SECTION 7.205. Acquisition or Divestiture Statements--Filing Requirements

(a) Filing Requirements. Filing and other regulatory requirements for acquisitions, changes of control, or divestitures and certain other matters as specified in the Act, §823.153 and §823.154, are governed by the Act, §823.153 and §823.154. For purposes of this subsection, a domestic insurer as defined in the Act, §823.153, includes any person controlling a domestic insurer, including a commercially domiciled insurer, unless the person is, either directly or through its affiliates, primarily engaged in business other than the business of insurance. A change or substitution of an attorney-in-fact of a Lloyds' or reciprocal or interinsurance exchange is subject to the Act, §823.154. A failure to file complete and accurate information in all material respects is grounds for a denial by the commissioner under the Act, §823.157.

(b) Form and content of statement. The statement required by subsection (a) of this section (elsewhere referred to as acquisition or divestiture statement) must be made in accord with §7.209 of this title (relating to Form A), the acquisition or divestiture statement, §7.209(a) - (n) and §7.209(o), respectively. The acquiring party must provide additional financial information in form or substance as required by the commissioner which is material to the finding required by the Act, §823.157. Any financial information required under the Act, §823.203, may be waived by the commissioner if the information is not deemed material. No statement required by subsection (a) of this section will be deemed filed with the commissioner until the date all material required and sufficient to constitute a full statement has been provided.

(c) Partnerships and corporate filings. If the person required to file the acquisition statement is a partnership, limited partnership, syndicate, or other group, the commissioner may require that the information called for by §7.209 of this title be given with respect to each partner of the partnership or limited partnership, each member of the syndicate or group, and each person who controls the partner or member. If any partner, member, or person is a corporation or if the person required to file the statement referred to in subsection (a) of this section is a corporation, the commissioner may require that the information called for by §7.209 be given with respect to the corporation and by each executive officer and director of the corporation, and each person who is directly or indirectly the beneficial owner of more than 10 percent of the outstanding voting securities of the corporation.

(d) Amendment. If any material change occurs in the facts set forth in the acquisition or divestiture statement filed with the commissioner, an amendment setting forth the change, together with copies of all documents and other material relevant to the change, must be filed with the commissioner and sent to the domestic insurer within two business days after the person learns of the change.

(e) Acquisition or divestiture of a domestic insurer as defined in subsection (a) of this section.

(1) If the person being acquired or divested is a domestic insurer solely because of the provisions of subsection (a) of this section, the name of the domestic insurer on the cover page should be indicated as follows: "ABC Insurance Company, a subsidiary of XYZ Holding Company."

(2) Where a domestic insurer as defined in subsection (a) of this section is being acquired or divested, references to "the insurer" contained in §7.209 of this title refer to both the domestic subsidiary insurer and the person being acquired or divested.

(f) Approval or denial by commissioner; hearings. All mergers, acquisitions, changes of control, or divestitures and other matters specified in the Act, §823.154, and mergers contemplated by Insurance Code §441.006, are subject to the Act, §823.157. The acquiring or divesting party has the burden of providing sufficient competent evidence for the commissioner to make the determinations required under the Act, §823.157.

(g) Notices; payment of expenses.

(1) Notices, payments of expenses, and other matters specified in the Act, §823.156, must comport with that subsection.

(2) All provisions of Insurance Code Chapter 823, and this subchapter relating to the timely mailing of a copy of the acquisition or divestiture statement, and relating to the timely mailing of a copy of a notice of hearing before the commissioner to an insurer, may be waived by the written unanimous consent of the insurer and the person or persons filing such acquisition or divestiture statement. The written waiver must acknowledge receipt of a copy of the acquisition or divestiture statement.

