submitted to the director; however, the provisions of subsection (C)(4) do not apply to an industrial insured captive insurance company insuring the risks of an industrial insured group; and

(b)    the director may disclose the information to a public officer having jurisdiction over the regulation of insurance in another state if:

(i)        the public official agrees in writing to maintain the confidentiality of the information; and

(ii)    the laws of the state in which the public official serves require the information to be confidential."

SECTION    5.    Section 38-90-20(F) of the 1976 Code, as last amended by Act 228 of 2002, is further amended to read:

"(F)    The terms and conditions set forth in Section 38-5-170 apply in full to captive insurance companies licensed under this chapter. A foreign or alien captive insurance company, upon approval of the director or his designee, may become a domestic captive insurance company by complying with all of the requirements of law relative to the organization and licensing of a domestic captive insurance company of the same or equivalent type in this State and by filing with the Secretary of State its articles of association, charter, or other organizational document, together with appropriate amendments to them adopted in accordance with the laws of this State bringing those articles of association, charter, or other organizational document into compliance with the laws of this State, along with a certificate of general good issued by the director. After this is accomplished, the captive insurance company is entitled to the necessary or appropriate certificates and licenses to continue transacting business in this State and is subject to the authority and jurisdiction of this State. In connection with this redomestication, the director may waive any requirements for public hearings. It is not necessary for a company redomesticating into this State to merge, consolidate, transfer assets, or otherwise engage in any other reorganization, other than as specified in this section."

SECTION    6.    Section 38-90-25(E) and (F), as added by Act 58 of 2001, is amended to read:

"(E)    Information submitted pursuant to this section is confidential and may not be made public by the director or an agent or employee of the director without the written consent of the company as provided in Section 38-90-35, except that:

(1)    information may be is discoverable by a party in a civil action or contested case to which the submitting captive reinsurance insurance company that submitted the information is a party, upon a showing by the party seeking to discover the information finding by the court that:

(1)    the captive is a necessary party to the action and not joined only for the purposes of evading the confidentiality provisions of this chapter;

(a)(2)    the information sought is relevant, material to, and necessary for the furtherance of the action or case prosecution or defense of the claim asserted in litigation; and

(b)(3)    the information sought is unavailable from other nonconfidential sources not available through another source;.

(c)    a subpoena issued by a judicial or administrative law officer of competent jurisdiction has been submitted to the director; and

(2)    the director may disclose the information to the public officer having jurisdiction over the regulation of insurance in another state if:

(a)    the public official agrees in writing to maintain the confidentiality of the information; and

(b)    the laws of the state in which the public official serves require the information to be confidential.

(F)    The provisions of subsection (E) do not apply to an industrial insured captive reinsurance company insuring the risks of an industrial insured group."

SECTION    7.    Section 38-90-40 of the 1976 Code, as last amended by Act 73 of 2003, is further amended to read:

"Section 38-90-40.    (A)(1)    The director may not issue a license to a captive insurance company unless the company possesses and maintains unimpaired paid-in capital of:

(1)(a)    in the case of a pure captive insurance company, not less than one hundred thousand dollars;

(2)(b)    in the case of an association captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than four hundred thousand dollars;

(3)(c)    in the case of an industrial insured captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than two hundred thousand dollars;

(4)(d)    in the case of a sponsored captive insurance company, not less than five hundred thousand dollars; however, if the sponsored captive insurance company does not assume any risk, the risks insured by the protected cells are homogeneous and there are no more than ten cells, the director may reduce this amount to an amount not less than one hundred fifty thousand dollars;

(5)(e)    in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company's business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

(2)(a)    Except for a sponsored captive insurance company that does not assume any risk, the capital may must be in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State and or as approved by the director.

(b)    For a sponsored captive insurance company that does not assume any risk, the capital also may be in the form of other high quality securities as approved by the director.

(B)(1)    The director may not issue a license to a captive insurance company incorporated as a nonprofit corporation unless the company possesses and maintains unrestricted net assets of:

(a)    in the case of a pure captive insurance company, not less than two hundred fifty thousand dollars; and

(b)    in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company's business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

(2)    Contributions to a captive insurance company incorporated as a nonprofit corporation must in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State or as approved by the director.

(C)    The director may prescribe additional capital or net assets based upon the type, volume, and nature of insurance business transacted. This Contributions in connection with these prescribed additional net assets or capital may be in the form of an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State or as approved by the director.

(C)(D)    In the case of a branch captive insurance company, as security for the payment of liabilities attributable to branch operations, the director shall require that a trust fund, funded by an irrevocable letter of credit or other acceptable asset, be established and maintained in the United States for the benefit of United States policyholders and United States ceding insurers under insurance policies issued or reinsurance contracts issued or assumed, by the branch captive insurance company through its branch operations. The amount of the security may be no less than the capital and surplus required by this chapter and the reserves on these insurance policies or reinsurance contracts, including reserves for losses, allocated loss adjustment expenses, incurred but not reported losses and unearned premiums with regard to business written through branch operations; however, the director may permit a branch captive insurance company that is required to post security for loss reserves on branch business by its reinsurer to reduce the funds in the trust account required by this section by the same amount so long as the security remains posted with the reinsurer. If the form of security selected is a letter of credit, the letter of credit must be established by, or issued or confirmed by, a bank chartered in this State or a member bank of the Federal Reserve System.

(D)(E)(1)    A captive insurance company may not pay a dividend out of, or other distribution with respect to, capital or surplus, in excess of the limitations set forth in Section 38-21-250 through Section 38-21-270, without the prior approval of the director. Approval of an ongoing plan for the payment of dividends or other distributions must be conditioned upon the retention, at the time of each payment, of capital or surplus in excess of amounts specified by, or determined in accordance with formulas approved by, the director.

(2)    A captive insurance company incorporated as a nonprofit corporation may not make any distributions without the prior approval of the director."

SECTION    8.    Section 38-90-50 of the 1976 Code, as last amended by Act 73 of 2003, is further amended to read:

"Section 38-90-50.    (A)(1)    The director may not issue a license to a captive insurance company unless the company possesses and maintains free surplus of:

(1)(a)    in the case of a pure captive insurance company, not less than one hundred fifty thousand dollars;

(2)(b)    in the case of an association captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than three hundred fifty thousand dollars;

(3)(c)    in the case of an industrial insured captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than three hundred thousand dollars;

(4)(d)    in the case of an association captive insurance company incorporated as a mutual insurer, not less than seven hundred fifty thousand dollars;

(5)(e)    in the case of an industrial insured captive insurance company incorporated as a mutual insurer, not less than five hundred thousand dollars;

(6)(f)    in the case of a sponsored captive insurance company, not less than five hundred thousand dollars; however, if the sponsored captive insurance company does not assume any risk, the risks insured by the protected cells are homogeneous and there are no more than ten cells, the director may reduce this amount to an amount not less than one hundred fifty thousand dollars; and

(7)(g)    in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company's business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

(2)a)    Except for a sponsored captive insurance company that does not assume any risk, the surplus may must be in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with the branch office in this State and approved by the director.

(b)    For a sponsored captive insurance company that does not assume any risk, the surplus also may be in the form of other high quality securities as approved by the director.

(B)    Notwithstanding the requirements of subsection (A) a captive insurance company organized as a reciprocal insurer under this chapter may not be issued a license unless it possesses and thereafter maintains free surplus of one million dollars.

