ENCLOSURE I

ENCLOSURE I

73 1 797.2

Ins. Code § 185.2

determine such transfer is not in the interest of the policyholders of this State.

Added by P.A. 85-131, § 1, eff. Aug. 3, 1987.

798. § 186. Renumbered § 185.1 by P.A. 85-131, § 1, eff. Aug. 3, 1987.

ARTICLE XII CORRECTIVE ORDERS Article XII: was added by P.A. 84-715, § 1. eff. Sept. 20, 1985.

798.1. Supervision by director

§ 186.1. Supervision by the Director. (1) If the Director determines that any domestic insurance company is operating in a manner, that could lead to, or is in, a financial condition, which if continued would make it hazardous to the public, and its policyholders, the Director may issue an order.

(a) notifying the company and its Board of Directors of his determination and setting forth the specific deficiencies leading to the determination;

(b) setting forth the specific action required or prohibited to correct the cited deficiencies; and

(c) ordering the company to comply with the Director's order within such reasonable time as the Director shall prescribe.

(2) Operation or financial condition deficiencies supporting the Director's determination under subsection (1) may include, but are not limited to, the following.

(a) The company has failed to maintain a relationship of policyholder surplus to premium writings or policyholder surplus to claim and unearned premium reserves which provides a reasonable margin of safety for the policyholders considering the classes of insurance the company is writing.

(b) The company's asset liquidity is not adequate to provide orderly payment of its obligations.

(c) The company's current or projected net income is inadequate to meet its present or projected obligations. (d) The company has a history of claim reserve inadequacy which affects the reliability of its financial state

ments.

(e) The company has failed to maintain adequate books and records or has otherwise conducted its insurance operation in a manner which impairs the Director's ability to determine its true financial condition.

(3) If a company fails to comply with the Director's order issued pursuant to subsection (1) within the time prescribed for such compliance the Director may institute proceedings for the conservation, rehabilitation or liquidation of the company under Article XIII of this Code.'

(4)(a) The Director may require that the company prepare and file a plan to correct the deficiencies cited by the Director in his order within such time as the Director may prescribe. A corrective order may require, prohibit or permit certain acts subject to conditions including the Director's prior approval. The scope of a corrective order may relate to but shall not be limited to:

(i) the disposition, recovery or mix of assets;

(ii) the assumption or cession of reinsurance, including reinsurance of outstanding risks;

(iii) lending and borrowing,

(iv) investments;

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(v) restricting underwriting and marketing activities. (b) The Director may require that any company under such corrective order direct any certified public accountants, consulting actuary or financial consultant retained by the company to prepare for the Director such reports, accounting data and such other reports as the Director may reasonably require to assist in carrying out the responsibilities of the Director under this Section.

(5)(a) Any company subject to an order under subsections (1) or (4) may request a hearing before the Director to review that order. Such request shall be made in writing within 10 days of the receipt of such order, shall state the company's objections to the order, and shall be addressed to the Director. Such hearing shall be convened not less than 10 days nor more than 20 days after receipt of the written request for hearing unless otherwise agreed to by the company. The Director shall make a final determination within 10 days after the conclusion of the hearing. The Director shall hold all hearings under this subsection privately in accordance with subsection (6) of this Section. The pendency of a hearing or pendency of the Director's final determination shall not stay the effect of the Director's order.

(b) After the Director's final determination pursuant to any hearing under this subsection, any party to the proceedings whose interests are affected by the Director's final determination shall be entitled to judicial review of such final determination pursuant to the provisions of the "Administrative Review Law".?

Notwithstanding the availability of administrative remedies or judicial review under the "Administrative Review Law", a company which is subject to an order of the Director under this Section shall be entitled to immediate judicial review and injunctive relief in the Circuit Court of Cook County or the Circuit Court of Sangamon County upon satisfying the court:

(i) that accepting the facts set forth in the order as true, the order is arbitrary or capricious;

(ii) that the company's interests are substantially impaired by the order, and

(iii) that the company will suffer permanent injury in the absence of immediate injunctive relief.

