(a) The letter of credit must be clean, irrevocable, and unconditional, and issued or confirmed by a qualified United States financial institution. The letter of credit must contain an issue date and must 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 must 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 must not contain reference to any other agreements, documents, or entities, except as provided in subsection (h)(1) of this section.
(b) The heading of the letter of credit may include a boxed section that contains the name of the applicant and other appropriate notations to provide a reference for such letter of credit. If included, the boxed section must be clearly marked to indicate that such information is for internal identification purposes only. Neither the boxed section nor the internal identification may affect the terms of the letter of credit.
(c) The letter of credit must 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 on reimbursement.
(d) The term of the letter of credit must be for at least one year and must contain an evergreen clause that prevents the expiration of the letter of credit without written notice from the issuer. The evergreen clause must provide for a period of no less than 30 days' written notice prior to expiry date or nonrenewal.
(e) The letter of credit must state that:
  (1) it is subject to and governed by either the laws of the State of Texas, 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 (UCP);
  (2) in the event of any conflict, whether the laws of Texas or the laws of the state in which the issuing bank is domiciled will apply; and
  (3) all drafts drawn under the letter of credit are presentable at an office in the United States of a qualified United States financial institution.
(f) If the letter of credit is made subject to the UCP, then the letter of credit must 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 force majeure occurrences specified in the UCP occur.
(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 must be met.
  (1) The issuing financial institution must formally designate the confirming qualified United States financial institution as its agent for the receipt and payment of the drafts.
  (2) The evergreen clause must provide for 60 days' written notice prior to expiry date or nonrenewal.
(h) Reinsurance agreement provisions applicable with letters of credit must comply with the requirements of paragraphs (1)-(4) of this subsection.
  (1) The reinsurance agreement, in conjunction with the letter of credit provided pursuant to applicable credit for reinsurance statutes and rules, must contain provisions that:
    (A) require the assuming insurer to provide letters of credit to the ceding insurer and specify what they are to cover; or
    (B) stipulate that the assuming insurer and ceding insurer agree that the letter of credit provided by the assuming insurer, pursuant to the provisions of the reinsurance agreement, may be drawn on at any time, notwithstanding any other provisions in such agreement, and may be utilized by the ceding insurer or its successors in interest for the following purposes:
      (i) to reimburse the ceding insurer for the assuming insurer's share of premiums returned to the owners of policies reinsured under the reinsurance agreement on account of cancellations of such policies;
      (ii) to reimburse the ceding insurer for the assuming insurer'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;
      (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 must include amounts for policy reserves, claims and losses incurred, and unearned premium reserves); and
      (iv)
to pay any other amounts due to the ceding insurer under the reinsurance agreement.
  (2) All of the provisions of paragraph (1) of this subsection must be applied without diminution because of insolvency on the part of the ceding insurer or assuming insurer.
  (3) The reinsurance agreement may, if applicable, provide for the ceding insurer and assuming insurer to:
    (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; or
    (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) 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 that is incorporated into the reinsurance agreement or be a separate document.
(i) A letter of credit may not be used to reduce any liability for reinsurance ceded to an unauthorized assuming insurer in financial statements required to be filed with TDI 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.
(j) Only one expiration date may 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 that the letter of credit will expire.
(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 assuming insurer must not exceed 10 percent 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 that are named as beneficiaries in accordance with subsection (l) of this section.
(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 assuming insurer may be named as beneficiary.
(m) Only one amount may appear on the letter of credit except that, in the event of affiliated beneficiaries, the letter of credit must show an aggregate amount covering the total reserve credit taken by all such affiliated beneficiaries and also must specifically designate for each named beneficiary, by dollar amount or percentage of the aggregate, the maximum amount that each named beneficiary may draw down.
(n) The term "beneficiary" must include any successor by operation of law of the named beneficiary including, without limitation, any liquidator, receiver, conservator, or supervisor.
(o) The account holder must be the assuming insurer.
(p) No schedule of periodic payments must appear on the letter of credit.
(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)-(4) of this subsection must be met.
  (1) The letter of credit that is being confirmed must comply in substance and form with Insurance Code §493.104 and §493.105 and this subchapter, except that the period of the evergreen clause as referenced in subsection (g)(2) of this section shall be increased to 60 days.
  (2) The confirmation letter must show on its face:
Cont'd...