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You are here: Home . rules . 2006 . 0907-059

SUBCHAPTER A. Examination and Financial Analysis

28 TAC §7.7

1. INTRODUCTION. The Texas Department of Insurance proposes amendments to §7.7, concerning subordinated indebtedness. The proposed amendments are necessary to add a new paragraph (3) to existing §7.7(f) to acknowledge that insurers may purchase, acquire, own, and hold as an admitted asset a subordinated indebtedness of a non-affiliated insurer that meets the requirements for rated and non-rated notes under the NAIC's Accounting Practices and Procedures Manual, Statement of Statutory Accounting Principles No. 41. The proposed new §7.7(f)(3) requires insurers to calculate such subordinated indebtedness pursuant to the NAIC's Accounting Practices and Procedures Manual, Statement of Statutory Accounting Principles No. 41. The proposed new paragraph permits an insurer to report a subordinated indebtedness of a non-affiliated insurer as an admitted asset on its financial statements in an amount authorized by the Insurance Code. The amendments are also necessary to: (i) define the term affiliate or affiliated; (ii) clarify the definition of subordinated indebtedness in subsection (a)(1) and (3) (Definitions); (iii) delete superfluous language in subsection (b)(2) (General Provisions) that is redundant of the statute; (iv) clarify in section (c)(5) that, in the event of liquidation, any payment of interest and repayment of principal under the written agreement shall be made in accordance with the provisions of the Insurance Code Chapter 21A; (v) in subsection (d)(1)(G), require that the affidavit contain an affirmation that the insurer agrees to issue the subordinated indebtedness and receive funding within 15 days of the date the order of the Commissioner is entered approving the subordinated indebtedness, and that the executive officer agrees to provide the Texas Department of Insurance with written evidence that the subordinated indebtedness has been funded; (vi) clarify in subsection (f)(4) that an insurer may invest in, purchase, acquire, own and hold a subordinated indebtedness of an affiliated insurer and may report it as an admitted asset on its financial statements in an amount equal to the amount then due and payable under the terms of the subordinated indebtedness agreement; (vii) update obsolete references throughout the section due to the enactment of the nonsubstantive Insurance Code revision by the Legislature; and (viii) correct grammatical errors.

2. FISCAL NOTE. Ms. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for the first five years the proposed amendments are in effect, there will be no fiscal implications for state or local government as a result of the amendments, and there will be no effect on local employment or the local economy.

3. PUBLIC BENEFIT/COST NOTE. Ms. Patterson has also determined that for each year of the first five years the proposed amendments are in effect, the public benefit will be more accurate reporting of subordinated indebtedness by insurers on their financial statements, resulting in more efficient regulation of insurers subject to the provisions of the Insurance Code Article 1.39 and Insurance Code Chapter 823 Subchapter C, as this subchapter relates to transactions regarding subordinated indebtedness. The proposed amendments will also result in more consistent treatment of and reporting by domestic and foreign insurance companies licensed to conduct the business of insurance in Texas. There is no financial cost to persons required to comply as a result of the adoption, enforcement or administration of the proposed amendments, and therefore, there is no adverse economic effect on small and micro businesses.

4. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on October 23, 2006 to Gene C. Jarmon, General Counsel and Chief Clerk, Texas Department of Insurance, Mail Code 113-2A, P.O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments must be submitted simultaneously to Betty Patterson, Senior Associate Commissioner, Financial Program, Texas Department of Insurance, Mail Code 305-2A, P.O. Box 149104, Austin, Texas 78714-9104. Any request for a public hearing on the proposal should be submitted separately to the Office of the Chief Clerk.

5. STATUTORY AUTHORITY. The amendments are proposed under the Insurance Code Article 1.39 and §36.001. Article 1.39 provides that the Commissioner may adopt rules as necessary to implement Article 1.39 (Subordinated Indebtedness). Section 36.001 provides that the Commissioner may adopt any rules necessary and appropriate to implement the powers and duties of the Department under the Insurance Code and other laws of this state.

6. CROSS REFERENCE TO STATUTE. The following statutes are affected by the proposal:

Statute

Insurance Code Article 1.39

Insurance Code Chapter 823 Subchapter C

7. TEXT.

§7.7. Subordinated Indebtedness, Surplus Debentures, Surplus Notes, Premium Income Notes, Bonds, or Debentures, and Other Contingent Evidences of Indebtedness.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Affiliate or affiliated--Has the same meaning as the term affiliate is used, defined, or applied in the Insurance Code, §823.003.

(2 ) [ ( 1 ) ] Minimum surplus or floor--The amount of surplus specified in the written agreement evidencing the subordinated indebtedness which may not be used for payments or repayments of subordinated indebtedness and which amount must exceed the greater of the following:

(A) a minimum surplus stated and fixed in the agreement; or

(B) a minimum surplus of $500,000 for that insurer.

(3) [ (2) ] Subordinated indebtedness , surplus notes, surplus debenture, contribution certificates, surplus capital notes, and premium income notes, bonds, or debentures--Any contingent indebtedness issued by an insurer for which such insurer assumes a subordinated liability for repayment of principal and payment of interest pursuant to a written agreement providing for payment only out of that portion of an insurer's surplus that exceeds a minimum surplus stated in such agreement. Subordinated indebtedness includes advances or loans made in accordance with the Insurance Code, §§882.253, 883.162, 912.309, 942.158, and 961.206[,Articles 11.16, 17.17 and 19.07, and surplus notes, as herein defined].

