Source: https://leg.mt.gov/bills/billhtml/sb0107.htm
Timestamp: 2018-06-22 13:26:18
Document Index: 205273586

Matched Legal Cases: ['art 230', 'art 30', 'art 30', 'art 30', 'art 30', 'art 11', 'art 11', 'art 11', 'art 11', 'art 8', 'art 8', 'art 8', 'art 6', 'art 6', 'art 5', 'art 8', 'art 13', 'arts 1', 'art 13', 'art 8', 'art 8', 'art 8']

Montana SB 107
AN ACT GENERALLY REVISING THE LAWS GOVERNING INVESTMENTS BY INSURERS; AMENDING SECTIONS 33-2-202, 33-2-213, 33-2-502, 33-2-531, 33-2-534, 33-2-603, 33-2-1217, 33-3-432, 33-6-101, 33-20-603, 33-25-211, 33-27-115, AND 33-31-215, MCA; REPEALING SECTIONS 33-2-801, 33-2-802, 33-2-803, 33-2-804, 33-2-805, 33-2-806, 33-2-811, 33-2-812, 33-2-813, 33-2-814, 33-2-815, 33-2-816, 33-2-817, 33-2-818, 33-2-819, 33-2-820, 33-2-821, 33-2-822, 33-2-823, 33-2-824, 33-2-825, 33-2-826, 33-2-827, 33-2-828, 33-2-829, 33-2-830, 33-2-831, 33-2-832, 33-2-833, 33-2-841, 33-2-842, 33-2-843, 33-2-851, AND 33-2-852, MCA; AND PROVIDING AN EFFECTIVE DATE.
Section 1. Purpose and scope. (1) The purpose of [sections 1 through 36] is to protect the interests of insureds by promoting insurer solvency and financial strength. This purpose will be accomplished through the application of investment standards that facilitate a reasonable balance of the following objectives:
(a) to preserve principal;
(b) to ensure reasonable diversification as to type of investment, issuer, and credit quality; and
(c) to allow insurers to allocate investments in a manner consistent with principles of prudent investment management to achieve an adequate return so that obligations to insureds are adequately met and financial strength is sufficient to cover reasonably foreseeable contingencies.
(2) [Sections 1 through 36] apply only to investments and investment practices of domestic insurers and United States branches of alien insurers entered through this state. [Sections 1 through 36] do not apply to separate accounts of an insurer.
Section 2. Definitions. As used in [sections 1 through 36], the following definitions apply:
(a) (i) as to securities lending transactions and for the purpose of calculating the counterparty exposure amount, cash, cash equivalents, letters of credit, or direct obligations of or securities that are fully guaranteed as to principal and interest by the government of the United States, by any agency of the United States, by the federal national mortgage association, or by the federal home loan mortgage corporation; and
(ii) as to lending foreign securities, sovereign debt rated 1 by the SVO;
(b) as to repurchase transactions, cash, cash equivalents, and direct obligations of or securities that are fully guaranteed as to principal and interest by the government of the United States, by an agency of the United States, by the federal national mortgage association, or by the federal home loan mortgage corporation; and
(2) "Acceptable private mortgage insurance" means insurance written by a private insurer protecting a mortgage lender against loss occasioned by a mortgage loan default and issued by a licensed mortgage insurance company, with an SVO 1 designation or a rating issued by a nationally recognized statistical rating organization equivalent to an SVO 1 designation, that covers losses up to an 80% loan-to-value ratio.
(3) "Accident and health insurance" means insurance protection that provides payment of benefits for covered sickness or accidental injury, excluding credit insurance, disability insurance, accidental death and dismemberment insurance, and long-term care insurance.
(4) "Accident and health insurer" means a licensed life or health insurer or health service corporation whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutorily required reserves.
(5) (a) "Admitted assets" means, subject to subsection (5)(b), assets determined in accordance with the requirements of 33-2-501.
(b) The term does not include assets of separate accounts. The investments of separate accounts are not subject to the provisions of [sections 1 through 36].
(6) "Affiliate" has the meaning provided in 33-2-1101.
(7) (a) "Asset-backed security" means a security or other instrument, excluding a mutual fund, evidencing an interest in or the right to receive payments from or payable from distributions on an asset, a pool of assets, or specifically divisible cash flows that are legally transferred to a trust or another special purpose bankruptcy-remote business entity, on the following conditions:
(i) the trust or other business entity is established solely for the purpose of acquiring specific types of assets or rights to cash flows, issuing securities and other instruments representing an interest in or right to receive cash flows from those assets or rights, and engaging in activities required to service the assets or rights and any credit enhancement or support features held by the trust or other business entity; and
(ii) the assets of the trust or other business entity consist solely of interest-bearing obligations or other contractual obligations representing the right to receive payment from the cash flows from the assets or rights.
(b) However, the existence of credit enhancements, such as letters of credit, guarantees, or support features, such as swap agreements, may not cause a security or other instrument to be ineligible as an asset-backed security.
(8) "Business entity" includes a sole proprietorship, corporation, limited liability company, association, partnership, joint stock company, joint venture, mutual fund, trust, joint tenancy, or other similar form of business organization, whether organized for profit or not for profit.
(9) "Cap" means an agreement obligating the seller to make payments to the buyer, with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number. The predetermined number is sometimes called the strike rate or strike price.
(10) "Capital and surplus" means the sum of the capital and surplus of the insurer required to be shown on the most recent statutory financial statement of the insurer required to be filed with the commissioner.
(11) "Cash equivalents" means short-term, highly rated, and highly liquid investments or securities readily convertible to known amounts of cash without penalty and so near maturity that they present insignificant risk of change in value. Cash equivalents include government money market mutual funds and class one money market mutual funds.
(12) "Class one bond mutual fund" means a mutual fund that at all times qualifies for investment using the bond class one reserve factor under the Purposes and Procedures of the Securities Valuation Office or any successor publication.
(14) "Collar" means an agreement to receive payments as the buyer of an option, cap, or floor and to make payments as the seller of a different option, cap, or floor.
(15) "Construction loan" means a loan for a term of less than 3 years that is made for financing the cost of construction of a building or other improvement to real estate and that is secured by the real estate.
(16) "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or nonmanagement services), or otherwise, unless the power is the result of an official position with a corporation or a corporate office held by the person. Presumption of control is pursuant to [section 8].
(17) "Counterparty exposure amount" means the net amount of credit risk attributable to a derivative instrument, pursuant to [section 9], entered into with a business entity other than through a qualified exchange or qualified foreign exchange or cleared through a qualified clearinghouse. The derivative instrument is also known as an over-the-counter derivative instrument.
(18) "Covered" means that an insurer:
(a) owns or can immediately acquire, through the exercise of options, warrants, or already-owned conversion rights, the underlying interest in order to fulfill or secure its obligations under a call option, cap, or floor it has written; or
(b) has set aside, under a custodial or escrow agreement, cash or cash equivalents with a market value equal to the amount required to fulfill its obligations under a put option it has written in an income generation transaction.
(19) "Credit tenant loan" means a mortgage loan that is made primarily in reliance on the credit standing of a major tenant, structured with an assignment of the rental payments to the lender with real estate pledged as collateral in the form of a first lien.
(20) (a) "Derivative instrument" means an agreement, an option, an instrument, or a series or combination of agreements, options, or instruments:
(i) to make or take delivery of or assume or relinquish a specified amount of one or more underlying interests or to make a cash settlement in lieu of delivery; or
(ii) that has a price, level, performance, value, or cash flow based primarily upon the actual or expected price, level, performance, value, or cash flow of one or more underlying interests.
(b) (i) Derivative instruments include options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, futures, and any other agreements, options, or instruments substantially similar to the enumerated instruments or any series or combination of the enumerated instruments and any agreements, options, or instruments permitted under rules adopted pursuant to [section 11].
(ii) Derivative instruments do not include an investment authorized by [sections 15 through 21, 23, and 29 through 33].
(21) "Derivative transaction" means a transaction involving the use of one or more derivative instruments.
(22) "Direct" or "directly", when used in connection with an obligation, means that the designated obligor is primarily liable on the instrument representing the obligation.
(23) "Dollar roll transaction" means two simultaneous transactions with different settlement dates that are no more than 96 days apart, so that in the transaction with the earlier settlement date, an insurer sells to a business entity, and in the other transaction, the insurer is obligated to purchase from the same business entity, substantially similar securities of the following types:
(a) asset-backed securities issued, assumed, or guaranteed by the government national mortgage association, the federal national mortgage association, or the federal home loan mortgage corporation or their successors; and
(b) other asset-backed securities referred to in section 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. 77r-1), as amended.
(24) "Domestic jurisdiction" means the United States, any state, Canada, any province of Canada, or any political subdivision of a state or province.
(25) "Equity interest" means any of the following that are not rated credit instruments:
(f) an ownership interest in minerals, oil, or gas, the rights to which have been separated from the underlying fee interest in the real estate where the minerals, oil, or gas is located;
(g) instruments that are mandatorily, or at the option of the issuer, convertible to equity;
(h) limited partnership interests and those general partnership interests authorized under [section 4(4)];
(k) instruments that would be rated credit instruments except for the provisions of subsection (70)(b).
(26) "Equivalent securities" means:
(a) in a securities lending transaction, securities that are identical to the loaned securities in all features including the amount of the loaned securities, except as to certificate number if held in physical form, but if any different security is exchanged for a loaned security by recapitalization, merger, consolidation, or other corporate action, the different security is considered to be the loaned security;
(27) "Floor" means an agreement obligating the seller to make payments to the buyer in which each payment is based on the amount by which a predetermined number, sometimes called the floor rate or price, exceeds a price, level, performance, or value of one or more underlying interests.
(28) "Foreign currency" means a currency other than that of a domestic jurisdiction.
(29) (a) "Foreign investment" means an investment in a foreign jurisdiction, or an investment in a person, real estate, or asset domiciled in a foreign jurisdiction, that is substantially of the same type as those eligible for investment under [sections 1 through 30, 32, and 34 through 36].
(b) An investment may not be considered to be foreign if the issuing person, qualified primary credit source, or qualified guarantor is a domestic jurisdiction or a person domiciled in a domestic jurisdiction, unless:
(ii) the investment is not assumed, accepted, guaranteed or insured, or otherwise backed by a domestic jurisdiction or a person that is not a shell business entity and that is domiciled in a domestic jurisdiction.
(30) "Foreign jurisdiction" means a jurisdiction other than a domestic jurisdiction.
(31) "Forward" means an agreement, other than a future, to make or take delivery of or effect a cash settlement based on the actual or expected price, level, performance, or value of one or more underlying interests.
(32) "Future" means an agreement, traded on a qualified exchange or qualified foreign exchange, to make or take delivery of or effect a cash settlement based on the actual or expected price, level, performance, or value of one or more underlying interests.
(33) "Government money market mutual fund" means a money market mutual fund that at all times:
(34) "Government-sponsored enterprise" means a:
(b) corporation, limited liability company, association, partnership, joint stock company, joint venture, trust, or other entity or instrumentality organized under the laws of any domestic jurisdiction to accomplish a public policy or other governmental purpose.
(35) "Guaranteed or insured", when used in connection with an obligation acquired under [sections 1 through 36], means that the guarantor or insurer has agreed to:
(36) "Hedging transaction" means a derivative transaction that is entered into and maintained to reduce:
(a) the risk of a change in the value, yield, price, cash flow, or quantity of assets or liabilities that the insurer has acquired or incurred or anticipates acquiring or incurring; or
(37) "High-grade investment" means a rated credit instrument rated 1 or 2 by the SVO.
(38) "Highly rated" means an investment rated "P-1" by Moody's investors service, inc. or "A-1" by Standard and Poor's division of the McGraw Hill companies, inc. or its equivalent rating by a nationally recognized statistical rating organization recognized by the SVO.
(39) "Income" means, as to a security, interest, accrual of discount, dividends, or other distributions, such as rights, tax or assessment credits, warrants, and distributions in kind.
(40) "Income generation transaction" means a derivative transaction involving the writing of covered call options, covered put options, covered caps, or covered floors that is intended to generate income or enhance return.
(41) "Insurance future" means a future relating to an index or pool that is based on insurance-related items.
(42) "Insurance futures option" means an option on an insurance future.
(43) "Investment company" means an investment company as defined in section 80a-3 of the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.), as amended, and a person described in section 80a-3(c) of that act.
(44) "Investment company series" means an investment portfolio of an investment company that is organized as a series company and to which assets of the investment company have been specifically allocated.
(45) "Investment practices" means transactions of the types described in [sections 20, 22, 32, or 34].
(46) "Investment strategies" means the techniques and methods used by an insurer to meet its investment objectives, such as active bond portfolio management, passive bond portfolio management, interest rate anticipation, growth investing, and value investing.
(47) "Investment subsidiary" means a subsidiary of an insurer engaged or organized to engage exclusively in the ownership and management of assets authorized as investments for the insurer if each subsidiary agrees to limit its investment in any asset so that its investments will not cause the amount of the total investment of the insurer to exceed any of the investment limitations or avoid any other provisions of [sections 1 through 36] applicable to the insurer.
(48) "Letter of credit" means a clean, irrevocable, and unconditional letter of credit issued or confirmed by and payable and presentable at a financial institution on the list of financial institutions meeting the standards for issuing letters of credit under the Purposes and Procedures of the Securities Valuation Office or any successor publication.
(49) "Limited liability company" means a business organization, excluding partnerships and ordinary business corporations, organized or operating under the laws of the United States or any state that limits the personal liability of investors to the equity investment of the investor in the business entity.
(50) "Lower-grade investment" means a rated credit instrument rated 4, 5, or 6 by the SVO.
(51) "Market value" means:
(a) as to cash and letters of credit, the amounts of cash or a letter of credit; and
(b) as to a security, as of any date, the price for the security on that date obtained from a generally recognized source or the most recent quotation from a generally recognized source or, to the extent that a generally recognized source does not exist, the price for the security as determined in good faith by the parties to a transaction, plus accrued but unpaid income on a security to the extent not included in the price as of that date.
(52) "Medium-grade investment" means a rated credit instrument rated 3 by the SVO.
