By: Hancock H.B. No. 3161

A BILL TO BE ENTITLED

AN ACT

relating to limited purpose subsidiary life insurance companies.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Chapter 841, Insurance Code, is amended by adding Subchapter P to read as follows:

SUBCHAPTER P. LIMITED PURPOSE SUBSIDIARY LIFE INSURANCE COMPANIES

Sec. 841.801. PURPOSE. The purpose of this subchapter is to authorize the establishment of domestic limited purpose subsidiary life insurance companies ("limited purpose company" or "LPS") in order to allow that such limited purpose companies may issue securities and otherwise access financial markets and alternative sources of capital through securitizations and other transactions.

Sec. 841.802. DEFINITIONS. For purposes of this subchapter, the following definitions shall apply:

(1) "Affiliated companies" means:

(A) domestic life insurance companies that are directly or indirectly wholly owned subsidiaries of the same holding company; or

(B) controlled persons.

(2) "Ceding insurer" means either a domestic life insurance company that is the parent of the limited purpose subsidiary or an affiliated company of a limited purpose subsidiary and that cedes risk to the LPS pursuant to a reinsurance contract.

(3) "Commissioner" means the insurance commissioner.

(4) "Controlled person" means a person organized or authorized to do business under the laws of this state who is controlled directly or indirectly by a holding company.

(5) "Guaranty" means an agreement to pay specified obligations of the limited purpose subsidiary by a holding company or affiliated company of the limited purpose subsidiary approved by the commissioner that is not a ceding insurer and the guarantor has sufficient equity, less the equity of all ceding insurers that are subsidiaries of the guarantor, to satisfy the agreement during the life of the guaranty.

(6) "Holding company" means a person who directly or indirectly controls an insurer.

(7) "Insurance securitization" or "securitization" means a transaction or a group of related transactions, which may include capital market offerings, that are effected through related risk transfer instruments and facilitating administrative agreements where all or part of the result of such transactions is used to fund the LPS's obligations under a reinsurance contract with a ceding insurer and by which proceeds are:

(A) obtained by an LPS, directly or indirectly, through the issuance of securities by the LPS or any other person; or

(B) provided through one or more letters of credit or other assets for the benefit of the LPS, which the commissioner authorizes the LPS to treat as admitted assets for purposes of the LPS's annual statement where all or any part of such proceeds, letters of credit, or assets, as applicable, is used to fund the LPS's obligations under a reinsurance contract with a ceding insurer.

(8) "Insurer" for purposes of this chapter, means a domestic life insurance company organized under Chapter 841.

(9) "Letters of credit" means clean, unconditional, irrevocable letters of credit issued or confirmed by a qualified United States financial institution as defined in Section 492.104(b)(2)(C) of this code.

(10) "LPS" means a limited purpose subsidiary life insurance company organized pursuant to this subchapter, that is wholly owned by a life insurance company or an affiliated company and that is issued a certificate of authority by the commissioner pursuant to this chapter.

(11) "LPS security" means:

(A) a security issued by an LPS; or

(B) a security issued by a third party, the proceeds of which are obtained directly or indirectly by an LPS.

(12) "Management" means the board of directors, managing board, or other individual or individuals vested with overall responsibility for the management of the affairs of the LPS.

(13) "Material" means a transaction or series of transactions involving amounts equal to or exceeding three percent of the LPS's admitted assets less any letters of credit, guaranties and intangible assets included as an admitted asset of the LPS.

(14) "Organizational documents" means an LPS's articles of incorporation and bylaws.

(15) "Organizing company" means the company that organizes an LPS pursuant to this subchapter.

(16) "Parent" means a person, as defined in Section 823.002(7) of this code, that directly or indirectly through one or more intermediaries wholly owns or is an affiliated company of an LPS.

(17) "Person" has the same meaning as defined in Section 823.002(7) of this code.

(18) "Reinsurance contract" means a contract between an LPS and a ceding insurer pursuant to which the LPS agrees to provide reinsurance to the ceding insurer for risks.

(19) "Risk" means risks associated with life insurance policies and annuity contracts written by the ceding insurer or assumed by the ceding insurer from an affiliated company which were written by the affiliated company and for which the ceding insurer holds statutory reserves for those policies.

