Current through Register 2024 Notice Reg. No. 52, December 27, 2024
(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;
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
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.
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).
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.