(C)    The director may prescribe additional surplus based upon the type, volume, and nature of insurance business transacted. This capital may be in the form of an irrevocable letter of credit issued by a bank chartered by this State, or a member bank of the Federal Reserve System with a branch in this State or as approved by the director.

(D)    A captive insurance company may not pay a dividend out of, or other distribution with respect to, capital or surplus in excess of the limitations set forth in Section 38-21-270, without the prior approval of the director. Approval of an ongoing plan for the payment of dividends or other distribution must be conditioned upon the retention, at the time of each payment, of capital or surplus in excess of amounts specified by, or determined in accordance with formulas approved by, the director."

SECTION    9.    Section 38-90-60(A), (D), (E), (I), (L), and (M) of the 1976 Code, as last amended by Act 73 of 2003, is further amended to read:

"(A)    A pure captive insurance company or a sponsored captive insurance company may be:

(1)    incorporated as a stock insurer with its capital divided into shares and held by the stockholders; or

(2)    incorporated as a public benefit, mutual benefit, or religious nonprofit corporation with members in accordance with the South Carolina Nonprofit Corporation Act of 1994; or

(3)    organized as a limited liability company with its capital divided into capital accounts and held by its members.

(D)    In the case of a captive insurance company formed as a corporation, a nonprofit corporation, or a limited liability company, before the articles of incorporation or articles of organization are transmitted to the Secretary of State, the incorporators or organizers shall petition the director to issue a certificate setting forth a finding that the establishment and maintenance of the proposed entity will promote the general good of the State. In arriving at this finding the director shall consider:

(1)    the character, reputation, financial standing, and purposes of the incorporators or organizers;

(2)    the character, reputation, financial responsibility, insurance experience, and business qualifications of the officers and directors or managers; and

(3)    other aspects as the director considers advisable.

(E)    The articles of incorporation or articles of organization, the certificate issued pursuant to subsection (D), and the organization fees required by Section 33-1-220, 33-31-122, or 33-44-1204, as applicable, must be transmitted to the Secretary of State, who shall record both the articles of incorporation or articles of organization and the certificate.

(I)    In the case of a captive insurance company formed as a corporation or a nonprofit corporation, at least one of the members of the board of directors of a captive insurance company incorporated in this State must be a resident of this State.

(L)    A captive insurance company formed as a corporation, a nonprofit corporation, or a limited liability company, pursuant to the provisions of this chapter has the privileges and is subject to the provisions of the general corporation law, including the South Carolina Nonprofit Corporation Act of 1994 for nonprofit corporations and the South Carolina Uniform Limited Liability Company Act of 1996 for limited liability companies, as applicable, as well as the applicable provisions contained in this chapter. If a conflict occurs between a provision of the general corporation law, including the South Carolina Nonprofit Corporation Act of 1994 for nonprofit corporations and the South Carolina Uniform Limited Liability Company Act of 1996 for limited liability companies, as applicable, and a provision of this chapter, the latter controls. The provisions of this title pertaining to mergers, consolidations, conversions, mutualizations, and redomestications apply in determining the procedures to be followed by a captive insurance company in carrying out any of the transactions described in those provisions, except the director may waive or modify the requirements for public notice and hearing in accordance with regulations which the director may promulgate addressing categories of transactions. If a notice of public hearing is required, but no one requests a hearing, the director may cancel the hearing.

(M)(1)    A captive insurance company formed as a reciprocal insurer pursuant to the provisions of this chapter has the privileges and is subject to Chapter 17 in addition to the applicable provisions of this chapter. If a conflict occurs between the provisions of Chapter 17 and the provisions of this chapter, the latter controls. To the extent a reciprocal insurer is made subject to other provisions of this title pursuant to Chapter 17, the provisions are not applicable to a reciprocal insurer formed pursuant to the provisions of this chapter unless the provisions are expressly made applicable to a captive insurance company pursuant to the provisions of this chapter.

(2)    In addition to the provisions of item (1), a captive insurance company organized as a reciprocal insurer that is an industrial insured group has the privileges and is subject to the provisions of Chapter 17 in addition to applicable provisions of this title."

SECTION    10.    Section 38-90-70(B) of the 1976 Code, as last amended by Act 58 of 2001, is further amended to read:

"(B)     Before March first of each year, a captive insurance company or a captive reinsurance company shall submit to the director a report of its financial condition, verified by oath of two of its executive officers. Except as provided in Sections 38-90-40 and 38-90-50, a captive insurance company or a captive reinsurance company shall report using generally accepted accounting principles, unless the director approves the use of statutory accounting principles, with useful or necessary modifications or adaptations required or approved or accepted by the director for the type of insurance and kinds of insurers to be reported upon, and as supplemented by additional information required by the director. Except as otherwise provided, an association captive insurance company and an industrial insured group shall file its report in the form required by Section 38-13-80, and each industrial insured group shall comply with the requirements set forth in Section 38-13-85. The director by regulation shall prescribe the forms in which pure captive insurance companies and industrial insured captive insurance companies shall report. Information submitted pursuant to this section is confidential as provided in Section 38-90-35, except for reports submitted by a captive insurance company formed as a Risk Retention Group under the Product Liability Risk Retention Act of 1986, 15 U.S.C. Section 3901 et seq., as amended."

SECTION    11.    Section 38-90-80(B) of the 1976 Code is amended to read:

"(B)    All examination reports, preliminary examination reports or results, working papers, recorded information, documents and copies of documents produced by, obtained by, or disclosed to the director or any other person in the course of an examination made under this section are confidential and are not subject to subpoena and may not be made public by the director or an employee or agent of the director without the prior written consent of the company, except to the extent provided in this subsection.

(1)    Nothing in this subsection prevents the director from using this information in furtherance of the director's regulatory authority under this title.

(2)    The director may grant access to this information to public officers having jurisdiction over the regulation of insurance in any other state or country, or to law enforcement officers of this State or any other state or agency of the federal government at any time, so long as the officers receiving the information agree in writing to hold it in a manner consistent with this section.

(3)    The confidentiality provisions of this subsection do not extend to final reports produced by the director in inspecting or examining a captive insurance company formed as a Risk Retention Group under the Product Liability Risk Retention Act of 1986, 15 U.S.C. Section 3901 et seq., as amended."

SECTION    12.    Section 38-90-140(F) of the 1976 Code is amended to read:

"(F)    For the purposes of this section, 'common ownership and control' means:

(1)    in the case of stock corporations or limited liability companies, the direct or indirect ownership of eighty percent or more of the outstanding voting stock or membership interests of two or more corporations or limited liability companies by the same person or entity; and

(2)    in the case of nonprofit corporations, the direct or indirect ownership of eighty percent or more of the voting power of two or more nonprofit corporations by the same member or members; and

(3)    in the case of mutual corporations, the direct or indirect ownership of eighty percent or more of the surplus and the voting power of two or more corporations by the same member or members."

SECTION    13.    Section 38-90-180(A) of the 1976 Code, as last amended by Act 82 of 2001, is further amended to read:

"(A)     Except as otherwise provided in this section, the terms and conditions set forth in Chapters 26 and 27 in this title pertaining to insurance reorganizations, receiverships, and injunctions apply in full to captive insurance companies formed or licensed under this chapter."

SECTION    14.    Sections 38-90-10 through 38-90-240 of the 1976 Code are designated Article 1, Chapter 90, Title 38 of the 1976 Code and entitled "Captive Insurance Companies".