(h) Exemptions. The provisions of this section do not apply to transactions and other matters exempted under the Act, §823.164. A restructuring within an insurance holding company system which results in a direct or indirect change in control of a domestic insurer is subject to the Act, §823.164(h)(1). An acquisition of a voting security of a domestic insurer specified in the Act, §823.164(f)(1) and (2), must be disclosed by amendment to the registration statement as provided in §7.203(f) of this title (relating to Registration of Insurers). An acquisition of a voting security of a domestic insurer by a security holder controlling, directly and indirectly, 50 percent of the then issued and outstanding voting securities of the domestic insurer, is subject to the Act, §823.164(g). An acquisition of a voting security of an insurer domiciled in this state which is not subject to the Act, §823.154, by virtue of the Act, §823.153, is subject to the Act, §823.164(h)(2).

(i) Retention of control. For certain matters relating to retention of control and certain violations of the Act, see the Act, §823.163.

(j) Duty of insurer. Authorized insurers must notify the commissioner of control of, or of actions to acquire control of, an insurer as required by the Act, §823.161.

(k) Preliminary filings. Any acquisition or divestiture statement may be preliminarily filed with the commissioner to obtain a preliminary review by the commissioner. It must be clearly marked or designated as a preliminary filing. The preliminary filing must not invoke the requirements of this subchapter or Insurance Code Chapter 823, requiring that notice be given to the affected insurer involved. The preliminary filing will have no legal effect and does not constitute compliance with Insurance Code Chapter 823, and this subchapter. The commissioner is not bound by the preliminary review nor deemed to have in any manner approved the filing.

(l) Violations. The following are violations of this section:

(1) the failure to file any statement, amendment, or other material required to be filed under this section; or

(2) the effectuation of, or any attempt to effectuate, an acquisition, change of control of, divestiture, or merger with, a domestic insurer unless the commissioner has approved it.

(m) Additional violations. Each director or officer of an insurance company subject to these sections, or of an insurance holding company system subject to these sections, who knowingly and willfully violates, participates in, or assents to or who knowingly and willfully permits any of the officers, agents, or employees of the insurer or holding company system to engage in transactions or make investments that have not been properly reported or submitted under these sections or that knowingly and willfully violate these sections, is subject to administrative penalty under Insurance Code §§84.001-84.051.

(n) Additional sanctions. An entity that holds a certificate of authority granted by the department or the commissioner and that violates the Insurance Code is subject to the sanctions authorized under Insurance Code §§82.001-82.056.

(o) Producer-controlled property and casualty insurer.

(1) For purposes of this section, a controlling producer, as defined in §7.202(a)(8) of this title (relating to Definitions), is subject to the filing requirements of the Act, in addition to the following requirements.

(A) No acquisition of an insurer by a controlling producer in another state may be approved by the commissioner under the Act, §823.157, unless the acquiring party demonstrates, to the satisfaction of the commissioner, compliance with the requirements contained in subparagraph (B) of this paragraph.

(B) Approval of the acquisition of an insurer by a controlling producer in another state may not be approved unless the following requirements are met.

(i) Required contract provisions. A controlled insurer must not accept business from a controlling producer and a controlling producer must not place business with a controlled insurer unless there is a written contract between the controlling producer and the controlled insurer specifying the responsibilities of each party, which contract has been approved by the board of directors of the controlled insurer and which contains the following:

(I) a provision that the controlled insurer may terminate the contract for cause, upon written notice to the controlling producer. The controlled insurer must suspend the authority of the controlling producer to write business during the pendency of any dispute regarding the cause for the termination;

(II) a provision that the controlling producer render accounts to the controlled insurer detailing all material transactions, including information necessary to support all commissions, charges, and other fees received by, or owing to, the controlling producer;

(III) a provision that the controlling producer remit all funds due under the terms of the contract to the controlled insurer on at least a monthly basis. The due date must be fixed so that the premiums or installments collected are remitted no later than 90 days after the effective date of any policy placed with the controlled insurer under this contract;

(IV) a provision that all funds collected for the controlled insurer's account must be held by the controlling producer in a fiduciary capacity, in one or more appropriately identified bank accounts in banks that are members of the Federal Reserve System;

(V) a provision that the controlling producer maintain separately identifiable records of business written for the controlled insurer;

(VI) a provision that the contract not be assigned in whole or in part by the controlling producer;

