28 Tex. Admin. Code § 7.610 - Letter of Credit Requirements
(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:
(A) the office in the United States,
inclusive of complete name and address, where presentations for draws are to be
made; and
(B) the specific month,
day, time, and year that the confirmation letter will
expire.
(3) The
confirmation letter must:
(A) contain an
evergreen clause that prevents expiration of the confirmation letter without
some affirmative action by the issuer;
(B) coincide with the term of the letter of
credit being confirmed; and
(C)
provide that the confirmation letter automatically will be extended for a like
term unless, prior to the end of the stated term, the confirming bank has given
the ceding insurer (beneficiary), the assuming insurer, and the issuing bank
not less than 60 days' written notice of nonrenewal by either certified or
registered mail, or other mutually agreed means.
(4) The confirming bank must comply with
subsection (k) of this section.
(r) Qualifying foreign branches of Federal
Deposit Insurance Corporation banks may issue letters of credit, and such
letters of credit will be acceptable if the face of the letter of credit
clearly shows that the letter of credit may be drawn down at a United States
office of the bank and specifically lists the street address of that office.
Similarly, qualifying foreign branches of Federal Deposit Insurance Corporation
banks may confirm letters of credit. A confirmation letter will be acceptable
if the face of the confirmation letter clearly shows that the letter of credit
may be drawn down at a United States office of the confirming bank and
specifically lists the street address of that office.
(s) In the event a letter of credit is not
renewed or replaced under a reinsurance arrangement between the ceding insurer
and assuming insurer, the ceding insurer must not be precluded from withdrawing
the balance of the letter of credit and placing such sums in trust to secure
continuing obligations under the reinsurance agreement until a renewal letter
of credit or a substitution in lieu thereof has been received.
(t) All letters of credit must be readily
available for viewing by TDI on request; letters of credit must be available at
any time to TDI examiners in connection with the preparation of reports of
examination. All confirming letters must be attached to the letters of credit
that they confirm.
(u) In the event
that either a letter of credit or a confirming letter of credit is not renewed
or replaced or is suspended to become inactive, the ceding insurer and the
issuing bank must give immediate notice of such nonrenewal or inactive status
and the ceding insurer must advise TDI of any amount still outstanding and
unsettled under the reinsurance agreement(s). This required notice must be sent
to TDI by certified mail, return receipt requested (or by registered
mail).
Notes
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