1. (a) The letter of credit must be clean, irrevocable, and unconditional, and issued or confirmed by a qualified United States financial institution as defined in the Insurance Code, Article 3.10, §(e)(1), or Article 5.75-1, §(e)(1). The letter of credit shall contain an issue date and shall stipulate that the beneficiary need only draw a draft under the letter of credit and present it to obtain funds and that no other document need be presented. The letter of credit shall also indicate that it is not subject to any condition or qualifications outside of the letter of credit. In addition, the letter of credit itself shall not contain reference to any other agreements, documents, or entities, except as provided in subsection (i)(1) of this section.
2. (b) The heading of the letter of credit may include a boxed section which contains the name of the applicant and other appropriate notations to provide a reference for such letter of credit. The boxed section shall be clearly marked to indicate that such information is for internal identification purposes only. Neither the boxed section nor the internal identification shall affect the terms of the letter of credit.
3. (c) 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.
4. (d) The term of the letter of credit shall be for at least one year and shall contain an evergreen clause which prevents the expiration of the letter of credit without written notice from the issuer. The evergreen clause shall provide for a period of no less than 30 days' written notice prior to expiry date or nonrenewal.
5. (e) The letter of credit shall state that it is subject to and governed by either the laws of the State of Texas, or the laws of the state of domicile of the issuing bank, or the "Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce" (Publication 400) and in the event of any conflict shall specify whether the laws of Texas or the laws of the state in which the issuing bank is domiciled shall apply, and all drafts drawn thereunder shall be presentable at an office in the United States of a qualified United States financial institution.
6. (f) If the letter of credit is made subject to the "Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce" (Publication 400), then the letter of credit shall specifically address and make provision for an extension of time to draw against the letter of credit in the event that one or more of the occurrences specified in Publication 400, Article 19, occur.

7. (g) If the letter of credit is confirmed by a qualified United States financial institution authorized to issue letters of credit, then the following additional requirements in paragraphs (1) and (2) of this subsection shall be met.

   1. (1) The issuing financial institution shall formally designate the confirming qualified United States financial institution as its agent for the receipt and payment of the drafts.
   2. (2) The evergreen clause shall provide for 60 days' written notice prior to expiry date or nonrenewal.

8. (h) Reinsurance agreement provisions applicable with letters of credit shall comply with the requirements of paragraphs (1)-(4) of this subsection.

   1. (1) The reinsurance agreement, in conjunction with the letter of credit provided pursuant to applicable credit for reinsurance statutes and rules, shall contain provisions which:

      1. (A) require the reinsurer to provide letters of credit to the reinsured and specify what they are to cover; or

      2. (B) stipulate that the reinsurer and ceding insurer agree that the letter of credit provided by the reinsurer, pursuant to the provisions of the reinsurance agreement, may be drawn upon at any time, notwithstanding any other provisions in such agreement, and shall be utilized by the ceding insurer or its successors in interest for the following purposes:

         1. (i) to reimburse the ceding insurer for the reinsurer's share of premiums returned to the owners of policies reinsured under the reinsurance agreement on account of cancellations of such policies;
         2. (ii) to reimburse the ceding insurer for the reinsurer's share of surrenders and benefits or losses paid by the ceding insurer under the terms and provisions of the policies reinsured under the reinsurance agreement;
         3. (iii) in the event of notice of nonrenewal of the letter of credit, to fund an account with the ceding insurer in an amount at least equal to the deduction, for reinsurance ceded, from the ceding insurer's liabilities for policies ceded under the agreement (such amount shall include, but not be limited to, amounts for policy reserves, claims and losses incurred, and unearned premium reserves); and
         4. (iv) to pay any other amounts due to the ceding insurer under the reinsurance agreement.
   2. (2) All of the provisions of paragraph (1) of this subsection shall be applied without diminution because of insolvency on the part of the ceding insurer or reinsurer.

   3. (3) The reinsurance agreement may, if applicable, provide for the ceding insurer and reinsurer to:

      1. (A) make an interest payment to the assuming insurer, at a rate not in excess of the prime rate of interest on the amounts held pursuant to paragraph (1)(B)(iii) of this subsection; and/or
      2. (B) return any amounts drawn down on the letters of credit in excess of the actual amounts required, or in the case of paragraph (1)(B)(iv) of this subsection any amounts that are subsequently determined not to be due.
   4. (4) When a letter of credit is obtained in conjunction with a reinsurance agreement and where it is customary practice to provide a letter of credit for a specific purpose, then such reinsurance agreement may, in lieu of paragraph (1)(B) of this subsection, require that the parties enter into a trust agreement which may be incorporated into the reinsurance agreement or be a separate document.
9. (i) A letter of credit may not be used to reduce any liability for reinsurance ceded to an unauthorized reinsurer in financial statements required to be filed with the State Board of Insurance unless an acceptable letter of credit specifying the filing ceding insurer as beneficiary has been issued on or before the date of the financial statement. Further, the reduction for the letter of credit may be up to the amount available under the letter of credit but no greater than the specific obligation under the reinsurance agreement which the letter of credit was intended to secure.
10. (j) Only one expiration date shall appear on the letter of credit and the date must be clearly noted on the face of the letter of credit and must set forth the specific month, day, time, and year on which the letter of credit will expire.
11. (k) The aggregate of all letters of credit issued or confirmed to any one ceding insurer by one financial institution on behalf of any one reinsurer must not exceed 10% of the financial institution's total equity capital, as shown in its most recent report of condition as filed with the appropriate federal financial institution regulatory agency. As used in this subsection, the term "any one ceding insurer" also includes all affiliated insurers who are named as beneficiaries in accord with subsection (l) of this section.
12. (l) Only one beneficiary may be named on the letter of credit except that, in the event of affiliated insurers all of whom are members of the same holding company system and are participants in a specific intercompany reinsurance pooling arrangement, each affiliate ceding insurer through participation in the pool to the same reinsurer may be named as beneficiary.
13. (m) Only one amount may appear on the letter of credit except that, in the event of affiliated beneficiaries, the letter of credit shall show an aggregate amount covering the total reserve credit taken by all such affiliated beneficiaries and also shall specifically designate for each named beneficiary, by dollar amount and/or percentage of the aggregate, the maximum amount which may be drawn down by each named beneficiary.
14. (n) The term "beneficiary" shall include any successor by operation of law of the named beneficiary including, without limitation, any liquidator, receiver, conservator, or supervisor.
15. (o) The account holder shall be the reinsurer.
16. (p) No schedule of periodic payments shall appear on the letter of credit.

17. (q) If a letter of credit is issued by a financial institution which does not qualify as a qualified United States financial institution but is confirmed by a qualified United States financial institution, the following requirements in paragraphs (1)-(5) of this subsection must be met.

    1. (1) The letter of credit that is being confirmed must comply in substance and form with Form R-5, Letter of Credit, except that the period of the evergreen clause as referenced in subsection (g)(2) of this section shall be increased to 60 days.
    2. (2) The confirmation letter must show on its face the office in the United States, inclusive of complete name and address, where presentations for draws are to be made; it also must show the specific month, day, time, and year on which it will expire.
    3. (3) The confirmation letter must contain an evergreen clause which prevents expiration of the confirmation letter without some affirmative action by the issuer; its term must coincide with the term of the letter of credit which it is confirming and must provide that it automatically will be extended for a like term unless, prior to the end of the stated term, the confirming bank has given the ceding insurer (beneficiary), the reinsurer, and the issuing bank not less than 60 days' written notice of nonrenewal by certified or registered mail.
    4. (4) The confirmation letter must comply in form and substance with Form R-6, Confirmation Letter.
    5. (5) The confirming bank must comply with subsection (k) of this section.
18. (r) Qualifying foreign branches of Federal Deposit Insurance Corporation banks may issue letters of credit, and such letters of credit will be acceptable if the face of the letter of credit clearly shows that the letter of credit may be drawn down at a United States office of the bank and specifically lists the street address of that office. Similarly, qualifying foreign branches of Federal Deposit Insurance Corporation banks may confirm letters of credit. A confirmation letter will be acceptable if the face of the confirmation letter clearly shows that the letter of credit may be drawn down at a United States office of the confirming bank and specifically lists the street address of that office.
19. (s) In the event a letter of credit is not renewed or replaced under a reinsurance arrangement between the ceding insurer and reinsurer, the ceding insurer must not be precluded from withdrawing the balance of the letter of credit and placing such sums in trust to secure continuing obligations under the reinsurance agreement until a renewal letter of credit or a substitution in lieu thereof has been received.
20. (t) All letters of credit must be readily available for viewing by the State Board of Insurance upon request; letters of credit must be available at any time to the State Board of Insurance examiners in connection with the preparation of reports of examination. All confirming letters shall be attached to the letters of credit which they confirm.
21. (u) In the event that either a letter of credit or a confirming letter of credit is not renewed or replaced or is suspended to become inactive, the ceding insurer and the issuing bank shall give immediate notice of such nonrenewal or inactive status and the ceding insurer shall advise the State Board of Insurance of any amount still outstanding and unsettled under the reinsurance agreement(s). This required notice shall be sent by certified mail, return receipt requested (or by registered mail), to: Reinsurance Division 015-6, State Board of Insurance, 1110 San Jacinto Boulevard, Austin, Texas 78701-1998.

Source Note:The provisions of this §7.610 adopted to be effective August 16, 1990, 15 TexReg 4435; amended to be effective September 30, 1993, 18 TexReg 6329.