By: Van de Putte S.B. No. 1735
 
 
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 I to read as follows:
  SUBCHAPTER I. LIMITED PURPOSE SUBSIDIARY LIFE INSURANCE COMPANIES
         Sec. 841.401.  PURPOSE. The purpose of this subchapter is to
  authorize the establishment of domestic limited purpose subsidiary
  life insurance companies to enable those companies to support
  excess reserves for certain life insurance policies.
         Sec. 841.402.  DEFINITIONS. In this subchapter:
               (1)  "Affiliated companies" means domestic life
  insurance companies that are:
                     (A)  directly or indirectly wholly owned
  subsidiaries of the same holding company; or
                     (B)  controlled persons of the same holding
  company.
               (2)  "Appointed actuary" means the actuary who is
  appointed by a limited purpose subsidiary life insurance company to
  render the actuarial opinion required by Subchapter B, Chapter 425.
               (3)  "Ceding insurer" means a company that cedes risk
  to a limited purpose subsidiary life insurance company under a
  reinsurance contract and that is:
                     (A)  a domestic life insurance company that is the
  parent of a limited purpose subsidiary life insurance company; or
                     (B)  an affiliated company of a limited purpose
  subsidiary life insurance company.
               (4)  "Controlled person" means a person organized or
  authorized to do business under the laws of this state that is
  controlled directly or indirectly by a holding company.
               (5)  "Excess reserves" means the amount of statutory
  reserves determined to be redundant by the appointed actuary for
  life insurance policies whose reserves are calculated under 28
  T.A.C. Subchapter EE, Chapter 3.  Excess reserves may not be an
  amount greater than the difference between the reserves calculated
  using 28 T.A.C. Subchapter EE, Chapter 3 and the reserves
  calculated using generally accepted accounting principles.
               (6)  "Guarantor" means a holding company or an
  affiliated company under Section 841.417 of the limited purpose
  subsidiary life insurance company that is a party to a guaranty.
               (7)  "Guaranty" means a commissioner-approved
  agreement by a guarantor with sufficient equity and financial
  strength to pay, during the life of the guaranty, an amount equal to
  the specified obligations of a limited purpose subsidiary life
  insurance company, less the equity of all ceding insurers that are
  subsidiaries of the guarantor, to satisfy the agreement.
               (8)  "Holding company" means a person that directly or
  indirectly controls an insurer.
               (9)  "Insurer" means a domestic life insurance company
  organized under this chapter.
               (10)  "Letter of credit" means a clean, unconditional,
  irrevocable letter of credit issued or confirmed by a qualified
  United States financial institution, as defined by Section
  492.104(b)(2)(C).
               (11)  "Limited purpose subsidiary life insurance
  company" means a limited purpose subsidiary life insurance company
  organized under this subchapter:
                     (A)  that is wholly owned by a life insurance
  company or an affiliated company; and
                     (B)  to which the commissioner issues a
  certificate of authority under this chapter.
               (12)  "Material transaction" means a transaction or
  series of transactions involving amounts equal to or exceeding
  three percent of a limited purpose subsidiary life insurance
  company's admitted assets.
               (13)  "Organizational document" means a limited
  purpose subsidiary life insurance company's articles of
  incorporation and the company's bylaws.
               (14)  "Organizing company" means the company that
  organizes a limited purpose subsidiary life insurance company under
  this subchapter.
               (15)  "Parent" means a person that directly or
  indirectly controls through one or more intermediaries, wholly
  owns, or is an affiliated company of a limited purpose subsidiary
  life insurance company.
               (16)  "Person" has the meaning assigned by Section
  823.002.
               (17)  "Reinsurance contract" means a contract between a
  limited purpose subsidiary life insurance company and a ceding
  insurer under which the limited purpose subsidiary life insurance
  company agrees to provide reinsurance to the ceding insurer for
  certain risks.
               (18)  "Risk" means a risk associated with life
  insurance policies written on or after September 1, 2011, by a
  ceding insurer, or assumed by a ceding insurer from an affiliated
  company under life insurance policies written on or after September
  1, 2011, by the affiliated company and for which the ceding insurer
  calculates statutory reserves for those policies under 28 T.A.C.
  Subchapter EE, Chapter 3.
         Sec. 841.403.  ORGANIZATIONAL DOCUMENTS. (a)  A wholly
  owned domestic insurer authorized to transact the business of
  insurance under this chapter or an affiliated company organized or
  authorized to conduct business under the laws of this state may
  organize a limited purpose subsidiary life insurance company under
  this subchapter.
         (b)  A limited purpose subsidiary life insurance company may
  reinsure risks of the organizing company and of an affiliated
  company.
