Decisions on Bank Applications
Continental Savings Bank
The Board of Directors
Continental Savings Bank
2000 Two Union Square
601 Union Street
Seattle, Washington 98101
Dear Board Members:
The undersigned, under delegated authority, has approved the application filed on behalf of Continental Savings Bank to hold all of the shares of Continental Reinsurance Company, a de novo foreign organization headquartered in the Turks and Caicos Islands, a British Overseas Territory. This approval is subject to the conditions included in the enclosed Order for the reasons set forth in the Statement attached to the Order.
The approval granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with the application. In particular, it is our understanding that Continental Reinsurance Company will only provide reinsurance of private mortgage insurance and such reinsurance will be confined to those loans underwritten or purchased by Continental Savings Bank and its mortgage lending affiliates. In addition, duplicate records of the foreign organization's operations will be maintained in the United States.
Please note that expansion of the subsidiary's activities, including the underwriting of other types of property insurance, would be governed by Part 347 and Part 362 of the FDIC Rules and Regulations and may require another application.
If you have any questions, you may contact Regional Director George J. Masa of our San Francisco Regional Office at (415) 546-1810, 25 Ecker Street, San Francisco, California, 94105. Please advise our San Francisco Regional Office of the action taken regarding this proposal.
Sincerely,
James L. Sexton Director
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Continental Savings Bank, Seattle, Washington
Application for Consent to Directly Acquire and Hold All of the Shares of a Foreign Financial Entity to be Organized Under the Laws of the Turks and Caicos Islands
STATEMENT
Pursuant to provisions of Section 18(l) and Section 24 of the Federal Deposit Insurance Act and Parts 303, 347, and 362 of the Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations, Continental Savings Bank, Seattle, Washington ("Continental"), has applied for the FDIC's consent to hold 100 percent of the issued and outstanding shares of Continental Reinsurance Company, a de novo foreign financial entity, to be established in the Turks and Caicos Islands, a British Overseas Territory. The Supervisor of Insurance Companies, Turks and Caicos Islands, has agreed to the issuance of an insurance license to Continental Reinsurance Company upon approval by the FDIC.
All transactions pursuant to the operation will be conducted in the United States. Continental Reinsurance Company will only provide reinsurance of private mortgage insurance directly related to an extension of credit originated or purchased by Continental and its affiliates and will be limited to ensuring the repayment of the outstanding balance due on the extension of credit. Continental Reinsurance Company will not provide insurance products or services directly to any third party customers. Instead, Continental Reinsurance Company has entered into a reinsurance agreement with an unaffiliated insurance carrier that currently insures certain credit-related exposures of Continental and its affiliates. The reinsurance agreement will take the form of an "excess loss" arrangement. Under this arrangement, the primary insurer pays claims arising from a specified loan pool up to a predetermined amount, after which Continental Reinsurance Company is obligated to reimburse the primary insurer's claims up to another predetermined amount. Thereafter, the primary insurer is solely responsible for the remaining claims from that specified loan pool.
Despite being incorporated in the Turks and Caicos Islands, the reinsurance agreements will require Continental Reinsurance Company to comply with the reinsurance regulatory requirements of the primary insurer's location of domicile, which will be the United States. In addition, Continental Reinsurance Company will be subject to standard U.S. accounting practices that require separate insurance reserves for the unearned portion of premiums assumed, the estimated future losses on loans that are delinquent but for which an insurance claim has not yet been perfected, and the estimated losses on loans which are delinquent but not yet reported as such to the primary insurer. Continental Reinsurance Company operations will be included in Continental's annual external audit to an extent that Continental's external auditor will issue an opinion on the consolidated financial statements of Continental's parent company.
In approving this application, the FDIC relied on information in Continental's application, Continental Reinsurance Company's Business Plan, and certain commitments made by Continental. Continental has agreed to maintain duplicate records of Continental Reinsurance Company's activities in the United States. Also, reinsurance agreements will be solely between Continental Reinsurance Company and the unaffiliated entity, and Continental committed that neither Continental, nor any of its affiliates will guarantee the activities or obligations of Continental Reinsurance Company or provide Continental Reinsurance Company with any other credit enhancement.
Since Continental Reinsurance Company will be a wholly-owned subsidiary, Continental committed that Continental and its affiliates will not rely on private mortgage insurance reinsured by Continental Reinsurance Company to comply with the loan-to-value standards in the Interagency Guidelines for Real Estate Lending Policies detailed under Appendix A to Part 365 of the FDIC Rules and Regulations. Specifically, if a mortgage with a loan-to-value ratio in excess of the supervisory guidelines is part of a pool of loans with private mortgage insurance that is reinsured by Continental Reinsurance Company, Continental and its affiliates will treat that mortgage as an exception to Part 365. If the mortgage is sold, Continental will report its recourse obligation as an exception to the interagency guidelines since Continental retains a risk of loss through its wholly-owned subsidiary that reinsures private mortgage insurance on the sold mortgage.