(53) "Money market mutual fund" means a mutual fund that meets the conditions of 17 CFR 270.2a-7, under the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.), as amended or renumbered.
(54) "Mortgage loan" means an obligation secured by a mortgage, deed of trust, trust deed, or other consensual lien on real estate.
(55) "Multilateral development bank" means an international development organization of which the United States is a member.
(56) "Mutual fund" means an investment company or an investment company series that is registered with the United States securities and exchange commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.), as amended.
(57) "NAIC" means the national association of insurance commissioners.
(58) "Obligation" means a bond, note, debenture, trust certificate including an equipment certificate, production payment, negotiable bank certificate of deposit, bankers' acceptance, credit tenant loan, loan secured by financing net leases, and other evidence of indebtedness for the payment of money (or participations, certificates, or other evidences of an interest in any of the foregoing), whether constituting a general obligation of the issuer or payable only out of certain revenue or certain funds pledged or otherwise dedicated for payment.
(59) "Option" means an agreement giving the buyer the right to buy or receive (a "call option"), sell or deliver (a "put option"), enter into, extend or terminate, or effect a cash settlement based on the actual or expected price, level, performance, or value of one or more underlying interests.
(60) "Person" has the meaning provided in 33-1-202.
(61) "Potential exposure" means the amount determined in accordance with the NAIC Annual Statement Instructions.
(62) "Preferred stock" means preferred, preference, or guaranteed stock of a business entity authorized to issue the stock that has a preference in liquidation over the common stock of the business entity.
(63) "Qualified bank" means:
(a) a national bank, state bank, or trust company that at all times is adequately capitalized as determined by standards adopted by United States banking regulators and that is either regulated by state banking laws or is a member of the federal reserve system; or
(b) a bank or trust company incorporated or organized under the laws of a country other than the United States that is regulated as a bank or trust company by that country's government or an agency of that government and that at all times is adequately capitalized as determined by the standards adopted by international banking authorities.
(64) "Qualified business entity" means a business entity that is:
(a) an issuer of obligations or preferred stock that is rated 1 or 2 by the SVO or an issuer of obligations, preferred stock, or derivative instruments that are rated the equivalent of 1 or 2 by the SVO or by a nationally recognized statistical rating organization recognized by the SVO; or
(b) a primary dealer in United States government securities recognized by the federal reserve bank of New York.
(65) "Qualified clearinghouse" means a clearinghouse for, and subject to the rules of, a qualified exchange or a qualified foreign exchange, which provides clearing services, including acting as a counterparty to each of the parties to a transaction so that the parties no longer have a credit risk as to each other.
(66) "Qualified exchange" means:
(a) a securities exchange registered as a national securities exchange or a securities market regulated under the Securities Exchange Act of 1934 (15 U.S.C. 78, et seq.), as amended;
(b) a board of trade or commodities exchange designated as a contract market by the commodity futures trading commission or its successor;
(c) private offerings, resales, and trading through automated linkages;
(d) a designated offshore securities market as defined in securities exchange commission regulation S, 17 CFR part 230, as amended; or
(67) "Qualified foreign exchange" means a foreign exchange, board of trade, or contract market located outside the United States or its territories or possessions:
(a) that has received regulatory comparability relief under commodity futures trading commission rule 30.1 (as set forth in appendix C to part 30 of the regulations, 17 CFR part 30);
(b) that is, or its members are, subject to the jurisdiction of a foreign futures authority that has received regulatory comparability relief under commodity futures trading commission rule 30.1 (as set forth in appendix C to part 30 of the regulations, 17 CFR part 30) as to futures transactions in the jurisdiction where the exchange, board of trade, or contract market is located; or
(c) upon which foreign stock index futures contracts are listed that are the subject of no-action relief issued by the CFTC's office of general counsel, provided that an exchange, board of trade, or contract market that qualifies as a qualified foreign exchange only under this subsection (67) is a qualified foreign exchange as to foreign stock index futures contracts that are the subject of no-action relief.
(68) "Qualified guarantor" means a guarantor against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction.
(69) "Qualified primary credit source" means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction.
(70) (a) "Rated credit instrument" means a contractual right to receive cash or another rated credit instrument from another entity if the instrument:
(ii) in the case of an instrument with a maturity of 397 days or less, is issued, guaranteed, or insured by an entity that is rated by, or another obligation of the entity is rated by, the SVO or by a nationally recognized statistical rating organization recognized by the SVO;
(i) an instrument that is mandatorily or at the option of the issuer convertible to an equity interest; or
(ii) a security that has a par value and whose terms provide that the issuer's net obligation to repay all or part of the security's par value is determined by reference to the performance of an equity, a commodity, a foreign currency, an index of equities, commodities, foreign currencies, or combinations of equities, commodities, and foreign currency.
(71) (a) "Real estate" means:
(ii) interests in real property, such as leaseholds, minerals, oil, and gas, that have not been separated from the underlying fee interest;
(iii) improvements and fixtures located on or in real property; and
(b) As to a mortgage on a leasehold estate, real estate includes the leasehold estate only if it has an unexpired term, including renewal options exercisable at the option of the lessee, extending beyond the scheduled maturity date of the obligation that is secured by a mortgage on the leasehold estate by a period equal to at least 20% of the original term of the obligation or 10 years, whichever is greater.
(72) "Replication transaction" means a derivative transaction that is intended to replicate the performance of one or more assets that an insurer is authorized to acquire under [sections 1 through 36]. A derivative transaction that is entered into as a hedging transaction may not be considered a replication transaction.
(73) "Repurchase transaction" means a transaction in which an insurer purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period of time or upon demand.
(74) "Required liabilities" means total liabilities required to be reported on the statutory financial statement of the insurer most recently required to be filed with the commissioner.
(75) "Residential mortgage loan" means a loan primarily secured by a mortgage on real estate improved with a residence for no more than four families.
(76) "Reverse repurchase transaction" means a transaction in which an insurer sells securities to a business entity and is obligated to repurchase the sold securities or equivalent securities from the business entity at a specified price, either within a specified period of time or upon demand.
(77) "Secured location" means the contiguous real estate owned by one person.
(78) "Securities lending transaction" means a transaction in which securities are loaned by an insurer to a business entity that is obligated to return the loaned securities or equivalent securities to the insurer, either within a specified period of time or upon demand.
(79) "Series company" means an investment company that is organized as a series company, as defined in rules adopted under the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.), as amended.
(80) "Shell business entity" means a business entity having no economic substance, except as a vehicle for owning interests in assets issued, owned, or previously owned by a person domiciled in a foreign jurisdiction.
(81) "Short-term" means investments with a remaining term to maturity of 90 days or less.
(82) "Sinking fund stock" means preferred stock that:
(b) provides for mandatory sinking fund installments or open market purchases commencing not more than 10 1/2 years from the date of issue, with the sinking fund installments providing for the purchase or redemption, on a cumulative basis commencing 10 years from the date of issue, of at least 2.5% a year of the original number of shares of that issue of preferred stock.
(83) "State" has meaning provided in 33-1-201.
(84) "Substantially similar securities" means securities that meet all criteria for substantially similar specified in the NAIC Accounting Practices and Procedures Manual, as amended, and in an amount that constitutes good delivery form as determined from time to time by the public securities administration.
(85) "SVO" means the securities valuation office of the NAIC or any successor office established by the NAIC.
(87) "Total investment of the insurer" includes:
(b) the insurer's proportionate share of an investment in an asset by an investment subsidiary of the insurer, which must be calculated by multiplying the amount of the subsidiary's investment by the percentage of the insurer's ownership interest in the subsidiary.
(88) "Underlying interest" means the assets, liabilities, other interests, or a combination of assets, liabilities, or other interests underlying a derivative instrument, such as any one or more securities, currencies, rates, indices, commodities, or derivative instruments.
(90) "Warrant" means an instrument that gives the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement. Warrants may be issued alone or in connection with the sale of other securities, for example, as part of a merger or recapitalization agreement, or to facilitate divestiture of the securities of another business entity.
Section 3. General investment qualifications. (1) Insurers may acquire, hold, or invest in investments or engage in investment practices as set forth in [sections 1 through 36]. Investments not conforming to [sections 1 through 36] may not be admitted assets. Affiliate investments under 33-2-1113, other than those investments made by or on behalf of domestic insurers, are not subject to this provision.
(2) Subject to subsection (3), an insurer may not acquire or hold an investment as an admitted asset unless at the time of acquisition it is:
(a) (i) eligible for the payment or accrual of interest or discount, whether in cash or other securities;
(ii) eligible to receive dividends or other distributions; or
(iii) otherwise income-producing; or
(b) acquired under [sections 19(3), 20, 22, 24, 31(3), 32, 34, or 35] or under the authority of sections of Montana law other than [sections 1 through 36].
(3) An insurer may acquire or hold as admitted assets investments that do not otherwise qualify as provided in [sections 1 through 36] if the insurer has not acquired them for the purpose of circumventing any limitations contained in [sections 1 through 36] and if the insurer complies with the provisions of [sections 5 and 8] and acquires the investments in the following circumstances:
(a) as payment on account of existing indebtedness or in connection with the refinancing, restructuring, or workout of existing indebtedness if taken to protect the insurer's interest in that investment;
(b) as realization on collateral for an obligation;
(c) in connection with an otherwise qualified investment or investment practice, as interest on or a dividend or other distribution related to the investment or investment practice, or in connection with the refinancing of the investment, in each case for no additional or only nominal consideration;
(d) under a lawful and bona fide agreement of recapitalization or voluntary or involuntary reorganization in connection with an investment held by the insurer; or
(e) under a bulk reinsurance, merger, or consolidation transaction approved by the commissioner if the assets constitute admissible investments for the ceding, merged, or consolidated companies.
(4) An investment or portion of an investment acquired by an insurer under subsection (3) must become a nonadmitted asset 3 years, or 5 years in the case of mortgage loans and real estate, from the date of its acquisition, unless within that period the investment has become a qualified investment under a provision of [sections 1 through 36] other than subsection (3). However, an investment acquired under an agreement of bulk reinsurance, merger, or consolidation may be qualified for a longer period if provided for in the plan for reinsurance, merger, or consolidation as approved by the commissioner. Upon application by the insurer and a showing that the nonadmission of an asset held under subsection (3) would materially injure the interests of the insurer, the commissioner may extend the period for admissibility for an additional reasonable period of time.
(5) Except as provided in subsections (6) and (8), an investment must qualify under [sections 1 through 36] if, on the date the insurer committed to acquire the investment or on the date of its acquisition, it would have qualified under [sections 1 through 36]. For the purposes of determining limitations contained in [sections 1 through 36], an insurer shall give appropriate recognition to any commitments to acquire investments.
(6) (a) An investment held as an admitted asset by an insurer on [the effective date of this act] that qualified under former law remains qualified as an admitted asset under [sections 1 through 36].
(b) Each specific transaction constituting an investment practice of the type described in [sections 1 through 36] that was lawfully entered into by an insurer and was in effect on the [effective date of this act] continues to be permitted under [sections 1 through 36] until its expiration or termination under its terms.
(7) Unless otherwise specified, an investment limitation computed on the basis of an insurer's admitted assets or capital and surplus relates to the amount required to be shown on the most recent statutory balance sheet of the insurer required to be filed with the commissioner. For purposes of computing any limitation based upon admitted assets, the insurer shall deduct from the amount of its admitted assets the amount of the liability recorded on its statutory balance sheet for:
(a) the return of acceptable collateral received in a reverse repurchase transaction or a securities lending transaction;
(b) cash received in a dollar roll transaction; and
(c) the amount reported as borrowed money in the most recently filed financial statement to the extent not included in subsections (7)(a) and (7)(b).
(8) An investment qualified, in whole or in part, for acquisition or holding as an admitted asset may be qualified or requalified at the time of acquisition or a later date, in whole or in part, under any other section if the relevant conditions contained in the other section are satisfied at the time of qualification or requalification.
(9) An insurer shall maintain documentation demonstrating that investments were acquired in accordance with [sections 1 through 36].
(10) An insurer may not enter into an agreement to purchase securities in advance of their issuance for resale to the public as part of a distribution of the securities by the issuer or otherwise guarantee the distribution, except that an insurer may acquire privately placed securities with registration rights.
(11) Notwithstanding the provisions of [sections 1 through 36], the commissioner, for good cause, may under the Montana Administrative Procedure Act order an insurer to nonadmit, limit, dispose of, withdraw from, or discontinue an investment or investment practice. The authority of the commissioner under this subsection is in addition to any other authority of the commissioner.
(12) Insurance futures and insurance futures options are not considered investments or investment practices for purposes of [sections 1 through 36].
Section 4. Authorization of investments by board of directors. (1) An insurer's board of directors shall adopt a written plan for acquiring and holding investments and for engaging in investment practices that specifies guidelines as to the quality, maturity, and diversification of investments and that contains other specifications including investment strategies intended to ensure that the investments and investment practices are appropriate for the business conducted by the insurer, its liquidity needs, and its capital and surplus.
(2) The board of directors is ultimately responsible for investment decisions and shall review, at least annually, whether all investments acquired and held under [sections 1 through 36] have been made in accordance with delegations, standards, limitations, and investment objectives prescribed by the board or a committee of the board charged with the responsibility to direct its investments.
(3) An insurer's board of directors or committee of the board of directors shall:
(a) on no less than a quarterly basis and more often if considered appropriate, receive and review a summary report on the insurer's investment portfolio, its investment activities, and investment practices engaged in under delegated authority, in order to determine whether the investment activity of the insurer is consistent with its written plan; and
(b) on no less than an annual basis and more often if considered appropriate, review and revise, as appropriate, the written plan.
(4) In discharging its duties under this section, the board of directors may require that records of any authorizations or approvals, other documentation as the board may require, and reports of any action taken under authority delegated under the plan referred to in subsection (1) may be made available on a regular basis to the board of directors.
(5) If an insurer does not have a board of directors, all references to the board of directors in [sections 1 through 36] are considered to be references to the governing body of the insurer having authority equivalent to that of a board of directors.