[(3) Surplus notes--Surplus notes, also known as "surplus debentures," "contribution certificates," "surplus capital notes," and "premium income notes, bonds, or debentures," however denominated, which are financing vehicles that increase the surplus of an insurer.]

(b) General Provisions.

(1) (No change.)

(2) An insurer may not issue[assume] a subordinated indebtedness[liability] until the commissioner has approved the subordinated indebtedness agreement[, or approval has been deemed] under [either] the Insurance Code, Chapter 823, Subchapter C[,Article 21.49-1,] or Article 1.39.[Notice of a subordinated indebtedness agreement that is subject to the Insurance Code, Article 21.49-1, §4(d)(1), shall be given at least 90 days prior to entering into the agreement or such shorter period as the commissioner may permit. Notice of a subordinated indebtedness agreement that is subject to the Insurance Code, Article 21.49-1, §4(d)(2) or Article 1.39, respectively, shall be given at least 30 days prior to the entering into the agreement or such shorter period as the commissioner may permit. A subordinated indebtedness agreement subject to the Insurance Code, Article 21.49-1, is subject to all of the requirements and provisions thereof.]

(3) All written applications and notices contemplated by this section shall be filed with Financial Analysis/Examinations[Monitoring], Mail Code 303-1A, Texas Department of Insurance, P.O. Box 149104 [ 149099 ], 333 Guadalupe, Austin , Texas 78714-9104 [78714-9099].

(4) (No change.)

(c) Written Agreements. When issuing subordinated indebtedness, the insurer must execute a written agreement with the creditor, providing the following:

(1) - (4) (No change.)

(5) in the event of liquidation, any payment of interest and repayment of principal under the written agreement shall be made in accordance with the provisions of the Insurance Code, Chapter 21A[ are subordinated to policyholder and beneficiary claims].

(d) Written Application.

(1) The written application for approval of the issuance of the subordinated indebtedness agreement shall include information including, but not limited to, the following:

(A) - (F) (No change.)

(G) a[the] signed and notarized affidavit of an executive officer of the insurer which states that the insurer is aware of the requirements of the Insurance Code, Article 1.39(e)[,] and subsection (e) of this section regarding notices to the Texas Department of Insurance relating to the payment of interest or the repayment of principal corresponding to subordinated indebtedness and agrees to comply with such requirements. The affidavit shall contain an affirmation that the insurer agrees to issue the subordinated indebtedness and receive funding within 15 days of the date the order of the commissioner is entered approving the subordinated indebtedness, and that the executive officer further agrees to provide the Texas Department of Insurance with written evidence that the subordinated indebtedness has been funded.

(2) (No change.)

(e) Payments of Interest and Repayments of Principal.

(1) An insurer may not repay principal or pay interest on a subordinated indebtedness issued [liability assumed] under either the Insurance Code, Chapter 823, Subchapter C[, Article 21.49-1, §4,] or Article 1.39, on or after September 1, 1995 , unless either:

(A) - (B) (No change.)

(2) (No change.)

(f) Accounting Requirements.

(1) A loan or advance made under the written agreement, and any interest accruing on the loan or advance, is a legal liability and financial statement liability of the insurer only to the extent provided by the terms and conditions of the loan or advance agreement, and the loan or advance may not otherwise be a legal liability or financial statement liability of the insurer. Such a loan or advance agreement, whether or not containing a provision for a minimum sum certain payable, repayment schedule, maturity date, prepayment or any combination thereof, shall not be considered a legal liability or financial statement liability of the insurer, and shall be considered a subordinated indebtedness to be recorded with the capital and surplus items in the financial statements of the insurer. If such a written agreement provides specific terms for the payment of principal and interest, and only after such payment of principal[principle] or interest is due, and the minimum surplus requirements for such payment of principal and interest have been met, then there shall be a financial statement liability only to the extent of such payment that is due of principal or interest and only to the extent the minimum surplus requirements have been met. Assuming such terms have been satisfied, then any provision providing that no financial statement liability exists shall be considered to be in conflict with the specific terms for the payment of principal and interest; and, for financial statement purposes, the terms for the payment of principal and interest shall result in the reflection of a financial statement liability.

(2) (No change.)

(3) An insurer may invest in, purchase, acquire, own, and hold as an admitted asset a subordinated indebtedness of a non-affiliated insurer that meets the requirements for rated and non-rated notes under the NAIC's Accounting Practices and Procedures Manual, Statement of Statutory Accounting Principles No. 41. An insurer shall calculate such subordinated indebtedness pursuant to the NAIC's Accounting Practices and Procedures Manual, Statement of Statutory Accounting Principles No. 41. An insurer may report such subordinated indebtedness as an admitted asset on its financial statements in an amount authorized by the Insurance Code.

(4) [ (3) ] An insurer may invest in, purchase, acquire, own, and hold[holding] a subordinated indebtedness of an affiliated[another] insurer and may report it as an admitted asset on its financial statements in an amount equal to the amount then due and payable under the terms of the subordinated indebtedness agreement.

(g) (No change.)



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