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INVESTMENTS OF INSURERS MODEL ACT

(Defined Limits Version)

ARTICLE I. GENERAL PROVISIONS

Section 1. Purpose and Scope

Section 2. Definitions

Section 3. General Investment Qualifications

Section 4. Authorization of Investments by the Board of Directors

Section 5. Prohibited Investments

Section 6. Loans to Officers and Directors

Section 7. Valuation of Investments

Section 8. Regulations

ARTICLE II. LIFE AND HEALTH INSURERS

Section 9. Applicability

Section 10. General Three Percent Diversification, Medium and Lower Grade Investments and Canadian Investments

Section 11. Rated Credit Instruments

Section 12. Insurer Investment Pools

Section 13. Equity Interests

Section 14. Tangible Personal Property Under Lease

Section 15. Mortgage Loans and Real Estate

Section 16. Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions

Section 17. Foreign Investments and Foreign Currency Exposure

Section 18. Derivative Transactions

Section 19. Policy Loans

Section 20. Additional Investment Authority

ARTICLE III. PROPERTY AND CASUALTY, FINANCIAL GUARANTY AND MORTGAGE GUARANTY

INSURERS

Section 21. Applicability

Section 22. Reserve Requirements

Section 23. General Five Percent Diversification, Medium and Lower Grade Investments and Canadian Investments

Section 24. Rated Credit Instruments

Section 25. Insurer Investment Pools

Section 26. Equity Interests

Section 27. Tangible Personal Property Under Lease

Section 28. Mortgage Loans and Real Estate

Section 29. Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions

Section 30. Foreign Investments and Foreign Currency Exposure

Section 31. Derivative Transactions

Section 32. Additional Investment Authority

Statement of Principles

The development of regulation of the investments of insurers requires an analysis of the complexities, uncertainties,

competitive forces and frequent changes in the investment markets and in the insurance business, the diversity among

insurers, and the need for a balance among risk, reward and liquidity of an insurer’s investments. It also requires an analysis

of how to safeguard the financial condition of domestic insurers and at the same time to permit domestic insurers to be

competitive with insurer’s domiciled in other states and with other financial industries that operate under different regulatory

regimes.

Each state is urged to determine through independent study which methods are best suited to its needs and whether its

existing regulatory structure may be improved by using provisions of model laws recommended by the National Association

of Insurance Commissioners (NAIC) or existing regulatory structures in other states or industries.

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This model law is not considered by the NAIC to exhaust regulatory methods to address the regulation of investments of

insurers. Nor is this model law recommended by the NAIC to be used as a standard for the examination of insurers unless

substantially similar provisions are found in the statutes and regulations of the state of domicile of the insurer.

ARTICLE I. GENERAL PROVISIONS

Section 1. Purpose and Scope

A. Purpose

The purpose of this Act is to protect the interests of insureds by promoting insurer solvency and financial

strength. This will be accomplished through the application of investment standards that facilitate a

reasonable balance of the following objectives:

(1) To preserve principal;

(2) To assure reasonable diversification as to type of investment, issuer and credit quality; and

(3) 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.

B. Scope

This Act shall apply only to investments and investment practices of domestic insurers and United States

branches of alien insurers entered through this state. This Act shall not apply to separate accounts of an

insurer except to the extent that the provisions of [see Drafting Note 2] so provide.

Drafting Note: This Act does not define the types of insurers subject to its provisions, leaving this to other sections of the code since state laws treat insurers

writing various lines of insurance differently. For example, if an entity is authorized to operate as a health maintenance organization, the state may provide

additional investment authority commensurate to operating as a health maintenance organization.

Drafting Note: Insert a cross-reference to the section of the code governing separate accounts that states when the provisions of this Act are applicable to

investments in separate accounts, either aggregated with an insurer’s general account investments or treated as if the assets in each separate account were all

of an insurer’s admitted assets. Except to the extent specifically provided in that section, this Act has no application to the investments of separate accounts.

If the code does not so provide, then Section 1B must be amended to provide that this Act does not apply to separate accounts.