(6) In discharging their duties under this section, the directors of an insurer shall perform their duties as provided in 35-1-418.
Section 5. Prohibited investments. (1) An insurer may not, directly or indirectly, without the prior written approval of the commissioner:
(a) invest in an obligation or security or make a guarantee for the benefit of or in favor of an officer or director of the insurer, except as provided in [section 6];
(b) invest in an obligation or security of, make a guarantee for the benefit of or in favor of, or make other investments in a business entity of which 10% or more of the voting securities or equity interests are owned directly or indirectly by or for the benefit of one or more officers or directors of the insurer, except as authorized in Title 33, chapter 2, part 11, or as provided in [section 6];
(c) engage on its own behalf or through one or more affiliates in a transaction or series of transactions designed to evade the prohibitions of [sections 1 through 36]; or
(d) except as provided in subsection (2), invest in or lend its funds upon the security of shares of its own stock.
(2) (a) An insurer may acquire shares of its own stock for the following purposes:
(i) conversion of a stock insurer into a mutual or reciprocal insurer or conversion of a mutual or reciprocal insurer into a stock insurer; or
(ii) issuance to the insurer's officers, employees, or agents in connection with a plan approved by the commissioner in connection with stock option and employee benefit plans.
(b) Shares of stock that are subject to subsection (2)(a) may not be admitted assets of the insurer.
(3) (a) An insurer may not, directly or indirectly, without the prior written approval of the commissioner invest in a partnership as a general partner, except that an insurer may make an investment as a general partner:
(i) if all other partners in the partnership are subsidiaries of the insurer;
(ii) for the purpose of:
(A) meeting cash calls committed to prior to [the effective date of this act];
(B) completing those specific projects or activities of the partnership in which the insurer was a general partner as of [the effective date of this act] that had been undertaken as of [the effective date of this act]; or
(C) making capital improvements to property owned by the partnership on [the effective date of this act] if the insurer was a general partner as of [the effective date of this act]; or
(iii) in accordance with [section 3(3)].
(b) Subsection (3)(a) does not prohibit a subsidiary or other affiliate of the insurer from becoming a general partner.
Section 6. Loans to officers and directors. (1) (a) Except as provided in subsection (2), an insurer may not, directly or indirectly, without the prior written approval of the commissioner:
(i) make a loan to an officer or director of the insurer or make another investment in a person in which the officer or director has any direct or indirect financial interest;
(ii) make a guarantee for the benefit of or in favor of an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest; or
(iii) enter into an agreement for the purchase or sale of property from or to an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest.
(b) For purposes of this section, an officer or director may not have a financial interest by reason of an interest that is held directly or indirectly through the ownership of equity interests representing less than 2% of all outstanding equity interests issued by a person that is a party to the transaction or solely by reason of that individual's position as a director or officer of a person that is a party to the transaction.
(c) This subsection (1) does not permit an investment that is prohibited by [section 5].
(d) This subsection (1) does not apply to a transaction between an insurer and any of its subsidiaries or affiliates that is entered into in compliance with Title 33, chapter 2, part 11, other than a transaction between an insurer and its officer or director.
(2) An insurer may, without the prior written approval of the commissioner, make any of the following:
(a) policy loans in accordance with the terms of the policy or contract and [section 23];
(b) advances to officers or directors for expenses reasonably expected to be incurred in the ordinary course of the insurer's business or guarantees associated with credit or charge cards issued or credit extended for the purpose of financing these expenses;
(c) loans secured by the principal residence of an existing or new officer of the insurer made in connection with the officer's relocation at the insurer's request if the loans comply with the requirements of [section 19 or 31] and the terms and conditions are the same as those generally available from unaffiliated third parties;
(d) secured loans to an existing or new officer of the insurer made in connection with the officer's relocation at the insurer's request if the loans:
(i) do not have a term exceeding 2 years;
(ii) are required to finance mortgage loans outstanding at the same time on the prior and new residences of the officer;
(iii) do not exceed an amount equal to the equity of the officer in the prior residence; and
(iv) are required to be fully repaid upon the earlier of the end of the 2-year period or the sale of the prior residence; or
(e) loans and advances to officers or directors made in compliance with state or federal law specifically related to the loans and advances by a regulated noninsurance subsidiary or affiliate of the insurer in the ordinary course of business and on terms no more favorable than available to other customers of the entity.
Section 7. Valuation of investments. For the purposes of [sections 1 through 36], the value or amount of an investment acquired or held under [sections 1 through 36] or an investment practice engaged in under [sections 1 through 36], unless otherwise specified in statute, must be the value at which assets of an insurer are required to be reported for statutory accounting purposes as determined in accordance with procedures prescribed in published accounting and valuation standards of the NAIC, including the Purposes and Procedures of the Securities Valuation Office, the Valuation of Securities Manual, the Accounting Practices and Procedures Manual, the Annual Statement Instructions, or any successor valuation procedures officially adopted by the NAIC.
Section 8. Presumption of control. Control is presumed to exist if a person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of another person. This presumption may be rebutted by a showing that control does not exist in fact. The commissioner may determine, after furnishing all interested persons notice and an opportunity to be heard and making specific findings of fact to support the determination, that control exists in fact, notwithstanding the absence of a presumption to that effect.
Section 9. Credit risk attributable to derivative statement. (1) The amount of credit risk equals:
(a) the market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or
(b) zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer.
(2) If over-the-counter derivative instruments are entered into under a written master agreement that provides for netting of payments owed by the respective parties and the domiciliary jurisdiction of the counterparty is either within the United States or if not within the United States, within a foreign jurisdiction listed in the Purposes and Procedures of the Securities Valuation Office as eligible for netting, the net amount of credit risk must be the greater of zero or the net sum of:
(a) the market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment to the insurer; and
(b) the market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment by the insurer to the business entity.
(3) For open transactions, market value must be determined at the end of the most recent quarter of the insurer's fiscal year and must be reduced by the market value of acceptable collateral held by the insurer or placed in escrow by one or both parties.
Section 10. Special rated credit instrument. (1) (a) Subject to subsection (1)(b), a rated credit instrument is a special rated credit instrument if it is an instrument that is:
(i) structured so that if it is held until retired by or on behalf of the issuer, its rate of return, based on its purchase cost and any cash flow stream possible under the structure of the transaction, may become negative because of reasons other than the credit risk associated with the issuer of the instrument; or
(ii) an asset-backed security that:
(C) has a negative rate of return at the time of acquisition if a prepayment threshold assumption is used with the prepayment threshold assumption defined as either:
(I) two times the prepayment expectation reported by a recognized, publicly available source as being the median of expectations contributed by broker dealers or other entities, except insurers, engaged in the business of selling or evaluating the securities or assets. The prepayment expectation used in this calculation must be, at the insurer's election, the prepayment expectation for passthrough securities of the federal national mortgage association, the federal home loan mortgage corporation, or the government national mortgage association or for other assets of the same type as the assets that underlie the asset-backed security, in either case with a gross weighted average coupon comparable to the gross weighted average coupon of the assets that underlie the asset-backed security.
(II) another prepayment threshold assumption specified by the commissioner by rule adopted under [section 11].
(b) A rated credit instrument may not be a special rated credit instrument under this section if it is:
(ii) an instrument, other than an asset-backed security, with payments of par value fixed as to amount and timing or callable but in any event payable only at par or greater and with interest or dividend cash flows that are based on either a fixed or variable rate determined by reference to a specified rate or index;
(iii) an instrument, other than an asset-backed security, that has a par value and is purchased at a price no greater than 110% of par;
(iv) an instrument, including an asset-backed security, with a rate of return that would become negative only as a result of a prepayment due to casualty, condemnation, economic obsolescence of collateral, or change of law;
(v) an asset-backed security that relies on collateral that meets the requirements of subsection (1)(b)(ii), the par value of which collateral:
(A) is not permitted to be paid sooner than one-half of the remaining term to maturity from the date of acquisition;
(B) is permitted to be paid prior to maturity only at a premium sufficient to provide a yield to maturity for the investment, considering the amount prepaid and reinvestment rates at the time of early repayment, at least equal to the yield to maturity of the initial investment; or
(C) is permitted to be paid prior to maturity at a premium at least equal to the yield of a treasury issue of comparable remaining life; or
(vi) an asset-backed security that relies on cash flows from assets that are not prepayable at any time at par, but is not otherwise governed by subsection (1)(b)(v), if the asset-backed security has a par value reflecting principal payments to be received if held until retired by or on behalf of the issuer and is purchased at a price no greater than 105% of the par amount.
(2) For purposes of subsection (1), if the asset-backed security is purchased in combination with one or more other asset-backed securities that are supported by identical underlying collateral, the insurer may calculate the rate of return for these specific combined asset-backed securities in combination. The insurer shall maintain documentation demonstrating that the securities were acquired and are continuing to be held in combination.
Section 11. Rules. The commissioner may adopt rules implementing the provisions of [sections 1 through 36].
Section 12. Foreign and alien insurers. A foreign insurer or an alien insurer, as those terms are defined in 33-1-201, shall maintain its investments according to the laws of its domicile. For purposes of this section, an alien insurer shall claim as its domicile the state where it maintains its principal deposit.
Section 13. Applicability. [Sections 13 through 24] apply to the investments and investment practices of life and health insurers, subject to the provisions of [section 1(2)].
Section 14. General three percent diversification -- medium-grade and lower-grade investments -- Canadian investments. (1) (a) Except as otherwise specified in [sections 1 through 36], an insurer may not acquire, directly or indirectly through an investment subsidiary, an investment under [sections 1 through 36] if, as a result of and after giving effect to the investment, the insurer would hold more than 3% of its admitted assets in investments of all kinds issued, assumed, accepted, insured, or guaranteed by a single person.
(b) The 3% limitation does not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally recognized statistical rating organization.
(c) Asset-backed securities are subject to the limitations of subsection (1)(a). However, an insurer may not acquire an asset-backed security if, as a result of and after giving effect to the investment, the aggregate amount of asset-backed securities secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity then held by the insurer would exceed 3% of its admitted assets.
(2) (a) An insurer may not acquire, directly or indirectly through an investment subsidiary, an investment under [section 15, 18, or 21] or counterparty exposure under [section 22(4)] if, as a result of and after giving effect to the investment:
(i) the aggregate amount of medium-grade and lower-grade investments then held by the insurer would exceed 20% of its admitted assets;
(ii) the aggregate amount of lower-grade investments then held by the insurer would exceed 10% of its admitted assets;
(iii) the aggregate amount of investments rated 5 or 6 by the SVO then held by the insurer would exceed 3% of its admitted assets;
(iv) the aggregate amount of investments rated 6 by the SVO then held by the insurer would exceed 1% of its admitted assets; or
(v) the aggregate amount of medium-grade and lower-grade investments then held by the insurer that receive as cash income less than the equivalent yield for treasury issues with a comparative average life would exceed 1% of its admitted assets.
(b) An insurer may not acquire, directly or indirectly through an investment subsidiary, an investment under [section 15, 18, or 21] or counterparty exposure under [section 22(4)] if, as a result of and after giving effect to the investment:
(i) the aggregate amount of medium-grade and lower-grade investments issued, assumed, guaranteed, accepted, or insured by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed 1% of its admitted assets; or
(ii) the aggregate amount of lower-grade investments issued, assumed, guaranteed, accepted, or insured by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed 0.5% of its admitted assets.
(c) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection (2), the insurer is precluded from acquiring investments in other rating categories subject to the specific and multicategory limits applicable to those investments.
(3) (a) An insurer may not acquire, directly or indirectly through an investment subsidiary, a Canadian investment authorized by [sections 1 through 36] if, as a result of and after giving effect to the investment, the aggregate amount of these investments then held by the insurer would exceed 40% of its admitted assets or if the aggregate amount of Canadian investments not acquired under [section 15(3)] then held by the insurer would exceed 25% of its admitted assets.
(b) However, as to an insurer that is authorized to do business in Canada or that has outstanding insurance, annuity, or reinsurance contracts on lives or risks resident or located in Canada and denominated in Canadian currency, the limitations of subsection (3)(a) must be increased by the greater of:
(i) the amount the insurer is required by Canadian law to invest in Canada or to be denominated in Canadian currency; or
(ii) 115% of the amount of the insurer's reserves and other obligations under contracts on lives or risks resident or located in Canada.
Section 15. Rated credit instruments. (1) Subject to the limitations of subsection (7), an insurer may acquire rated credit instruments in accordance with this section.
(2) Subject to the limitations of [section 14(2)], an insurer may acquire rated credit instruments issued, assumed, guaranteed, or insured by:
(b) a government-sponsored enterprise of the United States, if the instruments of the government sponsored enterprise are assumed, guaranteed, or insured by the United States or are otherwise backed or supported by the full faith and credit of the United States.
(3) (a) Subject to the limitations of [section 14(2)], an insurer may acquire rated credit instruments issued, assumed, guaranteed, or insured by:
(ii) a government-sponsored enterprise of Canada, if the instruments of the government sponsored enterprise are assumed, guaranteed, or insured by Canada or are otherwise backed or supported by the full faith and credit of Canada.
(b) An insurer may not acquire an instrument under this subsection (3) if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subsection (3) would exceed 40% of its admitted assets.
(4) (a) Subject to the limitations of [section 14(2)], an insurer may acquire rated credit instruments, excluding asset-backed securities:
(i) issued by a government money market mutual fund, a class one money market mutual fund, or a class one bond mutual fund;
(ii) issued, assumed, guaranteed, or insured by a government sponsored enterprise of the United States other than those eligible under subsection (2);
(iii) issued, assumed, guaranteed, or insured by a state, if the instruments are general obligations of the state; or
(b) However, an insurer may not acquire an instrument of any one fund, enterprise, entity, or state under this subsection (4) if, as a result of and after giving effect to the investment, the aggregate amount of investments then held in any one fund, enterprise, entity, or state under this subsection (4) would exceed 10% of its admitted assets.
