100 Irrevocable Lc At Sight

[Louella Kammann]

TheDepartment has recently reviewed the various conditions it has required in connection with the use of letters of credit and by means of this Circular Letter advises all licensed insurers that the Department will not find letters of credit to be acceptable unless they meet the following conditions:

(1) The letter of credit must be "clean", irrevocable and unconditional. By "clean" and unconditional, it is meant that the letter of credit stipulates that the beneficiary need only draw a sight 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 conditions or qualifications outside of the letter of credit. In addition, the letter of credit itself cannot contain references to any other agreements, documents or entities.

(2) The heading of the letter of credit may include a boxed section which contains the name of the applicant and other appropriate notations to provide a reference for such letter of credit. The boxed section must be clearly marked to indicate that such information is for internal identification purposes only and does not affect the terms of the letter of credit or the bank's obligations thereunder.

(4) The term of the letter of credit must be for at least one year and must contain an "evergreen clause", which prevents the expiration of the letter of credit without due notice from the issuer. In addition, the "evergreen clause" should allow for a period of no less than 30 days notice prior to expiry date for non-renewal.

(5) The letter of credit must state whether it is subject to and governed by the Laws of the State of New York or the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 290), and all drafts drawn thereunder must be presentable at a bank office in the United States .

(6) If the letter of credit is made subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 290), 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 occurrences specified in Article 11 of Publication 290 occur.

(8) The aggregate of all letters of credit issued or confirmed to any one licensed insurance company by one bank on behalf of any one entity must not exceed 5% of the bank's capital and surplus, as shown in its annual report as of the end of its preceding fiscal year, as filed with the New York State Banking Department or the appropriate Federal banking regulatory agency.

(2) Stipulate that the reinsurer and reinsured agree that the letters of credit provided by the reinsurer pursuant to the provisions of the reinsurance agreement may be drawn upon at any time, notwithstanding any other provisions in such agreement, and shall be utilized by the reinsured or its successors in interest only for one or more of the following:

(ii) to reimburse the reinsured for the reinsurer's share of surrenders and benefits or losses paid by the reinsured under the terms and provisions of the policies reinsured under the reinsurance agreement,

(iii) to fund an account with the reinsured in an amount at least equal to the deduction, for reinsurance ceded, from the reinsured liabilities for policies ceded under the agreement. Such amount shall include, but not be limited to, amounts for policy reserves, claims and losses incurred and unearned premium reserves, and

(c) When a letter of credit is obtained in conjunction with a reinsurance agreement covering risks other than life, where it is customary practice to provide a letter of credit for a specific purpose, then such reinsurance agreement may in lieu of (a)(2) above require that the parties enter into a "Trust Agreement" which may be incorporated into the reinsurance agreement or be a separate document. Such "Trust Agreement" shall conform in substance to Exhibit D.

(11) A letter of credit may not be used to reduce any liability for reinsurance ceded to an unauthorized reinsurer in financial statements required to be filed with this Department unless an acceptable letter of credit with the filing ceding insurer as beneficiary has been issued on or before the "as of 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 obligations under the reinsurance agreement which the letter of credit was intended to secure.

(12) The conditions stated herein, shall apply to letters of credit issued, confirmed, amended or renewed on or after October 1, 1983. However, Condition No. (10)(a) shall not apply to reinsurance agreements entered into prior to October 1, 1983, provided that the reinsurance agreement does not restrict the drawing down of the letter of credit in any way and no new business is ceded under the agreement.

We hereby undertake to promptly honor your sight draft(s) drawn on us, indicating our Credit No. _____, for all or any part of this Credit if presented at (bank address) on or before the expiry date or any automatically extended date.

Except as stated herein, this undertaking is not subject to any condition or qualification. The obligation of the Bank under this Letter of Credit shall be the individual obligation of the Bank, in no way contingent upon reimbursement with respect thereto.

It is a condition of this Letter of Credit that it shall be deemed automatically extended without amendment for one year from the expiry date hereof, or any future expiration date, unless thirty days prior to any expiration date we shall notify you by Registered Mail that we elect not to consider this Letter of Credit renewed for any such additional period.

Should you have occasion to communicate with us regarding this Credit, kindly direct your communication to the attention of our Letter of Credit Department, making specific reference to our Credit No. _____.

We hereby undertake to promptly honor your sight draft(s) drawn on us, indicating our Credit No. _____for all or any part of this credit if presented at this Bank, or at such office of the confirming bank as shall be designated by written notice, on or before the expiry date or any automatically extended date.

It is a condition of this Letter of Credit that it shall be deemed automatically extended without amendment for one year, from the expiry date hereof, or any future expiration date, unless sixty days prior to any expiration date we shall notify you by Registered Mail that we elect not to consider this Letter of Credit renewed for any such additional period.

We hereby confirm the credit and thereby undertake to pay on sight all drafts drawn and presented as specified therein on or before _________ or any automatically extended date of the letter of credit.

Except as stated herein, this undertaking is not subject to any condition or qualification. The obligation of the Bank under this Confirmation shall be the individual obligation of the Bank, in no way contingent upon reimbursement with respect thereto.

Now, THEREFORE, in consideration of Reinsurer's having so applied for and secured delivery of said Letter of Credit which hereby acknowledged, the Company undertakes to use and apply any amounts which it may draw upon such Credit, without diminution because of any insolvency of the Company, for the following purposes only:

a. To pay or reimburse itself for Reinsurer's share under the Treaty of any losses sustained (including incurred but not reported losses) or unearned premiums due to the company if not otherwise paid by the Reinsurer.

c. To obtain a cash deposit of Reinsurer's share under the Treaty of loss and unearned premium reserves, if Clean Irrevocable Credit No._____ is not renewed at least _____days before its expiration and the Reinsurer will continue thereafter to have a share in such loss and expense reserves.

IT IS FURTHER AGREED between the parties hereto that at annual intervals, or more frequently as required but never more frequently than quarterly, the balance of Credit made available shall be adjusted in the following manner:

b. If the Reinsurer's share of losses outstanding plus unearned premiums under the Treaty shall exceed the then existing balance of the Credit made available, the Reinsurer will, within 30 days after receiving notice of such excess, secure delivery to the Company of an amendment of Clean Irrevocable Credit No. _____ increasing the amount of Credit available by the amount of such difference.

c. Should however, the Reinsurer's share of losses plus unearned premium reserves under the Treaty be less than the balance of credit available on the accounting date, the Company shall, within 30 days after receipt of written request of Reinsurer, release such excess credit by agreeing to secure an amendment to Clean Irrevocable Credit No. _____ reducing the amount of Credit available by the amount of such excess credit.

IT IS FURTHER AGREED as between the parties hereto that said ____________________Bank with or without notice of the existence of this Agreement, shall have no responsibility whatsoever in connection with its execution or, without limiting the generality of the foregoing, with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to see that withdrawals are made only upon the order of properly authorized representatives of the Company and it is understood that the Company shall incur no obligation to said Bank in acting upon said Credit, other than as appears in the express terms thereof.

1. We hereby establish this irrevocable and transferable Letter of Credit in your favor for one or more drawings up to United States $____. This Letter of Credit is payable at [issuing financial institution's and, if any, confirming financial institution's] office at [issuing financial institution's address and, if any, confirming financial institution's address] and expires with our close of business on ____, or any automatically extended expiration date.

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