SECTION    15.    Chapter 90, Title 38 of the 1976 Code is amended by adding:

Section 38-90-410.    This article provides for the creation of Special Purpose Financial Captives (SPFCs) exclusively to facilitate the securitization of one or more risks, as a means of accessing alternative sources of capital and achieving the benefits of securitization. SPFCs are created for the limited purpose of entering into a SPFC contract and insurance securitization transactions directly or indirectly with investors and into related agreements to facilitate the accomplishment and execution of those transactions. The creation of SPFCs is intended to achieve greater efficiencies in structuring and executing insurance securitizations, to diversify and broaden insurers' access to sources of capital, to facilitate access for many insurers to insurance securitization and capital markets financing technology, and to further the economic development and expand the interest of the State of South Carolina through its captive insurance program.

Section 38-90-420.    For purposes of this article:

(1)    'Affiliated company' means a company in the same corporate system as a parent, by virtue of common ownership, control, operation, or management.

(2)    'Control', including the terms 'controlling', 'controlled by' and 'under common control with', means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control must be presumed to exist if a person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing ten percent or more of the voting securities of another person. This presumption may be rebutted by a showing that control does not exist. Notwithstanding other provisions of this item, for purposes of this article, the fact that a SPFC exclusively provides reinsurance to a ceding insurer under a SPFC contract is not by itself sufficient grounds for a finding that the SPFC and ceding insurer are under common control.

(3)    'Counterparty' means a SPFC's parent or affiliated company, as ceding insurer and counterparty to the SPFC contract, or subject to the prior approval of the director, a nonaffiliated company.

(4)    'Director' means the Director of the South Carolina Department of Insurance or the director's designee.

(5)    'Department' means the South Carolina Department of Insurance.

(6)    'Fair value' means:

(a)    as to cash, the amount of it; and

(b)    as to an asset other than cash:

(i)    the amount at which that asset could be bought or sold in a current transaction between arms-length, willing parties;

(ii)    the quoted mid-market price for the asset in active markets must be used if available; and

(iii)    if quoted mid-market prices are not available, a value determined using the best information available considering values of similar assets and other valuation methods, such as present value of future cash flows, historical value of the same or similar assets, or comparison to values of other asset classes, the value of which have been historically related to the subject asset.

(7)    'Insolvency' or 'insolvent' means that the SPFC is unable to pay its obligations when they are due, unless those obligations are the subject of a bona fide dispute.

(8)    'Insurance securitization' means a package of related risk transfer instruments, capital market offerings, and facilitating administrative agreements by which proceeds are obtained by a SPFC directly or indirectly through the issuance of securities, which proceeds are held in trust pursuant to the provisions of this article to secure the obligations of the SPFC under one or more SPFC contracts with a counterparty, where investment risk to the holders of these securities is contingent upon the obligations of the SPFC to the counterparty under the SPFC contract in accordance with the transaction terms.

(9)    'Management' means the board of directors, managing board, or other individual or individuals vested with overall responsibility for the management of the affairs of the SPFC, including the election and appointment of officers or other of those agents to act on behalf of the SPFC.

(10)    'Organizational document' means the SPFC's Articles of Incorporation, Articles of Organization, Bylaws, Operating Agreement, or other foundational documents that establish the SPFC as a legal entity or prescribes its existence.

(11)    'Parent' means any corporation, limited liability company, partnership, or individual that directly or indirectly owns, controls, or holds with power to vote more than fifty percent of the outstanding voting securities of a SPFC.

(12)    'Permitted investments' means those investments that meet the qualifications pursuant to Section 38-90-530.

(13)    'Protected cell' means a separate account established and maintained by a SPFC for one SPFC contract and the accompanying insurance securitization with a counterparty as further provided for in Chapter 10 of this title.

(14)    'Qualified United States financial institution' means, for purposes of meeting the requirements of a trustee as specified in Section 38-90-530, a financial institution that is eligible to act as a fiduciary of a trust, and is:

(a)    organized, or, in the case of a United States branch or agency office of a foreign banking organization, is licensed under the laws of the United States or any state of the United States; and

(b)    regulated, supervised, and examined by federal or state authorities having regulatory authority over banks and trust companies.

(15)    'Securities' means those different types of debt obligations, equity, surplus certificates, surplus notes, funding agreements, derivatives, and other legal forms of financial instruments in form approved by the director.

(16)    'SPFC' or 'Special Purpose Financial Captive' means a captive insurance company which has received a certificate of authority from the director for the limited purposes provided for in this article.

(17)    'SPFC contract' means a contract between the SPFC and the counterparty pursuant to which the SPFC agrees to provide insurance or reinsurance protection to the counterparty for risks associated with the counterparty's insurance or reinsurance business.

(18)    'SPFC securities' means the securities issued by a SPFC.

(19)    'Surplus note' means an unsecured subordinated debt obligation issued by the SPFC under the general corporation law of this State and deemed to be a surplus certificate as described in Section 38-13-110(4) and otherwise possessing characteristics consistent with paragraph 3 of the Statement of Statutory Accounting Principals No. 41, as amended, National Association of Insurance Commissioners (NAIC).

Section 38-90-430.    (A)    No provisions of the Code of Laws of South Carolina, 1976, other than those specifically referenced in this article, apply to a SPFC, and those provisions apply only as modified by this article. If a conflict occurs between a provision of the Code of Laws of South Carolina, 1976, and a provision of this article, the latter controls.

(B)    Sections 38-3-110 through 38-3-240, 38-5-130, 38-57-200, and 38-90-175 apply to SPFCs.

(C)    The director, by rule, regulation, or order, may exempt SPFCs, on a case by case basis, from provisions of this article that he determines to be inappropriate given the nature of the risks to be insured.

Section 38-90-440.    (A)    A SPFC, when permitted by its organizational documents, may apply to the director for a license to transact business as authorized by this article. A SPFC only may insure or reinsure the risks of its counterparty. Notwithstanding another provisions of this article, a SPFC may purchase reinsurance to cede the risks assumed under the SPFC contract as approved by the director.

(B)    To transact business in this State a SPFC shall:

(1)    obtain from the director a license authorizing it to conduct insurance or reinsurance business, or both, in this State;

(2)    hold at least one management meeting each year in this State;

(3)    maintain its principal place of business in this State; and

(4)    appoint a resident registered agent to accept service of process and to otherwise act on its behalf in this State. If the registered agent, with reasonable diligence, is not found at the registered office of the SPFC, the director must be an agent of the SPFC upon whom any process, notice, or demand may be served.

(C)(1)    Before receiving a license, a SPFC shall file with the director a certified copy of its organizational documents, a statement under oath of its president and secretary showing its financial condition, and any other statements or documents required by the director.

(2)    In addition to the information required by item (1), an applicant SPFC shall file with the director evidence of:

(a)    the amount and liquidity of its assets relative to the risks to be assumed;

(b)    the adequacy of the expertise, experience, and character of the person or persons who manages it;

(c)    the overall soundness of its plan of operation; and

(d)    other factors considered relevant by the director in ascertaining whether the proposed SPFC is able to meet its policy obligations.

(3)    In addition to the information required by items (1) and (2), and to the provisions of Section 38-90-480, if a protected cell is used, an applicant SPFC shall file with the director:

(a)    a business plan demonstrating how the applicant accounts for the loss and expense experience of each protected cell at a level of detail found to be sufficient by the director, and how it reports the experience to the director;

(b)    a statement acknowledging that all financial records of the SPFC, including records pertaining to any protected cells, must be made available for inspection or examination by the director;

(c)    all contracts or sample contracts between the SPFC and any counterparty, related to each protected cell; and

(d)    evidence that expenses are allocated to each protected cell in an equitable manner.