Section 2. Definitions

For purposes of this Act:

A. “Acceptable collateral” means:

(1) As to securities lending transactions, and for the purpose of calculating counterparty exposure

amount, cash, cash equivalents, letters of credit, direct obligations of, or securities that are fully

guaranteed as to principal and interest by, the government of the United States or any agency of

the United States, or by the Federal National Mortgage Association or the Federal Home Loan

Mortgage Corporation, and as to lending foreign securities, sovereign debt rated 1 by the SVO;

(2) As to reverse 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 or an agency of the United States, or by the Federal National Mortgage Association or the

Federal Home Loan Mortgage Corporation; and

(3) As to repurchase transactions, cash and cash equivalents.

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B. “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 to an eighty percent (80%) loan-

to-value ratio.

C. “Accident and health insurance” means protection which 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.

D. “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

ninety-five percent (95%) of total premium considerations or total statutory required reserves, respectively.

E. “Admitted assets” means assets [see Drafting Note 3] permitted to be reported as admitted assets on the

statutory financial statement of the insurer most recently required to be filed with the commissioner, but

excluding assets of separate accounts, the investments of which are not subject to the provisions of this

Act.

Drafting Note: If the code contains a definition of admitted assets, insert “determined in accordance with the requirements of [insert section defining

admitted assets].”

Drafting Note: Whenever the term “commissioner” appears, the title of the chief insurance regulatory official shall be inserted.

F. “Affiliate” means, as to any person, another person that, directly or indirectly through one or more

intermediaries, controls, is controlled by, or is under common control with the person.

G. “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 which are legally transferred to a trust or another special purpose

bankruptcy-remote business entity, on the following conditions:

(1) 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

(2) 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. However, the existence of credit enhancements, such as letters of credit or

guarantees, or support features such as swap agreements, shall not cause a security or other

instrument to be ineligible as an asset-backed security.

H. “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.

I. “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, sometimes called the strike rate or strike price.

J. “Capital and surplus” means the sum of the capital and surplus of the insurer required to be shown on the

statutory financial statement of the insurer most recently required to be filed with the commissioner.

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K. “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 money market mutual funds. For purposes of this

definition:

(1) “Short-term” means investments with a remaining term to maturity of ninety (90) days or less; and

(2) “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.

L. “Code” means [insert reference to adopting state’s insurance code].

M. “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.

N. “Commercial mortgage loan” means a loan secured by a mortgage, other than a residential mortgage loan.

O. “Construction loan” means a loan of less than three (3) years in term, made for financing the cost of

construction of a building or other improvement to real estate, that is secured by the real estate.

P. “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 non-management services), or otherwise, unless the power

is the result of an official position with or corporate office held by the person. Control shall be presumed to

exist if a person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies

representing ten percent (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.

Q. “Counterparty exposure amount” means:

(1) The net amount of credit risk attributable to a derivative instrument entered into with a business

entity other than through a qualified exchange, qualified foreign exchange, or cleared through a

qualified clearinghouse (“over-the-counter derivative instrument”). 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

which 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 NAIC Investment

Analysis Office as eligible for netting, the net amount of credit risk shall 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

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(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 shall be determined at the end of the most recent quarter of

the insurer’s fiscal year and shall be reduced by the market value of acceptable collateral held by

the insurer or placed in escrow by one or both parties.

R. “Covered” means that an insurer owns or can immediately acquire, through the exercise of options,

warrants or conversion rights already owned, the underlying interest in order to fulfill or secure its

obligations under a call option, cap or floor it has written, or 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.

S. “Credit tenant loan” means a mortgage loan which 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.

T. (1) “Derivative instrument” means an agreement, option, instrument or a series or combination

thereof:

(a) 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 thereof; or

(b) That has a price, 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.

(2) 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 thereto or any series or combination

thereof and any agreements, options or instruments permitted under regulations adopted under

Section 8. Derivative instruments shall not include an investment authorized by Sections 11

through 17, 19 and 24 through 30.

U. “Derivative transaction” means a transaction involving the use of one or more derivative instruments.

V. “Direct” or “directly,” when used in connection with an obligation, means that the designated obligor is

primarily liable on the instrument representing the obligation.

W. “Dollar roll transaction” means two (2) simultaneous transactions with different settlement dates no more

than ninety-six (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:

(1) 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 respective successors; and

(2) 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.