(6) All administrative and judicial proceedings arising under this Article shall be held privately unless a public hearing is requested by the company, and all records of the company, and all records of the Department concerning the company, so far as they pertain to or are a part of the record of the proceedings, shall be and remain confidential, unless the company requests otherwise. Such records shall not be subject to public disclosure ander "The Illinois Freedom of Information Act", certified December 27, 1983, as amended, or otherwise, nor shall such records be subject to subpoena by third parties, unless the company and Director consent to such disclosure or release under subpoena.

(7) The powers vested in the Director by this Section are additional to any and all other powers and remedies vested in the Director by law, and nothing herein contained shall prohibit the Director from proceeding under any other

2

798.2. Cooperation with director-Violation

§ 186.2. (1) Any officer, manager, director, trustee, owner, employee, or agent of any insurer, or any other person with authority over or in charge of any segment of the company's affairs, shall cooperate with the Director in any proceeding under this Article or any investigation preliminary to the proceeding. The term "person" as used in this Section shall include any person who exercises control directly or indirectly over activities of the company through any holding company or other affiliate of the To "cooperate" shail include, but shall not be limited to, the following:

company.

(a) to reply promptly in writing to any inquiry from the Director of Insurance requesting such a reply; and

(b) to make available to the Director any books, accounts, documents, or other records or information or property of or pertaining to the company and in such person's possession, custody or control.

(2) No person shall obstruct or interfere with the Director in the conduct of any proceeding under Sections 186.1 and 186.2 or any investigation preliminary or incidental thereto.

(3) This Section shall not be construed to abridge otherwise existing legal rights, including the right to contest any order issued under this Code.

(4) Any person who obstructs or interferes with the Director in the conduct of any proceeding or investigation under this Article, or who violates any valid order issued under this Article shall be subject to civil forfeitures, fines or penalties pursuant to Sections 134, 149, 403A and 505.1 of this Code.2

Added by P.A. 84-715, § 1, eff. Sept. 20, 1985.

1 Paragraph 798.1 of this chapter.

2 Paragraphs 746, 761, 1015A and 1065.52-1 of this chapter.

ARTICLE XIII REHABILITATION, LIQUIDATION, CONSERVATION AND DISSOLUTION OF COMPANIES

799. Scope of article

§ 187. Scope of Article. (1) This article shall apply to every corporation, association, society, order, firm, company, partnership, individual, and aggregation of individuals to which any article of this Code is applicable, or which is subject to examination, visitation or supervision by the Director under any provision of this Code or under any law of this State, or which is engaging in or proposing or attempting to engage in or is representing that it is doing an insurance or surety business, including the exchanging of reciprocal or inter-insurance contracts between individuals, partnerships and corporations in this State, or which is in the process of organization for the purpose of doing or attempting or intending to do such business, anything as to any such corporation, association, society, order, firm, company, partnership, individual or aggregation of individuals provided in this Code or elsewhere in the laws of this State to the contrary notwithstanding.

73 1800 Ins. Code § 188

(2) The word "company" as used in this article includes all of the corporations, associations. societies, orders, firms, companies, partnerships, and individuals specified in subsection (1) of this section and the word "assets" as used in this article includes all deposits and funds of a special or trust nature.

Amended by Laws 1959, p. 1422, eff. July 17, 1959.

800. Grounds for rehabilitation and liquidation of a domestic company or an unauthorized foreign or alien company

§ 188. Grounds for rehabilitation and liquidation of a domestic company or an unauthorized foreign or alien company. Whenever any domestic company or any unau thorized foreign or alien company

1. is insolvent;

2. has refused to submit its books, papers, accounts, records or affairs to the reasonable inspection or examination of the Director or his actuaries, supervisors, deputies,

or examiners;

3. has concealed, removed, altered, destroyed or failed to establish and maintain books, records, documents, accounts, vouchers and other pertinent material adequate for the determination of its financial condition by examination under Section 132 or has failed to properly administer claims and to maintain claims records which are adequate for the determination of its outstanding claims liability, 4. has neglected or refused to observe an order of the Director to make good within the time prescribed by law any deficiency, whenever its capital and minimum required surplus, if a stock company, or its required surplus, if a company other than stock, has become impaired;