(4)    Information submitted pursuant to this subsection is confidential and is subject to Section 38-90-610.

(D)    Section 38-13-60 applies to examinations, investigations, and processing conducted pursuant to the authority of this article.

(E)    In addition, a complete SPFC application must include the following:

(1)    an affidavit from the applicant verifying that the prospective SPFC meets the provisions of this article;

(2)    a representation from the applicant that the prospective SPFC will operate only pursuant to the provisions in this article;

(3)    biographical affidavits in NAIC format of all of the prospective SPFC's officers and directors, providing their legal names, any names under which they have or are conducting their affairs, and any affiliations with other persons as defined in Chapter 21 of this title, together with other biographical information as the director may request;

(4)    the source and form of the minimum capital to be contributed to the SPFC;

(5)    a plan of operation, consisting of a description of the contemplated insurance securitization, the SPFC contract, and related transactions, which must include:

(a)    draft documentation or, at the discretion of the director, a written summary of all material agreements that are entered into to effectuate the SPFC contract and the insurance securitization, to include the names of the counterparty, the nature of the risks being assumed, the proposed use of protected cells, if any, and the maximum amounts, purpose, and nature and the interrelationships of the various transactions required to effectuate the insurance securitization;

(b)    the investment strategy of the SPFC and a representation from the applicant that the investment strategy complies with the investment provisions provided for in this article;

(c)    a description of the underwriting, reporting, and claims payment methods by which losses covered by the SPFC contract are reported, accounted for, and settled;

(d)    a representation from the applicant that the trust agreement, the trusts holding assets that secure the obligations of the SPFC under the SPFC contract, and the SPFC contract with the counterparty in connection with the contemplated insurance securitization is structured pursuant to the provisions in this article; and

(e)    a pro forma balance sheet and income statements illustrating various stress case scenarios for the performance of SPFC under the SPFC contract.

(F)(1)    A SPFC shall pay to the department a nonrefundable fee of two hundred dollars for processing its application for license. In addition, the director may retain legal, financial, and examination services from outside the department to examine and investigate the application, the reasonable cost of which may be charged against the applicant, or the director may use internal resources to examine and investigate the application for a fee of twelve thousand dollars, half of which is payable upon filing of the application and the remainder upon licensure.

(2)    In addition, a SPFC also shall pay a license fee for the year of registration of three hundred dollars and an annual renewal fee of five hundred dollars.

(3)    A SPFC shall pay an annual review fee of twenty-four hundred dollars or, if higher, the actual cost as determined by the director.

(G)    The director may grant a license authorizing the SPFC to transact business as a SPFC in this State upon finding that:

(1)    the proposed plan of operation provides a reasonable and expected successful operation;

(2)    the terms of the SPFC contract and related transactions comply with this article;

(3)    the proposed plan of operation is not hazardous to any counterparty; and

(4)    the commissioner of the state of domicile of each counterparty has notified the director in writing or otherwise provided assurance satisfactory to the director that it has approved or nondisapproved the transaction.

(5)    the director may grant a license authorizing the SPFC to do insurance or reinsurance business in this State until March first at which time the license may be renewed.

(6)    the certificate of authority authorizing the SPFC to transact business is limited only to the insurance or reinsurance activities that the SPFC is allowed to conduct pursuant to this article.

(7)    the SPFC shall provide a complete set of the documentation of the insurance securitization to the director upon closing of the transactions, including an opinion of legal counsel with respect to compliance with this article and any other applicable laws as of the effective date of the transaction.

(8)    in evaluating the expectation of a successful operation, the director shall consider, among other factors, whether the proposed SPFC, and its management are of known good character and reasonably believed not to be affiliated, directly or indirectly, through ownership, control, management, reinsurance transactions, or other insurance or business relations, with a person known to have been involved in the improper manipulation of assets, accounts, or reinsurance.

(H)    A foreign or alien corporation or limited liability company, upon approval of the director, may become a domestic SPFC by complying with all of the provisions of this article and by filing with the Secretary of State its organizational documents, together with appropriate amendments to it, as may be adopted pursuant to the provisions of this article to bring these organizational documents into compliance with this article. After this is accomplished, the foreign or alien corporation or limited liability company is entitled to the necessary or appropriate certificates or licenses to transact business as a SPFC in this State and is subject to the authority and jurisdiction of this State. In connection with this redomestication, the director may waive any requirements for public hearings. It is not necessary for a corporation or limited liability company redomesticating into this State to merge, consolidate, transfer assets, or otherwise engage in another reorganization, other than as specified in this section.

Section 38-90-450.    (A)    A SPFC may be established as a stock corporation, limited liability company, mutual, partnership, or other form of organization approved by the director.

(B)    The SPFC's organizational documents limits the SPFC's authority to transact the business of insurance or reinsurance to those activities the SPFC conducts to accomplish its purpose as expressed in this article.

(C)    The SPFC may not adopt a name that is the same as, deceptively similar to, or likely to be confused with or mistaken for another existing business name registered in this State.

(D)    A SPFC may not have fewer than three incorporators or organizers of whom not fewer than two must be residents of this State.

(E)    Before transmitting its organizational documents to the Secretary of State, the incorporators or organizers shall petition the director to issue a certificate setting forth a finding that the establishment and maintenance of the proposed SPFC promotes the general good of the State. In arriving at this finding the director shall consider:

(1)    the character, reputation, financial standing, and purposes of the incorporators or organizers;

(2)    the character, reputation, financial responsibility, insurance experience, and business qualifications of the officers, directors, partners, members, manager, or organizers, as applicable;

(3)    other aspects as the director considers advisable.

(F)    The organizational documents, the certificate issued pursuant to subsection (E), and the required organization fees must be transmitted to the Secretary of State, who shall record the relevant organizational documents.

(G)    The capital stock of a SPFC incorporated as a stock insurer must be issued at not less than par value.

(H)    At least one of the members of the management of the SPFC must be a resident of this State.

(I)    A SPFC formed pursuant to the provisions of this article has the privileges of and is subject to the provisions of the Code of Laws of South Carolina, 1976, applicable to its formation, as well as the applicable provisions contained in this article. If a conflict occurs between a provision of the applicable law and a provision of this article, the latter controls.

Section 38-90-460.    (A)    A SPFC initially shall possess and after that maintain minimum capitalization of not less than two hundred and fifty thousand dollars. All of the minimum initial capitalization must be in cash. All other funds of the SPFC in excess of its minimum initial capitalization must be in the form of cash, cash equivalent, or securities invested as provided in Section 38-90-530 and approved by the director.

(B)    Additional capitalization for the SPFC must be determined, if so required, by the director after giving due consideration to the SPFC's business plan, feasibility study, pro-formas, and the nature of the risks being insured or reinsured, which may be prescribed in formulas approved by the director.

Section 38-90-470.    (A)    A SPFC may insure only the risks of a counterparty.

(B)    A SPFC may not issue a contract for assumption of risk or indemnification of loss other than a SPFC contract. However, the SPFC may cede risks assumed through a SPFC contract to third party reinsurers through the purchase of reinsurance or retrocession protection on terms approved by the director.

