§ 223.9 - Determination of financial condition and other required information.

§ 223.9 Valuation Determination of assets and liabilities.

Cross Reference

Link to an amendment published at 89 FR 48833, June 10, 2024.

financial condition and other required information.

In determining the financial condition of every such company, its assets and liabilities will be computed in accordance with the guidelines contained in the Treasury's current Annual Letter to Executive Heads of Surety Companies. However, the Secretary of the Treasury may value the assets and liabilities of such companies in his discretion. Credit will be allowed for reinsurance in all classes of risks if the reinsuring company holds a certificate of authority from the Secretary of the Treasury, provided such reinsuring company is in continuing compliance with all certificate of authority requirements, or has been recognized as an admitted reinsurer in accord with § 223.12.

[42 FR 8637, Feb. 11, 1977, as amended at 79 FR 62000, Oct. 16, 2014

company applying for a certificate of authority or renewal of a certificate of authority under this part, Treasury will generally compute the company's assets and liabilities in accordance with paragraphs (a) through (f) of this section, provided that Treasury may exercise discretion in valuing the assets and liabilities of such companies. While paragraphs (a) through (f) specify how Treasury will value certain classes of assets and liabilities and the analysis that Treasury will perform, they are not intended to be an exhaustive list of all assets and liabilities that Treasury may require to be reported and may evaluate as part of this analysis. Additionally, Treasury will annually publish supplemental guidance on the financial analysis performed by Treasury, including applicable ratios and acceptable ranges for ratios.

(a) Assets —

(1) General criteria for admissibility. The cash capital and other funds included in the financial statement must be safely invested in accordance with the laws of the state in which the company is incorporated. Admissible assets must be reported in U.S. Dollars and are generally limited to investments in cash, cash equivalents, short term investments, mortgage loans (within certain limits), and real property necessary for the conduct of a company's business. In cases where an investment (other than U.S. Government securities and securities of affiliates or subsidiaries) exceeds 10 percent of the total admitted assets, Treasury may require additional supporting documentation as needed on a case-by-case basis in order for the asset to be admissible. Additionally, Treasury considers normal account balances (such as, but not limited to, investment income due and accrued, agents' balances and premiums receivables, reinsurance recoverables on paid losses, and funds held by or deposited with ceding reinsuring companies) to be admissible provided they meet Treasury's standards. In order to be admissible, normal account balances may be evaluated for transactional substance, quality, and liquidity. Some assets that may be admissible under codification and/or certain state permitted practices may require supporting documentation as needed on a case-by-case basis in order to be admissible under Treasury's criteria. Assets resulting from reinsurance transactions must meet the credit for reinsurance standards listed under paragraph (c) of this section.

(2) Securities. Bonds, unaffiliated common stocks, and unaffiliated preferred stocks must be valued and reported in accordance with the NAIC's Accounting Practices and Procedures Manual (as updated or amended from time to time) and the NAIC Securities Valuation Office (SVO). Those with an investment grade designation will be admissible and those with a non-investment grade designation will be considered on a case-by-case basis.

(i) All other securities. The value of all other securities should be valued as of December 31 and reported in U.S. Dollars. For securities that do not have a SVO designation or have a SVO non-investment grade designation and are significant for Treasury purposes, Treasury may consider, if it deems appropriate, other relevant data (e.g., prospectus, marketability/liquidity information, internal investment strategies/philosophies) and perform an analysis to determine whether the securities meet Treasury's criteria for admissibility.

(ii) Securities of controlled companies. Investments in subsidiaries, controlled entities, and affiliated entities must be reported in accordance with the NAIC Accounting Practices and Procedures Manual (as updated or amended from time to time).

(A) Other insurance companies. Companies owning securities of other insurance companies, which are under the same direction and control as the reporting company, must furnish copies of the NAIC File Upload of the subsidiaries. The assets of these subsidiaries will be analyzed according to the criteria set forth in this section.

