Texas Administrative Code
Title 28 - INSURANCE
Part 1 - TEXAS DEPARTMENT OF INSURANCE
Chapter 7 - CORPORATE AND FINANCIAL REGULATION
Subchapter A - EXAMINATION AND FINANCIAL ANALYSIS
Section 7.7 - Subordinated Indebtedness, Surplus Debentures, Surplus Notes, Premium Income Notes, Bonds, or Debentures, and Other Contingent Evidences of Indebtedness

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

(2) 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:

(3) 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.

(1) A subordinated indebtedness agreement issued by an insurer on or after September 1, 1995, is subject to the prior approval of the commissioner, as to form and content, regardless of amount.

(2) An insurer may not issue a subordinated indebtedness until the commissioner has approved the subordinated indebtedness agreement under Insurance Code, Chapter 823, Subchapter C or Article 1.39.

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

(4) The consideration received by an insurer in return for the issuance of subordinated indebtedness shall be in the form of cash, cash equivalent securities, or other assets that have a readily determinable value and are satisfactory to the commissioner. In the instance of an issuer required by the department to increase its surplus as regards policyholders, the subordination of a current liability owed by the issuer to the prospective holder of the subordinated indebtedness, may be considered in an amount acceptable to the commissioner.

(1) the creditor may be paid only out of the portion of the insurer's surplus that exceeds the minimum surplus stated in the agreement;

(2) the minimum surplus or floor shall exceed the greater of the following:

(3) repayment provisions shall be clearly set forth in the written agreement;

(4) if the subordinated indebtedness is in the form of a premium note, bond, or debenture, which includes a provision for the payment or repayment only out of a sinking fund established by the insurer by setting aside a specified amount during a specified period, all payments must be made from the established sinking fund, subject to the minimum surplus stated in the written agreement, and such amount accumulated and held in the sinking fund shall be a legal liability and financial statement liability of the insurer.

(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.

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

(2) No application for the issuance of subordinated indebtedness shall be deemed filed with the commissioner until the date that all material listed in subsection (d)(1) of this section has been provided.

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

(2) Notice required by this subsection

(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 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) All agreements shall be clearly reported in an insurer's "Notes to Financial Statements" of the Annual Statement and shall disclose all pertinent aspects of payment and prepayment provisions.

(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) 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.