SECTION 7.204. Transactions Subject to Prior Notice

(a) Prior approval and notice.

(1) The prior written approval of the commissioner is required for the transactions specified in the Act, §823.102. This section only applies to sales, purchases, exchanges, loans or extensions of credit or guarantees, or investments, including an amendment or modification of an affiliate agreement previously filed under this section.

(2) The following transactions under the Act, §823.103, including any amendments or modification of an agreement as previously filed between a domestic insurer and any person in its holding company system may not be entered into unless the insurer has notified the commissioner in writing of its intention to enter into any like transaction at least 30 days prior, or a shorter period as the commissioner may permit, and the commissioner has not disapproved it within the period:

(A) sales, purchases, exchanges, loans or extensions of credit or guarantees, or investments;

(B) reinsurance agreements, including reinsurance treaties, or pooling agreements, or any amendments or modification to any agreement, and those agreements that may require as consideration the transfer of assets from an insurer to a nonaffiliate, if an agreement or understanding exists between the insurer and nonaffiliate that any portion of the assets will be transferred to one or more affiliates of the insurer;

(C) any contract, agreement, or arrangement for the furnishing or receiving of services or facilities on a regular or systematic basis; or

(D) management or service agreements, cost sharing agreements, rental or leasing agreements must at a minimum, to the extent not inconsistent with applicable law or regulation, and as applicable:

(i) identify the person providing services and the nature of the services;

(ii) set forth the methods to allocate costs to include Insurance Code §823.101(e);

(iii) 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;

(iv) prohibit advancement of funds by the insurer to the affiliate except to pay for services defined in the agreement;

(v) 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;

(vi) define books and records of the insurer to include all books and records developed or maintained under or related to the agreement;

(vii) specify that all books and records of the insurer are and remain the property of the insurer and are subject to control of the insurer;

(viii) 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;

(ix) include standards for termination of the agreement with and without cause;

(x) include indemnifying the insurer in the event of gross negligence or willful misconduct by the affiliate providing the services;

(xi) specify that, if the insurer is placed in receivership or seized by the commissioner under Insurance Code Chapter 443:

(I) all of the rights of the insurer under the agreement extend to the receiver or commissioner; and

(II) all books and records will immediately be made available to the receiver or the commissioner, and must be turned over to the receiver or commissioner immediately upon the receiver or the commissioner's request;

(xii) 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

(xiii) specify that the affiliate will continue to maintain any systems, programs, or other infrastructure notwithstanding a 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;

(E) agreements to consolidate federal income tax returns, which agreements must provide that a domestic insurer will be adequately indemnified in the event the Internal Revenue Service levies upon the insurance company's assets for unpaid taxes in excess of the amount paid under the agreement;

(F) transactions with affiliated financial institutions, other than fully insured deposits;

(G) participation in an investment pool by a property and casualty insurer under Insurance Code Chapter 424; and

(H) any material transactions which the commissioner has determined after notice may adversely affect the interest of the insurer's policyholders or of the public.

(3) A domestic insurer may not enter into transactions that are part of a plan or series of similar transactions with persons within the holding company system to avoid the statutory threshold amount and avoid review. If the commissioner determines that the transactions were entered into over any 12-month period for that purpose, the commissioner may consider the series of transactions with regard to their cumulative effect and may apply the applicable statutory thresholds or the commissioner may apply sanctions under the Code.

(4) Nothing in this rule will authorize or permit any transactions which, in the case of a noncontrolled insurer, would be otherwise contrary to law.

(5) The commissioner, in reviewing transactions, must consider whether the transactions comply with the standards set forth in subsection (c) of this section and whether they may adversely affect the interest of policyholders. Any disapproval by the commissioner of any of the transactions must set forth the specific reasons for the disapproval.

(6) The approval of any transaction under this subsection is deemed an amendment under §7.203(e) of this title (relating to Registration of Insurers) to an insurer's registration statement without further filing.

(b) Transactions. An insurer required to request approval of transactions under subsection (a)(1) of this section and give notices of proposed transactions under subsection (a)(2) of this section, must furnish the required information on Form D (relating to Prior Notice of a Transaction) including the applicable filing fee provided for in §7.1301(d)(23) of this title (relating to Regulatory Fees). The descriptions must in all cases include at least the following: the nature and purpose of the transaction; the nature and amounts of any payments or transfers of assets between the parties; the identities of all parties to the transactions; whether any officers or directors of a party are pecuniarily interested, and copies of any proposed contracts, agreements, or memoranda of understanding between the parties relating to the transaction along with sufficient competent documentation evidencing compliance with the standards specified in Insurance Code §823.101, and evidencing that the transaction will not adversely affect the interest of policyholders. Proposed contracts, agreements, or memoranda of understanding must provide for settlement within 90 days. No request or notice is deemed filed with the commissioner until the date all of the material has been provided.

(c) Transactions with affiliates and others. Material transactions by registered insurers with their holding companies, subsidiaries, or affiliates are subject to the standards specified in the Act, §823.101.

(d) Extraordinary dividends and other distributions.

(1) An insurer subject to registration under §7.203(a) of this title must not pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until:

(A) 30 days after the commissioner has received written notice in accord with §7.213 of this title (relating to Form E) of the declaration, including the applicable filing fee under §7.1301(d)(23) of this title, provided the commissioner has not disapproved the payment; or

(B) the commissioner approves the payment within the 30-day period. The written notice required under this paragraph will be deemed filed with the commissioner only when all material sufficient to constitute a complete filing, including documentation to support each of the standards set forth in the Act, §823.008, and the payment of any required filing fee under §7.1301(d)(23) of this title have been provided.

(2) For purposes of these sections:

(A) an extraordinary dividend or distribution includes any dividend or distribution of cash or other property, whose fair market value together with that of other dividends or distributions made within the preceding 12 months under the Act, §823.107;

(B) an extraordinary dividend or distribution must not include pro rata distributions of any class of an insurer's own securities;

(C) in determining the 12-month cumulative amount for dividends or distributions, the calculation must be based on the payment date(s) of the dividends or distributions.

(3) Notwithstanding any other provision of law, an insurer may declare an extraordinary dividend or distribution under the conditions specified in the Act, §823.107.

(e) Adequacy of surplus. For the purposes of these sections, in determining whether an insurer's surplus as regards policyholders is reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs, the factors specified in the Act, §823.008, among others, must be considered.

Source Note: The provisions of this §7.204 adopted to be effective January 1, 1976; amended to be effective November 30, 1984, 9 TexReg 5926; amended to be effective April 29, 1988, 13 TexReg 1761; amended to be effective April 13, 1992, 17 TexReg 2273; amended to be effective July 14, 1994, 19 TexReg 5098; amended to be effective May 15, 1996, 21 TexReg 3798; amended to be effective May 5, 2002, 27 TexReg 3559; amended to be effective May 26, 2013, 38 TexReg 3033