X. “Domestic jurisdiction” means the United States, Canada, any state, any province of Canada or any

political subdivision of any of the foregoing.

Y. “Equity interest” means any of the following that are not rated credit instruments:

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(1) Common stock;

(2) Preferred stock;

(3) Trust certificate;

(4) Equity investment in an investment company other than a money market mutual fund or a listed

bond mutual fund;

(5) Investment in a common trust fund of a bank regulated by a federal or state agency;

(6) 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 are located;

(7) Instruments which are mandatorily, or at the option of the issuer, convertible to equity;

(8) Limited partnership interests and those general partnership interests authorized under Section 5D;

(9) Member interests in limited liability companies;

(10) Warrants or other rights to acquire equity interests that are created by the person that owns or

would issue the equity to be acquired; or

(11) Instruments that would be rated credit instruments except for the provisions of Subsection 2RRR

(2) of this section.

Z. “Equivalent securities” means:

(1) 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 shall be exchanged for a loaned security by

recapitalization, merger, consolidation or other corporate action, the different security shall be

deemed to be the loaned security;

(2) In a repurchase transaction, securities that are identical to the sold securities in all features

including the amount of the sold securities, except as to the certificate number if held in physical

form; or

(3) In a reverse repurchase transaction, securities that are identical to the purchased securities in all

features including the amount of the purchased securities, except as to the certificate number if

held in physical form.

AA. “Floor” means an agreement obligating the seller to make payments to the buyer in which each payment is

based on the amount by which that a predetermined number, sometimes called the floor rate or price,

exceeds a reference price, level, performance or value of one or more underlying interests.

BB. “Foreign currency” means a currency other than that of a domestic jurisdiction.

CC. (1) “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 this Act, other than under Sections 17 and 30. An investment

shall not be deemed 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:

(a) The issuing person is a shell business entity; and

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(b) 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, domiciled in a

domestic jurisdiction.

(2) For purposes of this definition:

(a) “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;

(b) “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; and

(c) “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.

DD. “Foreign jurisdiction” means a jurisdiction other than a domestic jurisdiction.

EE. “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.

FF. “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.

GG. “Government money market mutual fund” means a money market mutual fund that at all times:

(1) Invests only in obligations issued, guaranteed or insured by the federal government of the United

States or collateralized repurchase agreements composed of these obligations; and

(2) Qualifies for investment without a reserve under the Purposes and Procedures of the NAIC

Investment Analysis Office or any successor publication.

HH. “Government sponsored enterprise” means a:

(1) Governmental agency; or

(2) 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.

II. “Guaranteed or insured,” when used in connection with an obligation acquired under this Act, means that

the guarantor or insurer has agreed to:

(1) Perform or insure the obligation of the obligor or purchase the obligation; or

(2) Be unconditionally obligated until the obligation is repaid to maintain in the obligor a minimum

net worth, fixed charge coverage, stockholders’ equity or sufficient liquidity to enable the obligor

to pay the obligation in full.

JJ. “Hedging transaction” means a derivative transaction which is entered into and maintained to reduce:

(1) The risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities which

the insurer has acquired or incurred or anticipates acquiring or incurring; or

(2) The currency exchange rate risk or the degree of exposure as to assets or liabilities which an

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insurer has acquired or incurred or anticipates acquiring or incurring.

KK. “High grade investment” means a rated credit instruments rated 1 or 2 by the SVO.

LL. “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.

MM. “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.

NN. “Initial margin” means the amount of cash, securities or other consideration initially required to be

deposited to establish a futures position.

OO. “Insurance future” means a future relating to an index or pool that is based on insurance-related items.

PP. “Insurance futures option” means an option on an insurance future.

QQ. “Investment company” means an investment company as defined in Section 3(a) of the Investment

Company Act of 1940 (15 U.S.C. §§ 80a-1 et seq.), as amended, and a person described in Section 3(c) of

that Act.

RR. “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.

SS. “Investment practices” means transactions of the types described in Sections 16, 18, 29 or 31.

