Subordinated Indebtedness

PURPOSE: This rule specifies information to be submitted to the director for prior approval of subordinated indebtedness agreements, the form of consideration for these agreements and the accounting procedures to be followed. This rule implements sections 354.355, 354.480, 375.535, 375.539, and 381.075, RSMo. (1) Application. This rule applies to all health service corporations, health maintenance organizations (HMOs), insurance companies, and reciprocal interinsurance exchanges organized under the laws of this state and is applicable to any debts other than those shown as a legal liability of the company. Notwithstanding any other provision to the contrary, no company or other entity which has the power to assess its members may issue any subordinated indebtedness unless it is a mutual company organized under Chapter 379, RSMo. (2) Definition, Subordinated Indebtedness (Surplus Notes). Subordinated indebtedness, for the purposes of this rule includes any contingent obligation for the repayment of a sum of money upon a written agreement that the loan or advance with interest shall be repaid only out of surplus profits of the company, as defined at 20 CSR 200-11.150(2), or as deemed necessary by the director of insurance to secure the interests of the policyholders and creditors of this company. (3) Approval by the Director. (A) The following shall be submitted to the director for prior approval: 1. Duplicate copies of the entire subordinated indebtedness agreement; and 2. Certified copy of the resolution of the board of directors or committee which is empowered to authorize these agreements. The resolution shall stipulate the maximum amount of subordinated indebtedness authorized and the purpose for which it is incurred. It also shall limit the application of the proceeds to the specific purpose for which the subordinated indebtedness is incurred. (B) After submission of the documents and approval, the director may authorize the execution of the subordinated indebtedness agreement. All agreements shall be executed and the consideration received immediately after the approval unless otherwise stated in the approval order. (C) Any amendment to or cancellation of an approved subordinated indebtedness agreement is to be submitted to the director for prior approval in accordance with subsection (3)(A) of this rule. (4) Consideration. The consideration tendered to the company in exchange for the agreement shall be in the form of cash or other admitted assets having readily determinable values and liquidity acceptable to and approved by the director. (5) Reporting and Accounting of Subordinated Indebtedness. (A) The director shall be notified immediately in writing upon the execution of any subordinated indebtedness agreement as to the amount and to whom payable. (B) All outstanding subordinated indebtedness and interest accruing shall be reported at face value in the annual statement on page 3 and in other financial statements of the company as a special surplus account. Accrued interest that has not been approved for payment should be accounted for by debiting unassigned funds and crediting the special surplus account. (6) Approval of Repayment by Director. Repayment of principal or payment of interest may be made only with the approval of the director when s/he is satisfied that the financial condition of the company warrants this action. Repayment of surplus note interest should first reverse any unapproved accrued interest accounting by debiting the special surplus account and crediting unassigned funds. The interest payment should then be recorded by debiting interest expense and crediting cash. Repayment of principal should follow the guidance set forth in the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual. (7) Other Loans. Nothing in this section is to be construed to mean that a company cannot otherwise borrow money, but the amount so borrowed with accrued interest shall be carried by the company as a liability. AUTHORITY: sections 354.120, 354.485, and 374.045, RSMo 2016.* This rule was previously filed as 4 CSR 190-11.010. Original rule filed June 12, 1970, effective July 1, 1970. Amended: Filed Aug. 5, 1974, effective Aug. 15, 1974. Amended: Filed July 18, 1989, effective Nov. 1, 1989. Amended: Filed Oct. 30, 2018, effective April 30, 2019. *Original authority: 354.120, RSMo 1973, amended 1983, 1993, 1995; 354.485, RSMo 1983, 2007; and 374.045, RSMo 1967, 1993, 1995, 2008.