(a) An asset or a deduction from liability for reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of Section 922.4 shall be allowed in an amount not exceeding the liabilities carried by the ceding insurer to the extent of either of the following:

(1) The asset or deduction is not greater than the amount of funds held by the ceding insurer under a reinsurance contract with that assuming insurer as security for the payment of obligations thereunder and those funds are held in the United States under the exclusive control of the ceding insurer.

(2) The asset or deduction is not greater than the amount of funds held in a trust, satisfactory to the commissioner, on behalf of the ceding insurer under a reinsurance contract with the assuming insurer as security for the payment of obligations thereunder and is held in a qualified United States financial institution, as defined in subdivision (b) of Section 922.7, subject to withdrawal solely by the ceding insurer.

The security under this subdivision may be in the form of cash or securities authorized as general investments under Article 3 (commencing with Section 1170) of Chapter 2, or securities listed by the Securities Valuation Office of the NAIC, including those deemed exempt from filing, as defined by the Purposes and Procedures Manual of the National Association of Insurance Commissioners Securities Valuation Office, qualifying as admitted assets under this code and with liquidity meeting the requirements of Section 706.5, and not otherwise disallowed in the commissioner’s discretion.

(b) An asset or a deduction from liability for reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of Section 922.4 shall be allowed in an amount not exceeding the liabilities carried by the ceding insurer to the extent that security is provided in the form of letters of credit, satisfactory to the commissioner, which shall be:

(1) Clean, irrevocable, unconditional letters of credit, issued or confirmed by qualified United States financial institutions, as defined in subdivision (a) of Section 922.7, effective no later than December 31st in respect of the year for which filing is being made, and in the possession of the ceding insurer on or before the filing date of its annual statement.

(2) Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance or confirmation and shall, notwithstanding the issuing or confirming institutions’ subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification, or amendment, whichever first occurs.

(c) For purposes of this section, the phrase “deemed exempt from filing as defined by the Purposes and Procedures Manual of the National Association of Insurance Commissioners Securities Valuation Office” shall mean all United States government securities, and all other securities or bonds with a rating of SVO 1 or FE 1 listed by the National Association of Insurance Commissioners Securities Valuation Office as exempt.

(d) The commissioner may adopt, by regulation pursuant to subdivision (b) of Section 922.85, specific additional requirements relating to or setting forth the valuation of assets or reserve credits, the amount and forms of security supporting reinsurance arrangements described in paragraph (2) of subdivision (b) of Section 922.85, and the circumstances pursuant to which credit will be reduced or eliminated.

(Amended by Stats. 2017, Ch. 202, Sec. 3. (AB 938) Effective September 1, 2017.)