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§ 2303.5. Credit for Reinsurance Secured by an Approved U.S. Trust.

10 CA ADC § 2303.5Barclays Official California Code of Regulations

Barclays California Code of Regulations
Title 10. Investment
Chapter 5. Insurance Commissioner (Refs & Annos)
Subchapter 3. Insurers
Article 3. Annual Statements
Premiums in Course of Collection
10 CCR § 2303.5
§ 2303.5. Credit for Reinsurance Secured by an Approved U.S. Trust.
Currentness
(a) Credit on financial statements shall be allowed for reinsurance ceded to an assuming insurer that, as of any date on which statutory financial statement credit for reinsurance is claimed and thereafter for so long as credit for reinsurance is claimed, maintains an approved U.S. trust as security for the payment of the valid claims of its U.S. domiciled ceding insurers, their assigns and successors in interest, unless the cession of a domestic insurer is not in compliance with the applicable provisions of Sections 2303.11 through 2303.13 of this article. As used in this section, “assuming insurer” includes all categories of insurers described in Code Section 922.4(d)(4).
(b) An assuming insurer seeking approval of a U.S. trust under Code Section 922.4(d) may file an application with the Commissioner in the manner set forth in Section 2303.21(d) of this article. The application shall include:
1. A copy of the trust document, certified by the commissioner of the Oversight State. As used in this section, “Oversight State” means the state where the trust is domiciled or the state whose commissioner has accepted principal regulatory oversight of the trust pursuant to the terms of the trust agreement;
2. A certified copy of the approval of the form of the trust issued by the commissioner of the Oversight State;
3. An independent audit report;
4. An actuarial opinion;
5. Copies of all documents submitted to the Oversight State, unless the Commissioner has agreed that copies of specified documents need not be provided;
6. An executed Certificate of Assuming Insurer Form AR-1, published in Section 2303.22(a) of this article, wherein the assuming insurer:
A. Submits to the authority of the Commissioner to examine its books and records, and agrees to bear the expense of any such examination; and
B. Affirms it has attached to the Certificate a current list of its ceding insurers domiciled in California, and undertakes to submit additions to or deletions from the list to the Commissioner at least once per calendar quarter, unless, for good cause shown, the Commissioner permits a different reporting interval for additions to or deletions from the list;
7. An executed Designation of Agent for Service of Process and Consent to Jurisdiction Form AR-2, published in Section 2303.22(b) of this article; and
8. Any other documents requested by the Commissioner.
(c) The form of a trust reviewed under this section shall not be acceptable to the Commissioner unless it (1) meets the requirements of Code Sections 922.4(d)(3), (2) meets the requirements of subdivision (f) of this section if the assets of the trust include a letter of credit, and (3) provides that the trustee shall be liable for its negligence or willful misconduct.
(d) A trust shall not be deemed sufficient by the Commissioner unless it (1) is in the amount prescribed in Code Section 922.4(d)(4), (2) is held in a U.S. financial institution which meets the requirements of Code Section 922.7, and (3) consists of assets meeting the requirements of this section. Assets equal to liabilities shall be on deposit in the trust no later than 45 days after the end of each calendar quarter unless the Commissioner determines that, for good cause shown, a reasonable extension of time to fund the deposit should be granted. Trust assets shall consist only of cash in United States dollars, certificates of deposit issued by a United States financial institution as defined in Code Section 922.7(a), investments as permitted in subdivision (e) of this section, or letters of credit as permitted in subdivision (f) of this section.
(e) In determining the sufficiency of the trust, only the following investments may be considered, according to their fair market value:
1. Government obligations that are not in default as to principal or interest, that are valid and legally authorized and that are issued, assumed or guaranteed by:
A. The United States or by any agency or instrumentality of the United States;
B. Any state of the United States;
C. A territory, possession or other governmental unit of the United States;
D. An agency or instrumentality of a government unit referred to in subparagraphs (B) and (C) of this paragraph, if the obligations are by law (statutory or otherwise) payable, as to both principal and interest, from taxes levied or by law required to be levied or from adequate special revenues pledged or otherwise appropriated or by law required to be provided for the purpose of making these payments, but not including obligations payable solely out of special assessments on properties benefited by local improvements; or
E. The government of any other country that is a member of the Organisation for Economic Co-operation and Development and whose government obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;
2. Obligations that are issued in the United States, or that are dollar-denominated and issued in a non-U.S. market, by a solvent United States institution (other than an insurance company) or that are assumed or guaranteed by a solvent United States institution (other than an insurance company) and that are not in default as to principal or interest if the obligations:
A. Are rated A or higher (or the equivalent) by a securities rating agency recognized by the Securities Valuation Office of the NAIC, or if not so rated, are similar in structure and other material respects to other obligations of the same institution that are so rated; or
B. Are insured by at least one authorized insurer (other than the investing insurer or parent, subsidiary or affiliate of the investing insurer) licensed to insure obligations in this state and, after considering the insurance, are rated AAA (or the equivalent) by a securities rating agency recognized by the Securities Valuation Office of the NAIC; or
C. Have been designated as Class One or Class Two by the Securities Valuation Office of the NAIC;
3. Obligations issued, assumed or guaranteed by a solvent non-United States institution chartered in a country that is a member of the Organisation for Economic Co-operation and Development or obligations of U.S. corporations issued in a non-U.S. currency, provided that in either case the obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;
4. An investment made pursuant to the provisions of paragraphs (e)(1), (e)(2) or (e)(3) of this section shall be subject to the following additional limitations:
A. An investment in or loan upon the obligations of any one institution, other than an institution that issues mortgage-related securities, shall not exceed five percent (5 %) of the assets of the trust;
B. An investment in any one mortgage-related security shall not exceed five percent (5 %) of the assets of the trust;
C. The aggregate total investment in mortgage-related securities shall not exceed twenty-five percent (25 %) of the assets of the trust; and
D. Preferred or guaranteed shares issued or guaranteed by a solvent United States institution are permissible investments if all of the institution's obligations are eligible as investments under subparagraphs (e)(2)(A) and (e)(2)(C) of this section, but shall not exceed two percent (2%) of the assets of the trust;
5. As used in this subdivision:
A. “Mortgage-related security” means an obligation that is rated AA or higher (or the equivalent thereto) by a securities rating agency recognized by the Securities Valuation Office of the NAIC and:
i. Represents ownership of one or more promissory notes or certificates of interest or participation in such notes (including any rights designed to assure servicing of, or the receipt or timeliness of receipt by the holders of such notes, certificates, or participation of amounts payable under such notes, certificates or participation), which notes:
a. Are directly secured by a first lien on a single parcel of real estate, including stock allocated to a dwelling unit in a residential cooperative housing corporation, upon which is located a dwelling or mixed residential and commercial structure, or on a residential manufactured home as defined in 42 U.S.C. § 5402(6), whether the manufactured home is considered real or personal property under the laws of the state in which it is located; and
b. Were originated by a savings and loan association, savings bank, commercial bank, credit union, insurance company, or similar institution that is supervised and examined by a federal or state housing authority, or by a mortgagee approved by the Secretary of Housing and Urban Development pursuant to 12 U.S.C. §§ 1709 and 1715b, or, where such notes involve a lien on the manufactured home, by any such institution or by any financial institution approved for insurance by the Secretary of Housing and Urban Development pursuant to 12 U.S.C. § 1703; or
ii. Is secured by one or more promissory notes or certificates of deposit or participation in such notes (with or without recourse to the insurer thereof) and, by its terms, provides for payments of principal in relation to payments or reasonable projections of payments, or notes meeting the requirements of subitems (e)(5)(A)(i)(a) and (e)(5)(A)(i)(b) of this section.
B. “Promissory note”, when used in connection with a manufactured home, shall also include a loan, advance or credit sale as evidenced by a retail installment sales contract or other instrument;
6. Investments in common shares or partnership interests of a solvent United States institution are permissible if:
A. Its obligations and preferred shares, if any, are eligible as investments under subdivision (e) of this section; and
B. The equity interests of the institution (except an insurance company) are registered on a national securities exchange, as provided in the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a and following, or otherwise registered pursuant to that Act, and, if otherwise registered, price quotations for them are furnished through a nationwide automated quotations system approved by the Financial Industry Regulatory Authority, or successor organization. A trust shall not invest in equity interests under paragraph (e)6. of this section in an amount exceeding one percent (1%) of the assets of the trust even though the equity interests are not so registered and are not issued by an insurance company;
7. Investments in common shares of a solvent institution organized under the laws of a country that is a member of the Organisation for Economic Co-operation and Development are permissible if:
A. All its obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC; and
B. The equity interests of the institution are registered on a securities exchange regulated by the government of a country that is a member of the Organization for Economic Cooperation and Development;
8. Obligations issued, assumed or guaranteed by a multinational development bank, provided the obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;
9. Securities of an investment company registered pursuant to the Investment Company Act of 1940, 15 U. S.C. §§ 80a-1 and following, are permissible investments if the investment company:
A. Invests at least ninety percent (90%) of its assets in the types of securities that qualify as an investment under paragraphs (e)(1), (e)(2) or (e)(3) of this section; or that invests in securities that are determined by the Commissioner to be substantively similar to the permitted securities; or
B. Invests at least ninety percent (90%) of its assets in the types of equity interests that qualify as an investment under paragraph (e)(6) of this section;
10. An investment in or loan upon any one institution's outstanding equity interests shall not exceed one percent (1%) of the assets of the trust;
11. Investments in an investment company qualifying under subparagraph (e)(9)(A) of this section shall not exceed ten percent (10%) of the assets in the trust and the aggregate amount of investments in such investment companies shall not exceed twenty-five percent (25%) of the assets in the trust. Investments in an investment company qualifying under subparagraph (e)(9)(B) of this section shall not exceed five percent (5%) of the assets in the trust;
12. The aggregate investment in equity interests permitted under paragraphs (e)(6) and (e)(7) and subparagraph (e)(9)(B) of this section shall not exceed ten percent (10%) of the assets in the trust;
13. Investments in or issued by an entity controlling, controlled by or under common control with either the grantor or beneficiary of the trust shall not exceed five percent (5%) of total investments; and
14. No more than twenty percent (20%) of the total of the investments in the trust may be the foreign investments authorized under subparagraph (e)(1)(E), paragraph (e)(3), subparagraph (e)(6)(B) or paragraph (e)(7) of this section, and no more than ten percent (10%) of the total of the investments in the trust may be securities denominated in foreign currencies. For purposes of applying the preceding sentence, a depository receipt denominated in United States dollars and representing rights conferred by a foreign security shall be classified as a foreign investment denominated in a foreign currency.
