| (a) The letter of credit must be clean, irrevocable,
and unconditional, and issued or confirmed by a qualified United States
financial institution. The letter of credit must contain an issue
date and must stipulate that the beneficiary need only draw a draft
under the letter of credit and present it to obtain funds and that
no other document need be presented. The letter of credit must also
indicate that it is not subject to any condition or qualifications
outside of the letter of credit. In addition, the letter of credit
itself must not contain reference to any other agreements, documents,
or entities, except as provided in subsection (h)(1) of this section.
(b) The heading of the letter of credit may include
a boxed section that contains the name of the applicant and other
appropriate notations to provide a reference for such letter of credit.
If included, the boxed section must be clearly marked to indicate
that such information is for internal identification purposes only.
Neither the boxed section nor the internal identification may affect
the terms of the letter of credit.
(c) The letter of credit must contain a statement to
the effect that the obligation of the qualified United States financial
institution under the letter of credit is in no way contingent on
reimbursement.
(d) The term of the letter of credit must be for at
least one year and must contain an evergreen clause that prevents
the expiration of the letter of credit without written notice from
the issuer. The evergreen clause must provide for a period of no less
than 30 days' written notice prior to expiry date or nonrenewal.
(e) The letter of credit must state that:
(1) it is subject to and governed by either the laws
of the State of Texas, the laws of the state of domicile of the issuing
bank, or the Uniform Customs and Practice for Documentary Credits
of the International Chamber of Commerce (UCP);
(2) in the event of any conflict, whether the laws
of Texas or the laws of the state in which the issuing bank is domiciled
will apply; and
(3) all drafts drawn under the letter of credit are
presentable at an office in the United States of a qualified United
States financial institution.
(f) If the letter of credit is made subject to the
UCP, then the letter of credit must specifically address and make
provision for an extension of time to draw against the letter of credit
in the event that one or more of the force majeure occurrences specified
in the UCP occur.
(g) If the letter of credit is confirmed by a qualified
United States financial institution authorized to issue letters of
credit, then the following additional requirements in paragraphs (1)
and (2) of this subsection must be met.
(1) The issuing financial institution must formally
designate the confirming qualified United States financial institution
as its agent for the receipt and payment of the drafts.
(2) The evergreen clause must provide for 60 days'
written notice prior to expiry date or nonrenewal.
(h) Reinsurance agreement provisions applicable with
letters of credit must comply with the requirements of paragraphs
(1)-(4) of this subsection.
(1) The reinsurance agreement, in conjunction with
the letter of credit provided pursuant to applicable credit for reinsurance
statutes and rules, must contain provisions that:
(A) require the assuming insurer to provide letters
of credit to the ceding insurer and specify what they are to cover;
or
(B) stipulate that the assuming insurer and ceding
insurer agree that the letter of credit provided by the assuming insurer,
pursuant to the provisions of the reinsurance agreement, may be drawn
on at any time, notwithstanding any other provisions in such agreement,
and may be utilized by the ceding insurer or its successors in interest
for the following purposes:
(i) to reimburse the ceding insurer for the assuming
insurer's share of premiums returned to the owners of policies reinsured
under the reinsurance agreement on account of cancellations of such
policies;
(ii) to reimburse the ceding insurer for the assuming
insurer's share of surrenders and benefits or losses paid by the ceding
insurer under the terms and provisions of the policies reinsured under
the reinsurance agreement;
(iii) in the event of notice of nonrenewal of the letter
of credit, to fund an account with the ceding insurer in an amount
at least equal to the deduction, for reinsurance ceded, from the ceding
insurer's liabilities for policies ceded under the agreement (such
amount must include amounts for policy reserves, claims and losses
incurred, and unearned premium reserves); and
(iv) to pay any other amounts due to the ceding
insurer under the reinsurance agreement.
(2) All of the provisions of paragraph (1) of this
subsection must be applied without diminution because of insolvency
on the part of the ceding insurer or assuming insurer.
(3) The reinsurance agreement may, if applicable, provide
for the ceding insurer and assuming insurer to:
(A) make an interest payment to the assuming insurer,
at a rate not in excess of the prime rate of interest on the amounts
held pursuant to paragraph (1)(B)(iii) of this subsection; or
(B) return any amounts drawn down on the letters of
credit in excess of the actual amounts required, or in the case of
paragraph (1)(B)(iv) of this subsection any amounts that are subsequently
determined not to be due.
(4) When a letter of credit is obtained in conjunction
with a reinsurance agreement and where it is customary practice to
provide a letter of credit for a specific purpose, then such reinsurance
agreement may, in lieu of paragraph (1)(B) of this subsection, require
that the parties enter into a trust agreement that is incorporated
into the reinsurance agreement or be a separate document.
(i) A letter of credit may not be used to reduce any
liability for reinsurance ceded to an unauthorized assuming insurer
in financial statements required to be filed with TDI unless an acceptable
letter of credit specifying the filing ceding insurer as beneficiary
has been issued on or before the date of the financial statement.
Further, the reduction for the letter of credit may be up to the amount
available under the letter of credit but no greater than the specific
obligation under the reinsurance agreement which the letter of credit
was intended to secure.
(j) Only one expiration date may appear on the letter
of credit and the date must be clearly noted on the face of the letter
of credit and must set forth the specific month, day, time, and year
that the letter of credit will expire.
(k) The aggregate of all letters of credit issued or
confirmed to any one ceding insurer by one financial institution on
behalf of any one assuming insurer must not exceed 10 percent of the
financial institution's total equity capital, as shown in its most
recent report of condition as filed with the appropriate federal financial
institution regulatory agency. As used in this subsection, the term
"any one ceding insurer" also includes all affiliated insurers that
are named as beneficiaries in accordance with subsection (l) of this
section.
(l) Only one beneficiary may be named on the letter
of credit except that, in the event of affiliated insurers all of
whom are members of the same holding company system and are participants
in a specific intercompany reinsurance pooling arrangement, each affiliate
ceding insurer through participation in the pool to the same assuming
insurer may be named as beneficiary.
(m) Only one amount may appear on the letter of credit
except that, in the event of affiliated beneficiaries, the letter
of credit must show an aggregate amount covering the total reserve
credit taken by all such affiliated beneficiaries and also must specifically
designate for each named beneficiary, by dollar amount or percentage
of the aggregate, the maximum amount that each named beneficiary may
draw down.
(n) The term "beneficiary" must include any successor
by operation of law of the named beneficiary including, without limitation,
any liquidator, receiver, conservator, or supervisor.
(o) The account holder must be the assuming insurer.
(p) No schedule of periodic payments must appear on
the letter of credit.
(q) If a letter of credit is issued by a financial
institution which does not qualify as a qualified United States financial
institution but is confirmed by a qualified United States financial
institution, the following requirements in paragraphs (1)-(4) of this
subsection must be met.
(1) The letter of credit that is being confirmed must
comply in substance and form with Insurance Code §493.104 and §493.105
and this subchapter, except that the period of the evergreen clause
as referenced in subsection (g)(2) of this section shall be increased
to 60 days.
(2) The confirmation letter must show on its face:
Cont'd... |