5. has, by articles of consolidation, contract of reinsurance or otherwise, transferred or attempted to transfer its entire property or business not in conformity with this Code, or entered into any transaction the effect of which is to merge substantially its entire property or business in any other company without having first obtained the written approval of the Director under this Code;

6.

is found to be in such condition that its further transaction of business would be hazardous to its policyholders, or to its creditors, or to the public;

7. has violated its charter or any law of this State or has exceeded or is exceeding its corporate powers;

8. has an officer who has refused upon reasonable demand to be examined under oath touching its affairs; 9. is found to be in such condition that it could not meet the requirements for organization and authorization as required by law, except as to the amount of the original surplus required of a stock company in Section 13,2 and except as to the amount of the surplus required of a mutual company in excess of the minimum surplus required by this Code to be maintained;

10. has ceased for the period of one year to transact insurance business;

11. has commenced, or has attempted to commence, any voluntary liquidation or dissolution proceeding, or any proceeding to procure the appointment of a receiver, liquidator, rehabilitator, sequestrator, or a similar officer for itself;

12. is a party, whether plaintiff or defendant in any proceeding in which an application is made for the appointment of a receiver, custodian, liquidator, rehabilitator, sequestrator, or similar officer for such company or its

ENCLOSURE II

ENCLOSURE II

73 1737.24a

Ins. Code § 125.24a

securities exchange registered under the Securities Exchange Act of 1934, as amended,' or any board of trade designated as a contract market by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act, as amended, is authorized, on the following conditions:

(a) A company shall not sell a call option on either (i) securities it does not own or (ii) in an amount greater than securities which it presently owns; provided, however, that in the case of financial futures contracts and stock or bond index contracts where it is not feasible to own the underlying security, a company may sell a call option only ⚫ in connection with a hedging transaction;

(b) A company shall not sell a put option unless its obligations under such put option are fully secured by a deposit by the company with a bank or other custodian of cash or cash equivalents;

(c) A company shall not purchase as opening transactions under this Section more than 10% of the excess of its capital and surplus over the minimum requirements of a new stock or mutual company to qualify for a certificate of authority to write the kind of insurance which the company is authorized to write; and

(d) The Director may promulgate reasonable rules and regulations for transactions under this Section, to include but not limited to rules and regulations which impose financial solvency standards, valuation standards and reporting requirements.

Added by P.A. 83-695, § 1, eff. Jan. 1, 1984.

1 Chapter 121%, 1 137.1 et seq.

215 US.C.A. § 77a et seq.

738 to 743. §§ 126 to 131. Repealed by Laws 1963, p. 3139, eff. Aug. 19, 1963.

ARTICLE VIII INSURANCE HOLDING
COMPANY SYSTEMS

Article 8: was added by P.A. 77-673, eff. Aug. 9, 1971.

743.1. Definitions

131.1. Definitions. As used in this Article, the following terms have the respective meanings set forth in this Section unless the context requires otherwise:

(a) An "affiliate" of, or person "affiliated" with, a specific person, is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.

(b) "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, the holding of policyholders' proxies by contract other than a commercial contract for goods or non-management services, or otherwise, unless the power is solely the result of an official position with or corporate office held by the person. Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds shareholders' proxies representing 10% or more of the voting securities of any other person, or holds or controls sufficient policyholders' proxies to elect the majority of the board of directors of the domestic company. This presumption may be rebutted by a showing

100

made in the manner as the Director may provide by rule. The Director may determine, after furnishing all persons in interest notice and opportunity to be heard and making specific findings of fact to support such determination. that control exists in fact, notwithstanding the absence of a presumption to that effect.

(c) "Insurance holding company system" means two or more affiliated persons, one or more of which is an insurance company as defined in paragraph (e) of Section 2 of this Code.'