         (c)  A limited purpose subsidiary life insurance company's
  organizational documents must:
               (1)  limit the company's authority to transact the
  business of insurance to reinsuring only the risks of a ceding
  insurer;
               (2)  provide that the limited purpose subsidiary life
  insurance company may not otherwise engage in the business of
  insurance; and
               (3)  provide that the limited purpose subsidiary life
  insurance company must always be wholly owned by a domestic insurer
  authorized to transact the business of insurance under this chapter
  or by an affiliated company organized or authorized to do business
  under the laws of this state.
         Sec. 841.404.  CERTIFICATE OF AUTHORITY REQUIRED. A limited
  purpose subsidiary life insurance company may not engage in the
  business of reinsurance in this state unless the limited purpose
  subsidiary life insurance company obtains from the commissioner a
  certificate of authority under this subchapter.
         Sec. 841.405.  APPLICATION FOR CERTIFICATE OF AUTHORITY. To
  obtain a charter for a limited purpose subsidiary life insurance
  company, the incorporators of the company shall pay to the
  department a charter fee in an amount determined under Chapter 202
  and file with the department:
               (1)  an application for charter on the form prescribed
  by, and containing the information prescribed by, the commissioner;
               (2)  the company's articles of incorporation;
               (3)  an affidavit made by the company's president, vice
  president, treasurer, or chief financial officer stating 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;
                     (D)  the proposed organization and operation of
  the limited purpose subsidiary life insurance company comply with
  all applicable provisions of this subchapter;
                     (E)  the limited purpose subsidiary life
  insurance company's investment policy reflects and takes into
  account the liquidity of assets and the reasonable preservation,
  administration, and management of those assets with respect to the
  risks associated with the reinsurance contract; and
                     (F)  any reinsurance contract and any arrangement
  for securing the limited purpose subsidiary life insurance
  company's obligations under the reinsurance contract, including
  any agreements or other documentation to implement the arrangement;
               (4)  a business plan that includes pro forma financial
  statement projections that demonstrate how the limited purpose
  subsidiary life insurance company will comply with Section 841.412;
               (5)  a copy of any proposed guaranty that demonstrates
  how compliance with Sections 841.412 and 841.417 will be achieved;
               (6)  an opinion of a qualified independent actuary
  acceptable to the commissioner that the methodology and assumptions
  used to set and discount reserves make good and sufficient
  provision for the risk assumed by the limited purpose subsidiary
  life insurance company, including significant stress tests on key
  assumptions; and
               (7)  any other statement or document required by the
  commissioner to evaluate the limited purpose subsidiary life
  insurance company's application for a certificate of authority.
         Sec. 841.406.  INVESTMENT OF CERTAIN SURPLUS BY ORGANIZING
  COMPANY.  If the company that organizes a limited purpose
  subsidiary life insurance company is a domestic life insurance
  company, the organizing company may invest funds from the
  organizing company's surplus in the limited purpose subsidiary life
  insurance company.
         Sec. 841.407.  OFFICERS AND DIRECTORS. The officers and
  directors of a company that organizes a limited purpose subsidiary
  life insurance company may serve as officers and directors of the
  limited purpose subsidiary life insurance company.
         Sec. 841.408.  ISSUANCE OF CERTIFICATE OF AUTHORITY.
  (a)  The commissioner may issue a certificate of authority to a
  limited purpose subsidiary life insurance company, authorizing the
  company to transact reinsurance business in this state as a limited
  purpose subsidiary life insurance company based on a finding that:
               (1)  the company's application meets the criteria
  described by Section 841.061(a);
               (2)  the proposed plan of the limited purpose
  subsidiary life insurance company provides for viable operation of
  the company, including a determination by the commissioner that the
  limited purpose subsidiary life insurance company applicant has
  sufficiently strong financial support;
               (3)  the guaranties meet the requirements of Section
  841.417;
               (4)  the terms of any reinsurance arrangement,
  including the reinsurance contract and related transactions,
  comply with this subchapter and all applicable insurance laws and
  rules;
               (5)  the proposed application and reinsurance
  arrangement is not hazardous to any ceding insurer; and
               (6)  the proposed application and reinsurance contract
  will always fund authorized investments that comply with Section
  841.412, including statutory reserves for life insurance with
  invested assets at least equal to the amount of reserves required
  under generally accepted accounting principles.
         (b)  In conjunction with the issuance of a certificate of
  authority under this section, the commissioner may issue an order
  that includes any provisions, terms, and conditions regarding the
  organization, licensing, and operation of the limited purpose
  subsidiary life insurance company that the commissioner deems
  appropriate and that are not inconsistent with this chapter,
  including requesting from the company information to monitor the
  financial strength of guarantors and requiring the periodic
  reporting and monitoring of assets behind any guaranties issued.
