The Office of General Counsel issued the following opinion on October 15, 2003 representing the position of the New York State Insurance Department.
Re: N.Y. Ins. Law § 4105(a)
How should N.Y. Ins. Law § 4105(a) be interpreted for purposes of determining the amount of dividends declared or paid?
N.Y. Ins. Law § 4105(a)(McKinney 2000) requires that the Department determine the amount of dividends actually distributed in the twelve-month period prior to the distribution date for the proposed dividend. Any distributions made more than twelve months prior to the proposed distribution should not be included in the calculation under §4105(a).
The inquirer is general counsel for ABC, Inc., parent company of DEF Insurance Company ("The Company") and GHIJ Insurance Company, and have requested a legal opinion on the operation of N.Y. Ins. Law § 4105(a) (McKinney 2000). The request stems from the Departments denial of the Companys request for approval for a dividend declared on June 11, 2003. It is the inquirers contention that the dividend was properly payable without the Departments prior approval pursuant to N.Y. Ins. Law § 4105(a) (McKinney 2003). The Property Bureau took the position that the Company could not properly declare the dividend under that section.
The inquirer objects to the fact that the Department, in analyzing the dividend pursuant to N.Y. Ins. Law § 4105(a), effectively looked back further than twelve months, in that it included dividends paid by the Company on June 10, 2002. The Property Bureau stated that in order to apply the statutory test, the Departments standard procedure is to review all filed statements from the past 12 months in determining the amount of dividends paid. The inquirer objects to this method on the grounds that the use of these statements may likely result in the inclusion of dividends paid over a time period of more than twelve months.1 This is because the review of statements received over a twelve-month period can potentially include information about distributions that have occurred over a period of up to fifteen months.
N.Y. Ins. Law § 4105 (McKinney 2000) sets forth the rules governing the distribution of dividends by domestic stock property/casualty insurance companies and provides, in pertinent part, as follows:
(a) Except as provided in subsection (c) hereof no domestic stock property/casualty insurance company shall declare or distribute any dividend to shareholders except out of earned surplus. No such company shall declare or distribute any dividend to shareholders which, together with all dividends declared or distributed by it during the next preceding twelve months, exceeds the lesser of ten percent of its surplus to policyholders as shown by its last statement on file with the superintendent, or one hundred percent of adjusted net investment income during such period unless, upon prior application therefor, the superintendent approves a greater dividend distribution based upon his finding that the insurer will retain sufficient surplus to support its obligations and writings.
N.Y. Ins. Law § 4105(a) (McKinney 2000).
The language of the statute limits the amount of dividends that may be declared or distributed to ten percent of the companys surplus to policyholders (as of its last statement on file) over the course of the twelve-month period preceding the declaration or distribution. The proper interpretation of this section was the subject of an Opinion of the Office of General Counsel (NILS No. 75-1) published in the New York Insurance Department Monthly Bulletin (January 1975).2 One question at issue in that Opinion was the question of the interpretation of the twelve-month limitation. Specifically, whether the "declared or distributed" language would preclude either a declaration or distribution if there were either a declared or distributed dividends which, if considered together, would exceed the statutory limit in the twelve-month period. The Opinion, analyzing the rationale behind the statute, i.e., the prevention of the "milking" of insurance companies by their holding companies, concluded that such a result was not intended. Rather, it held that the twelve-month period should be measured only either from distribution to distribution or from declaration to declaration.
The second question addressed by the Opinion was what was meant by the term "last statement on file." The Opinion reasoned that the purpose of the statute was best served by the use of the most current information available to the superintendent. Accordingly, it determined that the reference to the filed statement was to the latest quarterly statement.
Therefore, pursuant to N.Y. Ins. Law § 4105(a) (McKinney 2000), the Department should determine the amount of dividends actually distributed in the twelve-month period prior to the distribution date for the proposed dividend.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1The Property Bureau, in an effort to accommodate the Company, did in fact review the relevant financial information for the twelve-month period preceding the distribution date. However, the figures provided could not be reconciled.
2 That Opinion actually addressed the predecessor sections of N.Y. Ins. Law § 4105(a), i.e., N.Y. Ins. Law §§ 313 & 343 (McKinney 1969). The relevant language of the statute at issue herein is essentially unchanged from that of the predecessor sections, however.