In addition to the restrictions of Part 365 regarding loan-to-value exceptions, assets sold with recourse are subject to risk-based capital standards under Part 325 of the FDIC Rules and Regulations. Regardless of the underlying loan-to-value ratio, Continental will retain an indirect risk of loss on any sold mortgage with private mortgage insurance reinsured by Continental Reinsurance Company. Part 325 states that for risk-based capital purposes, the definition of sales of assets with recourse, including the sale of 1-to-4 family residential mortgages, is consistent with the definition contained in the instructions for the preparation of the Consolidated Reports of Condition and Income. Those instructions include the following as an example of sales of assets with recourse, "the sale of an asset guaranteed by an insurance contract in which the seller, either directly or indirectly, indemnifies or otherwise protects the insurer in any manner against loss." Continental has committed to report the appropriate dollar volume of assets sold with recourse on the applicable schedules of its Consolidated Reports of Condition and Income.
The FDIC has fully considered all available facts and information relevant to the Continental application. Based on Continental's satisfactory condition and the level of investment in relation to Continental's capital, the FDIC has concluded that the application should be approved with certain conditions. In order to fulfill the FDIC's supervisory responsibilities, the conditions address concerns including, but not limited to, the FDIC's ability to assess the impact of Continental Reinsurance Company's operations on Continental. The confidentiality laws of the Turks and Caicos Islands present particular concerns in this regard; therefore, the Order includes conditions to ensure FDIC access to information about Continental Reinsurance Company's business operations.
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Continental Savings Bank
Seattle, Washington
Application for Consent to Directly Acquire and Hold All of the Shares of a Foreign Financial Entity to be Organized Under the Laws of the Turks and Caicos Islands
ORDER
The undersigned, acting under delegated authority, has fully considered all available facts and information relevant to the application of Continental Savings Bank, Seattle, Washington ("Continental"), for consent to hold all of the issued and outstanding shares of Continental Reinsurance Company, a de novo foreign financial entity organized under the laws of the Turks and Caicos Islands, a British Overseas Territory, and has concluded that the application should be approved under Section 347.104(b)(13) and Section 362.4(b)(1) of the FDIC Rules and Regulations.
Accordingly, it is hereby ORDERED, that the application submitted on behalf of Continental for consent to hold all of the issued and outstanding shares of Continental Reinsurance Company be and the same is hereby approved, subject to the following conditions:
1. In addition to the records, controls, and reports required by Section 347.110(a) of the FDIC Rules and Regulations, Continental shall take all steps within its control to ensure that Continental Reinsurance Company and its officers, employees, agents, independent contractors, and affiliates provide Continental with access to information and records concerning Continental Reinsurance Company's business operations and transactions as is permitted under Turks and Caicos Islands law. In addition to the requirements of Section 347.110(b) of the FDIC Rules and Regulations, Continental shall, upon request in connection with a FDIC examination of Continental, or otherwise, provide such information to the FDIC. To the extent Turks and Caicos Islands law impedes Continental's ability to obtain such information or to provide any information to the FDIC, Continental and Continental Reinsurance Company shall cooperate with the FDIC in attempts to obtain any third party waivers or consents that would permit FDIC access to such information under Turks and Caicos Islands law.
2. Continental shall ensure that consent provisions are included in appropriate and relevant documents and instruments governing Continental Reinsurance Company's customer relationships to permit Continental to disclose to the FDIC all documents and information concerning customer relationships and accounts.
3. All necessary and final approvals shall have been obtained from the appropriate state, federal, and foreign authorities.
4. Continental shall ensure that Continental Reinsurance Company develops and maintains a program designed to determine the identity of its customers; to determine its customers' sources of funds; to determine the normal and expected transactions of its customers; to monitor account activity for transactions that are inconsistent with those normal and expected transactions; and to report any transactions of its customers that are determined to be suspicious, in accordance with the FDIC's existing suspicious activity reporting regulation.
5. The consent granted herein is based on the facts, circumstances, and commitments presented to the FDIC in connection with this request. The FDIC's action is conditioned on its ability to alter, suspend, or withdraw its approval should any development be deemed to warrant such action, or should any restriction on access to information on the business operations and transactions of Continental Reinsurance Company subsequently interfere with the FDIC's ability to assess the effect of Continental Reinsurance Company's activities on Continental. Continental shall also take all reasonable steps to be aware of and to notify the FDIC of any changes in relevant facts, circumstances, or law which would adversely affect the FDIC's ability to obtain information about Continental Reinsurance Company's activities.
6. If the proposed investment has not occurred within twelve months from the date of this Order, or unless, in the interim, a request for an extension of time has been approved by the FDIC, the consent granted herein shall expire at the end of the twelve-month period.
Dated at Washington D.C., this day of February 2000.
FEDERAL DEPOSIT INSURANCE CORPORATION
James L. Sexton
Director
Division of Supervision