         Sec. 841.409.  SCOPE OF CERTIFICATE OF AUTHORITY. (a)  A
  limited purpose subsidiary life insurance company that has been
  issued a certificate of authority may reinsure only the risks of a
  ceding insurer.  A limited purpose subsidiary life insurance
  company may not otherwise engage in the business of insurance.
         (b)  A limited purpose subsidiary life insurance company may
  purchase reinsurance to cede the risks assumed under a reinsurance
  contract.
         (c)  A limited purpose subsidiary life insurance company
  organized under this subchapter is considered to be licensed to
  transact the business of reinsurance for the purposes of Section
  492.051, but may only reinsure risks of the company's affiliated
  companies.
         (d)  A limited purpose subsidiary life insurance company
  shall provide the commissioner with notice of any change in the
  company's business plan required by Section 841.405, including any
  material change in the methods used to comply with Section 841.413.
         Sec. 841.410.  CAPITAL AND SURPLUS. (a)  The commissioner
  may not issue a certificate of authority to a limited purpose
  subsidiary life insurance company unless the company possesses and
  maintains unimpaired paid-in capital and surplus of not less than
  $10 million.
         (b)  A limited purpose subsidiary life insurance company
  shall comply with the risk-based capital requirements adopted by
  the commissioner by rule.
         (c)  A limited purpose subsidiary life insurance company
  shall maintain risk-based capital in an amount that is at least
  equal to 300 percent of the authorized control level of risk-based
  capital adopted by the commissioner.
         Sec. 841.411.  FORECLOSURE ON COLLATERAL. A limited purpose
  subsidiary life insurance company shall immediately notify the
  commissioner of any action by a ceding insurer or any other person
  to foreclose on, or otherwise take possession of, collateral
  provided by the limited purpose subsidiary life insurance company
  to secure an obligation of the company.
         Sec. 841.412.  MINIMUM AUTHORIZED INVESTMENT REQUIREMENT
  AFTER CREDIT FOR REINSURANCE; LETTERS OF CREDIT; GUARANTIES.
  (a)  A limited purpose subsidiary life insurance company shall hold
  investments authorized under Subchapters C and D, Chapter 425,
  exclusive of investments in affiliates, in an amount that at least
  equals the sum of:
               (1)  the minimum capital and surplus requirements of
  Section 841.410;
               (2)  the risk-based capital requirements adopted by the
  commissioner; and
               (3)  reserves calculated using generally accepted
  accounting principles.
         (b)  Subject to compliance with Subsection (a) and
  notwithstanding Chapter 425, a limited purpose subsidiary life
  insurance company may reduce the amount of the company's excess
  reserves on account of:
               (1)  reinsurance that complies with Chapter 492;
               (2)  a letter of credit that complies with Section
  492.104(b)(2)(C); or
               (3)  guaranties from a holding company or an affiliated
  company as provided by Section 841.417(b)(3).
         (c)  Notwithstanding Subsection (b), a limited purpose
  subsidiary life insurance company may hold guaranties from a
  holding company or an affiliated company as provided by Section
  841.417(b)(3) as an admitted asset with an offsetting increase in
  special surplus funds to support excess reserves only.
         Sec. 841.413.  PERMITTED REINSURANCE. (a)  A limited
  purpose subsidiary life insurance company may only reinsure the
  risks of a ceding insurer under a reinsurance contract.
         (b)  Unless otherwise approved in advance by the
  commissioner, a limited purpose subsidiary life insurance company
  may not assume or retain exposure to reinsurance losses for the
  company's own account that are not funded by:
               (1)  premium and other amounts payable by the ceding
  insurer to the limited purpose subsidiary life insurance company
  under the reinsurance contract, or any return on the investment of
  the premiums or other amounts;
               (2)  letters of credit that qualify under Section
  492.104(b)(2)(C); or
               (3)  guaranties of a holding company or an affiliated
  company as provided by Section 841.417(b)(3).
         (c)  A limited purpose subsidiary life insurance company may
  cede risks assumed under a reinsurance contract to one or more
  reinsurers through the purchase of reinsurance, subject to the
  prior approval of the commissioner. The commissioner may approve a
  reinsurance contract under this subsection if the commissioner
  finds that:
               (1)  the proposed reinsurance complies with Chapter
  492;
               (2)  the proposed reinsurer has sufficient liquidity,
  admitted assets, and policyholder surplus to support the
  liabilities assumed under the reinsurance contract; and
               (3)  the proposed reinsurance contract would not result
  in a hazardous financial condition for the limited purpose
  subsidiary life insurance company.
