20-725. Borrowed surplus

A. A domestic stock or mutual insurer may borrow money to defray the expenses of its organization, provide it with surplus funds or for any purpose required by its business, on a written agreement that the money is required to be repaid only out of the insurer's surplus in excess of that stipulated in the agreement. The agreement may provide for interest at the rate agreed on, but not exceeding twelve per cent per year. This interest only constitutes a liability of the insurer if the director has approved payment of the interest.

B. The surplus note shall provide that the holder's interest is subordinate to the claims of policyholders, claimants and beneficiaries and to all other classes of creditors other than surplus noteholders and that interest payments and principal payments require prior approval of the director.

C. Money so borrowed, together with the interest if so stipulated in the agreement, shall not form a part of the insurer's legal liabilities or be the basis of any setoff until the director approves repayment. Until the money and interest are repaid, financial statements filed or published by the insurer shall show as a footnote the amount remaining unpaid plus any accrued, unpaid interest, pursuant to the accounting practices and procedures manual adopted by the national association of insurance commissioners.

D. Before entering a loan transaction as described in this section, a domestic mutual insurer shall file with the director a statement of the purposes of the loan and a copy of the proposed loan agreement, which shall be subject to the director's approval. The loan and agreement shall be deemed approved unless within fifteen days after the date of filing the insurer is notified in writing of the director's disapproval and the reasons for the disapproval. The director shall disapprove any proposed loan or agreement if the director finds that the loan is reasonably unnecessary or excessive for the purpose intended, that the terms of the loan agreement are not fair and equitable to the parties and to other similar lenders, if any, or to the insurer or that the information so filed by the insurer is inadequate, specifying the inadequacies.

E. A mutual insurer shall repay the loan or a substantial portion of the loan when the loan is no longer reasonably necessary for the purpose originally intended and after receiving the director's approval for repayment.

F. This section does not apply to loans obtained by the insurer in the ordinary course of business from banks and other financial institutions nor to loans secured by a pledge of assets.

G. Any eligible investment as prescribed in chapter 3, article 2 of this title may be contributed or borrowed pursuant to this section subject to any limitations provided in that article for that investment.