(d) "Company" has the same meaning as "Company" as defined in Section 2 of this Code, except that it does not include agencies, authorities or instrumentalities of the United States, its possessions and territories, the Commonwealth of Puerto Rico, the District of Columbia or a State or political subdivision of a State.

(e) "Person" means an individual, a corporation, a part. nership, an association, a joint stock company, a trust, an unincorporated organization, any similar entity or any combination of the foregoing acting in concert, but does not include any securities broker performing no more than the usual and customary broker's function or joint venture partnership exclusively engaged in owning, managing, leasing or developing real or tangible personal property other than capital stock.

(f) "Securityholder" of a specified person is one who owns any security of such person, including common stock, preferred stock, debt obligations, and any other security convertible into or evidencing the right to acquire any of the foregoing.

(g) "Subsidiary" of a specified person is an affiliate controlled by such person directly, or indirectly through one or more intermediaries.

(h) "Voting Security" is a security which gives to the holder thereof the right to vote for the election of directors and includes any security convertible into or evidencing a right to acquire a voting security.

(i) "Acquiring Party" means such person by whom or on whose behalf the merger or other acquisition of control referred to in Section 131.42 is to be affected and any person that controls such person or persons.

(j) "Policyholders' Proxies" are proxies which give the holder the right to vote for the election of the directors and other corporate actions not in the day-to-day operations of the company.

(k) "Non-operating Holding Company" is a general business corporation functioning solely for the purpose of forming, owning, acquiring and managing subsidiary business entities and having no other business operations not related thereto.

Amended by P.A. 84-805, § 1, eff. Jan. 1. 1986.

1 Paragraph 614 of this chapter.

* Paragraph 743.4 of this chapter.

743.2. Subsidiaries

§ 131.2. Subsidiaries. In addition to investments in common stock, preferred stock, debt obligations and other securities of subsidiaries permitted under all other sections of this Code, a domestic company, other than a company subject to Articles XVIII or XIX, may also: (a) invest, in common stock, preferred stock, debt obligations, and other securities of one or more subsidiaries, amounts which do not exceed the lesser of 10% of the company's assets or 50% of the company's surplus as

regards policyholders, but after such investments the com pany's surplus as regards policyholders must be reasonable in relation to the company's outstanding liabilities and adequate to its financial needs. In calculating the amount of such investments, there must be included (i) total net monies or other consideration expended and obligations assumed in the acquisition or formation of a subsidiary, including all organizational expenses and contributions to capital and surplus of the subsidiafy whether or not represented by the purchase of capital stock or issuance of other securities, and (ii) all amounts expended in acquiring additional common stock, preferred stock, debt obligations, and other securities, and all contributions to the capital or surplus of a subsidiary subsequent to its acquisition or formation;

(b) invest any amount in common stock, preferred stock, debt obligations and other securities of one or more direct subsidiaries acting only as a non-operating holding company or engaged or organized exclusively for the ownership and management of assets authorized as investments for the company, provided that each subsidiary agrees to limit its investments in any asset so that such investments will not cause the amount of the total investment of the company to exceed the amount the company could have invested in such asset. For the purpose of this clause, "the total investment of the company" will include (i) any direct investment by the company in an asset and (ii) the company's proportionate share of any investment in such asset by any direct subsidiary of the company, which must be calculated by multiplying the amount of the subsidiary's investment by the percentage of the company's own. ership of such subsidiary;

(c) invest in common stock of one or more insurance corporation subsidiaries any amount by which the investing company's capital and surplus exceeds the minimum capital and surplus required of a new company under Section 13 to qualify for a certificate of authority to write the kind or kinds of insurance which the company is authorized to write, if the company is a stock company, and if the company is other than a stock company, the company may invest the amount by which the company's surplus exceeds the minimum surplus required of a new company under Section 43 or 663 to qualify for a certifi cate of authority to write the kind or kinds of insurance which the company is authorized to write;

(d) with the approval of the Director, invest any greater amount in common stock, preferred stock, debt obligations, or other securities of one or more subsidiaries, but after such investment the company's surplus as regards policyholders must be reasonable in relation to the company's outstanding liabilities and adequate to its financial needs.