(C)    A SPFC may enter into contracts and conduct other commercial activities related or incidental to and necessary to fulfill the purposes of the SPFC contract, insurance securitization, and this article. Those activities may include, but are not limited to: entering into SPFC contracts; issuing securities of the SPFC; complying with the terms of these contract or securities; entering into trust, swap, tax, administration, reimbursement, or fiscal agent transactions; or complying with trust indenture, reinsurance, or retrocession, and other agreements necessary or incidental to effectuate an insurance securitization in compliance with this article or the plan of operation approved by the director.

(D)(1)    A SPFC may discount its reserves at discount rates as approved by the director.

(2)    A SPFC shall file annually an actuarial opinion on reserves provided by an approved independent actuary.

Section 38-90-480.    (A)    A SPFC may establish and maintain one or more protected cells to insure or reinsure risks of one or more SPFC contracts with a counterparty, subject to the following conditions:

(1)    each protected cell must be accounted for separately on the books and records of the SPFC to reflect the financial condition and results of operations of the protected cell, net income or loss, dividends or other distributions to the counterparty for the SPFC contract with each cell, and other factors as may be provided in the SPFC contract or required by the director;

(2)    the assets of a protected cell must not be chargeable with liabilities arising out of another SPFC contract the SPFC may enter into with the counterparty;

(3)    a sale, an exchange, or another transfer of assets may not be made by the SPFC between or among any of its protected cells without the consent of the director and each protected cell;

(4)    except as otherwise contemplated in the SPFC contract and related transaction documents, a sale, an exchange, a transfer of assets, a dividend, or a distribution may not be made from a protected cell to a counterparty without the director's approval and may not be approved if the sale, exchange, transfer, dividend, or distribution would result in insolvency or impairment with respect to a protected cell;

(5)    a SPFC annually shall file with the director financial reports the director requires, which must include, but are not limited to, accounting statements detailing the financial experience of each protected cell;

(6)    a SPFC shall notify the director in writing within ten business days of a protected cell that is insolvent or otherwise unable to meet its claims payment or expense obligations;

(7)    a SPFC contract with a protected cell does not take effect without the director's prior written approval, and the addition of each new protected cell constitutes a change in the business plan requiring the director's prior written approval. The director may retain legal, financial, and examination services from outside the department to examine and investigate the application for a protected cell, the reasonable cost of which may be charged against the applicant, or the director may use internal resources to examine and investigate the application the reasonable cost of which may be charged against the applicant up to a maximum of twelve thousand dollars.

(B)    This section is adopted to provide a basis for the creation of protected cells by a SPFC as one means of accessing alternative sources of capital, lowering formation and administrative expenses, and achieving the benefits of insurance securitization. The creation of protected cells is intended to be a means to achieve more efficiencies in conducting insurance securitizations.

Section 38-90-490.    (A)    A SPFC may issue securities, including surplus notes and other forms of financial instruments, subject to and in accordance with the approval of the director.

(B)    A SPFC, in connection with the issuance of securities, may enter into and perform all of its obligations under any required contracts to facilitate the issuance of these securities.

(C)    Subject to the approval of the director, a SPFC may lawfully:

(1)    issue surplus notes, under the general corporation law of this State, provided it is authorized to do so in its organizational documents;

(2)    account for the proceeds of surplus notes as surplus and not as debt for purposes of statutory accounting;

(3)    submit for prior approval of the director periodic written requests for payments of interest on and repayments of principal of surplus notes.

(D)    Surplus notes issued by a SPFC constitutes surplus or contribution notes of the type described at Section 38-27-610(9).

(E)    The director, without otherwise prejudicing the director's authority, may approve formulas for an ongoing plan of interest payments or principal repayments, or both, to provide guidance in connection with his ongoing reviews of requests to approve the payments on and principal repayments of the surplus notes.

(F)    The obligation to repay principal or interest, or both, on the securities issued by the SPFC must reflect the risk associated with the obligations of the SPFC to the counterparty under the SPFC contract.

Section 38-90-500.    A SPFC may enter into swap agreements, or other forms of asset management agreements, including guaranteed investment contracts, or other transactions that have the objective of leveling timing differences in funding of up-front or ongoing transaction expenses or managing asset, credit, or interest rate risk of the investments in the trust to ensure that the investments are sufficient to assure payment or repayment of the securities, and related interest or principal payments, issued pursuant to a SPFC insurance securitization transaction or the obligations of the SPFC under the SPFC contract.

Section 38-90-510.    A SPFC, at any given time, may enter into and effectuate a SPFC contract with a counterparty, provided that the SPFC contract obligates the SPFC to indemnify the counterparty for losses and that contingent obligations of the SPFC under the SPFC contract are securitized through a SPFC insurance securitization and are funded and secured with assets held in trust for the benefit of the counterparty pursuant to the provisions of this article pursuant to agreements contemplated by this article and invested in a manner that meet the criteria as provided in Section 38-90-530.

(B)    A SPFC may enter into agreements with affiliated companies and third parties and conduct business necessary to fulfill its obligations and administrative duties incidental to the insurance securitization and the SPFC contract. The agreements may include management and administrative services agreements and other allocation and cost sharing agreements, or swap and asset management agreements, or both, or agreements for other contemplated types of transactions provided in Section 38-90-500.

(C)    A SPFC contract must contain provisions that:

(1)    require the SPFC to enter into a trust agreement specifying what recoverables or reserves, or both, the agreement is to cover and to establish a trust account for the benefit of the counterparty;

(2)    stipulate that assets deposited in the trust account must be valued according to their current fair value and must consist only of permitted investments;

(3)    require the SPFC, before depositing assets with the trustee, to execute assignments, endorsements in blank, or to transfer legal title to the trustee of all shares, obligations, or any other assets requiring assignments, in order that the counterparty, or the trustee upon the direction of the counterparty, may negotiate whenever necessary the assets without consent or signature from the SPFC or another entity;

(4)    require that all settlements of account between the counterparty and the SPFC be made in cash or its equivalent; and

(5)    stipulate that the SPFC and the counterparty agree that the assets in the trust account, established pursuant to the provisions of the SPFC contract, may be withdrawn by the counterparty at any time, notwithstanding any other provisions in the SPFC contract, and must be utilized and applied by the counterparty or any successor by operation of law of the counterparty, including, subject to the provisions of Section 38-90-600, but without further limitation, any liquidator, rehabilitator, receiver, or conservator of the counterparty, without diminution because of insolvency on the part of the counterparty or the SPFC, only for the following purposes:

(a)    to transfer all of the assets into one or more trust accounts for the benefit of the counterparty pursuant to and in accordance with the terms of the SPFC contract and in compliance with the provisions of this article; and

(b)    to pay any other incurred and paid amounts that the counterparty claims are due pursuant to and under the terms of the SPFC contract and in compliance with this article.

(D)(1)    The SPFC contract may contain provisions that give the SPFC the right to seek approval from the counterparty to withdraw from the trust all or part of the assets, or income from them, contained in the trust and to transfer the assets to the SPFC, provided that:

(a)    at the time of the withdrawal, the SPFC shall replace the withdrawn assets, excluding any income withdrawn, with other qualified assets having a fair value equal to the fair value of the assets withdrawn and that meet the provisions of Section 38-90-530; and

(b)    after the withdrawals and transfer, the fair value of the assets in trust securing the obligations of the SPFC under the SPFC contract is no less than an amount needed to satisfy the funded requirement of the SPFC contract.

(2)    The counterparty must be the sole judge as to the application of these provisions but may not unreasonably nor arbitrarily withhold its approval.