TT. “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 this Act

applicable to the insurer. As used in this subsection, the total investment of the insurer shall include:

(1) Direct investment by the insurer in an asset; and

(2) The insurer’s proportionate share of an investment in an asset by an investment subsidiary of the

insurer, which shall be calculated by multiplying the amount of the subsidiary’s investment by the

percentage of the insurer’s ownership interest in the subsidiary.

UU. “Investment strategy” 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.

VV. “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 NAIC Investment Analysis Office or

any successor publication. To constitute acceptable collateral for the purposes of Sections 16 and 29, a

letter of credit must have an expiration date beyond the term of the subject transaction.

WW. “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 thereof that limits the

personal liability of investors to the equity investment of the investor in the business entity.

XX. “Listed bond mutual fund” means a mutual fund that at all times qualifies for inclusion on the “bond fund

list” within the Purposes and Procedures of the NAIC Investment Analysis Office or any successor

publication.

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YY. “Lower grade investment” means a rated credit instrument rated 4, 5 or 6 by the SVO.

ZZ. “Market value” means:

(1) As to cash and letters of credit, the amounts thereof; and

(2) 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 such a source or, to the extent no generally

recognized source exists, the price for the security as determined in good faith by the parties to a

transaction, plus accrued but unpaid income thereon to the extent not included in the price as of

that date.

AAA. “Medium grade investment” means a rated credit instrument rated 3 by the SVO.

BBB. “Money market mutual fund” means a mutual fund that meets the conditions of 17 Code of Federal

Regulations Par. 270.2a-7, under the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 et seq.), as

amended or renumbered.

CCC. “Mortgage loan” means an obligation secured by a mortgage, deed of trust, trust deed or other consensual

lien on real estate.

DDD. “Multilateral development bank” means an international development organization of which the United

States is a member.

EEE. “Mutual fund” means an investment company or, in the case of an investment company that is organized as

a series company, an investment company series, that, in either case, 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.

FFF. “NAIC” means the National Association of Insurance Commissioners.

GGG. “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 revenues or certain funds pledged or otherwise

dedicated for payment.

HHH. “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.

III. “Person” means an individual, a business entity, a multilateral development bank or a government or

quasi-governmental body, such as a political subdivision or a government sponsored enterprise.

JJJ. “Potential exposure” means the amount determined in accordance with the NAIC Annual Statement

Instructions.

KKK. “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.

LLL. “Qualified bank” means:

(1) A national bank, state bank or trust company that at all times is no less than 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 R

eserve System; or

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(2) 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 thereof and that at all times is no less than adequately capitalized as determined by the

standards adopted by international banking authorities.

MMM. “Qualified business entity” means a business entity that is:

(1) An issuer of obligations or preferred stock that are 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

(2) A primary dealer in United States government securities, recognized by the Federal Reserve Bank

of New York.

NNN. “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 such that the parties no longer have credit risk as to each other.

OOO. “Qualified exchange” means:

(1) 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;

(2) A board of trade or commodities exchange designated as a contract market by the Commodity

Futures Trading Commission or any successor thereof;

(3) Private Offerings, Resales and Trading through Automated Linkages (PORTAL);

(4) A designated offshore securities market as defined in Securities Exchange Commission

Regulation S, 17 C.F.R. Part 230, as amended; or

(5) A qualified foreign exchange.

PPP. “Qualified foreign exchange” means a foreign exchange, board of trade or contract market located outside

the United States, its territories or possessions:

(1) That has received regulatory comparability relief under Commodity Futures Trading Commission

(CFTC) Rule 30.10 (as set forth in Appendix C to Part 30 of the CFTC’s Regulations, 17 C.F.R.

Part 30);

(2) That is, or its members are, subject to the jurisdiction of a foreign futures authority that has

received regulatory comparability relief under CFTC Rule 30.10 (as set forth in Appendix C to

Part 30 of the CFTC’s Regulations, 17 C.F.R. Part 30) as to futures transactions in the jurisdiction

where the exchange, board of trade or contract market is located; or

(3) 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 shall

only be a “qualified foreign exchange” as to foreign stock index futures contracts that are the

subject of no-action relief.

