The Texas Department of Insurance has adopted substantial revisions to rules governing the regulation of insurance holding companies1 to implement changes in the Texas Insurance Holding Company Systems Regulatory Act (the "Texas Act")2 adopted by the Texas Legislature in 2005, 2007, and 2011, and to conform to model regulations ("NAIC Model Regulations") adopted by the National Association of Insurance Commissioners in connection with its Holding Company Model Law (the "Model Law), as recently updated to assess enterprise risk within holding company systems and its potential impact on the solvency of an insurer that is part of the system. The Texas rule amendments adopted changes relating to form filings, definitions, registration of insurers, transactions subject to prior notice, acquisition or divestiture statements filing requirements, and Forms A - F. The new rules took effect May 26, 2013.
The revisions to the rule also anticipated future legislative amendments to the Texas Act that would change the thresholds for transactions between an insurer and its affiliates that would be subject to prior notice to the Commissioner under Section 823.103 of the Texas Act. The rules deleted language specifying the transaction threshold for prior commissioner approval.3 These thresholds were, in fact, changed by the Legislature in 2013, to provide that the Commissioner need be notified of transactions regarding sales, purchases, loans, or investments with any entity in the insurer's holding company system that exceed, in the case of non-life insurers, the lesser of three percent of the insurer's admitted assets or 25 percent of its surplus as regards policyholders, or, for life insurers, three percent of its admitted assets.4 That amendment also added a requirement that loans or extensions of credit by an insurer to a non- affiliate that exceeded those thresholds would also be subject to prior notice if the proceeds of the transaction, wholly or substantially in part, are to be used to make loans or extensions of credit to, to purchase the assets of, or to make investments in, an affiliate of the insurer making the loan or extension of credit.5
Transactions between an insurer and its affiliates that are subject to prior notice to and/or approval of the Commissioner are now filed on Form D, which substantially follows the Form D format in the NAIC Model Regulations.6 Additional requirements, which follow NAIC Model Regulations, are now prescribed for management or service agreements and cost sharing agreements. The Texas rule also requires that rental or leasing agreements between an insurer an any affiliate meet these standards. Such agreements must, at a minimum, contain the following provisions, to the extent not inconsistent with applicable law or regulation, as applicable:7
(a) identify the person providing the services and the nature of the services;
(b) set forth the methods to allocate costs to include §823.101(e) of the Act;
(c) require timely settlement, at least every 90 days, and compliance with the requirements in the Accounting Practices and Procedures Manual published by the National Association of Insurance Commissioners;
(d) prohibit advancement of funds by the insurer to the affiliate except to pay for services defined in the agreement;
(e) state that the insurer will maintain oversight for functions provided to the insurer by the affiliate and that the insurer will monitor services annually for quality assurance;
(f) define books and records of the insurer to include all books and records developed or maintained under or related to the agreement;
(g) specify that all books and records of the insurer are and remain the property of the insurer and are subject to the control of the insurer;
(h) state that all funds and invested assets of the insurer are the exclusive property of the insurer, held for the benefit of the insurer and are subject to the control of the insurer;
(i) include standards for termination of the agreement with and without cause;
(j) include provisions indemnifying the insurer in the event of gross negligence or willful misconduct by the affiliate providing the services;
(k) specify that, if the insurer is placed in receivership or seized by the commissioner under Insurance Code Chapter 443:
(1) all of the rights of the insurer under the agreement extend to the receiver or commissioner; and
(2) all books and records will immediately be made available to the receiver or the commissioner, and must be turned over to the receiver or the commissioner immediately upon the receiver or the commissioner's request;
(l) specify that the affiliate has no automatic right to terminate the agreement if the insurer is placed in receivership under Insurance Code Chapter 443; and
(m) specify that the affiliate will continue to maintain any systems, programs or other infrastructure notwithstanding the seizure by the commissioner under Insurance Code Chapter 443, and will make them available to the receiver, for so long as the affiliate continues to receive timely payment for services rendered.
The Department has developed a checklist which must be filled in and filed at the time the Form D is filed for management or service agreements, cost sharing agreements, and leases. The Department has also indicated that existing agreements will not be required to be updated to comply with the new rules until the agreements are amended.