(20) "Security" means the same as defined in Article 581-4(a), Vernon' Civil Statutes, and shall also include any form of debt obligation, surplus note, derivative, or other financial instrument that the commissioner designates as a "security" for purposes of this chapter.

(21) "Surplus note" means an unsecured subordinated debt obligation.

Sec. 841.803. ORGANIZATIONAL DOCUMENTS OF AN LPS. (a) Either a wholly owned domestic insurer authorized to transact the business of insurance pursuant to Chapter 841 or an affiliated company organized or authorized to conduct business under the laws of this state may organize a domestic limited purpose subsidiary life insurance company pursuant to the provisions of this chapter.

(b) The limited purpose subsidiary life insurance company may reinsure risks of the organizing company, reinsure risks of affiliated companies, and access alternative forms of financing.

(c) An LPS's organizational documents shall limit the LPS's authority to transact the business of reinsurance to reinsure only the risks of a ceding insurer and shall state that the LPS shall not otherwise engage in the business of insurance.

(d) An LPS's organizational documents shall provide that the LPS shall always be either wholly owned by a domestic insurer authorized to transact the business of insurance pursuant to Chapter 841 or an affiliated company organized or authorized to do business under the laws of this state.

Sec. 841.804. CERTIFICATE OF AUTHORITY REQUIRED. No LPS shall do any reinsurance business in this state unless it obtains from the commissioner a certificate of authority pursuant to this rule.

Sec. 841.805. APPLICATION FOR CERTIFICATE OF AUTHORITY. (a) To obtain a charter for a domestic LPS, the incorporators must pay to the department the charter fee in an amount determined under Chapter 202 and file with the department:

(1) an application for charter on the form and containing the information prescribed by the commissioner;

(2) the company's articles of incorporation;

(3) an affidavit made by two or more of the incorporators that states that:

(A) the minimum capital and surplus requirements of this subchapter are satisfied;

(B) the capital and surplus are the bona fide property of the company;

(C) the information in the articles of incorporation is true and correct;

(4) submit any other statements or documents required by the commissioner to evaluate the LPS's application for a certificate of authority.

Sec. 841.806. INVESTMENT BY ORGANIZING COMPANY. If the organizing company is a domestic life insurance company, it may invest funds from its surplus in a limited purpose subsidiary life insurance company organized pursuant to this section.

Sec. 841.807. OFFICERS AND DIRECTORS. The organizing company's officers and directors may serve as officers and directors of a limited purpose subsidiary life insurance company organized pursuant to this section.

Sec. 841.808. ISSUANCE OF CERTIFICATE OF AUTHORITY. (a) The commissioner may issue a certificate of authority to an LPS, authorizing the LPS to transact reinsurance business as an LPS in this state based on the findings required in Section 841.061 of this code.

(b) In conjunction with the issuance of a certificate of authority to an LPS, the commissioner may issue an order that includes any provisions, terms, and conditions regarding the organization, licensing, and operation of the LPS that the commissioner deems appropriate and that are not inconsistent with the provisions of this chapter.

Sec. 841.809. SCOPE OF CERTIFICATE OF AUTHORITY. (a) An LPS that has been issued a certificate of authority may reinsure only the risks of a ceding insurer.

(b) An LPS shall not otherwise engage in the business of insurance.

(c) An LPS may purchase reinsurance to cede the risks assumed under a reinsurance contract.

(d) A limited purpose subsidiary life insurance company organized pursuant to this section shall be deemed to be licensed to transact the business of reinsurance for the purposes of Section 492.051, but may only reinsure risks of its affiliated companies.

Sec. 841.810. CAPITAL AND SURPLUS. (a) An LPS shall not be issued a certificate of authority unless it possesses and thereafter maintains unimpaired paid-in capital and surplus of not less than the amounts required by Section 841.054(a) of this code.

Sec. 841.811. DIVIDENDS AND DISTRIBUTIONS. An LPS may pay dividends and distributions that do not decrease the capital of the LPS below the minimum capital and surplus amount required by Section 841.810.