         (d)  A limited purpose subsidiary life insurance company may
  enter into contracts and conduct other commercial activities
  related or incidental to, and necessary to fulfill the purposes of,
  a reinsurance contract.
         Sec. 841.414.  REPORTS ON RESERVES AND RISK-BASED CAPITAL.
  (a)  A limited purpose subsidiary life insurance company annually
  shall file an opinion of the appointed actuary acceptable to the
  commissioner concerning the methods and assumptions used to set
  reserves. The opinion must demonstrate that the limited purpose
  subsidiary life insurance company holds risk-based capital and
  invested admitted assets that are at least equal to reserves
  specified by generally accepted accounting principles.
         (b)  The commissioner may reject the opinion of the appointed
  actuary if the commissioner determines that accepting the opinion
  would be hazardous to policyholders, enrollees, creditors, or the
  public.
         (c)  A limited purpose subsidiary life insurance company
  annually shall file with the commissioner a report of the limited
  purpose subsidiary life insurance company's risk-based capital
  level as of the end of the preceding calendar year containing the
  information required by the risk-based capital instructions
  adopted by the commissioner.
         Sec. 841.415.  OTHER LAWS NOT APPLICABLE. The deposit
  requirements in Subchapter H do not apply to a limited purpose
  subsidiary life insurance company.
         Sec. 841.416.  APPLICABILITY OF OTHER LAW. Except as
  specifically provided by law, all provisions of this code apply to a
  limited purpose subsidiary life insurance company formed under this
  subchapter.
         Sec. 841.417.  GUARANTY REQUIREMENTS. (a)  A guaranty may
  not be used to comply with this chapter without the prior written
  approval of the commissioner.
         (b)  Before approving a guaranty, the commissioner must find
  that:
               (1)  the guarantor has capital and surplus of $100
  million, exclusive of investments in subsidiaries and affiliates;
               (2)  the guarantor has admitted assets backing capital
  and surplus in an amount sufficient to fulfill the guaranty, and the
  sufficiency on an ongoing basis is demonstrated to the satisfaction
  of the commissioner;
               (3)  the guarantor and all affiliates are in good
  standing with the department;
               (4)  the guarantor has provided all information
  requested by the commissioner; and
               (5)  the guarantor is otherwise acceptable to the
  commissioner.
         (c)  Notwithstanding Subsection (b)(3), the commissioner may
  allow, subject to the commissioner's prior approval, an affiliated
  company of the holding company to serve as guarantor. The
  commissioner may approve an affiliated company as a guarantor on a
  finding that the affiliated company possesses the independent
  financial means to discharge the guaranty using the affiliated
  company's own financial resources.
         Sec. 841.418.  SUNSET PROVISION. This subchapter is valid
  for business sold only until January 1 after the year in which
  principle-based reserve requirements become operative in Texas
  under the adoption of the National Association of Insurance
  Commissioners' 2009 amendments to the NAIC Model Standard Valuation
  Law.  After that January 1, the limited purpose subsidiary life
  insurance company may not assume new risks of a ceding insurer
  relating to business sold after that date.
         Sec. 841.419.  CERTIFICATION OF ACTUARIAL OFFICER. (a)  At
  the time a limited purpose subsidiary life insurance company files
  an application for a certificate of authority under this
  subchapter, and not later than March 1 of each year that a limited
  purpose subsidiary life insurance company is in operation and is
  ceded new business from a ceding insurer, a senior actuarial
  officer of each ceding insurer shall file with the commissioner a
  certification that the ceding insurer's transactions with the
  limited purpose subsidiary life insurance company are not being
  used to gain an unfair advantage in the pricing of the ceding
  insurer's products.
         (b)  A ceding insurer may not be deemed to have an unfair
  advantage if the pricing of the policies and contracts reinsured by
  the limited purpose subsidiary life insurance company reflects, at
  the time the policies and contracts were issued, a reasonable
  long-term estimate of the cost to the ceding insurer of an
  alternative third-party transaction, and uses current pricing
  assumptions.
         (c)  The ceding insurer shall keep documentation between
  examinations that sets forth the manner in which a senior actuarial
  officer arrived at the conclusions in the certification.
         Sec. 841.420.  ACCOUNTING AND FINANCIAL REPORTING. The
  commissioner shall prescribe accounting and financial reporting
  requirements with regard to the limited purpose subsidiary life
  insurance company and any insurer as defined by Section 841.402
  that organizes a limited purpose subsidiary life insurance company.
         SECTION 2.  This Act takes effect immediately if it receives
  a vote of two-thirds of all the members elected to each house, as
  provided by Section 39, Article III, Texas Constitution.  If this
  Act does not receive the vote necessary for immediate effect, this
  Act takes effect September 1, 2011.