82R11113 TRH-F

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. DEFINITIONS. In this subchapter:

(1) "Affiliated company" means a domestic life insurance company that is classified as an affiliate under Section 823.003.

(2) "Material transaction" means a transaction or series of transactions involving an amount equal to or greater than three percent of a subsidiary company's admitted assets, less any letters of credit and intangible assets included as an admitted asset of the subsidiary company.

(3) "Parent" means a person that directly or indirectly controls, as described by Section 823.005, a subsidiary company.

(4) "Reinsurance contract" means a contract in which a subsidiary company agrees to provide reinsurance for risks of the domestic life insurance company to the domestic life insurance company that organized the subsidiary company.

(5) "Risk" means risk associated with life insurance policies and contracts written or assumed by a domestic life insurance company, for which the domestic life insurance company holds direct statutory reserves as required by Subchapter B, Chapter 425.

(6) "Securitization" means a transaction or group of related transactions to fund a subsidiary company's obligations under a reinsurance contract, including a capital market offering, that is effected through related risk transfer instruments and in which proceeds are:

(A) obtained by a subsidiary company through the issuance of securities by the subsidiary company or another person; or

(B) provided through a letter of credit or other asset for the benefit of the subsidiary company, authorized by the commissioner to be treated as admitted assets for the purpose of the subsidiary company's annual statements.

(7) "Security" has the meaning assigned by Section 4, The Securities Act (Article 581-4, Vernon's Texas Civil Statutes). The term also includes any form of debt obligation, surplus note, derivative, or other financial instrument that the commissioner designates as a security for purposes of this subchapter.

(8) "Subsidiary company" means a life insurance company organized under this subchapter that is wholly owned by the domestic life insurance company that organized the subsidiary company.

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

Sec. 841.402. ORGANIZATION. (a) A domestic life insurance company may organize a subsidiary company to which the domestic life insurance company cedes risk under a reinsurance contract.

(b) A subsidiary company organized under this subchapter:

(1) must be wholly owned by the domestic life insurance company that organized the subsidiary company; and

(2) may not issue stock to any organization or individual other than the domestic life insurance company that organized the subsidiary company.

(c) Except as provided by Subsection (d), a subsidiary company may not engage in the business of insurance.

(d) A subsidiary company may:

(1) reinsure risks of:

(A) the domestic life insurance company that organized the subsidiary company; or

(B) an affiliated company; and

(2) access alternative forms of financing.

(e) A domestic life insurance company may invest funds from its surplus in a subsidiary company organized by the domestic life insurance company.

(f) An officer or director of a domestic life insurance company may serve as an officer or director of a subsidiary company organized by the domestic life insurance company.

Sec. 841.403. CERTIFICATE OF AUTHORITY REQUIRED. A subsidiary company may engage in the limited business of insurance in this state, as described by Section 841.402(d), only if the subsidiary company holds a certificate of authority issued under this subchapter.

Sec. 841.404. APPLICATION FOR CERTIFICATE OF AUTHORITY. To obtain a certificate of authority for a subsidiary company, the domestic life insurance company that organizes a subsidiary company shall:

(1) pay to the department:

(A) a fee in an amount prescribed by the commissioner; and

(B) the reasonable expenses and costs incurred by the department in examining the subsidiary company's application; and

(2) file with the department:

(A) an application for a certificate of authority on a form containing information required by the department;

(B) the subsidiary company's articles of incorporation;

(C) an affidavit made by two or more of the incorporators of the subsidiary company stating that:

(i) the subsidiary company is able to satisfy the minimum capital and surplus requirements of this subchapter;

(ii) the subsidiary company's capital and surplus are the bona fide property of the subsidiary company;

(iii) the information contained in the subsidiary's articles of incorporation is true and correct; and

(iv) the subsidiary company's investment policy takes into consideration the liquidity of the subsidiary company's assets and the reasonable preservation, administration, and management of the assets with respect to the risks associated with the subsidiary company's reinsurance contract;

(D) a copy of the subsidiary company's reinsurance contract with the domestic life insurance company that organized the subsidiary company, and any other agreement securing the subsidiary company's obligations under the reinsurance contract; and

(E) any other statement or document required by the department.