Section 38-90-520.    In fulfilling its function, the SPFC shall adhere to the following requirements and, to the extent of its powers, shall ensure that contracts obligating other parties to perform certain functions incident to its operations are substantively and materially consistent with the following requirements and guidelines:

(1)    The assets of a SPFC must be preserved and administered by or on behalf of the SPFC to satisfy the liabilities and obligations of the SPFC incident to the insurance securitization and other related agreements.

(2)    Assets held by a SPFC in trust must be valued at their fair value.

(3)    The proceeds from the sale of securities by the SPFC, directly or indirectly, to or for the benefit of investors must be deposited with the trustee to the extent required to secure its obligations under the SPFC contract as provided by this article and must be held or invested by the trustee pursuant to the provisions of Section 38-90-530 and the asset management agreement, if any, filed with the department.

(4)    Assets of the SPFC, other than those held in trust for the counterparty, and income on trust assets received by the SPFC may be used to pay interest or other consideration on any securities or outstanding debt or other obligation of the SPFC, and nothing in this article may be construed or interpreted to prevent a SPFC from entering into a swap agreement or other asset management transaction that has the effect of hedging or guaranteeing the fixed or floating interest rate returns paid on the assets in trust or required for the securities issued by the SPFC generated from or other consideration or payment flows in the transaction.

(5)    In the SPFC insurance securitization, the contracts or other relating documentation must contain provisions identifying the SPFC.

(6)    Unless otherwise approved by the director, a SPFC may not:

(a)    issue or otherwise administer primary insurance policies;

(b)    enter into a SPFC contract with a person that is not licensed or otherwise authorized to transact the business of insurance or reinsurance in at least its state or country of domicile;

(c)    assume or retain exposure to insurance or reinsurance losses for its own account that is not funded by proceeds from a SPFC securitization that meets the provisions of this article. However, the SPFC may wholly or partially reinsure or retrocede the risks assumed to a third party reinsurer on terms approved by the director.

(7)    A SPFC may not:

(a)    have any direct obligation to the policyholders or reinsureds of the counterparty;

(b)    lend or otherwise invest, or place in custody, trust, or under management any of its assets with, or to borrow money or receive a loan from, other than by issuance of the securities pursuant to an insurance securitization, or advance from, anyone convicted of a felony, anyone who is untrustworthy or of known bad character, or anyone convicted of a criminal offense involving the conversion or misappropriation of fiduciary funds or insurance accounts, theft, deceit, fraud, misrepresentation, or corruption.

Section 38-90-530.    (A)    Assets of the SPFC held in trust to secure obligations under the SPFC contract must at all times be held in:

(1)    cash and cash equivalents;

(2)    securities listed by the securities Valuation Office of the NAIC and qualifying as admitted assets under statutory accounting convention in its state of domicile; or

(3)    another form of security acceptable to the director.

(B)    Assets of the SPFC that are pledged to secure obligations of the SPFC to a counterparty under a SPFC contract must be held in trust and administered by a qualified United States financial institution. The qualified United States financial institution does not control, is not controlled by, or is not under common control with, the SPFC or the counterparty.

(C)    The agreement governing this trust must create one or more trust accounts into which all pledged assets must be deposited and held until distributed in accordance with the trust agreement. The pledged assets must be held by the trustee at one of the trustee's offices or branch offices in the United States and may be held in certificated or electronic form.

(D)    The provisions for withdrawal by the counterparty of assets from the trust must be clean and unconditional, subject only to the following requirements:

(1)    the counterparty has the right to withdraw assets from the trust account at any time, without notice to the SPFC, subject only to written notice to the trustee from the counterparty that funds in the amount requested are due and payable by the SPFC, pursuant to the terms of the SPFC contract.

(2)    a statement or document does not need to be presented in order to withdraw assets, except the counterparty may be required to acknowledge receipt of withdrawn assets;

(3)    the trust agreement must indicate that it is not subject to any conditions or qualifications outside of the trust agreement;

(4)    the trust agreement must not contain references to any other agreements or documents.

(E)    The trust agreement must be established for the sole use and benefit of the counterparty at least to the full extent of the obligations of the SPFC to the counterparty under the SPFC contract. If there is more than one counterparty, or more than one SPFC contract with the same counterparty, a separate trust agreement must be entered into with the counterparty and a separate trust account must be maintained for each SPFC contract with the counterparty, unless otherwise approved by the director.

(F)    The trust agreement must provide for the trustee to:

(1)    receive assets and hold all assets in a safe place;

(2)    determine that all assets are in a form that the counterparty or the trustee, upon direction by the counterparty, may negotiate, whenever necessary, the assets, without consent or signature from the SPFC or another person or entity;

(3)    furnish to the SPFC, the director, and the counterparty a statement of all assets in the trust account reported at fair value upon its inception and at intervals no less frequent than the end of each calendar quarter;

(4)    notify the SPFC and the counterparty, within ten days, of any deposits to or withdrawals from the trust account;

(5)    upon written demand of the counterparty, immediately take the necessary steps to transfer absolutely and unequivocally all right, title, and interest in the assets held in the trust account to the counterparty and deliver physical custody of the assets to the counterparty; and

(6)    allow no substitutions or withdrawals of assets from the trust account, except pursuant to the trust agreement or SPFC contract, or as otherwise permitted by the counterparty.

(G)    The trust agreement must provide that at least thirty days, but not more than forty-five days, before termination of the trust account, written notification of termination must be delivered by the trustee to the counterparty with a copy of the notice provided to the director.

(H)    In addition to the requirements for the trust as provided in this article, the trust agreement may be made subject to and governed by the laws of any state. The state must be disclosed in the plan of operation filed with and approved by the director.

(I)    The trust agreement must prohibit invasion of the trust corpus for the purpose of paying compensation to, or reimbursing the expenses of, the trustee.

(J)    The trust agreement must provide that the trustee must be liable for its own negligence, wilful misconduct, or lack of good faith.

(K)(1)    Notwithstanding the provisions of subsection (D)(3) and (4), or of Section 38-90-755(C)(5), when a trust agreement is established in conjunction with a SPFC contract, then the trust agreement or SPFC contract, or both, may provide that the counterparty shall undertake to use and apply any amounts drawn upon the trust account, without diminution because of the insolvency of the counterparty or the SPFC, only for one or more of the following purposes:

(a)    to pay or reimburse the counterparty for payment of the SPFC's share of premiums to be returned to owners of counterparty's policies covered under the SPFC contract on account of cancellations of the policies under the counterparties policies;

(b)    to pay or reimburse the counterparty for payment of the SPFC's share of surrenders, benefits, losses, or other benefits covered and payable pursuant to the provisions of the SPFC contract;

(c)    to fund an account with the counterparty in an amount to secure the credit or reduction from liability for reinsurance coverage provided under the SPFC contract; or

(d)    to pay any other amounts the counterparty claims are legally and properly due under the SPFC contract.

(2)    Any assets deposited into an account of the counterparty pursuant to subitem (c) of item (1) or withdrawn by the counterparty pursuant to subitem (d) of item (1) and any interest or other earnings on them, must be held by the counterparty in trust and separate and apart from any general assets of the counterparty, for the sole purpose of funding the payments and reimbursements of the SPFC contract described in subitems (a) through (d) of item (1).