(5) Subject to the limitations of [section 14], an insurer may acquire preferred stocks that are not foreign investments and that meet the requirements of rated credit instruments if, as a result of and after giving effect to the investment:
(a) the aggregate amount of preferred stocks then held by the insurer under this subsection (5) does not exceed 20% of its admitted assets; and
(b) the aggregate amount of preferred stocks then held by the insurer under this subsection (5) that are not sinking fund stocks or rated P-1 or P-2 by the SVO does not exceed 10% of its admitted assets.
(6) Subject to the limitations of [section 14], in addition to those investments eligible under subsections (2) through (5) of this section, an insurer may acquire rated credit instruments that are not foreign investments.
(7) An insurer may not acquire special rated credit instruments under this section if, as a result of and after giving effect to the investment, the aggregate amount of special rated credit instruments then held by the insurer would exceed 5% of its admitted assets.
Section 16. Insurer investment pools. (1) An insurer may acquire investments in investment pools that invest only in:
(a) (i) obligations that are rated 1 or 2 by the SVO or a nationally recognized statistical rating organization recognized by the SVO or in the absence of a 1 or 2 or equivalent rating, the issuer has outstanding obligations with an SVO rating of 1 or 2 or an equivalent rating and that have:
(A) remaining maturity of 397 days or less or a put option that entitles the holder to receive the principal amount of the obligation and the put option may be exercised through maturity at specified intervals not exceeding 397 days; or
(B) remaining maturity of 3 years or less and:
(I) a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index such as federal funds, prime rate, treasury bills, London interbank offered rate, or commercial paper; and
(II) is subject to no maximum limit if the obligations do not have an interest rate that varies inversely to market interest rate changes;
(ii) government money market mutual funds or class one money market mutual funds; or
(iii) securities lending, repurchase, and reverse repurchase transactions that meet all the requirements of [section 20], except the quantitative limitations of [section 20(4)]; or
(b) investments that an insurer may acquire under [sections 1 through 36] if the insurer's proportionate interest in the amount invested in these investments does not exceed the applicable limits of [sections 1 through 36].
(2) For an investment in an investment pool to be qualified under [sections 1 through 36], the investment pool may not:
(a) acquire securities issued, assumed, guaranteed, or insured by the insurer or an affiliate of the insurer;
(b) borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions that meet the requirements of [section 20], except the quantitative limitations of [section 20(4)]; or
(c) permit the aggregate value of securities then loaned, sold to, purchased from, or invested in any one business entity under this section to exceed 10% of the total assets of the investment pool.
(3) The limitations of [section 14(1)] do not apply to an insurer's investment in an investment pool. However, an insurer may not acquire an investment in an investment pool under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section:
(a) in any one investment pool would exceed 10% of its admitted assets;
(b) in all investment pools investing in investments permitted under subsection (1)(b) would exceed 25% of its admitted assets; or
(c) in all investment pools would exceed 35% of its admitted assets.
(4) For an investment in an investment pool to be qualified under [sections 1 through 36], the manager of the investment pool:
(a) must be organized under the laws of the United States or a state and designated as the pool manager in a pooling agreement;
(i) the insurer, an affiliated insurer, a business entity affiliated with the insurer, a qualified bank, or a business entity registered under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1, et seq.), as amended;
(ii) in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-fact; or
(iii) in the case of a United States branch of an alien insurer, its United States manager or affiliates or subsidiaries of its United States manager;
(c) shall compile and maintain detailed accounting records setting forth:
(i) the cash receipts and disbursements reflecting each participant's proportionate investment in the investment pool;
(ii) a complete description of all underlying assets of the investment pool, including amount, interest rate, maturity date, if any, and other appropriate designations; and
(iii) other records that, on a daily basis, allow third parties to verify each participant's investment in the investment pool; and
(d) shall maintain the assets of the investment pool in one or more accounts, in the name of or on behalf of the investment pool, under a custody agreement with a qualified bank. The custody agreement must:
(i) state and recognize the claims and rights of each participant;
(ii) acknowledge that the underlying assets of the investment pool are held solely for the benefit of each participant in proportion to the aggregate amount of its investments in the investment pool; and
(iii) contain an agreement that the underlying assets of the investment pool may not be commingled with the general assets of the custodian qualified bank or any other person.
(5) The pooling agreement for each investment pool must be in writing and must provide that:
(a) an insurer and its affiliated insurers or, in the case of an investment pool investing solely in investments permitted under subsection (1)(a), the insurer and its subsidiaries or affiliates, any pension or profit-sharing plan of the insurer or its subsidiaries and affiliates, or in the case of a United States branch of an alien insurer, the affiliates or subsidiaries of its United States manager shall, at all times, hold 100% of the interests in the investment pool;
(b) the underlying assets of the investment pool may not be commingled with the general assets of the pool manager or any other person;
(c) in proportion to the aggregate amount of each pool participant's interest in the investment pool:
(i) each participant owns an undivided interest in the underlying assets of the investment pool; and
(ii) the underlying assets of the investment pool are held solely for the benefit of each participant;
(d) a participant or, in the event of the participant's insolvency, bankruptcy, or receivership, its trustee, receiver, or other successor in interest may withdraw all or any portion of its investment from the investment pool under the terms of the pooling agreement;
(e) withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds must occur within a reasonable and customary period not to exceed 5 business days. Distributions under this section must be calculated in each case net of all then-applicable fees and expenses of the investment pool. The pooling agreement must provide that the pool manager shall distribute to a participant, at the discretion of the pool manager:
(i) in cash, the then fair market value of the participant's pro rata share of each underlying asset of the investment pool;
(ii) in kind, a pro rata share of each underlying asset; or
(iii) in a combination of cash and in-kind distributions, a pro rata share in each underlying asset.
(f) the pool manager shall make the records of the investment pool available for inspection by the commissioner.
Section 17. Equity interests. (1) Subject to the limitations of [section 14], an insurer may acquire equity interests in business entities organized under the laws of any domestic jurisdiction.
(2) An insurer may not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section would exceed 20% of its admitted assets or the amount of equity interests then held by the insurer that are not listed on a qualified exchange would exceed 5% of its admitted assets. An accident and health insurer is subject to this section but is subject to the same aggregate limitation on equity interests as a property and casualty insurer under [section 29] and is also subject to the provisions of [section 36].
(3) An insurer may not acquire under the provisions of this section any investments that the insurer may acquire under [section 19].
(4) An insurer may not short sell equity investments unless the insurer covers the short sale by owning the equity investment or an unrestricted right to the equity instrument exercisable within 6 months of the short sale.
Section 18. Tangible personal property under lease. (1) (a) Subject to the limitations of [section 14], an insurer may acquire tangible personal property or equity interests in tangible personal property located or used wholly or in part within a domestic jurisdiction, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by [section 4(4)], joint ventures, stock of an investment subsidiary, membership interests in a limited liability company, trust certificates, or other similar instruments.
(b) Investments acquired under subsection (1)(a) are eligible only if:
(i) the property is subject to a lease or other agreement with a person whose rated credit instruments could be acquired by the insurer under [section 15] in the amount of the purchase price of the personal property; and
(ii) the lease or other agreement provides the insurer with the right to receive rental, purchase, or other fixed payments for the use or purchase of the property and the aggregate value of the payments, together with the estimated residual value of the property at the end of its useful life and the estimated tax benefits to the insurer resulting from ownership of the property, are adequate to return the cost of the insurer's investment in the property, plus a return considered adequate by the insurer.
(2) The insurer shall compute the amount of each investment under this section on the basis of the out-of-pocket purchase price and applicable related expenses paid by the insurer for the investment, net of each borrowing made to finance the purchase price and expenses, to the extent the borrowing is without recourse to the insurer.
(3) An insurer may not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under this section would exceed:
(a) 2% of its admitted assets; or
(b) 0.5% of its admitted assets as to any single item of tangible personal property.
(4) For purposes of determining compliance with the limitations of [section 14], investments acquired by an insurer under this section must be aggregated with those acquired under [section 15] and each lessee of the property under a lease referred to in this section is considered the issuer of an obligation in the amount of the investment of the insurer in the property determined as provided in subsection (2).
(5) Nothing in this section is applicable to tangible personal property lease arrangements between an insurer and its subsidiaries and affiliates under a cost-sharing arrangement or agreement permitted under Title 33, chapter 2, part 11.
Section 19. Mortgage loans -- income-producing real estate -- real estate for the accommodation of business -- quantitative limitations. (1) Subject to the limitations of [section 15], an insurer may acquire obligations secured by mortgages on real estate situated within a domestic jurisdiction, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by [section 4(4)], joint ventures, stock of an investment subsidiary, membership interests in a limited liability company, trust certificates, or other similar instruments. However, a mortgage loan that is secured by other than a first lien may not be acquired unless the insurer is the holder of the first lien. The obligations held by the insurer and any obligations with an equal lien priority may not, at the time of acquisition of the obligation, exceed:
(a) 90% of the fair market value of the real estate if the mortgage loan is secured by a purchase money mortgage or similar security received by the insurer upon disposition of the real estate;
(b) 80% of the fair market value of the real estate if the mortgage loan requires immediate scheduled payment in periodic installments of principal and interest, has an amortization period of 30 years or less, and has periodic payments made no less frequently than annually. Each periodic payment must be sufficient to ensure that at all times the outstanding principal balance of the mortgage loan is not greater than the outstanding principal balance that would be outstanding under a mortgage loan with the same original principal balance, with the same interest rate, and requiring equal payments of principal and interest with the same frequency over the same amortization period. Mortgage loans permitted under this subsection (1)(b) are permitted notwithstanding the fact that they provide for a payment of the principal balance prior to the end of the period of amortization of the loan. For residential mortgage loans, the 80% limitation may be increased to 97% if acceptable private mortgage insurance has been obtained.
(c) 75% of the fair market value of the real estate for mortgage loans that do not meet the requirements of subsection (1)(a) or (1)(b).
(2) For purposes of subsection (1)(a), the amount of an obligation required to be included in the calculation of the loan-to-value ratio may be reduced to the extent the obligation is insured by the federal housing administration, guaranteed by the administrator of veterans affairs, or insured or guaranteed by their successors.
(3) A mortgage loan that is held by an insurer under [section 3(6)] or that is acquired under this section and is restructured in a manner that meets the requirements of a restructured mortgage loan in accordance with the NAIC Accounting Practices and Procedures Manual or a successor publication continues to qualify as a mortgage loan under [sections 1 through 36].
(4) Subject to the limitations of [section 14], credit lease transactions that do not qualify for investment under [section 15] with the following characteristics are exempt from the provisions of subsection (1)(a) of this section:
(a) the loan amortizes over the initial fixed lease term in at least an amount sufficient so that the loan balance at the end of the lease term does not exceed the original appraised value of the real estate;
(b) the lease payments cover or exceed the total debt service over the life of the loan;
(c) a tenant or its affiliated entity with rated credit instruments that have an SVO 1 or 2 designation or a comparable rating from a nationally recognized statistical rating organization recognized by the SVO has a full faith and credit obligation to make the lease payments;
(d) the insurer holds or is the beneficial holder of a first lien mortgage on the real estate;
(e) the expenses of the real estate are passed through to the tenant, excluding exterior, structural, parking, and heating, ventilation, and air conditioning replacement expenses, unless annual escrow contributions, from cash flows derived from the lease payments, cover the expense shortfall; and
(f) there is a perfected assignment of the rents due pursuant to the lease to or for the benefit of the insurer.
(5) (a) An insurer may acquire, manage, and dispose of real estate situated in a domestic jurisdiction, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by [section 4(4)], joint ventures, stock of an investment subsidiary, membership interests in a limited liability company, trust certificates, or other similar instruments. The real estate must be income-producing or intended for improvement or development for investment purposes under an existing program, in which case the real estate is considered to be income-producing.
(b) The real estate may be subject to mortgages, liens, or other encumbrances, the amount of which must, to the extent that the obligations secured by the mortgages, liens, or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with subsections (7)(b) and (7)(c).
(6) (a) An insurer may acquire, manage, and dispose of real estate for the convenient accommodation of the insurer's or the insurer's affiliates' business operations, including home office, branch office, and field office operations.
(b) Real estate acquired under this subsection (6) may include excess space for rent to others if the excess space, valued at its fair market value, would otherwise be a permitted investment under subsection (5) and is so qualified by the insurer.
(c) The real estate acquired under this subsection (6) may be subject to one or more mortgages, liens, or other encumbrances, the amount of which must, to the extent that the obligations secured by the mortgages, liens, or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with subsection (7)(d).
(d) For purposes of this subsection (6), business operations may not include that portion of real estate used for the direct provision of health care services by an accident and health insurer for its insureds. An insurer may acquire real estate used for these purposes under subsection (5).
(7) (a) An insurer may not acquire an investment under subsection (1) if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under subsection (1) would exceed:
(i) 1% of its admitted assets in mortgage loans covering any one secured location;
(ii) 0.25% of its admitted assets in construction loans covering any one secured location; or
(iii) 2% of its admitted assets in construction loans in the aggregate.
(b) An insurer may not acquire an investment under subsection (5) if, as a result of and after giving effect to the investment and any outstanding guarantees made by the insurer in connection with the investment, the aggregate amount of investments then held by the insurer under subsection (5) plus the guarantees then outstanding would exceed:
(i) 1% of its admitted assets in one parcel or group of contiguous parcels of real estate, except that this limitation does not apply to that portion of real estate used for the direct provision of health care services by an accident and health insurer for its insureds, such as hospitals, medical clinics, medical professional buildings, or other health facilities used for the purpose of providing health services; or
(ii) 15% of its admitted assets in the aggregate, but not more than 5% of its admitted assets as to properties that are to be improved or developed.