Sec. 841.405. ISSUANCE OF CERTIFICATE OF AUTHORITY. (a) The commissioner may issue a certificate of authority to a subsidiary company authorizing the subsidiary company to engage in the reinsurance business if:

(1) the commissioner finds that the terms of the subsidiary company's reinsurance contract and any related transactions comply with this chapter and all other applicable provisions of this code or rules adopted under this code; and

(2) the subsidiary company maintains at least $700,000 of unimpaired paid-in capital and $700,000 of surplus.

(b) In conjunction with the issuance of a certificate of authority under Subsection (a), the commissioner may issue any order relating to the organization, licensing, or operation of the subsidiary company that the commissioner deems appropriate.

Sec. 841.406. REINSURANCE. (a) A subsidiary company may purchase reinsurance under which the risks assumed under a reinsurance contract with the domestic life insurance company that organized the subsidiary company are ceded to the reinsurer.

(b) Unless approved in advance by the commissioner, a subsidiary company may not assume or retain exposure to reinsurance losses for the account of the subsidiary company, unless the exposure is funded by:

(1) proceeds from a securitization;

(2) premium and other amounts payable to the domestic life insurance company that organized the subsidiary company under the applicable reinsurance contract;

(3) a letter of credit;

(4) a guarantee of a parent organization; or

(5) a return on investment of the items described by Subdivision (1) or (2).

(c) A subsidiary company may enter into a contract or conduct other commercial activities necessary to fulfill the purposes of a reinsurance contract, an insurance securitization, or this chapter, if the activity is approved in advance by the commissioner. Commercial activities described by this subsection include:

(1) entering into a reinsurance contract;

(2) issuing securities;

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

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

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

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

(d) Unless otherwise approved in advance by the commissioner, a reinsurance contract may not contain a provision for payment by the subsidiary company to any person other than the domestic life insurance company that organized the subsidiary company, or any receiver of that company, for the discharge of the subsidiary company's obligations under the reinsurance contract.

Sec. 841.407. REVOCATION OF CERTIFICATE OF AUTHORITY. The department shall revoke a subsidiary company's certificate of authority if the subsidiary company fails to maintain unimpaired paid-in capital and surplus in the amounts required under Section 841.405(a)(2).

Sec. 841.408. DIVIDENDS AND DISTRIBUTIONS. (a) A subsidiary company may pay a dividend or distribution if the dividend or distribution:

(1) does not decrease the subsidiary company's unimpaired paid-in capital and surplus below the minimum amounts required under Section 841.405(a)(2); and

(2) does not impair the subsidiary company's ability to fulfill the subsidiary company's obligations under the reinsurance contract.

(b) A subsidiary company shall notify the commissioner at least 15 days before the subsidiary company issues a dividend or distribution. The notice must include:

(1) the amount of the dividend or distribution to be issued; and

(2) a statement signed by an officer of the subsidiary company that the dividend or distribution meets the requirements of Subsection (a).

Sec. 841.409. REQUIRED REPORTS AND NOTICE BY SUBSIDIARY COMPANY. (a) Not later than the 45th day after the closing date of a securitization, a subsidiary company shall provide the commissioner with a copy of a complete set of executed documents for the issuance of the securitization.

(b) In the event of a material change in the financial condition or management of a subsidiary company, the subsidiary company shall notify the commissioner in writing not later than the fifth day after the date the material change occurs.

(c) A subsidiary company shall file with the commissioner:

(1) an annual actuarial opinion prepared by an actuary employed by the subsidiary company that complies with the requirements of Section 425.054, regarding the subsidiary company's reserves for all risks assumed by the subsidiary company under the subsidiary company's reinsurance contract;

(2) a biennial actuarial opinion prepared by an independent actuary that complies with the rules of the commissioner, regarding the methods and assumptions used by the subsidiary company to set reserves; and

(3) an annual report of the subsidiary company's risk-based capital level as of the end of the preceding calendar year.

