A. Notwithstanding Regulations .03.13 of this chapter and subject to the requirements of this regulation, the Commissioner shall allow a ceding insurer a reduction from liability for reinsurance obtained from an assuming insurer for the payment of the obligations under a reinsurance contract.
(1) The Commissioner shall allow a ceding insurer a reduction from liability for the reinsurance ceded in an amount equal to the funds held by it or on its behalf, including funds held in trust, as security for the payment of the obligations under a reinsurance contract.
(2) The reduction from liability that is allowed a ceding insurer may not exceed the liabilities carried by the ceding insurer for the business reinsured.
(3) Any funds held by the ceding insurer, or on its behalf, as security for the payment of its obligations under a reinsurance contract shall be held for the exclusive benefit of the ceding insurer.
C. Forms of Security Under Reinsurance Contract.
(1) The Commissioner shall accept the following as security under a reinsurance contract:
(b) A letter of credit issued or confirmed by a qualified U.S. financial institution;
(c) Any security that qualifies as an admitted asset and is listed by the Securities Valuation Office, including those deemed exempt from filing as defined by the Purposes and Procedures Manual of the Securities Valuation Office; or
(d) Any other form of security acceptable to the Commissioner.
(2) The security shall be held in:
(a) The United States and subject to withdrawal solely by and under the exclusive control of the ceding insurer; or
(b) A qualified U.S. financial institution, if the security is held in trust.
D. Standards of Acceptability for Letters of Credit.
(1) For acceptance as security under a reinsurance contract, a letter of credit shall:
(a) Be clean, irrevocable, and unconditional;
(b) Be issued or confirmed by a qualified U.S. financial institution authorized to issue letters of credit, pursuant to Regulation .02B(9)(b) of this chapter, and effective on or before December 31 of the year for which the annual statement filing is made;
(c) Be in the possession of or in trust for the ceding insurer on or before the date for filing its annual statement;
(d) Be issued for a term of at least 1 year, with an issue date and expiration date; and
(e) Contain an "evergreen clause" that:
(i) Prevents the expiration of the letter of credit without due notice from the issuer; and
(ii) Provides for the letter of credit to renew automatically unless the issuer notifies the Commissioner and beneficiary no less than 30 days prior to the expiration date or nonrenewal.
(2) On the date of issuance or confirmation of the letter of credit, the issuer of the letter of credit shall meet the applicable standards of acceptability for a letter of credit.
(3) Notwithstanding the failure of a previously accepted issuer of a letter of credit to continue to meet applicable standards of acceptability for a letter of credit, the letter of credit shall continue to be accepted until:
(a) 15 days from the date that its issuer fails to meet the standards of acceptability; or
(b) The date of its scheduled expiration, if earlier.
(4) A letter of credit shall provide that to obtain funds, the beneficiary need:
(a) Only draw a sight draft under the letter of credit and present it; and
(b) Not present any other document.
(5) A letter of credit shall provide that it is not subject to any condition outside of the letter of credit.
(6) A letter of credit may not contain references to any other agreements, documents, or entities.
(7) The heading of the letter of credit may include a boxed section containing the name of the applicant and other appropriate notations to provide a reference for the letter of credit. The boxed section shall be clearly marked to indicate that the information is for internal identification purposes only.
(8) The letter of credit shall contain a statement to the effect that the obligation of the qualified United States financial institution under the letter of credit is in no way contingent upon reimbursement with respect thereto.
(9) The letter of credit shall state whether it is subject to and governed by the laws of this State or the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce Publication 600 (UCP 600), International Standby Practices of the International Chamber of Commerce Publication 590 (ISP98), or any successor publication, and all drafts drawn thereunder shall be presentable at an office in the U. S. of a qualified U. S. financial institution.
(10) If the letter of credit is made subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce Publication 600 (UCP 600), International Standby Practices of the International Chamber of Commerce Publication 590 (ISP98), or any successor publication, then the letter of credit shall specifically address and provide for an extension of time to draw against the letter of credit in the event that one or more of the occurrences specified in Article 17 of Publication 500, or any other successor publication, occur.
(11) If the letter of credit is issued by a financial institution authorized to issue letters of credit, other than a qualified U. S. financial institution as described in Regulation .02B(9)(b) of this chapter, then the following additional requirements shall be met:
(a) The issuing financial institution shall formally designate the confirming qualified U.S. financial institution as its agent for the receipt and payment of the drafts; and
(b) The "evergreen clause" shall provide for 30 days notice, to the Commissioner and beneficiary, prior to the expiry date for nonrenewal.
E. Standards of Acceptability for Letters of Credit—Reinsurance Contract Provisions.
(1) The reinsurance contract in conjunction with which the letter of credit is obtained may contain provisions that:
(a) Require the assuming insurer to provide letters of credit to the ceding insurer and specify what they are to cover;
(b) Stipulate that the assuming insurer and ceding insurer agree that the letter of credit provided by the assuming insurer pursuant to the provisions of the reinsurance contract may be drawn upon at any time, notwithstanding any other provisions in the contract and shall be utilized by the ceding insurer or its successors in interest only for one or more of the following reasons:
(i) To pay or reimburse the ceding insurer for the assuming insurer's share under the specific reinsurance contract of premiums returned, but not yet recovered from the assuming insurers, to the owners of policies reinsured under the reinsurance contract on account of cancellations of the policies;
(ii) To pay or reimburse the ceding insurer for the assuming insurer's share, under the specific reinsurance contract of surrenders and benefits or losses paid by the ceding insurer, but not yet recovered from the assuming insurers, under the terms and provisions of the policies reinsured under the reinsurance contract;
(iii) To pay or reimburse the ceding insurer for any other amounts necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer; and
(iv) When the letter of credit will expire without renewal or be reduced or replaced by a letter of credit for a reduced amount and when the assuming insurer's entire obligations under the specific reinsurance remain unliquidated and undischarged 10 days prior to the termination date, to withdraw amounts equal to the assuming insurer's share of the liabilities, to the extent that the liabilities have not yet been funded by the assuming insurer and exceed the amount of any reduced or replacement letter of credit, and deposit those amounts in a separate account in the name of the ceding insurer in a qualified U.S. financial institution apart from its general assets, in trust for such uses and purposes specified in §E(1)(b)(i) of this regulation as may remain after withdrawal and for any period after the termination date.
(c) All of the provisions of §E of this regulation shall be applied without diminution because of insolvency on the part of the ceding insurer or assuming insurer.
(2) This section does not preclude the ceding insurer and assuming insurer from providing for:
(a) An interest payment, at a rate not in excess of the prime rate of interest, on the amounts held pursuant to §E(1)(b) of this regulation; or
(b) The return of any amounts drawn down on the letters of credit in excess of the actual amounts required for the above or any amounts that are subsequently determined not to be due.