(c) An insurer may not acquire an investment under subsection (5) or (6) if, as a result of and after giving effect to the investment and any outstanding guarantees made by the insurer in connection with the investment, the aggregate amount of all investments then held by the insurer under subsection (5) or (6) plus the guarantees then outstanding would exceed 45% of its admitted assets. However, an insurer may exceed this limitation by no more than 30% of its admitted assets if:
(i) this increased amount is invested only in residential mortgage loans;
(ii) the insurer has no more than 10% of its admitted assets invested in mortgage loans other than residential mortgage loans;
(iii) the loan-to-value ratio of each residential mortgage loan does not exceed 60% at the time the mortgage loan is qualified under this increased authority and the fair market value is supported by an appraisal no more than 2 years old prepared by an independent appraiser;
(iv) a single mortgage loan qualified under this increased authority may not exceed 0.5% of its admitted assets;
(v) the insurer files with the commissioner, and receives approval from the commissioner for, a plan that is designed to result in a portfolio of residential mortgage loans that is sufficiently geographically diversified; and
(vi) the insurer agrees to file annually with the commissioner records that demonstrate that its portfolio of residential mortgage loans is geographically diversified in accordance with the plan.
(d) The limitations of [section 14] do not apply to an insurer's acquisition of real estate under subsection (6). An insurer may not acquire real estate under subsection (6) if, as a result of and after giving effect to the acquisition, the aggregate amount of real estate then held by the insurer under subsection (6) would exceed 10% of its admitted assets. With the permission of the commissioner, additional amounts of real estate may be acquired under subsection (6).
Section 20. Securities lending, repurchase, reverse purchase, and dollar roll transactions. (1) An insurer may enter into securities lending, repurchase, reverse repurchase, and dollar roll transactions with business entities, subject to the following requirements:
(a) The insurer's board of directors shall adopt a written plan that is consistent with the requirements of the written plan provided for in [section 4(1)] and that specifies guidelines and objectives to be followed, such as:
(i) a description of how cash received will be invested or used for general corporate purposes of the insurer;
(ii) operational procedures to manage interest rate risk, counterparty default risk, the conditions under which proceeds from reverse repurchase transactions may be used in the ordinary course of business, and the use of acceptable collateral in a manner that reflects the liquidity needs of the transaction; and
(iii) the extent to which the insurer may engage in these transactions.
(b) The insurer shall enter into a written agreement for all transactions authorized in this section other than dollar roll transactions. The written agreement must require that each transaction terminates no more than 1 year from its inception or upon the earlier demand of the insurer. The agreement must be with the business entity counterparty, but for securities lending transactions, the agreement may be with an agent acting on behalf of the insurer if the agent is a qualified business entity and if the agreement:
(c) Cash received in a transaction under this section must be invested in accordance with [sections 1 through 36] and in a manner that recognizes the liquidity needs of the transaction or must be used by the insurer for its general corporate purposes. For as long as the transaction remains outstanding, the insurer or its agent or custodian shall maintain, as to acceptable collateral received in a transaction under this section, either physically or through the book entry systems of the federal reserve, depository trust company, participants trust company, or other securities depositories approved by the commissioner:
(iii) in the case of a jurisdiction outside of the United States, title to or rights of a secured creditor to the acceptable collateral.
(d) The limitations of [sections 14 and 21] do not apply to the business entity counterparty exposure created by transactions under this section. For purposes of calculations made to determine compliance with this subsection (1)(d), effect may not be given to the insurer's future obligation to resell securities, in the case of a repurchase transaction, or to repurchase securities, in the case of a reverse repurchase transaction. An insurer may not enter into a transaction under this section if, as a result of and after giving effect to the transaction:
(i) the aggregate amount of securities then loaned, sold to, or purchased from any one business entity counterparty under this section would exceed 5% of the insurer's admitted assets. In calculating the amount sold to or purchased from a business entity counterparty under repurchase or reverse repurchase transactions, effect may be given to netting provisions under a master written agreement.
(ii) the aggregate amount of all securities then loaned, sold to, or purchased from all business entities under this section would exceed 40% of the insurer's admitted assets.
(e) In a securities lending transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to 102% of the market value of the securities loaned by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than the market value of the loaned securities, the business entity counterparty is obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, equals at least 102% of the market value of the loaned securities.
(f) In a reverse repurchase transaction, other than a dollar roll transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to 95% of the market value of the securities transferred by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than 95% of the market value of the securities transferred, the business entity counterparty is obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, equals at least 95% of the market value of the transferred securities.
(g) In a dollar roll transaction, the insurer must receive cash in an amount at least equal to the market value of the securities transferred by the insurer in the transaction as of the transaction date.
(h) In a repurchase transaction, the insurer must receive as acceptable collateral transferred securities having a market value at least equal to 102% of the purchase price paid by the insurer for the securities. If at any time the market value of the acceptable collateral is less than 100% of the purchase price paid by the insurer, the business entity counterparty is obligated to provide additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, equals at least 102% of the purchase price. Securities acquired by an insurer in a repurchase transaction may not be sold in a reverse repurchase transaction, loaned in a securities lending transaction, or otherwise pledged.
(2) To constitute acceptable collateral for the purposes of this section, a letter of credit must have an expiration date beyond the term of the subject transaction.
Section 21. Foreign investments and foreign currency exposure. (1) Subject to the limitations of [section 14], an insurer may acquire foreign investments or engage in investment practices with persons of or in foreign jurisdictions if the investments or investment practices are of substantially the same types as those that an insurer is permitted to acquire under [sections 1 through 36], other than of the type permitted under [section 16] and if, as a result of and after giving effect to the investment, the aggregate amount of foreign investments then held by the insurer under this subsection (1):
(a) does not exceed 20% of its admitted assets; and
(b) in a single foreign jurisdiction does not exceed 10% of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or 3% of its admitted assets as to any other foreign jurisdiction.
(2) (a) Subject to the limitations of [section 14], an insurer may acquire investments or engage in investment practices denominated in foreign currencies, whether or not they are foreign investments acquired under subsection (1) or additional foreign currency exposure as a result of the termination or expiration of a hedging transaction with respect to investments denominated in a foreign currency, if the aggregate amount of investments then held by the insurer under this subsection (2) denominated in:
(i) foreign currencies does not exceed 10% of its admitted assets; and
(ii) the foreign currency of a single foreign jurisdiction does not exceed 10% of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or 3% of its admitted assets as to any other foreign jurisdiction.
(b) However, an investment under subsection (2)(a) may not be considered denominated in a foreign currency if the acquiring insurer enters into one or more contracts in transactions permitted under [section 22] and the business entity counterparty agrees under the contract or contracts to exchange all payments made on the foreign currency denominated investment for United States currency at a rate that effectively insulates the investment cash flows against future changes in currency exchange rates during the period the contract or contracts are in effect.
(3) (a) In addition to investments permitted under subsections (1) and (2), an insurer that is authorized to do business in a foreign jurisdiction and that has outstanding insurance, annuity, or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction may acquire foreign investments respecting that foreign jurisdiction and may acquire investments denominated in the currency of that jurisdiction subject to the limitations of [section 14].
(b) However, investments made under this subsection (3) in obligations of foreign governments, their political subdivisions, and government-sponsored enterprises are not subject to the limitations of [section 14] if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection (3) may not exceed the greater of:
(i) the amount the insurer is required by the law of the foreign jurisdiction to invest in the foreign jurisdiction; or
(4) In addition to investments permitted under subsections (1) and (2), an insurer that is not authorized to do business in a foreign jurisdiction and that has outstanding insurance, annuity, or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction may acquire foreign investments respecting that foreign jurisdiction and may acquire investments denominated in the currency of that jurisdiction subject to the limitations of [section 14]. However, investments made under this subsection in obligations of foreign governments, their political subdivisions, and government-sponsored enterprises are not subject to the limitations of [section 14] if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection may not exceed 105% of the amount of its reserves, net of reinsurance, and other obligations under the contracts on lives or risks resident or located in the foreign jurisdiction.
(5) Investments acquired under this section must be aggregated with investments of the same types made under [sections 1 through 36] and, in a similar manner, for purposes of determining compliance with the limitations, if any, contained in [sections 1 through 36]. Investments in obligations of foreign governments, their political subdivisions, and government-sponsored enterprises, except for those exempted under subsections (3) and (4), are subject to the limitations of [section 14].
Section 22. Derivative transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section under the following conditions:
(1) (a) An insurer may use derivative instruments under this section to engage in hedging transactions and certain income-generation transactions as provided in rules adopted by the commissioner.
(b) An insurer must be able to demonstrate to the commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of the transactions through cash flow testing or other appropriate analyses.
(2) An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to the transaction:
(a) the aggregate statement value of options, caps, floors, and warrants not attached to another financial instrument purchased and used in hedging transactions does not exceed 5% of its admitted assets;
(b) the aggregate statement value of options, caps, and floors written in hedging transactions does not exceed 3% of its admitted assets; and
(c) the aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed 6.5% of its admitted assets.
(3) An insurer may enter into the following types of income-generation transactions only if, as a result of and after giving effect to the transactions, the aggregate statement value of the fixed-income assets that are subject to call or that generate the cash flows for payments under the caps or floors, plus the face value of fixed income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the put options does not exceed 10% of its admitted assets:
(a) sales of covered call options on noncallable, fixed-income securities, callable fixed-income securities if the option expires by its terms prior to the end of the noncallable period, or derivative instruments based on fixed-income securities;
(b) sales of covered call options on equity securities if the insurer holds in its portfolio or can immediately acquire, through the exercise of options, warrants, or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold;
(c) sales of covered put options on investments that the insurer is permitted to acquire under [sections 1 through 36] if the insurer has placed in escrow or entered into a custodian agreement segregating cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put option during the complete term of the put option sold; or
(d) sales of covered caps or floors if the insurer holds in its portfolio the investments generating the cash flow to make the required payments under the caps or floors during the complete term that the cap or floor is outstanding.
(4) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of [section 14].
(5) Pursuant to rules adopted under [section 11], the commissioner may approve additional transactions involving the use of derivative instruments in excess of the limits of subsection (2) or for other risk management purposes under rules adopted by the commissioner, but replication transactions may not be permitted for other than risk management purposes.
Section 23. Policy loans. A life insurer may lend to a policyholder, on the security of the cash surrender value of the policyholder's policy, a sum not exceeding the legal reserve that the insurer is required to maintain on the policy.
Section 24. Additional investment authority. (1) Under this subsection (1), an insurer may acquire an investment or may engage in investment practices described in [section 20] solely for the purpose of acquiring investments that exceed the quantitative limitations of [sections 14 through 21]. However, an insurer may not acquire an investment or engage in investment practices described in [section 20] under this subsection (1) if, as a result of and after giving effect to the transaction:
(a) the aggregate amount of investments then held by an insurer under this subsection (1) would exceed 3% of its admitted assets; or
(b) the aggregate amount of investments as to a limitation in [sections 14 through 21] then held by the insurer under this subsection (1) would exceed 1% of its admitted assets.
(2) (a) In addition to the authority provided under subsection (1), an insurer may acquire under this subsection (2) an investment of any kind or engage in investment practices described in [section 20] that are not specifically prohibited by [sections 1 through 36] without regard to the categories, conditions, standards, or other limitations of [sections 14 through 21] if, as a result of and after giving effect to the transaction, the aggregate amount of investments then held under this subsection (2) would not exceed the lesser of:
(i) 10% of its admitted assets; or
(ii) 75% of its capital and surplus.
(b) However, an insurer may not acquire any investment or engage in any investment practice under this subsection (2) if, as a result of and after giving effect to the transaction, the aggregate amount of all investments in any one person then held by the insurer under this subsection (2) would exceed 3% of its admitted assets.
(3) In addition to the investments acquired under subsections (1) and (2), an insurer may acquire under this subsection (3) an investment of any kind or engage in investment practices described in [section 20] that are not specifically prohibited by [sections 1 through 36] without regard to any limitations of [section 14 through 21] if:
(a) the commissioner grants prior approval;
(b) the insurer demonstrates that its investments are being made in a prudent manner and that the additional amounts will be invested in a prudent manner; and
(c) as a result of and after giving effect to the transaction, the aggregate amount of investments then held by the insurer under this subsection (3) does not exceed the greater of:
(i) 25% of its capital and surplus; or
(ii) 100% of capital and surplus less 10% of its admitted assets.
(4) An investment prohibited under [section 5] that is not permitted under [section 22] or additional derivative instruments acquired under [section 22] may not be acquired under this section.
Section 25. Applicability. Subject to the provisions of [section 1(2)], [sections 26 through 36] apply to the investments and investment practices of property and casualty, financial guaranty, mortgage guaranty, surety, marine, and title insurers.
Section 26. General five percent diversification -- medium-grade and lower-grade investments -- Canadian investments. (1) (a) Except as otherwise specified in [sections 1 through 36], an insurer may not acquire, directly or indirectly through an investment subsidiary, an investment under [sections 1 through 36] if, as a result of and after giving effect to the investment, the insurer would hold more than 5% of its admitted assets in investments of all kinds issued, assumed, accepted, insured, or guaranteed by a single person.
(b) The 5% limitation in subsection (1)(a) does not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally recognized statistical rating organization.
(c) Asset-backed securities are not subject to the limitations of subsection (1)(a). However, an insurer may not acquire an asset-backed security if, as a result of and after giving effect to the investment, the aggregate amount of asset-backed securities that are secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity and that are then held by the insurer would exceed 5% of its admitted assets.
(2) (a) An insurer may not acquire, directly or indirectly through an investment subsidiary, an investment under [section 27, 30, or 33] or counterparty exposure under [section 34(4)] if, as a result of and after giving effect to the investment:
(i) the aggregate amount of all medium-grade and lower-grade investments then held by the insurer would exceed 20% of its admitted assets;
(iii) the aggregate amount of investments rated 5 or 6 by the SVO then held by the insurer would exceed 5% of its admitted assets;
(b) An insurer may not acquire, directly or indirectly through an investment subsidiary, an investment under [section 27, 30, or 33] or counterparty exposure under [section 34(4)] if, as a result of and after giving effect to the investment:
(i) the aggregate amount of medium-grade and lower-grade investments issued, assumed, accepted, insured, or guaranteed by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed 1% of its admitted assets; or
(ii) the aggregate amount of lower-grade investments issued, assumed, accepted, insured, or guaranteed by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed 0.5% of its admitted assets.
(c) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection (2), the insurer is not precluded from acquiring investments in other rating categories subject to the specific and multicategory limits applicable to those investments.