(d) A subsidiary company shall notify the commissioner immediately of any action by a domestic life insurance company or other person to foreclose on, or otherwise take possession of, collateral provided by the subsidiary company to secure an obligation of the subsidiary company.

(e) Notwithstanding Section 802.052 or any other law, a subsidiary company is not required to file a report, notice, or other document with the National Association of Insurance Commissioners unless required by the commissioner.

Sec. 841.410. PRIOR APPROVAL OF CERTAIN PAYMENTS. (a) A subsidiary company shall submit to the commissioner for prior approval a written request for authorization to make a payment of interest on, or a repayment of principal of, surplus notes and other debt obligations issued by the subsidiary company.

(b) The commissioner shall approve the payment described by Subsection (a) unless the commissioner determines that the payment would impair the ability of the subsidiary company or another person to fulfill the obligations of the subsidiary company or other person.

Sec. 841.411. SECURITIZATION AGREEMENTS. A document issued by a subsidiary company to prospective investors regarding the offer and sale of a surplus note or other security must include a disclosure that all or part of the proceeds of the securitization will be used to fund the subsidiary company's obligations under a reinsurance contract with the domestic life insurance company that organized the subsidiary company.

Sec. 841.412. ADMITTED ASSETS. (a) The admitted assets of a subsidiary company must include:

(1) proceeds from a securitization;

(2) a premium or other amount payable to the subsidiary company by the domestic life insurance company that organized the subsidiary company;

(3) a letter of credit;

(4) a guarantee of a parent company; or

(5) any other asset approved by the commissioner.

(b) Except as provided by Subsection (c), the commissioner may reduce the amount of admitted assets previously approved by the commissioner, if the commissioner determines that the value of those assets has decreased.

(c) The commissioner may not reduce the amount of admitted assets previously approved by the commissioner if the asset is covered by the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners.

(d) The commissioner shall notify a subsidiary company at least 30 days before the commissioner reduces the amount of previously approved admitted assets under Subsection (b). The notice provided by the commissioner under this subsection must identify the reasons for the reduction and give the subsidiary company an opportunity to remedy any issues or deficiencies identified by the commissioner.

Sec. 841.413. LOANS. (a) A subsidiary company may not make a loan or an investment in another entity unless:

(1) the commissioner first approves the loan or investment; and

(2) the loan is evidenced by documentation approved by the commissioner.

(b) A subsidiary company may issue a loan from the subsidiary company's minimum capital and surplus.

Sec. 841.414. SECURITIES. (a) A security issued by a subsidiary company is not subject to regulation as an insurance or reinsurance contract, and an investor or holder of a security issued by a subsidiary company may not be considered to be conducting the business of insurance in this state solely by reason of having an interest in the security.

(b) An underwriter's placement or selling agent, partner, commissioner, officer, member, manager, employee, representative, or advisor involved in an insurance securitization by a subsidiary company may not be considered to be an insurance producer or broker, or to be conducting the business of insurance or reinsurance, solely by virtue of participating in underwriting activities relating to the securitization.

Sec. 841.415. CERTIFICATION OF ACTUARIAL OFFICER. (a) At the time a domestic life insurance company files for a certificate of authority for a subsidiary company under Section 841.404, and by not later than the March 31 following the date on which the domestic life insurance company cedes business to the subsidiary company, the domestic life insurance company shall file with the commissioner a certification by a senior actuarial officer that the domestic life insurance company's transactions with a subsidiary company are not being used to an unfair advantage in the pricing of the domestic life insurance company's products.

(b) A domestic life insurance company may not be deemed as having an unfair advantage if the pricing of the policies and contracts reinsured by the subsidiary company:

(1) reflects, at the time the policies and contracts were issued, a reasonable long-term estimate of the cost to the domestic life insurance company of an alternative third-party transaction; and

(2) uses current pricing assumptions.

(c) A domestic life insurance company shall maintain documentation between examinations conducted under Subsection (a) that sets forth the methods by which the senior actuarial officer arrived at the conclusions in the certification.

SECTION 2. This Act takes effect January 1, 2012.