(3)    The counterparty shall return to the SPFC amounts withdrawn under subitems (a) through (d) of item (1) in excess of actual amounts required under subitems (a) through (c) of item (1), and in excess of the amounts subsequently determined to be due under subitem (d) of item (1), plus interest at a rate not in excess of the prime rate for the amounts held pursuant to subitem (c) of item (1) unless a higher rate of interest has been awarded by a panel of arbitration, and any net costs or expenses, including attorneys' fees, awarded by a panel of arbitration.

(4)    If the counterparty has received notification of termination of the trust account, and where the SPFC's entire obligations secured under the specific SPFC contract remain unliquidated and undischarged ten days before the termination date, to withdraw amounts equal to the obligations and deposit the amounts in a separate account, in the name of the counterparty, in a qualified United States financial institution, separate and apart from the counterparty's general assets, to the extent the obligations or liabilities have not been funded by the SPFC, in trust only for those uses and purposes specified in subitem (a) of item (1) as may remain executory after the withdrawal and for any period after the termination date until discharged.

Section 38-90-540.    (A)    A SPFC may not declare or pay dividends in any form to its owners other than in accordance with the insurance securitization transaction agreements, and in no extent shall the dividends decrease the capital of the SPFC below two hundred fifty thousand dollars, and, after giving effect to the dividends, the assets of the SPFC, including assets held in trust pursuant to the terms of the insurance securitization, must be sufficient to satisfy the director that it can meet its obligations. Approval by the director of an ongoing plan for the payment of dividends or other distribution by a SPFC must be conditioned upon the retention, at the time of each payment, of capital or surplus equal to or in excess of amounts specified by, or determined in accordance with formulas approved for the SPFC by the director.

(B)    The dividends may be declared by the management of the SPFC if the dividends do not violate the provisions of this article or jeopardize the fulfillment of the obligations of the SPFC or the trustee pursuant to the SPFC insurance securitization agreements, the SPFC contract, or any related transaction and other provisions of this article.

Section 38-90-550.    (A)    Any material change of the SPFC's plan of operation pursuant to the provisions of Section 38-90-440(E)(5) including, but not limited to, a new issuance of securities separate and apart from and unrelated to any former insurance securitization by the SPFC, whether or not through a SPFC protected cell, shall require prior approval of the director, provided however:

(1)    any subsequent issuance of securities to continue the securitization activities of the SPFC initially approved by the director pursuant to this article either during or after expiration, redemption, or satisfaction, of all of these, of part or all of the securities issued pursuant to initial insurance securitization transactions may not be considered a material change; or

(2)    a change and substitution in a counterparty to a swap transaction for an existing insurance securitization as allowed pursuant to the provisions of this article may not be considered a material change if the replacement swap counterparty carries a similar or higher rating to its predecessor with two or more nationally recognized rating agencies, or both.

(B)    No later than five months after the fiscal year end of the SPFC, the SPFC shall file with the director an audit by a certified public accounting firm of the financial statements of the SPFC and the trust accounts.

(C)    Each SPFC shall file by March first, a statement of operations, using either generally accepted accounting principles or, if requested by the director, statutory accounting principles with useful or necessary modifications or adaptations required or approved or accepted by the director for the type of insurance and kinds of insurers to be reported upon, and as supplemented by additional information required by the director. The statement of operations must include a statement of income, a balance sheet, and may include a detailed listing of invested assets, including identification of assets held in trust to secure the obligations of the SPFC under the SPFC contract. The SPFC also may include with the filing risk based capital calculations and other adjusted capital calculations to assist the director with evaluating the levels of the surplus of the SPFC for the year ending on December thirty-first of the previous year. The statements must be prepared on forms required by the director. In addition the director may require the filing of performance assessments of the SPFC contract.

(D)    A SPFC shall maintain its records in this State and shall make its records available for examination by the director at any time. The SPFC shall keep its books and records in such manner that its financial condition, affairs, and operations can be ascertained and so that the director may readily verify its financial statements and determine its compliance with this article.

(E)    All original books, records, documents, accounts, and vouchers must be preserved and kept available in this State for the purpose of examination and until authority to destroy or otherwise dispose of the records is secured from the director. The original records, however, may be kept and maintained outside this State if, according to a plan adopted by the management of the SPFC and approved by the director, it maintains suitable records instead of it. The books or records may be photographed, reproduced on film, or stored and reproduced electronically.

Section 38-90-560.    (A)    At least once every three years, and if the director determines it to be prudent, the director, or his designee, shall visit each SPFC and thoroughly inspect and examine its affairs to ascertain its financial condition, its ability to fulfill its obligations, and whether it has complied with this article. The director upon application, in his discretion, may enlarge the three-year period to five years, if a SPFC is subject to a comprehensive annual audit during that period of a scope satisfactory to the director by independent auditors approved by the director. The expenses and charges of the examination must be paid to the State by the company or companies examined, and the department shall issue its warrants for the proper charges incurred in all examinations.

(B)    All examination reports, preliminary examination reports or results, working papers, recorded information, documents, and copies of documents produced by, obtained by, or disclosed to the director or any other person in the course of an examination made pursuant to the provisions of this section are confidential and are not subject to subpoena and may not be made public by the director or an employee or agent of the director without the written consent of the company, except to the extent provided in this subsection. Nothing in this subsection prevents the director from using this information in furtherance of the director's regulatory authority as provided by the provisions of this title. The director may grant access to this information to public officers having jurisdiction over the regulation of insurance in another state or country, or to law enforcement officers of this State or another state or agency of the federal government at any time, if the officers receiving the information agree in writing to hold it in a manner consistent with this section.

Section 38-90-570.    (A)    At the cessation of business of a SPFC following termination or cancellation of a SPFC contract and the redemption of any related securities issued in connection with them, the authority granted by the director expires or, in the case of retiring and surviving protected cells, be modified, and the SPFC is no longer authorized to conduct activities unless and until a new or modified license is issued pursuant to a new filing pursuant to the provisions of Section 38-90-440 or as agreed by the director.

(B)    The director may suspend or revoke the license of a SPFC in this State for:

(1)    insolvency;

(2)    failure to meet the provisions of Sections 38-90-460 or 38-90-580;

(3)    use of methods that, although not otherwise specifically prohibited by law, nevertheless render its operation detrimental or its condition unsound with respect to the public, the holders of the securities, or policyholders of the SPFC; or

(4)    failure to otherwise to comply in any material respect with applicable laws of this State.

(C)    If the director finds, upon examination or other evidence, that a SPFC has committed any of the acts specified in subsection (B), the director may impose the penalties provided in Section 38-2-10 if the director considers it in the best interest of the public, the holders of the securities, and the policyholders of the SPFC.

(D)    Unless the grounds for suspension or revocation relate only to the financial condition or soundness of the SPFC or to a deficiency in its assets, the director shall notify the SPFC not less than thirty days before revoking its authority to do business in this State and specify in the notice the particulars of the alleged violation of the law or its organizational documents or grounds for revocation and a proper opportunity must be offered the SPFC to be heard before the Administrative Law Judge Division.

Section 38-90-580.    (A)    A SPFC shall pay to the department by March first of each year, a tax at the rate of four-tenths of one percent on the first twenty million dollars and three-tenths of one percent on each dollar after that, subject to a minimum annual tax of five thousand dollars and a maximum annual tax of one hundred thousand dollars. Taxes are based upon the direct premiums written or contracted for on policies or contracts of insurance, other than reinsurance policies or contracts written by the SPFC, during the year ending December thirty-first next preceding, after deducting from the direct premiums subject to the tax the amounts paid to insureds as returned premiums which must include dividends on unabsorbed premiums or premium deposits returned or credited to insureds.