Amended by P.A. 85-1186, § 1, eff. Aug. 13, 1988.

1 Paragraph 928 et seq. or 950 et seq. of this chapter.

* Paragraph 625 of this chapter.

* Paragraph 655 or 678 of this chapter..

743.3. Investments in stocks or obligations of subsidiaries

§ 131.3. (1) Investments in common stock, preferred stock, debt obligations or other securities of subsidiaries made under Section 131.2 of this Article are subject to Sections 124.1, 124.2, 124.3, 124.6, 125a and 133 of this Code but are not subject to any other of the otherwise applicable restrictions or prohibitions contained in this

73 1743.4 Ins. Code § 131.4

Code applicable to such investments of a domestic company subject to this Code.

(2) If a company ceases to control a subsidiary, it must dispose of any investment therein made under this section within 3 years from the time of the cessation of control or within such further time as the Director may prescribe, unless at any time after the investment is made, the investment meets the requirements for investment under any other section of this Code, and the company has notified the Director thereof.

Amended by P.A. 84-805, § 1, eff. Jan. 1, 1986.

1 Paragraph 743.2 of this chapter.

7 Paragraphs 736.1 to 736.3, 736.6, 737a and 745 of this chapter.

743.4. Acquisition of control of or merger with domestic company

§ 131.4. Acquisition of control of or merger with domestic company. No person other than the issuer may make a tender for or a request or invitation for tenders of, or enter into an agreement to exchange securities for or acquire in the open market, or otherwise, any voting security of a domestic company or acquire policyholders' proxies of a domestic company for consideration if, after the consummation thereof, that person would, directly or indirectly, (or by conversion or by exercise of any right to acquire) be in control of the company, and no person may enter into an agreement to merge or consolidate with or otherwise to acquire control of a domestic company, unless the offer, request, invitation, or agreement is conditioned on receiving the approval of the Director based on Section 131.8 of this Article and no such acquisition of control or a merger with a domestic company may be consummated unless the Director has approved the transaction or granted an exemption. For purposes of this Section a domestic company includes any other person which controls a domestic company or holds or controls sufficient policyholders' proxies to elect the majority of the board of directors of the domestic company. Prior to the acquisition, the Director may conclude that a statement need not be filed by the acquiring party if the acquiring party demonstrates to the satisfaction of the Director that:

(1) such transaction will not result in the change of control of the domestic company; or

(2) the person which is subject to the acquisition has assets in excess of $1,000,000 and shareholders of record of 500 or more and its insurance business either directly or through its affiliates is an insignificant portion of its total business; or

(3) the acquisition of, or attempt to acquire control of, such other person is subject to requirements in the jurisdiction of its domicile which are substantially similar to those contained in this Section and Sections 131.5 through 131.12; or

(4) the control of the policyholders' proxies is being acquired solely by virtue of the holders official office and not as the result of any agreement or for any consideration.

The purpose of this Section is to afford to the Director the opportunity to review acquisitions in order to deter mine whether or not the acquisition would be adverse to

the interests of the existing and future policyholders of the company.

Amended by P.A. 86-784, § 1, eff. Sept. 6, 1989.

| Paragraph 743.8 of this chapter.

* Paragraphs 743.5 to 743.12 of this chapter.

743.5. Statement Contents

$131.5. Statement-Contents. In order to seek the approval of the Director pursuant to Section 131.8,' the applicant must file a statement with the Director under oath or affirmation which contains as a minimum the following information:

(1) The name and address of each acquiring party, and (a) if such person is an individual, his principal occupation and all offices and positions held during the past 5 years, and any conviction of crimes, other than minor traffic violations, during the past 10 years;

(b) if such person is not an individual, a report of the nature of its business operations during the past 5 years or for such lesser period as the person and any predecessors thereof has been in existence, an informative description of the business intended to be conducted by the person and the person's subsidiaries; and a list of all individuals who are or who have been selected to become directors or executive officers of the person, or who per form or will perform functions appropriate to such positions. The list must include for each individual the infor mation required by subsection (1Xa).