(f) In the determination of whether a trust is sufficient to cover the assuming insurer's liabilities, a letter of credit issued by a United States financial institution as defined in Code Section 922.7(a) may be considered, in an amount not to exceed twenty percent (20%) of the assets in the trust. In order for a letter of credit to qualify as an asset of a trust reviewed under this section the trust agreement shall provide that:
1. The trustee shall have the right and the obligation to immediately draw down the full amount of the letter of credit and hold the proceeds in trust for the beneficiaries of the trust if the letter of credit will otherwise expire without being renewed or replaced; and
2. The failure of the trustee to draw against the letter of credit in circumstances where such draw would be required shall constitute negligence and/or willful misconduct.
(g) In the determination of whether a trust is sufficient to cover the assuming insurer's liabilities, the term “liabilities” shall mean the assuming insurer's gross liabilities attributable to reinsurance ceded by United States domiciled insurers that are not otherwise secured by acceptable means, and shall include:
1. For business ceded by insurers authorized to write either disability, or property and casualty insurance, or both:
A. Losses and allocated loss expenses paid by the ceding insurer recoverable from the assuming insurer;
B. Reserves for losses reported and outstanding;
C. Reserves for losses incurred but not reported;
D. Reserves for allocated loss expenses; and
E. Unearned premiums.
2. For business ceded by insurers authorized to write life, disability and annuity insurance:
A. Aggregate reserves for life policies and contracts net of policy loans and net due and deferred premiums;
B. Aggregate reserves for accident and health policies;
C. Deposit funds and other liabilities without life or disability contingencies; and
D. Liabilities for policy and contract claims.
As used in this subdivision, “disability” means the class of insurance defined in Code Section 106.
(h) If an assuming insurer provided security meeting the requirements of Sections 2303.7, 2303.8 or 2303.9 of this article, then exhaustion of that security is a condition precedent to presentation of a claim by the ceding insurer for payment by a trustee of a U.S. trust established by the assuming insurer. The condition precedent shall be deemed satisfied if security held under Section 2303.9 of this article has been exhausted, and a demand for payment of the security established by the assuming insurer under Section 2303.7 or 2303.8 of this article has not been met within sixty (60) days of the demand.
(i) The Commissioner shall designate a trust meeting the requirements of this section as an approved U.S. trust. To retain eligibility of the trust, the assuming insurer shall file its annual and quarterly financial statements, trust statements, and lists of ceding insurers with the Commissioner at the same time such filings are made with the Oversight State. Not later than February 28 of each year, the assuming insurer shall file the trustees' report required by Code Section 922.3(d)(3)(E). Not later than August 15 of each year, the assuming insurer shall file the documents required in subdivision (b) of this section in the manner provided in Section 2303.21(d), except that it is not necessary to file duplicates of financial documents already submitted. Alien insurers shall include in the annual filings all reports required by their domiciliary countries.
(j) Pursuant to Section 922.3 of the Code, the costs and expenses incurred by the Department to review the trust documents, reports, subsequent amendments, and periodic filings shall be charged to and collected from the assuming insurer.
(k) An assuming insurer, authorized under Code Section 922.4(d) for the specific purpose of permitting statement credit for a cession by a licensed insurer without the security otherwise required of the reinsurer by Code Section 922.5, is not a licensed insurer and may not solicit or transact insurance business in this state either directly or through an agent or reinsurance intermediary acting on its behalf.

Credits

Note: Authority cited: Sections 922.8, 922.85 and 923, Insurance Code; CalFarm Insurance Company v. Deukmejian, 48 Cal. 3d 805 (1989); and 20th Century Insurance Company v. Garamendi, 8 Cal. 4th 216 (1994). Reference: Sections 922.2, 922.3, 922.4, 922.43, 922.6 and 923, Insurance Code.
History
1. New section filed 10-24-2006; operative 11-23-2006 (Register 2006, No. 43).
2. Change without regulatory effect amending subsections (a), (c), (d), (e)1.E., (e)3., (e)6.B., (e)7., (e)9. and (i)-(k) and amending Note filed 3-25-2015 pursuant to section 100, title 1, California Code of Regulations (Register 2015, No. 13).
3. Amendment of subsections (b), (b)6., (b)7., (e)5.A.i.a.-b, (e)6.B. and (i) filed 11-27-2017; operative 1-1-2018 (Register 2017, No. 48).
This database is current through 5/24/24 Register 2024, No. 21.
Cal. Admin. Code tit. 10, § 2303.5, 10 CA ADC § 2303.5
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