QQQ. (1) “Rated credit instrument” means a contractual right to receive cash or another rated credit

instrument from another entity which instrument:

(a) Is rated or required to be rated by the SVO;

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(b) 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 such entity is rated by, the

SVO or by a nationally recognized statistical rating organization recognized by the SVO;

(c) In the case of an instrument with a maturity of 90 days or less is issued by a qualified

bank;

(d) Is a share of a listed bond mutual fund; or

(e) Is a share of a money market mutual fund.

(2) However, “rated credit instrument” does not mean:

(a) An instrument that is mandatorily, or at the option of the issuer, convertible to an equity

interest; or

(b) 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 or an index of equities, commodities,

foreign currencies or combinations thereof.

RRR. “Real estate” means:

(1) (a) Real property;

(b) Interests in real property, such as leaseholds, minerals and oil and gas that have not been

separated from the underlying fee interest;

(c) Improvements and fixtures located on or in real property; and

(d) The seller’s equity in a contract providing for a deed of real estate.

(2) As to a mortgage on a leasehold estate, real estate shall include 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 twenty percent (20%) of the original term of the

obligation or ten (10) years, whichever is greater.

SSS. “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 this Act. A derivative transaction that is

entered into as a hedging transaction shall not be considered a replication transaction.

TTT. “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.

UUU. “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.

VVV. “Residential mortgage loan” means a loan primarily secured by a mortgage on real estate improved with a

one-to-four family residence.

WWW. “Reverse 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.

XXX. “Secured location” means the contiguous real estate owned by one person.

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YYY. “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.

ZZZ. “Series company” means an investment company that is organized as a series company, as defined in Rule

18f-2(a) adopted under the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 et seq.), as amended.

AAAA. “Sinking fund stock” means preferred stock that:

(1) Is subject to a mandatory sinking fund or similar arrangement that will provide for the redemption

(or open market purchase) of the entire issue over a period not longer than forty (40) years from

the date of acquisition; and

(2) Provides for mandatory sinking fund installments (or open market purchases) commencing not

more than ten and one half (10.5) years from the date of issue, with the sinking fund installments

providing for the purchase or redemption, on a cumulative basis commencing ten (10) years from

the date of issue, of at least two and one half percent (2.5%) per year of the original number of

shares of that issue of preferred stock.

BBBB. “Special rated credit instrument” means a rated credit instrument that is:

(1) An instrument that is 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 due to reasons other than the credit risk associated with the

issuer of the instrument; however, a rated credit instrument shall not be a special rated credit

instrument under this subsection if it is:

(a) A share in a listed bond mutual fund;

(b) 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

interest or dividend cash flows that are based on either a fixed or variable rate determined

by reference to a specified rate or index;

(c) An instrument, other than an asset-backed security, that has a par value and is purchased

at a price no greater than one hundred ten percent (110%) of par;

(d) An instrument, including an asset-backed security, whose rate of return would become

negative only as a result of a prepayment due to casualty, condemnation or economic

obsolescence of collateral or change of law;

(e) An asset-backed security that relies on collateral that meets the requirements of

Subparagraph (b) of this paragraph, the par value of which collateral:

(i) Is not permitted to be paid sooner than one half of the remaining term to

maturity from the date of acquisition;

(ii) 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

(iii) 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

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(f) 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 Subparagraph (e) of this paragraph, 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

one hundred five percent (105%) of such par amount.

(2) An asset-backed security that:

(a) Relies on cash flows from assets that are prepayable at par at any time;

(b) Does not make payments of par that are fixed as to amount and timing; and

(c) Has a negative rate of return at the time of acquisition if a prepayment threshold

assumption is used with such prepayment threshold assumption defined as either:

(i) Two (2) 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 such securities or assets. The prepayment expectation used in this

calculation shall be, at the insurer’s election, the prepayment expectation for

pass-through securities of the Federal National Mortgage Association, the

Federal Home Loan Mortgage Corporation, 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; or

(ii) Another prepayment threshold assumption specified by the commissioner by

regulation promulgated under Section 8.

(3) For purposes of Subparagraph 2 of this subsection, 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 must maintain documentation demonstrating

that such securities were acquired and are continuing to be held in combination.

CCCC. “State” means a state, territory or possession of the United States of America, the District of Columbia or

the Commonwealth of Puerto Rico.

