Current through Register 2024 Notice Reg. No. 38, September 20, 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;
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.
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.