(3) (a) An insurer may not acquire, directly or indirectly through an investment subsidiary, any Canadian investments authorized by [sections 1 through 36] if as a result of and after giving effect to the investment, the aggregate amount of the investments then held by the insurer would exceed 40% of its admitted assets or if the aggregate amount of Canadian investments not acquired under [section 27(1)(b)] then held by the insurer would exceed 25% of its admitted assets.
(ii) 125% of the amount of its reserves and other obligations under contracts on risks resident or located in Canada.
Section 27. Rated credit instruments. (1) Subject to the limitations of subsection (2), an insurer may acquire rated credit instruments in accordance with the following:
(a) Subject to the limitations of [section 26(2)], but not to the limitations of [section 26(1)], an insurer may acquire rated credit instruments issued, assumed, insured, or guaranteed by:
(ii) a government-sponsored enterprise of the United States, if the instruments of the government-sponsored enterprise are assumed, guaranteed, or insured by the United States or are otherwise backed or supported by the full faith and credit of the United States.
(b) (i) Subject to the limitations of [section 26(2)], but not to the limitations of [section 26(1)], an insurer may acquire rated credit instruments issued, assumed, insured, or guaranteed by:
(B) a government-sponsored enterprise of Canada, if the instruments of the government-sponsored enterprise are assumed, guaranteed, or insured by Canada or are otherwise backed or supported by the full faith and credit of Canada.
(ii) However, an insurer may not acquire an instrument under this subsection (1)(b) if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subsection (1)(b) would exceed 40% of its admitted assets.
(c) (i) Subject to the limitations of [section 26(2)], but not to the limitations of [section 26(1)], an insurer may acquire rated credit instruments, excluding asset-backed securities:
(B) issued, assumed, insured, or guaranteed by a government-sponsored enterprise of the United States other than those eligible under subsection (1)(a);
(C) issued, assumed, insured, or guaranteed by a state if the instruments are general obligations of the state; or
(ii) However, an insurer may not acquire an instrument of any one fund, any one enterprise or entity, or any one state under this subsection (1)(c) if, as a result of and after giving effect to the investment, the aggregate amount of investments then held in any one fund, enterprise, entity, or state under this subsection (1)(c) would exceed 10% of its admitted assets.
(d) Subject to the limitations of [section 26], an insurer may acquire preferred stocks that are not foreign investments and that meet the requirements of rated credit instruments if, as a result of and after giving effect to the investment:
(i) the aggregate amount of preferred stocks then held by the insurer under this subsection (1)(d) does not exceed 20% of its admitted assets; and
(ii) the aggregate amount of preferred stocks then held by the insurer under this subsection (1)(d) that are not sinking fund stocks or rated P-1 or P-2 by the SVO does not exceed 10% of its admitted assets.
(e) Subject to the limitations of [section 26], in addition to those investments eligible under subsections (1)(a) through (1)(d), an insurer may acquire rated credit instruments that are not foreign investments.
(2) An insurer may not acquire special rated credit instruments under this section if, as a result of and after giving effect to the investment, the aggregate amount of special rated credit instruments then held by the insurer would exceed 5% of its admitted assets.
Section 28. Insurer investment pools. (1) An insurer may acquire investments in investment pools that:
(a) invest only in:
(i) obligations that are rated 1 or 2 by the SVO or have an equivalent of an SVO 1 or 2 rating by a nationally recognized statistical rating organization recognized by the SVO or, in the absence of a 1 or 2 rating or equivalent rating, the issuer has outstanding obligations with an SVO 1 or 2 or equivalent rating and have:
(A) a remaining maturity of 397 days or less or a put option that entitles the holder to receive the principal amount of the obligation that may be exercised through maturity at specified intervals not exceeding 397 days; or
(B) a remaining maturity of 3 years or less and a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London interbank offered rate, or commercial paper) and is subject to no maximum limit if the obligations do not have an interest rate that varies inversely to market interest rate changes;
(iii) securities lending, repurchase, and reverse repurchase transactions that meet all the requirements of [section 32], except the quantitative limitations of [section 32(1)(d)]; or
(b) invest only in investments that an insurer may acquire under [sections 1 through 36] if the insurer's proportionate interest in the amount invested in these investments does not exceed the applicable limits of [sections 1 through 36].
(a) acquire securities issued, assumed, insured, or guaranteed by the insurer or an affiliate of the insurer;
(b) borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions that meet the requirements of [section 32], except the quantitative limitations of [section 32(1)(d)]; or
(c) permit the aggregate value of securities then loaned or sold to, purchased from, or invested in any one business entity under this section to exceed 10% of the total assets of the investment pool.
(3) The limitations of [section 26(1)] do not apply to an insurer's investment in an investment pool. However, an insurer may not acquire an investment in an investment pool under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section:
(c) in all investment pools would exceed 40% of its admitted assets.
(a) must be organized under the laws of the United States or a state and must be designated as the pool manager in a pooling agreement;
(e) withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds must occur within a reasonable and customary period after withdrawal not to exceed 5 business days. Distributions under this subsection (5)(e) must be calculated in each case net of all then-applicable fees and expenses of the investment pool. The pooling agreement must provide that the pool manager shall distribute to a participant, at the discretion of the pool manager:
(iii) in a combination of cash and in-kind distributions, a pro rata share in each underlying asset; and
Section 29. Equity interests. (1) Subject to the limitations of [section 26], an insurer may acquire equity interests in business entities organized under the laws of any domestic jurisdiction.
(2) An insurer may not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section would exceed the greater of 25% of its admitted assets or 100% of its surplus as regards policyholders.
(3) An insurer may not acquire under this section any investments that the insurer may acquire under [section 31].
Section 30. Tangible personal property under lease. (1) (a) Subject to the limitations of [section 26], an insurer may acquire tangible personal property or equity interests in tangible personal property located or used wholly or in part within a domestic jurisdiction, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by [section 4(4)], joint ventures, stock of an investment subsidiary, membership interests in a limited liability company, trust certificates, or other similar instruments.
(i) the property is subject to a lease or other agreement with a person whose rated credit instruments in the amount of the purchase price of the personal property the insurer could then acquire under [section 27]; and
(ii) the lease or other agreement provides the insurer the right to receive rental, purchase, or other fixed payments for the use or purchase of the property and the aggregate value of the payments, together with the estimated residual value of the property at the end of its useful life and the estimated tax benefits to the insurer resulting from ownership of the property, are adequate to return the cost of the insurer's investment in the property, plus a return considered adequate by the insurer.
(4) For purposes of determining compliance with the limitations of [section 26], investments acquired by an insurer under this section must be aggregated with those acquired under [section 27] and each lessee of the property under a lease referred to in this section is considered the issuer of an obligation in the amount of the investment of the insurer in the property determined as provided in subsection (2).
(5) This section is not applicable to tangible personal property lease arrangements between an insurer and its subsidiaries and affiliates under a cost-sharing arrangement or agreement permitted under Title 33, chapter 2, part 11.
Section 31. Mortgage loans -- income producing real estate -- real estate for accommodation of business -- quantitative limitations. (1) (a) Subject to the limitations of [section 26], an insurer may acquire obligations secured by mortgages on real estate situated within a domestic jurisdiction, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by [section 4(4)], joint ventures, stock of an investment subsidiary, membership interests in a limited liability company, trust certificates, or other similar instruments. However, a mortgage loan that is secured by other than a first lien may not be acquired unless the insurer is the holder of the first lien. The obligations held by the insurer and any obligations with an equal lien priority may not, at the time of acquisition of the obligation, exceed:
(i) 90% of the fair market value of the real estate if the mortgage loan is secured by a purchase money mortgage or similar security received by the insurer upon disposition of the real estate;
(ii) 80% of the fair market value of the real estate if the mortgage loan requires immediate scheduled payment in periodic installments of principal and interest, has an amortization period of 30 years or less, and has periodic payments made no less frequently than annually. Each periodic payment must be sufficient to ensure that at all times the outstanding principal balance of the mortgage loan is not greater than the outstanding principal balance that would be outstanding under a mortgage loan with the same original principal balance, with the same interest rate, and requiring equal payments of principal and interest with the same frequency over the same amortization period. Mortgage loans permitted under this subsection (1)(b) are permitted notwithstanding the fact that they provide for a payment of the principal balance prior to the end of the period of amortization of the loan. For residential mortgage loans, the 80% limitation may be increased to 97% if acceptable private mortgage insurance has been obtained.
(iii) 75% of the fair market value of the real estate for mortgage loans that do not meet the requirements of subsections (1)(a)(i) or (1)(a)(ii).
(b) For purposes of subsection (1)(a), the amount of an obligation required to be included in the calculation of the loan-to-value ratio may be reduced to the extent the obligation is insured by the federal housing administration, guaranteed by the administrator of veterans affairs, or insured or guaranteed by their successors.
(c) A mortgage loan that is held by an insurer under [section 3(6)] or acquired under this section and that is restructured in a manner that meets the requirements of a restructured mortgage loan in accordance with the NAIC Accounting Practices and Procedures Manual or a successor publication continues to qualify as a mortgage loan under [sections 1 through 36].
(d) Subject to the limitations of [section 26], credit lease transactions that do not qualify for investment under [section 27] and that have the following characteristics are exempt from the provisions of subsection (1)(a):
(i) the loan amortizes over the initial fixed lease term in at least an amount sufficient so that the loan balance at the end of the lease term does not exceed the original appraised value of the real estate;
(ii) the lease payments cover or exceed the total debt service over the life of the loan;
(iii) a tenant or its affiliated entity with rated credit instruments that have an SVO 1 or 2 designation or a comparable rating from a nationally recognized statistical rating organization recognized by the SVO has a full faith and credit obligation to make the lease payments;
(iv) the insurer holds or is the beneficial holder of a first lien mortgage on the real estate;
(v) the expenses of the real estate are passed through to the tenant, excluding exterior, structural, parking, and heating, ventilation, and air conditioning replacement expenses, unless annual escrow contributions, from cash flows derived from the lease payments, cover the expense shortfall; and
(vi) there is a perfected assignment of the rents due pursuant to the lease to or for the benefit of the insurer.
(2) (a) An insurer may acquire, manage, and dispose of real estate situated in a domestic jurisdiction, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by [section 4(4)], joint ventures, stock of an investment subsidiary, membership interests in a limited liability company, trust certificates, or other similar instruments. The real estate must be income-producing or intended for improvement or development for investment purposes under an existing program, in which case the real estate must be considered to be income-producing.
(b) The real estate may be subject to mortgages, liens, or other encumbrances, the amount of which must, to the extent that the obligations secured by the mortgages, liens, or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with subsections (4)(b) and (4)(c).
(3) (a) An insurer may acquire, manage, and dispose of real estate for the convenient accommodation of the insurer's or the insurer's affiliates' business operations, including home office, branch office, and field office operations.
(b) Real estate acquired under this subsection (3) may include excess space for rent to others if the excess space, valued at its fair market value, would otherwise be a permitted investment under subsection (2) and is so qualified by the insurer.
(c) The real estate acquired under this subsection (3) may be subject to one or more mortgages, liens, or other encumbrances, the amount of which must, to the extent that the obligations secured by the mortgages, liens, or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with subsection (4)(d).
(d) For purposes of this subsection (3), business operations may not include that portion of real estate used for the direct provision of health care services by an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively. An insurer may acquire real estate used for these purposes under subsection (2).
(4) (a) An insurer may not acquire an investment under subsection (1) if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under subsection (1) would exceed:
(iii) 1% of its admitted assets in construction loans in the aggregate.
(b) An insurer may not acquire an investment under subsection (2) if, as a result of and after giving effect to the investment and any outstanding guarantees made by the insurer in connection with the investment, the aggregate amount of investments then held by the insurer under subsection (2) plus the guarantees then outstanding would exceed:
(i) 1% of its admitted assets in any one parcel or group of contiguous parcels of real estate, except that this limitation does not apply to that portion of real estate used for the direct provision of health care services by an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively, such as hospitals, medical clinics, medical professional buildings, or other health facilities used for the purpose of providing health services; or
(ii) the lesser of 10% of its admitted assets or 40% of its surplus as regards policyholders in the aggregate, except for an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively. This limitation must be increased to 15% of its admitted assets in the aggregate.
(c) An insurer may not acquire an investment under subsection (1) or (2) if, as a result of and after giving effect to the investment and any outstanding guarantees it has made in connection with the investment, the aggregate amount of all investments then held by the insurer under subsection (1) or (2) plus the guarantees then outstanding would exceed 25% of its admitted assets.
(d) The limitations of [section 26] do not apply to an insurer's acquisition of real estate under subsection (3). An insurer may not acquire real estate under subsection (3) if, as a result of and after giving effect to the acquisition, the aggregate amount of all real estate then held by the insurer under subsection (3) would exceed 10% of its admitted assets. With the permission of the commissioner, additional amounts of real estate may be acquired under subsection (3).
Section 32. Securities lending, repurchase, reverse repurchase, and dollar roll transactions. (1) An insurer may enter into securities lending, repurchase, reverse repurchase, and dollar roll transactions with business entities, subject to the following requirements:
(a) The insurer's board of directors shall adopt a written plan that is consistent with the requirements of the written plan provided for in [section 4(1)] that specifies guidelines and objectives to be followed, such as:
(b) The insurer shall enter into a written agreement for all transactions authorized in this section other than dollar roll transactions. The written agreement must require that each transaction terminate no more than 1 year from its inception or upon the earlier demand of the insurer. The agreement must be with the business entity counterparty, but for securities lending transactions, the agreement may be with an agent acting on behalf of the insurer if the agent is a qualified business entity and if the agreement:
(d) The limitations of [sections 26 and 33] do not apply to the business entity counterparty exposure created by transactions under this section. For purposes of calculations made to determine compliance with this subsection (1), no effect will be given to the insurer's future obligation to resell securities, in the case of a repurchase transaction, or to repurchase securities, in the case of a reverse repurchase transaction. An insurer may not enter into a transaction under this section if, as a result of and after giving effect to the transaction:
(ii) the aggregate amount of all securities then loaned, sold to, or purchased from all business entities under this section would exceed 40% of its admitted assets. However, the limitation of this subsection (1)(d) does not apply to reverse repurchase transactions as long as the borrowing is used to meet operational liquidity requirements resulting from an officially declared catastrophe and is subject to a plan approved by the commissioner.