(B)    A SPFC shall pay to the department by March first of each year, a tax at the rate of two hundred and twenty-five thousandths of one percent on the first twenty million dollars of assumed reinsurance premium, and one hundred fifty thousandths of one percent on the next twenty million dollars, and fifty thousandths of one percent on the next twenty million dollars, and twenty-five thousandths of one percent of each dollar after that, subject to a minimum annual tax of five thousand dollars and a maximum annual tax of one hundred thousand dollars. However, no reinsurance tax applies to premiums for risks or portions of risks which are subject to taxation on a direct basis, pursuant to subsection (A). A premium tax is not payable in connection with the receipt of assets in exchange for the assumption of loss reserves and other liabilities of another insurer under common ownership and control if the transaction is part of a plan to discontinue the operations of the other insurer and if the intent of the parties to the transaction is to renew or maintain business with the SPFC.

(C)    Each protected cell of the SPFC must be taxed as if it is a separate and distinct SPFC.

(D)    The tax provided in this section is the only tax collectible pursuant to the laws of this State from a SPFC and no other tax or occupation tax, nor any other taxes may be levied or collected from a SPFC by the State or a county, city, or municipality within this State, except ad valorem taxes on real and personal property used in the production of income.

Section 38-90-590.    A SPFC contract meeting the provisions of this article must be granted credit for reinsurance treatment or otherwise qualifies as an asset or a reduction from liability for reinsurance ceded by a domestic insurer to a SPFC as an assuming insurer pursuant to the provisions of Section 38-9-210 for the benefit of the counterparty, provided and only to the extent:

(1)    of the fair value of the assets held in trust for, or irrevocable letters of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System or as approved by the director, for the benefit of the counterparty under the SPFC contract;

(2)    the assets are held in trust pursuant to the provisions of this article;

(3)    the assets are administered in the manner and pursuant to arrangements as provided in this article; and

(4)    the assets are held or invested in one or more of the forms allowed in Section 38-90-530.

Section 38-90-600.    (A)(1)    Notwithstanding the provisions of Chapter 27, Title 38, the director may apply by petition to the circuit court for an order authorizing the director to conserve, rehabilitate, or liquidate a SPFC domiciled in this State on one or more of the following grounds:

(a)    there has been embezzlement, wrongful sequestration, dissipation, or diversion of the assets of the SPFC intended to be used to pay amounts owed to the counterparty or the holders of SPFC securities; or

(b)    the SPFC is insolvent and the holders of a majority in outstanding principal amount of each class of SPFC securities request or consent to conservation, rehabilitation, or liquidation pursuant to the provisions this article.

(2)    The court may not grant relief provided by subitem (a) of item (1) unless, after notice and a hearing, the director, who must have the burden of proof, establishes by clear and convincing evidence that relief must be granted.

(B)    Notwithstanding another provision in this title, regulations promulgated under this title, or another applicable law or regulation, upon any order of conservation, rehabilitation, or liquidation of a SPFC, the receiver shall manage the assets and liabilities of the SPFC pursuant to the provisions of this article.

(C)    With respect to amounts recoverable under a SPFC contract, the amount recoverable by the receiver must not be reduced or diminished as a result of the entry of an order of conservation, rehabilitation, or liquidation with respect to the counterparty, notwithstanding another provision in the contracts or other documentation governing the SPFC insurance securitization.

(1)    Notwithstanding the provisions of Chapter 27 of this title, an application or petition, or a temporary restraining order or injunction issued pursuant to the provisions of Chapter 27 of this title, with respect to a counterparty does not prohibit the transaction of a business by a SPFC, including any payment by a SPFC made pursuant to a SPFC security, or any action or proceeding against a SPFC or its assets.

(2)    Notwithstanding the provisions of Chapter 27 of this title, the commencement of a summary proceeding or other interim proceeding commenced before a formal delinquency proceeding with respect to a SPFC, and any order issued by the court does not prohibit the payment by a SPFC made pursuant to a SPFC security or SPFC contract or the SPFC from taking any action required to make the payment.

(D)    Notwithstanding the provisions of Chapter 27 of this title or other laws of this State:

(1)    a receiver of a counterparty may not void a nonfraudulent transfer by a counterparty to a SPFC of money or other property made pursuant to a SPFC contract; and

(2)    a receiver of a SPFC may not void a nonfraudulent transfer by the SPFC of money or other property made to a counterparty pursuant to a SPFC contract or made to or for the benefit of any holder of a SPFC security on account of the SPFC security.

(E)    With the exception of the fulfillment of the obligations under a SPFC contract, and notwithstanding another provision of this article or other laws of this State, the assets of a SPFC, including assets held in trust, must not be consolidated with or included in the estate of a counterparty in any delinquency proceeding against the counterparty pursuant to the provisions of this article for any purpose including, without limitation, distribution to creditors of the counterparty.

Section 38-90-610.    Information submitted pursuant to the provisions of this article is confidential and may not be made public by the director or an agent or employee of the director without the prior written consent of the SPFC, except that:

(1)    information submitted pursuant to the provisions of this article is discoverable by a party in a civil action or contested case to which the submitting SPFC is a party, upon a specific finding by the court that:

(a)    the SPFC is a necessary party to the action and not joined only for the purposes of evading the confidentiality provisions of this article;

(b)    the party seeking the information demonstrates by a clear and convincing standard that the information sought is relevant, material to, and necessary for the prosecution or defense of the claim asserted in the action; and

(c)    the information sought is unavailable from other nonconfidential sources.

(2)    The director may disclose the information to the public officer having jurisdiction over the regulation of insurance in another State if:

(a)    the public official agrees in writing to maintain the confidentiality of the information; and

(b)    the laws of the State in which the public official serves require the information to be confidential.

Section 38-90-620.    (A)    A contested case brought by a third party based on a decision of the director pursuant to this article is governed by applicable civil law except that, the aggrieved party shall:

(1)    prove the appeal by a clear and convincing evidence standard;

(2)    demonstrate irreparable harm;

(3)    not have another adequate remedy at law; and

(4)    post a bond of sufficient surety to protect the interests of the holders of the SPFC securities and policyholders but in not less than fifteen percent of the total amount of the securitized transaction.

(B)    If the director decides to reverse, amend, or modify a license issued to a SPFC or the order issued in connection with them for a reason other than that specified in Section 38-90-570(B), the director shall meet the standards and criteria provided in subsection (A).

Section 38-90-630.    The director may promulgate regulations necessary to effectuate the purposes of this article. Regulations promulgated pursuant to this section do not affect a SPFC insurance securitization in effect at the time of the promulgation."

SECTION    16.    If any section, subsection, paragraph, subparagraph, sentence, clause, phrase, or word of this act is for any reason held to be unconstitutional or invalid, such holding shall not affect the constitutionality or validity of the remaining portions of this act, the General Assembly hereby declaring that it would have passed this act, and each and every section, subsection, paragraph, subparagraph, sentence, clause, phrase, and word thereof, irrespective of the fact that any one or more other sections, subsections, paragraphs, subparagraphs, sentences, clauses, phrases, or words hereof may be declared to be unconstitutional, invalid, or otherwise ineffective.

SECTION    17.    Section 38-90-170 of the 1976 Code is repealed.

SECTION    18.    This act takes effect upon approval by the Governor.

This web page was last updated on Thursday, June 25, 2009 at 10:01 A.M.