Insurance; Mutual Insurance Company Guaranty Funds; Dividend Payments

Subject:

Insurance; Mutual Insurance Company Guaranty Funds; Dividend Payments

Requested By:

Ron Raxter Staff Attorney Department of Insurance

Questions:

1. Are cash or stock dividends now paid to guaranty fund shareholders, which dividends jointly exceed 10% annually, in violation of G.S. 58-96?&?

2. Does the income from guaranty fund investments accrue solely to benefit of the guaranty fund shareholders?

Conclusions:

1. Yes.

2. No.

Charlotte Liberty Mutual Insurance Company (here after "insurance company") was chartered in 1926 as a mutual company to issue life, annuity, and accident and health insurance. Until the year 1976, the insurance company had no authorized capital stock including guaranty fund capital stock. During its entire history, no dividend has been paid to its policyholders and on December 31, 1975, there was an earned surplus of approximately $3 million.

G.S. 58-95 states that in a corporation with guaranty capital, one-half of the directors shall be chosen by and from the stockholders. In 1976, the insurance company’s corporate charter was amended to authorize "Guaranty Capital Stock" "for the purpose of providing a Guaranty Fund." Pursuant to the charter amendment, guaranty capital stock was issued. Currently the corporate books reflect the issuance of $370,900 on guaranty fund stock, some of which has been internally generated in stock dividends.

The insurance company contends that it is entitled to pay to the guaranty fund stockholders a 10% cash dividend under G.S. 58-96 and to segregate the earnings of the guaranty fund assets, with such investment earnings accruing directly to the benefit of the guaranty fund stockholders. Accordingly, since 1977, the company has been paying a G.S. 58-96 cash dividend from general funds as well as a stock dividend credited against the investment income. Together, the dividends exceed 10%.

The statute authorizing guaranty funds, to wit, G.S. 58-96, in part states the following:

". . . The stockholders of the guaranty capital of a company or owners of guaranty surplus are entitled to an annual dividend of not more than 10 percentum (10%) on their respect shares, if the net profits or unused premiums left after all expenses, losses, and liabilities then incurred, together with the reserve as provided for, are sufficient to pay the same. . . ."

That this statute limits the total amount of remuneration available to guaranty funds stockholders is clear for several reasons. First for the use of money, an owner or user might receive an interest or contract payment. However, such payments are not customary for stockholders. Common sense speaks loudly to the proposition that an interest, rental, or payment other than a dividend is not to be received by a stockholder in the absence of an expressed statement to that effect. Customarily, a stockholder receives dividends, nothing more. There is no expressed statement authorizing other than a dividend. Second, guaranty fund stock embodies no rights other than those created by statute. 44 C.J.S., Insurance § 113. The only right expressly given by the statute is a dividend right with a limit of 10%. Nowhere can it be read into G.S. 58-96 that the stockholders are entitled to more than the annual dividend. Third, when the guaranty fund stock was issued, the insurance company received property of value and issued the stock in payment thereof. The property received now belongs to the insurance company and not to the stockholders. 19 Fletcher Cyclopedia Corporations § 5231. Accordingly, investment income from the guaranty fund is income for general corporation purposes. 19 Fletcher, supra, § 9272; 73 C.J.S., Profit or Profits. General corporate income is not to be paid to stockholders in addition to a dividend in the absence of an expressed statement to that effect.

If G.S. 58-96 provided, which it does not, that a separate investment account should be established for the guaranty fund, such provision would not be tantamount to stating that the stockholders are entitled to the investment income as well as to a separate dividend. Of course, the separate investment account would be a good vehicle for determining whether the guaranty stockholders should receive a dividend. If investment losses occurred, perhaps good judgment would demand that guaranty fund stockholders forego dividends. This technique would be compatible with the provisions of G.S. 58-88, which provides for separate accounts and an 8% dividend at least as to stock companies’ guaranty funds established in accordance with G.S. 58-87, since the statute can be interpreted to the effect that the dividend should be paid only from the investment profits.

G.S. 58-69 provides that the general corporate laws are normally applicable to insurance companies. In the current matter, when a stock dividend is issued, the stockholders actually receive stock certificates, and the books of account are modified so as to transfer earned income to paid-in capital. G.S. 55-47(e) requires such an increase in stated capital upon declaration of stock divided.

With stock having issued to the stockholders, and stated capital having increased, obviously the assets of even a separate account belong to the insurance company. The stockholders cannot have both the stock and ownership of the assets. Accordingly, any income earned by the separate account assets belongs to the insurance company rather than to the stockholders. At most, the stockholders have a right to have their dividend declared from the separate account income.

We are of the opinion that G.S. 58-96 authorizes payment of an annual dividend but imposes a 10% maximum limitation on such dividend. The limitation speaks both toward cash and stock dividends so that the limitation applies to such dividends individually and collectively. The investment income from guaranty fund assets, even if in segregated accounts, is general corporate income and does not belong to the guaranty fund stockholders. However, such income may be used for payment of the guaranty fund stock dividend.

Rufus L. Edmisten Attorney General

Richard L. Griffin Assistant Attorney General