SECTION 28.3. The Encouragement of the Merger of Insurers in Weak Financial Condition with Insurers in a Stronger Financial Condition

(a) Purpose and applicability. The purpose of this section is to provide the basis for encouragement of the merger of financially weak insurers with financially stronger insurers, as provided in the Insurance Code, Article 21.28-A, §1, in circumstances where rehabilitation or conservation of an insurer would be inefficient or impracticable. The provisions of this section shall be utilized in conjunction with authority granted and duties required in the Insurance Code, Articles 1.15-1.19, 1.32, 9.48, 21.28, 21.28-A, 21.28-C, 21.28-D, and 21.49-1. If a financially weak insurer, as provided in this section, indicates it does not wish to be merged with a potential merger partner, the provisions of this section shall not apply.

(b) Threshold criteria for merger. The commissioner of insurance, in determining whether to pursue a merger alternative under this section, shall consider the following threshold criteria:

(1) whether the corporate form of the financially weak insurance carrier is one which legally accommodates a merger alternative; and

(2) whether conservation or rehabilitation of the financially weak insurer is inefficient or impracticable.

(c) Scope of consideration. So long as the criteria of subsection (b)(1) of this section is present, the commissioner may consider and pursue merger of a financially weak insurer upon determination that merger is a feasible alternative to supervision, conservatorship, or receivership which otherwise would be required of such insurer. The commissioner is not required, however, to further pursue the alternative of merger with respect to a financially weak insurer if either of the conditions described in subsection (b)(1) and (2) of this section is not present.

(d) Identification of potential merger partners and financially weak insurers. To facilitate the merger of financially weak insurers with financially stronger insurers, the Texas Department of Insurance shall utilize the procedures outlined in paragraphs (1) and (2) of this subsection for identification of potential merger partners and financially weak insurers, respectively.

(1) Potential merger partners are those which exhibit one or more of the following characteristics as of the close of the most recent calendar year:

(A) a review of internal management and accounting controls as required by generally accepted auditing standards which are documented by a certified public accountant's audit;

(B) an operations history of at least five years with respect to all lines of insurance to be merged; and/or

(C) any other documented characteristics, including any financial conditions, deemed appropriate by the commissioner.

(2) Financially weak insurers are those which exhibit any or a combination of the following factors which would result in a finding of hazardous financial condition by the commissioner of insurance:

(A) the required surplus, capital, or capital stock is impaired to an extent prohibited by law;

(B) the surplus, capital, or capital stock of the company is insufficient to permit it by law to continue to write new business;

(C) the business of the insurance company is being conducted fraudulently;

(D) the insurer has attempted to dissolve or liquidate without first having made provisions satisfactory to the commissioner of insurance for the payment of liabilities arising from policies of insurance issued by such company; and/or

(E) a review of the financial condition of the insurer indicates that the continued operation of the insurer might be hazardous to its policyholders, creditors, or the general public when such review is made in conjunction with the following:

(i) the kinds and nature of risks insured;

(ii) the loss experience and ownership of the insurer;

(iii) the ratio of total annual premium and net investment income to commission expenses, general insurance expenses, policy benefits paid, and required policy reserve increases;

(iv) the capabilities of management to sufficiently direct and operate the insurer;

(v) the method of operation of the insurer;

(vi) affiliations;

(vii) investments;

(viii) any contracts which lead or may lead to contingent liability; and/or

(ix) agreements with respect to which the insurer is a guarantor or surety.

(e) Compilation and maintenance of list of potential merger partners. The Texas Department of Insurance shall, on or before August 1 of each year, solicit insurers potentially meeting the criteria of subsection (d)(1) of this section to be included on a list of potential merger partners interested in pursuing merger with weak insurers. All interested potential merger partners shall be added to the list of potential merger partners compiled and maintained by the department.

(f) Procedural provisions. Any insurer identified as a weak insurer and meeting the criteria set out in subsection (b) of this section shall be provided with the list of potential merger partners in connection with a communication encouraging the weak insurer to contact potential merger partners for a possible merger. The weak insurer shall provide the department with either of the following within 30 days from the date on which the list of insurers is mailed to the weak insurer:

(1) a letter of intent to merge, from one or more potential merger partners; provided that the commissioner of insurance may extend the time period for response, based upon written application of the weak insurer, and establish such conditions and limitations as are appropriate under the circumstances; or

(2) a letter or other communication indicating that the insurer has elected not to pursue the alternative of merging with any potential merger partner.

(g) Failure to respond. In the event a financially weak insurer fails to respond in accordance with subsection (f) of this section, the insurer shall be deemed to have elected not to pursue the alternative of merger.

(h) Docketing pending mergers. Any merger initiated pursuant to the provisions of this section shall have preference over other matters of a similar nature pending before the Texas Department of Insurance and shall receive official action at the earliest practicable date.

(i) In relation to other law. The provisions of this section are not intended in any manner to limit the authority conferred upon the commissioner of insurance in the Insurance Code or other applicable law.

Source Note: The provisions of this §28.3 adopted to be effective August 27, 1992, 17 TexReg 5688.