(e) In a securities lending transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to 102% of the market value of the securities loaned by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than the market value of the loaned securities, the business entity counterparty must be obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, equals at least 102% of the market value of the loaned securities.
(h) In a repurchase transaction, the insurer must receive as acceptable collateral transferred securities having a market value at least equal to 102% of the purchase price paid by the insurer for the securities. If at any time the market value of the acceptable collateral is less than 100% of the purchase price paid by the insurer, the business entity counterparty must be obligated to provide additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, equals at least 102% of the purchase price. Securities acquired by an insurer in a repurchase transaction may not be sold in a reverse repurchase transaction, loaned in a securities lending transaction, or otherwise pledged.
Section 33. Foreign investments and foreign currency exposure. (1) Subject to the limitations of [section 26], an insurer may acquire foreign investments or engage in investment practices with persons of or in foreign jurisdictions if the investments or investment practices are of substantially the same types as those that an insurer is permitted to acquire under [sections 1 through 36], other than of the type permitted under [section 28] and if as a result of and after giving effect to the investment the aggregate amount of foreign investments then held by the insurer under this subsection (1):
(b) in a single foreign jurisdiction does not exceed 10% of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or 5% of its admitted assets as to any other foreign jurisdiction.
(2) (a) Subject to the limitations of [section 26], an insurer may acquire investments or engage in investment practices denominated in foreign currencies, whether or not they are foreign investments acquired under subsection (1), or additional foreign currency exposure as a result of the termination or expiration of a hedging transaction with respect to investments denominated in a foreign currency if:
(i) the aggregate amount of investments then held by the insurer under this subsection (2) denominated in foreign currencies does not exceed 15% of its admitted assets; and
(ii) the aggregate amount of investments then held by the insurer under this subsection (2) denominated in the foreign currency of a single foreign jurisdiction does not exceed 10% of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or 5% of its admitted assets as to any other foreign jurisdiction.
(b) However, an investment may not be considered denominated in a foreign currency if the acquiring insurer enters into one or more contracts in transactions permitted under [section 34] and the business entity counterparty agrees under the contract or contracts to exchange all payments made on the foreign currency denominated investment for United States currency at a rate that effectively insulates the investment cash flows against future changes in currency exchange rates during the period the contract or contracts are in effect.
(3) (a) Subject to [section 26] and subsection (3)(b) of this section and in addition to investments permitted under subsections (1) and (2), an insurer that is authorized to do business in a foreign jurisdiction and that has outstanding insurance, annuity, or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction may acquire foreign investments respecting that foreign jurisdiction and may acquire investments denominated in the currency of that jurisdiction.
(b) However, investments made under this subsection (3) in obligations of foreign governments, their political subdivisions, and government-sponsored enterprises are not subject to the limitations of [section 26] if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection (3) may not exceed the greater of:
(i) the amount the insurer is required by law to invest in the foreign jurisdiction; or
(ii) 125% of the amount of its reserves, net of reinsurance, and other obligations under the contracts.
(4) (a) In addition to investments permitted under subsections (1) and (2) and except as provided in subsection (4)(b), an insurer that is not authorized to do business in a foreign jurisdiction and that has outstanding insurance, annuity, or reinsurance contracts on lives or risks resident or located in a foreign jurisdiction and denominated in foreign currency of that jurisdiction may acquire foreign investments respecting that foreign jurisdiction and may acquire investments denominated in the currency of that jurisdiction subject to the limitations set forth in [section 26].
(b) However, investments made under this subsection (4) in obligations of foreign governments, their political subdivisions, and government-sponsored enterprises are not subject to the limitations of [section 26] if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection (4) may not exceed 105% of the amount of its reserves, net of reinsurance, and other obligations under the contracts on risks resident or located in the foreign jurisdiction.
(5) Investments acquired under this section must be aggregated with investments of the same types made under [sections 1 through 36] and, in a similar manner, for purposes of determining compliance with the limitations, if any, contained in [sections 1 through 36]. Investments in obligations of foreign governments, their political subdivisions, and government-sponsored enterprises, except for those exempted under subsections (3) and (4), are subject to the limitations of [section 26].
Section 34. Derivative transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section under the following conditions:
(1) (a) An insurer may use derivative instruments under this section to engage in hedging transactions and certain income generation transactions as provided in rules adopted by the commissioner.
(b) An insurer must be able to demonstrate to the commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of transactions through cash flow testing or other appropriate analyses.
(3) An insurer may enter into the following types of income-generation transactions only if, as a result of and after giving effect to the transactions, the aggregate statement value of the fixed-income assets that are subject to call, plus the face value of fixed-income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the put options does not exceed 10% of its admitted assets:
(b) sales of covered call options on equity securities if the insurer holds in its portfolio or can immediately acquire, through the exercise of options, warrants, or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold; or
(c) sales of covered put options on investments that the insurer is permitted to acquire under [sections 1 through 36] if the insurer has placed in escrow or entered into a custodian agreement segregating cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put option during the complete term of the put option sold.
(4) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of [section 26].
Section 35. Additional investment authority. (1) Under this section, an insurer may acquire investments, may engage in investment practices of any kind that are not specifically prohibited by [sections 1 through 36], or may engage in investment practices without regard to any limitation in [sections 26 through 33]. However, an insurer may not acquire an investment or engage in an investment practice under this section if, as a result of and after giving effect to the transaction, the aggregate amount of the investments then held by the insurer under this section would exceed the greater of:
(a) its unrestricted surplus; or
(ii) 50% of its surplus as regards policyholders.
(2) An insurer may not acquire an investment or engage in an investment practice under subsection (1) if, as a result of and after giving effect to the transaction, the aggregate amount of all investments in any one person then held by the insurer under subsection (1) would exceed 5% of its admitted assets.
Section 36. Reserve requirements -- authority of commissioner. (1) Subject to all other limitations and requirements of this title, a property and casualty, financial guaranty, mortgage guaranty, surety, marine, title, or accident and health insurer shall maintain an amount at least equal to 100% of adjusted loss reserves and loss adjustment expense reserves, 100% of adjusted unearned premium reserves, and 100% of statutorily required policy and contract reserves in:
(b) high-grade investments and medium-grade investments that qualify under [section 27 or 28];
(c) equity interests that qualify under [section 29] and that are traded on a qualified exchange;
(d) investments of the type set forth in [section 33] if the investments are rated in the highest generic rating category by a nationally recognized statistical rating organization recognized by the SVO for rating foreign jurisdictions and if any foreign currency exposure is effectively hedged through the maturity date of the investments;
(e) qualifying investments of the type set forth in subsection (1)(b), (1)(c), or (1)(d) that are acquired under [section 35];
(f) interest and dividends receivable on qualifying investments of the type set forth in subsections (1)(a) through (1)(e); or
(2) (a) For purposes of determining the amount of assets to be maintained under this subsection (2), the calculation of adjusted loss reserves and loss adjustment expense reserves, adjusted unearned premium reserves, and statutorily required policy and contract reserves must be based on the amounts reported as of the most recent annual or quarterly statement date.
(b) Adjusted loss reserves and loss adjustment expense reserves must be equal to the sum of the amounts derived from the following calculations:
(i) the result of each amount reported by the insurer as losses and loss adjustment expenses unpaid for each accident year for each individual line of business; multiplied by
(ii) the discount factor that is applicable to the line of business and accident year published by the internal revenue service under Internal Revenue Code section 846 (26 U.S.C. 846), as amended, for the calendar year that corresponds to the most recent annual statement of the insurer; minus
(iii) accrued retrospective premiums discounted by an average discount factor. The discount factor must be calculated by dividing the losses and loss adjustment expenses unpaid after discounting (the product of subsections (2)(b)(i) and (2)(b)(ii)) by loss and loss adjustment expense reserves before discounting subsection (2)(b)(i).
(c) For purposes of the calculations in subsections (2)(b)(i) through (2)(b)(iii), the losses and loss adjustment expenses unpaid must be determined net of anticipated salvage and subrogation and gross of any discount for the time value of money or tabular discount.
(d) Adjusted unearned premium reserves must be equal to the result of the following calculation:
(i) the amount reported by the insurer as unearned premium reserves; minus
(A) premiums in and agents' balances in the course of collection, accident and health premiums due and unpaid, and uncollected premiums for accident and health premiums;
(C) bills receivable, taken for premium.
(3) A property and casualty, financial guaranty, mortgage guaranty, surety, marine, title, or accident and health insurer shall supplement its annual statement with a reconciliation and summary of its assets and reserve requirements as required in (1). A reconciliation and summary showing that an insurer's assets as required in subsection (1) are greater than or equal to its undiscounted reserves referred to in subsection (1) must be sufficient to satisfy this requirement. Upon prior notification, the commissioner may require an insurer to submit a reconciliation and summary with any quarterly statement filed during the calendar year.
(4) If a property and casualty, financial guaranty, mortgage guaranty, surety, marine, title, or accident and health insurer's assets and reserves do not comply with subsection (1), the insurer shall notify the commissioner immediately of the amount by which the reserve requirements exceed the annual statement value of the qualifying assets, explain why the deficiency exists, and within 30 days of the date of the notice, propose a plan of action to remedy the deficiency.
(5) (a) If the commissioner determines that an insurer is not in compliance with subsection (1), the commissioner shall require the insurer to eliminate the condition causing the noncompliance within a specified time from the date the notice of the commissioner's requirement is mailed or delivered to the insurer.
(b) If an insurer fails to comply with the commissioner's requirement under subsection (5)(a), the insurer is considered to be in hazardous financial condition and the commissioner shall take one or more of the actions authorized by law with respect to insurers in hazardous financial condition.
Section 37. Section 33-2-202, MCA, is amended to read:
"33-2-202. Required deposit of assets. (1) An alien insurer may use Montana as a state of entry to transact insurance in the United States by making and maintaining in this state a deposit of assets in trust with a solvent bank or trust company approved by the commissioner.
(2) The deposit, together with other trust deposits of the insurer held in the United States for the same purpose, shall must be in amount not less than the deposits required of an alien insurer under 33-2-111(1) and shall must consist of cash and/or and securities of the same character and diversification as those eligible for the investment of the funds of domestic insurers under part 8 of this chapter [sections 1 through 36].
(3) Such a A deposit under this section may be referred to as "trusteed assets"."
Section 38. Section 33-2-213, MCA, is amended to read:
"33-2-213. Withdrawal of assets. (1) The A trust agreement shall under this part must provide, in substance, that no withdrawals of trusteed assets shall may not be made by the insurer or permitted by the trustee without the written authorization or approval of the commissioner in advance thereof of the withdrawal, except as follows:
(a) any or all income, earnings, dividends, or interest accumulations of the trusteed assets may be paid over to the United States manager of the insurer upon request of the insurer or the manager;
(b) for substitution, coincidentally with such a withdrawal, of other securities or assets of value at least equal in amount to those being withdrawn if such the substituted securities or assets are likewise such as are eligible for investment of the funds of domestic insurers under part 8 of this chapter [sections 1 through 36], if such the withdrawal is requested in writing by the insurer's United States manager pursuant to general or specific written authority previously given or delegated by the insurer's board of directors or other similar governing body and a copy of such the authority has been filed with the trustee;
(c) for the purpose of making deposits required by law in any state in which the insurer is or thereafter becomes an authorized insurer, for the protection of the insurer's policyholders or policyholders and creditors in such state or in the United States, if such a withdrawal does not reduce the insurer's deposit in this state to an amount less than the minimum deposit required under 33-2-111(1)(c)(i) and (ii)(1)(c)(ii). The trustee shall transfer any assets so withdrawn and in the amount so required to be deposited in the other state direct to the depositary required to receive such the deposit in such the other state, as certified in writing by the public official having supervision of insurance in the other state.
(d) for the purpose of transferring the trusteed assets to an official liquidator, conservator, or rehabilitator pursuant to the order of a court of competent jurisdiction.
(2) The commissioner shall so authorize or approve withdrawal of only such the assets as that are in excess of the amount of assets required to be so held in trust under 33-2-202 or as may otherwise be consistent with the provisions of this part.
(3) If at any time the insurer becomes insolvent or if its assets held in the United States are less in amount than as required under 33-2-111(1)(c), upon determination thereof the commissioner shall in writing order the trustee to suspend the right of the insurer or any other person to withdraw assets as authorized under (a), (b), and (c) of subsection (1) above subsections (1)(a), (1)(b), and (1)(c), and the trustee shall comply with such the order and until the further order of the commissioner."
Section 39. Section 33-2-502, MCA, is amended to read:
"33-2-502. Assets expressly not allowed. In addition to assets impliedly excluded by the provisions of 33-2-501, the following expressly shall may not be allowed as assets in any determination of the financial condition of an insurer:
(1) goodwill, trade names, and other like intangible assets;
(2) advances to officers (other than policy loans), whether secured or not, and advances to employees, insurance producers, and other persons on personal security only;
(3) stock of such the insurer, owned by it, or any equity therein in the stock or loans secured thereby by the stock or any proportionate interest in such the stock acquired or held through the ownership by such the insurer of an interest in another firm, corporation, or business unit;
(4) furniture, fixtures (other than electronic data processing machines authorized under 33-2-501(11)), furnishings, safes, vehicles, libraries, stationery, literature, and supplies, except:
(a) in the case of title insurers, such materials and plants as that the insurer is expressly authorized to invest in under 33-2-851 33-25-211; and
(b) in the case of any insurer, such personal property as that the insurer is permitted to hold pursuant to part 8 of this chapter [sections 1 through 36] or which that is acquired through foreclosure of chattel mortgages acquired pursuant to 33-2-831 [section 19 or 31] or which that is reasonably necessary for the maintenance and operation of real estate lawfully acquired and held by the insurer other than real estate used by it for home office, branch office, and similar purposes;
(5) the amount, if any, by which the aggregate book value of investments as carried in the ledger assets of the insurer exceeds the aggregate value thereof of the investments as determined under this code title."