The new rules also include amendments relating to the content of Form B registration statements to conform the regulations to Section 823.052(c-1) of the Insurance Code, which provides that financial statements for the insurance holding company system and all affiliates of the holding company system need be filed only on the request of the Commissioner. (The rule is still inconsistent with Section 823.052(c- 1) by seeming to require filing financial statements for the ultimate controlling person, even though the statute would include financial statements for the insurance holding company system within the "upon request of the Commissioner" standard.)
The amended rules change the requirements for filing annual amendments to an insurer's Form B registration statement. The annual amendment must be filed not later than the 120th day after the last day of each fiscal year of the ultimate controlling person on a new Form C, adopted by this rule change.8 The old requirement for a completely updated Form B registration statement every five years is no longer effective.9 The Form C follows the NAIC Model Regulation and requires a brief description of all items in the current annual registration statement that represent material changes from the prior year's Form B, and must be presented "in a manner permitting proper evaluation by the commissioner," including "specific references to the items in the annual registration statement and to the terms contained [therein]."10 Changes on the registrant's organizational chart involving ownership of voting securities held by each affiliate need be reported only if the change results in ownership or holdings of 10 percent or more of voting securities, loss or transfer of control, or acquisition or loss of partnership interest. Changes to biographical information are to be noted only where the individual is, for the first time, made a director or executive officer or terminates responsibilities as a director or executive officer of the ultimate controlling person, or in the event an individual is named president of the ultimate controlling person. If a transaction reported in a prior year has been changed, the nature of the change must be described in the Form C. If a transaction reported in a prior year has been "effectuated," the registrant must "furnish the mode of completion and any flow of funds between affiliates resulting from the transaction."11 Finally, as in the NAIC Model Form C, the registered insurer must "furnish a statement that the transactions entered into since the filing of the prior year's annual registration statement are not part of a plan or series of like transactions whose purpose is to avoid statutory threshold amounts and the review that might otherwise occur."
Texas has repealed its old Form D (which was the form used for reporting extraordinary dividends or distributions) and replaces it with a new "Form E" which is now also used for reporting ordinary dividends or distributions by an insurer.12 The Form E incorporates the information that was formerly reported on the Department's HCDividend form, which was found on its website. Section b(5) of Form E includes a statement that "earned surplus" defined as unassigned funds (surplus) must be greater than the current dividend amount reported on the Form E, and the old earned surplus form is being discontinued by the Department. The rule provides that "the old distinction between earned surplus and adequacy of surplus, for purposes of Insurance Code Chapter 823 regarding dividends, no longer remains." Section 7.213(b)(9) of the rule adds a certification on the Form E that the declaration or payment of the dividend or distribution does not violate "certain provisions of the Insurance Code, as applicable."
A new Form F (Enterprise Risk Report) has been added to the Texas Holding Company Regulations, and contains the enterprise risk report information enacted in amendments to the Texas Act, Section 823.0595, adopted by the Texas Legislature in 2011. In general, it follows the language of the Form F prescribed by the NAIC Model Regulations.
Practitioners should carefully review the new rule and new form requirements to ensure that all required information is filed with the Department for required holding company transaction filings. Also note that the checklist required to be filed with management agreements, service agreements, leases, and cost sharing agreements is not currently available on the Department's website, but must be obtained directly from the Department.
1. 28 TEX.ADMIN.CODE §§ 7.201-205, 7.209, 7.210, and 7.211-7.214
2. TEX.INS.CODE ANN. Chapter 823
3. See 28 TEX.ADMIN.CODE §7.204
4. House Bill 3460, (83rd Legislature, 2013), effective June 14, 2013
5. See TEX.INS.CODE ANN. Section 823.103
6. Prior to these changes, notice of and/or approval of transactions with affiliates were submitted by letter and no particular format was required.
7. 28 TEX. ADMIN. CODE §7.204(a)(2)(D).
8. The old Form C was a "Disclaimer of Control," which has been repealed.The process for filing a disclaimer of control or affiliation with an insurer is described in 28 Texas Administrative Code §7.203(m), and is simply a checklist for a narrative filing.
9. Statute was amended to eliminate the five year restated Form B in 2007.
10. Bracketed word is in the NAIC Model, but omitted in the Texas rule.
11. Follows the awkward language of the NAIC Model.
12. Texas does not use a “Form E” pre-acquisition notification form regarding the potential competitive impact of a merger or acquisition, as set forth in the NAIC Model Regulations.