Sec. 841.812. REPORTS OF SECURITIZATIONS. An LPS shall provide the commissioner with a copy of a complete set of executed documentation of an insurance securitization no later than 45 days after the closing on the transactions for such securitization.

Sec. 841.813. FORECLOSURE ON COLLATERAL. An LPS shall notify the commissioner immediately of any action by a ceding insurer or any other person to foreclose on or otherwise take possession of collateral provided by the LPS to secure any obligation of the LPS.

Sec. 841.814. FILING REPORTS WITH THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. Notwithstanding Section 802.051 of this code, or any other law, an LPS shall not be required to file any report, notice, or other document with the National Association of Insurance Commissioners unless required by the commissioner.

Sec. 841.815. SECURITIZATION AGREEMENTS. The LPS securitization, the security-offering memorandum or other document issued to prospective investors regarding the offer and sale of a surplus note or other security shall include a disclosure that all or part of the proceeds of such insurance securitization will be used to fund the LPS's obligations to the ceding insurer.

Sec. 841.816. ADMITTED ASSETS. (a) Admitted assets of a limited purpose subsidiary life insurance company shall include assets approved by the commissioner which shall be deemed to be, and reported as, admitted assets of the LPS.

(b) In addition to the investments authorized under Subchapters C, and D of Chapter 425 of this code and notwithstanding any other law, admitted assets of the LPS shall include proceeds from a securitization, premium and other amounts payable by a ceding insurer to the LPS, letters of credit, guaranties of a holding company, guaranties of an affiliated company, and any other assets approved by the commissioner, which shall be deemed to be, and reported as, admitted assets of the LPS.

Sec. 841.817. SECURITIES. (a) An LPS security shall not be subject to regulation as an insurance or reinsurance contract.

(b) An investor in such a security or a holder of such a security shall not be considered to be transacting the business of insurance in this state solely by reason of having an interest in the security.

(c) The underwriter's placement or selling agents and their partners, commissioners, officers, members, managers, employees, agents, representatives, and advisors involved in an insurance securitization by an LPS shall not be considered to be insurance producers or brokers or to be conducting business as an insurance or reinsurance company or as an insurance agency, brokerage, intermediary, advisory, or consulting business solely by virtue of their underwriting activities in connection with such securitization.

Sec. 841.818. PERMITTED REINSURANCE. (a) An LPS may reinsure, pursuant to a reinsurance contract, only the risks of a ceding insurer.

(b) Unless otherwise approved in advance by the commissioner, an LPS may not assume or retain exposure to reinsurance losses for its own account that are not funded by one or more of the following:

(1) proceeds from a securitization;

(2) premium and other amounts payable by the ceding insurer to the LPS pursuant to the reinsurance contract;

(3) letters of credit;

(4) guaranties of a holding or affiliated company; or

(5) any return on investment of the items in Subsections (1) or (2).

(c) An LPS may cede risks assumed through a reinsurance contract to one or more reinsurers through the purchase of reinsurance, subject to the prior approval of the commissioner.

(d) An LPS may enter into contracts and conduct other commercial activities related or incidental to and necessary to fulfill the purposes of a reinsurance contract, an insurance securitization, and this chapter. Such contracts and activities may include but are not limited to:

(1) entering into reinsurance contracts;

(2) issuing LPS securities;

(3) complying with the terms of these contracts or securities;

(4) entering into trust, guaranteed investment contract, swap, or other derivative, tax, administration, services reimbursement, or fiscal agent transactions;

(5) complying with trust indenture, reinsurance, or retrocession; or

(6) entering into other agreements necessary or incidental to effect a reinsurance contract or an insurance securitization in compliance with this chapter.

(e) Unless otherwise approved in advance by the commissioner, a reinsurance contract shall not contain any provision for payment by the LPS in discharge of its obligations under the reinsurance contract to any person other than the ceding insurer or any receiver of the ceding insurer.

Sec. 841.825. OTHER LAWS NOT APPLICABLE. The deposit requirements in Subchapter H of this chapter shall not apply to an LPS.

SECTION 2. This Act shall be effective January 1, 2012.