DDDD. “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.

EEEE. “SVO” means the Securities Valuation Office of the NAIC or any successor office established by the

NAIC.

FFFF. “Swap” means an agreement to exchange or to net payments at one or more times based on the actual or

expected price, level, performance or value of one or more underlying interests.

GGGG.“Underlying interest” means the assets, liabilities, other interests or a combination thereof underlying a

derivative instrument, such as any one or more securities, currencies, rates, indices, commodities or

derivative instruments.

HHHH.“Unrestricted surplus” means the amount by which total admitted assets exceed 125 percent of the insurer’s

required liabilities.

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IIII. “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

A. Insurers may acquire, hold or invest in investments or engage in investment practices as set forth in this

Act. Investments not conforming to this Act shall not be admitted assets.

Drafting Note: It may be necessary to modify the language in Section 3A to address investments in affiliated entities permitted under other portions of the

code.

B. Subject to Subsection C of this section, an insurer shall not acquire or hold an investment as an admitted

asset unless at the time of acquisition it is:

(1) Eligible for the payment or accrual of interest or discount (whether in cash or other securities),

eligible to receive dividends or other distributions or is otherwise income producing; or

(2) Acquired under Sections 15C, 16, 18, 20, 28C, 29, 31 or 32 or under the authority of sections of

the code other than this Act.

C. An insurer may acquire or hold as admitted assets investments that do not otherwise qualify as provided in

this Act if the insurer has not acquired them for the purpose of circumventing any limitations contained in

this Act, if the insurer acquires the investments in the following circumstances and the insurer complies

with the provisions of Sections 5 and 7 as to the investments:

(1) 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;

(2) As realization on collateral for an obligation;

(3) 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;

(4) Under a lawful and bona fide agreement of recapitalization or voluntary or involuntary

reorganization in connection with an investment held by the insurer; or

(5) 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.

D. An investment or portion of an investment acquired by an insurer under Subsection C of this section shall

become a nonadmitted asset three (3) years (or five (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 section of this Act other than Subsection C of this section, but an investment acquired under an

agreement of bulk reinsurance, merger or consolidation may be qualified for a longer period if so provided

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 C of this section would

materially injure the interests of the insurer, the commissioner may extend the period for admissibility for

an additional reasonable period of time.

E. Except as provided in Subsections F and H of this section, an investment shall qualify under this Act if, on

the date the insurer committed to acquire the investment or on the date of its acquisition, it would have

qualified under this Act. For the purposes of determining limitations contained in this Act, an insurer shall

give appropriate recognition to any commitments to acquire investments.

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F. (1) An investment held as an admitted asset by an insurer on the effective date of this Act which

qualified under [insert reference to state’s prior code provisions on insurer investments] shall

remain qualified as an admitted asset under this Act.

(2) Each specific transaction constituting an investment practice of the type described in this Act that

was lawfully entered into by an insurer and was in effect on the effective date of this Act shall

continue to be permitted under this Act until its expiration or termination under its terms.

G. Unless otherwise specified, an investment limitation computed on the basis of an insurer’s admitted assets

or capital and surplus shall relate to the amount required to be shown on the statutory balance sheet of the

insurer most recently 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:

(1) The return of acceptable collateral received in a repurchase transaction or a securities lending

transaction;

(2) Cash received in a dollar roll transaction; and

(3) The amount reported as borrowed money in the most recently filed financial statement to the

extent not included in Paragraphs (1) and (2) of this subsection.

H. 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.

I. An insurer shall maintain documentation demonstrating that investments were acquired in accordance with

this Act, and specifying the section of this Act under which they were acquired.

J. An insurer shall 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.

K. Notwithstanding the provisions of this Act, the commissioner, for good cause, may order under the state’s

administrative procedures or equivalent, 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.

L. Insurance futures and insurance futures options are not considered investments or investment practices for

purposes of this Act.

Section 4. Authorization of Investments by the Board of Directors

A. 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 other specifications including investment strategies intended to assure that the investments

and investment practices are appropriate for the business conducted by the insurer, its liquidity needs and

its capital and surplus. The board shall review and assess the insurer’s technical investment and

administrative capabilities and expertise before adopting a written plan concerning an investment strategy

or investment practice.