(2) The source, nature and amount of the consideration used or to be used in effecting the merger, consolidation or other acquisition of control, a description of any transaction wherein funds were or are to be obtained for any such purpose, including any pledge of the company's own securities or the securities of any of its subsidiaries or affiliates, and the identity of persons furnishing such consideration. However, where a source of such consideration is a loan made in the lender's ordinary course of business, the identity of the lender must remain confidential, if the person filing the statement so requests.

(3) Financial information as to the earnings and finan cial condition of each acquiring party for the preceding fiscal years of each acquiring party (or for such lesser period as the acquiring party and any predecessors thereof have been in existence) audited by an independent certified public accountant in accordance with generally accepted auditing standards and similar unaudited information for the second and third preceding fiscal years and as of a date not earlier than 90 days prior to the filing of the statement. If an acquiring party is an insurer which has been actively engaged in the business of insurance for 10 years, the financial information need not be audited, provided it is based on the annual statements of such acquiring person filed with the insurance department of the person's domiciliary state and is in accordance with the requirement of insurance or other accounting principles prescribed or permitted under the laws and regulations of such state.

(a) When an applicant is controlled by an individual, financial information for that individual will not be required if the applicant is currently subject to the registration and reporting requirements of Section 12(g) of the Securities Exchange Act of 1934 or is an insurer which has been actively engaged in the business of insurance for a period in excess of 10 years;

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(b) When an individual as an acquiring party must file financial information under this paragraph such informa tion need not be delivered to the company. However, such information shall be available if the Director holds a hearing pursuant to Section 131.8.

(4) Any plans or proposals which each acquiring party may have to liquidate such company, to sell its assets or merge or consolidate it with any person, or to make any other material change in its business or corporate struc ture or management.

(5) The number of shares of any security referred to in Section 131.43 which each acquiring party proposes to acquire, and the terms of the offer, request, invitation, agreement, or acquisition referred to in Section 131.4.

(6) The amount of each class of any security referred to in Section 131.4 which is beneficially owned or concerning which there is a right to acquire beneficial ownership by each acquiring party.

(7) A full description of any existing contracts, arrangements or understandings with respect to any security referred to in Section 131.4 in which any acquiring party is involved, including but not limited to transfer of any of the securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or guarantees of profits, division of losses or profits, or the giving or withholding of proxies. The description must identify the persons with whom such contracts, ar rangements or understandings have been entered into. (8) A description of the acquisition of any security or policyholders' proxy referred to in Section 181.4 during the 12 calendar months preceding the filing of the statement, by any acquiring party, including the dates of acquisition, names of the acquirors, and consideration paid or agreed to be paid therefor.

(9) A description of any recommendations to acquire any security referred to in Section 131.4 made during the 12 calendar months preceding the filing of the statement, by any acquiring party, or by anyone based upon interviews or at the suggestion of such acquiring party.

(10) Copies of all tender offers for, requests or invitations for tenders of, exchange offers for, and agreements to acquire or exchange any securities referred to in Seetion 131.4, and (if distributed) of additional soliciting material relating thereto.

(11) The terms of any agreement, contract or understanding made with any broker-dealer as to solicitation of securities referred to in Section 131.4 for tender, and the amount of any fees, commissions or other compensation to be paid to broker-dealers with regard thereto.

(12) Any additional information as the Director may by rule or regulation prescribe as necessary or appropriate for the protection of policyholders or in the public interest. Amended by P.A. 84–805, § 1, eff. Jan. 1, 1986.

Paragraph 743.8 of this chapter.

215 US.C.A. 781.

3 Paragraph 743.4 of this chapter.

743.6. Statement of partnership, syndicate or group-Material changes in facts in statement

4 131.6. (1) If the person required to file the statement referred to in Section 131.5 is a partnership, limited partnership, syndicate or other group, the Director may require that the information be given with respect to each partner of such partnership or limited partnership, each