Section 40. Section 33-2-531, MCA, is amended to read:
"33-2-531. Deposit of reserves -- domestic life insurers. (1) Domestic life insurers shall deposit and maintain on deposit, in securities and assets, with depositaries and subject to conditions as provided for in part 6 of this chapter, an amount not less than the reserves on its outstanding life insurance policies and annuity contracts, as valued under 33-2-521 through 33-2-526, minus policy loans.
(2) Annually on or before April 1, the insurer shall deposit any additional securities or assets required under subsection (1) and related to the increase of the reserves, minus policy loans, during the preceding calendar year next preceding, as determined from the insurer's annual statement as at December 31 of the preceding year.
(3) A domestic stock life insurer may credit toward the deposit the amount of any other deposit of the insurer held under part 6 of this chapter for the protection of its policyholders or of its policyholders and creditors.
(4) Deposits of the reserves of a domestic life insurer under this section must consist of securities and assets acquired and valued in accordance with parts part 5 and 8 of this chapter and [sections 1 through 36].
(5) Real estate mortgage loans and chattel mortgage loans may be made a part of the deposit by filing a verified statement of the loans with the commissioner. The statement is subject to audit at all times by the commissioner. Nonnegotiable securities deposited with the commissioner must be accompanied by transfer powers in due form. If the insurer uses real estate acquired under 33-2-832 [section 19] as a deposit, then a deed of trust, mortgage, or other instrument sufficient to convey a security interest in the real estate, in a form acceptable to the commissioner, must be completed in due form and recorded prior to being deposited with the commissioner.
(6) If default occurs in the payment of interest or principal of any deposited security and the default continues for a period of 120 days, the commissioner may declare the security no longer eligible for deposit under this section."
Section 41. Section 33-2-534, MCA, is amended to read:
"33-2-534. Valuation of property. (1) Real property acquired pursuant to a mortgage loan or contract for sale shall may not be valued at an amount greater than the unpaid principal of the defaulted loan or contract at the date of such acquisition, together with any taxes and expenses paid or incurred in connection with such the acquisition, the cost of improvements thereafter made by the insurer after acquisition, and any amounts thereafter paid by the insurer after acquisition on assessments levied for improvements in connection with the property. After the initial valuation as set forth herein in this section, any land shall must be valued at its acquisition cost and any improvements thereon shall on the land must be valued at depreciated acquisition cost.
(2) Other real property held by an insurer shall may not be valued at an amount in excess of acquisition cost, if land, and depreciated acquisition cost, if an improvement to land.
(3) Personal property acquired pursuant to chattel mortgages made in accordance with 33-2-831 shall may not be valued at an amount greater than the unpaid balance of principal on the defaulted loan at the date of acquisition, together with taxes and expenses incurred in connection with such the acquisition, or the fair value of such the property, whichever amount is the lesser."
Section 42. Section 33-2-603, MCA, is amended to read:
"33-2-603. Securities eligible for deposit. (1) All such deposits required under 33-2-111 for authority to transact insurance in this state shall must consist of certificates of deposit or any combination of the following securities: of the kinds described in the following sections of this code: 33-2-811(1), 33-2-812, and 33-2-813
(a) United States or Canadian government bonds, notes, warrants, or other evidences of indebtedness that are direct obligations of the United States or of Canada or for which the full faith and credit of the United States or of Canada is pledged for the payment of principal and interest;
(b) state, county, municipal, and school bonds or other evidences of indebtedness that are general obligations of or are secured by a pledge of specific revenue of a state or of a province of Canada or of any of the counties, incorporated cities or towns, school districts, or other taxing districts in a state or province; and
(c) revenue bonds, notes, or other evidences of indebtedness of any state or province, political subdivision of a state or province or agency or instrumentality of a state or province that are payable from revenue or earnings specifically pledged for the payment of the principal and interest on the obligations and for the payment of which a lawful sinking fund or reserve fund has been established and is being maintained.
(2) All other deposits of a domestic insurer held in this state pursuant to the laws of another state, province, or country shall must be comprised of assets of the kinds described in subsection (1) above and of such additional kind or kinds of securities required or permitted by the laws of such the state, province, or country except common stocks, mortgages of any kind, and real estate.
(3) Deposits of the reserves of a domestic life insurer shall must consist of securities and assets as provided under 33-2-531.
(4) Deposits of foreign insurers made in this state under the retaliatory law, 33-2-709, shall must consist of such assets as that are required by the commissioner pursuant to such law 33-2-709."
Section 43. Section 33-2-1217, MCA, is amended to read:
"33-2-1217. Reduction of liability for reinsurance ceded by domestic insurer to assuming insurer -- definition. A reduction from liability for the reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of 33-2-1216 must be allowed in an amount not exceeding the liabilities carried by the ceding insurer. The reduction must be in the amount of funds held by or on behalf of the ceding insurer, including funds held in trust for the ceding insurer:
(1) under a reinsurance contract with the assuming insurer as security for the payment of obligations under the contract if the security is held in the United States subject to withdrawal solely by and under the exclusive control of the ceding insurer; or
(2) in the case of a trust, in a qualified United States financial institution. This security may be in the form of:
(b) securities listed by the securities valuation office of the NAIC and qualifying as admitted assets;
(c) clean, irrevocable, unconditional letters of credit that are issued or confirmed by a qualified United States financial institution no later than December 31 of the year for which filing is being made and that are in the possession of the ceding company on or before the filing date of its annual statement. Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance or confirmation must, notwithstanding the issuing or confirming institution's subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification, or amendment, whichever occurs first.
(3) For the purposes of subsection (2)(c), a "qualified United States financial institution" means an institution that:
(a) is organized or, in the case of a United States office of a foreign banking organization, licensed under the laws of the United States or any of its states;
(b) is regulated, supervised, and examined by United States federal or state authorities with regulatory authority over banks and trust companies; and
(c) has been determined by either the commissioner or the securities valuation office of the national association of insurance commissioners to meet the standards of financial condition and standing that are considered necessary and appropriate to regulate the quality of financial institutions whose letters of credit will be acceptable to the commissioner.
(4) For the purposes of this part, except for subsection (2)(c), "qualified United States financial institution" means, with respect to institutions eligible to act as a fiduciary of a trust, an institution that:
(a) is organized or, in the case of a United States branch or agency office of a foreign banking corporation, licensed under the laws of the United States or any of its states and that has been granted authority to operate with fiduciary powers; and
(5) The commissioner may adopt rules implementing the provisions of 33-2-307, 33-2-708, and 33-2-806 [sections 1 through 36]."
Section 44. Section 33-3-432, MCA, is amended to read:
"33-3-432. Impairment of capital or assets. (1) If a stock insurer's capital, as represented by the aggregate par value of its outstanding capital stock, becomes impaired or the assets of a mutual insurer are less than its liabilities and the minimum amount of surplus required to be maintained by it under 33-3-204 for authority to transact the kinds of insurance being transacted, the commissioner shall at once determine the amount of deficiency and serve notice upon the insurer to make good the deficiency within 60 days after service of such notice.
(2) The deficiency may be made good in cash or in assets eligible under chapter 2, part 8, [sections 1 through 36] for the investment of the insurer's funds; as follows:
(a) if a stock insurer, by reduction of the insurer's capital to an amount not below the minimum required for the kinds of insurance thereafter to be transacted; or
(b) if a mutual insurer, by amendment of its certificate of authority to cover only such the kind or kinds of insurance thereafter for which the insurer has sufficient surplus under this code title.
(3) If the deficiency is not made good and proof thereof is filed with the commissioner within such the 60-day period, the insurer shall be deemed is insolvent and the commissioner shall institute delinquency proceedings against it under chapter 2, part 13; except that if such the deficiency exists because of increased loss reserves required by the commissioner or because of disallowance by the commissioner of certain assets or reduction of the value at which carried in the insurer's accounts, the commissioner may, in his discretion and upon application and good cause shown, extend for not more than an additional 60 days the period within which such the deficiency may be so made good and such proof thereof so of making good is filed."
Section 45. Section 33-6-101, MCA, is amended to read:
(2) No The provisions of this code shall title do not apply to any such benevolent association unless contained or referred to in this chapter.
(3) In addition to the provisions contained in this chapter, other chapters and provisions of this title shall apply to benevolent associations, to the extent applicable, as follows: parts 1, 2, 3, 4, 5, and 7 of chapter 1; 33-1-601 through 33-1-603; 33-2-101; 33-2-107; 33-2-112; 33-2-117 through 33-2-121; 33-2-501; 33-2-502; 33-2-804 [section 5]; chapter 2, part 13; 33-2-1207; 33-3-308; 33-3-401; 33-3-402; 33-3-436; chapter 15; chapter 18; 33-22-304; and 33-22-506."
Section 46. Section 33-20-603, MCA, is amended to read:
"33-20-603. Separate accounts for life insurance or annuities. (1) Subject to the provisions of subsection (2), a life insurer may establish one or more separate accounts and may allocate to those accounts the amounts necessary to provide for life insurance or annuities and benefits incidental to the life insurance or annuities, payable in fixed or variable amounts, or both. The amounts allocated to the accounts may include without limitation proceeds applied under optional modes of settlement or under dividend options.
(2) Separate accounts for life insurance or annuities established under the provisions of subsection (1) are subject to the following:
(b) Except as provided for reserves for guaranteed benefits and funds in subsection (2)(c):
(i) amounts allocated to a separate account and accumulations on the separate account may be invested and reinvested in any class of investment authorized under Title 33, chapter 2, part 8, [sections 1 through 36] if limitations under 33-2-806 [section 20 or 32] on investments in stocks are not applicable;
(ii) the investments in the separate account or accounts may not be considered in applying the investment limitations otherwise applicable to the investments of the insurer.
(c) Except with the approval of the commissioner and under conditions relating to investments and other prescribed matters that recognize the guaranteed nature of the benefits provided, reserves for benefits guaranteed as to amount and duration and for funds guaranteed as to principal amount or stated rate of interest may not be maintained in a separate account.
(d) Unless otherwise approved by the commissioner, assets allocated to a separate account must be valued at their market value on the date of valuation or, if there is no readily available market, as provided under the terms of the contract or the rules or other written agreement applicable to that separate account; however, unless otherwise approved by the commissioner, the portion, if any, of the assets of that separate account equal to the insurer's reserve liability with regard to the guaranteed benefits and funds referred to in subsection (2)(c) must be valued in accordance with the laws and rules otherwise applicable to the insurer's assets.
(e) Amounts allocated to a separate account in the exercise of the power granted by this part must be owned by the insurer, and the insurer may not be or hold itself out to be a trustee with respect to those amounts. If and to the extent provided under applicable contracts, that portion of the assets of a separate account equal to the reserves and other contract liabilities with respect to the account are not chargeable with liabilities arising out of any other business the insurer may conduct.
(f) (i) A sale, exchange, or other transfer of assets may not be made by an insurer between any of its separate accounts or between any other investment account and one or more of its separate accounts unless:
(A) in case of a transfer into a separate account, the transfer is made solely to establish the account or to support the operation of the contracts with respect to the separate account to which the transfer is made; or
(B) the transfer, whether into or from a separate account, is made by a transfer of cash or by a transfer of securities having a readily determinable market value and the transfer of securities is approved by the commissioner.
(ii) The commissioner may approve other transfers among these accounts if, in the commissioner's opinion, transfers would not be inequitable.
(g) To the extent an insurer considers it necessary to comply with any applicable federal or state laws, the insurer, with respect to any separate account, including without limitation any separate account that is a management investment company or a unit investment trust account, may provide, for persons having an interest in the account, appropriate voting and other rights and special procedures for the conduct of the business of that account, including without limitation special rights and procedures relating to investment policy, investment advisory services, selection of independent public accountants, and selection of a committee, the members of which need not be otherwise affiliated with the insurer, to manage the business of that account."
Section 47. Section 33-25-211, MCA, is amended to read:
"33-25-211. Guaranty fund -- investments. (1) A title insurer shall establish and maintain the guaranty fund required under 33-2-517 and may invest in necessary plant and equipment and in other investments as authorized under 33-2-851 this section.
(2) In addition to other investments eligible under this part, a title insurer may invest and have invested an amount not exceeding 50% of its paid-in capital stock in its title plant, in equipment, and with the commissioner's consent, in stock of abstract companies and of title insurance producers.
(3) Investments authorized by this section may not be credited against the insurer's required guaranty fund or unearned premium reserve provided for under 33-2-517.
(4) A title plant and equipment may not be allowed as an asset in any determination of the insurer's financial condition at a value greater than actual cost."
Section 48. Section 33-27-115, MCA, is amended to read:
"33-27-115. Composition of independent liability fund. The money, assets, and investments contributed to an independent liability fund must meet the criteria established for investments by an insurance company in Title 33, chapter 2, part 8, [sections 1 through 36] and must be valued as such those assets and investments would be valued."
Section 49. Section 33-31-215, MCA, is amended to read:
"33-31-215. Investment regulations. Except for a health maintenance organization operated as a plan by a health service corporation, a domestic health maintenance organization may invest its funds only as prescribed in Title 33, chapter 2, part 8 [sections 1 through 36]."
Section 50. Repealer. Sections 33-2-801, 33-2-802, 33-2-803, 33-2-804, 33-2-805, 33-2-806, 33-2-811, 33-2-812, 33-2-813, 33-2-814, 33-2-815, 33-2-816, 33-2-817, 33-2-818, 33-2-819, 33-2-820, 33-2-821, 33-2-822, 33-2-823, 33-2-824, 33-2-825, 33-2-826, 33-2-827, 33-2-828, 33-2-829, 33-2-830, 33-2-831, 33-2-832, 33-2-833, 33-2-841, 33-2-842, 33-2-843, 33-2-851, and 33-2-852, MCA, are repealed.
Section 51. Codification instruction. [Sections 1 through 36] are intended to be codified as an integral part of Title 33, and the provisions of Title 33 apply to [sections 1 through 36].
Section 52. Effective date. [This act] is effective July 1, 1999.
Processed for the Web on April 7, 1999 (10:46AM)