(VII) a provision that the controlled insurer provide the controlling producer with its underwriting standards, rules, procedures, manuals setting forth the rates to be charged, and the conditions for the acceptance or rejection of risks. The controlling producer must adhere to the standards, rules, procedures, rates, and conditions. The standards, rules, procedures, rates, and conditions must be the same as those applicable to comparable business placed with the controlled insurer by a producer other than the controlling producer;

(VIII) a provision establishing the rate and terms of the controlling producer's commissions, charges, or other fees and the purposes for those charges or fees. The rates of the commissions, charges, and other fees must be no greater than those applicable to comparable business placed with the controlled insurer by producers other than controlling producers. For purposes of this subclause and subclause (VII) of this clause, examples of "comparable business" include the same lines of insurance, same kinds of insurance, same kinds of risks, similar policy limits, and similar quality of business;

(IX) a provision that, if the contract provides that the controlling producer, on insurance business placed with the insurer, is to be compensated contingent upon the insurer's profits on that business, the compensation must not be determined and paid until at least five years after the premiums on liability insurance are earned and at least one year after the premiums are earned on any other insurance. No commissions may be paid until the adequacy of the controlled insurer's reserves on remaining claims has been independently verified;

(X) a provision limiting the controlling producer's writings in relation to the controlled insurer's surplus and total writings. The controlled insurer may establish a different limit for each line or subline of business. The controlled insurer must notify the controlling producer when the applicable limit is approached and must not accept business from the controlling producer if the limit is reached. The controlling producer must not place business with the controlled insurer if it has been notified by the controlled insurer that the limit has been reached; and

(XI) a provision that the controlling producer may negotiate but must not bind reinsurance on behalf of the controlled insurer on business the controlling producer places with the controlled insurer, except that the controlling producer may bind facultative reinsurance contracts pursuant to obligatory facultative agreements if the contract with the controlled insurer contains underwriting guidelines including, for both reinsurance assumed and ceded, a list of reinsurers with which the automatic agreements are in effect, the coverages and amounts or percentages that may be reinsured, and commission schedules.

(ii) Audit committee. Every controlled insurer must have an audit committee of the board of directors composed of independent directors. The audit committee must annually meet with management, the controlled insurer's independent certified public accountants, and an independent casualty actuary or other independent loss reserve specialist acceptable to the commissioner to review the adequacy of the controlled insurer's loss reserves.

(iii) Reporting requirements.

(I) In addition to any other required loss reserve certification, the controlled insurer must annually, on April 1 of each year, file with the commissioner an opinion of an independent casualty actuary, or other independent loss reserve specialist acceptable to the commissioner, reporting loss ratios for each line or subline of business written and attesting to the adequacy of loss reserves established for losses incurred and outstanding as of year-end, including incurred but not reported losses, on business placed by the controlling producer.

(II) The controlled insurer must annually report to the commissioner in its registration statement filed under §7.203(g) of this title the amount of commissions paid to the controlling producer, the percentage the amount represents of the net premium written, and comparable amounts and percentages paid to noncontrolling producers for placements of the same kinds of insurance.

(iv) Disclosure requirements. The controlling producer, prior to the effective date of the policy, must deliver written notice to the prospective insured disclosing the relationship between the controlling producer and the controlled insurer, except that, if the business is placed through a subproducer who is not a controlling producer, the controlling producer must retain in the records a signed commitment from the subproducer that the subproducer is aware of the relationship between the controlled insurer and the controlling producer and that the subproducer has notified or will notify the insured.

(2) The contract referred to in paragraph (1)(B)(i) of this subsection does not provide to or expand any rights or privileges of a controlling producer, including, but not limited to, authority to place or write business, that do not otherwise exist or could not otherwise be exercised under the laws of the State of Texas or another state.

(p) A producer controlled insurer is subject to all the provisions of the Act absent a determination that the laws of its domiciliary state are substantially similar as provided by the Act, §823.014.

Source Note: The provisions of this §7.205 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 December 24, 1993, 18 TexReg 9310; 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