(B) Non-insurance companies. Companies owning securities of non-insurance companies, which are under the same direction and control as the reporting company, must furnish copies of independently audited financial statements of such companies as of the reporting date.

(3) Real estate and mortgages. Only real estate essential to the operating needs of the company for conducting its business, and conventional first mortgage loans on unencumbered, improved, or productive real estate located within the United States, are admissible. These must be reported in accordance with the NAIC's Accounting Practices and Procedures Manual (as updated or amended from time to time). The real estate and mortgaged property must be supported by an appraisal report that includes the information and computations normally used in arriving at a competent appraised value. In instances where the aggregate values exceed 20 percent of the policyholders' surplus, Treasury may, if it deems appropriate, require additional supporting documentation.

(b) Minimum bail reserve requirements. Companies transacting surety bail business must submit a schedule showing bail premiums in force, bail liability, and the amount of any associated unearned premium reserve.

(c) Reinsurance.

(1) Companies are required to submit Treasury Schedule F (Treasury Form No. TFS 6314) reflecting information in the company's annual statements. Credit for reinsurance may be taken (to the extent specified in the referenced provisions of § 223.12) for reinsurance in all classes of risk provided that it is ceded to the following companies:

(i) Companies holding a current certificate of authority from Treasury;

(ii) U.S. domiciled non-Treasury certified or recognized parents, subsidiaries, and/or affiliates if Treasury determines that the parent, subsidiary, and/or affiliate is financially solvent;

(iii) Admitted reinsurers as defined under § 223.12(h);

(iv) Complementary reinsurers as defined under § 223.12(i);

(v) Alien reinsurers as defined under § 223.12(j), up to the extent credit is allowed for reinsurance ceded to the alien reinsurer by the ceding company's state of domicile (subject to paragraph (c)(3) of this section); and

(vi) An instrumentality or agency of the United States that is permitted by Federal law or regulation to execute reinsurance contracts.

(2) Treasury may give credit for reinsurance not covered in paragraph (c)(1) of this section, to the extent of funds withheld or letters of credit or trust agreements from such reinsurers, provided the company advises Treasury and provides sufficient documentation of the amount of funds held, letters of credit posted or funds secured in trust for each company. Treasury may also give credit for trust account assets associated with multi-beneficiary trust agreements established and maintained in the United States by overseas accredited or trusteed reinsurers listed online at https://www.fiscal.treasury.gov/surety-bonds/, to the extent the relevant ceded business is covered by these trust account assets.

(3) If, after its review of the financial documentation submitted by an alien reinsurer recognized pursuant to § 223.12(j) and of the financial documentation submitted by the ceding company, Treasury determines that either company may be unable to carry out its obligations, Treasury may require additional collateral for the ceding company to receive credit for reinsurance to the extent credit is given for reinsurance ceded to the alien reinsurer by the ceding company's state of domicile.

(d) Risk based capital (RBC). Treasury uses RBC in determining the financial solvency of companies, together with such companies' overall financial results, ratios, and trends. Companies must maintain RBC results that fall within acceptable ranges as established by the NAIC or provide a satisfactory explanation for results that do not.

(e) Financial ratios. Treasury uses the NAIC IRIS ratios to measure companies' solvency, profitability, and liquidity. Companies must maintain results for these ratios that fall within acceptable ranges as established by the NAIC or provide a satisfactory explanation for results that do not.

(f) Financial results and trends. Treasury analyzes financial results from annual and quarterly financial statements required under this part for evidence of negative financial results or trends. Treasury may require companies to submit additional documentation or explanation regarding financial statements with evidence of negative financial results or trends such as decreasing policyholders' surplus, large underwriting losses, negative cashflows, or unsatisfactory IRIS ratio results.

(g) Noncompliance. Noncompliance with paragraphs (a) through (f) of this section may result in Treasury denying a company's application for its certificate of authority, or renewal of its certificate, or in Treasury revoking a company's certificate.

[89 FR 48833, June 10, 2024]