B. Investments acquired and held under this Act shall be acquired and held under the supervision and

direction of the board of directors of the insurer. The board of directors shall evidence by formal

resolution, at least annually, that it has determined whether all investments 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.

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C. On no less than a quarterly basis, and more often if deemed appropriate, an insurer’s board of directors or

committee of the board of directors shall:

(1) 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

(2) Review and revise, as appropriate, the written plan.

D. In discharging its duties under this section, the board of directors shall 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 A of this section shall be made available

on a regular basis to the board of directors.

E. In discharging their duties under this section, the directors of an insurer shall perform their duties in good

faith and with that degree of care that ordinarily prudent individuals in like positions would use under

similar circumstances.

F. If an insurer does not have a board of directors, all references to the board of directors in this Act shall be

deemed to be references to the governing body of the insurer having authority equivalent to that of a board

of directors.

Section 5. Prohibited Investments

An insurer shall not, directly or indirectly:

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, make a guarantee for the benefit of or in favor of, or make other

investments in a business entity of which ten percent (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 the [insert reference to holding company law] or 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 this Act;

D. (1) Invest in a partnership as a general partner, except that an insurer may make an investment as a

general partner:

(a) If all other partners in the partnership are subsidiaries of the insurer;

(b) For the purpose of:

(i) Meeting cash calls committed to prior to the effective date of this Act;

(ii) 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 that date; or

(iii) 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 that date; or

(c) In accordance with Section 3C;

(2) This subsection shall not prohibit a subsidiary or other affiliate of the insurer from becoming a

general partner; or

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E. Invest in or lend its funds upon the security of shares of its own stock, except that an insurer may acquire

shares of its own stock for the following purposes, but the shares shall not be admitted assets of the insurer:

(1) Conversion of a stock insurer into a mutual or reciprocal insurer or a mutual or reciprocal insurer

into a stock insurer;

(2) Issuance to the insurer’s officers, employees or agents in connection with a plan approved by the

commissioner for converting a publicly held insurer into a privately held insurer under [insert

reference to the section of the code providing for approval of a conversion plan] or in connection

with other stock option and employee benefit plans; or

(3) In accordance with any other plan approved by the commissioner.

Section 6. Loans to Officers and Directors

A. (1) Except as provided in Section 6B, an insurer shall not, without the prior written approval of the

commissioner, directly or indirectly:

(a) Make a loan to or other investment in an officer or director of the insurer or a person in

which the officer or director has any direct or indirect financial interest;

(b) 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

(c) 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.

(2) For purposes of this section, an officer or director shall not be deemed to have a financial interest

by reason of an interest that is held directly or indirectly through the ownership of equity interests

representing less than two percent (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.

(3) This subsection does not permit an investment that is prohibited by Section 5.

(4) This subsection does not apply to a transaction between an insurer and any of its subsidiaries or

affiliates that is entered into in compliance with the [insert reference to holding company law],

other than a transaction between an insurer and its officer or director.

B. An insurer may make, without the prior written approval of the commissioner:

(1) Policy loans in accordance with the terms of the policy or contract and Section 19;

(2) 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;

(3) 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 15 or 28 and the terms and conditions otherwise are the same as those

generally available from unaffiliated third parties;

(4) 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:

(a) Do not have a term exceeding two (2) years;

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(b) Are required to finance mortgage loans outstanding at the same time on the prior and

new residences of the officer;

(c) Do not exceed an amount equal to the equity of the officer in the prior residence; and

(d) Are required to be fully repaid upon the earlier of the end of the two (2) year period or

the sale of the prior residence; and

(5) 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 non-insurance 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 this Act, the value or amount of an investment acquired or held, or an investment practice engaged in,

under this Act, unless otherwise specified in this code, shall 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 NAIC Investment Analysis 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. Regulations

The commissioner may, in accordance with [insert reference to administrative procedures act or other statutes concerning

promulgation of regulations], promulgate regulations implementing the provisions of this Act.

ARTICLE II. LIFE AND HEALTH INSURERS

Section 9. Applicability

This Article shall apply to the investments and investment practices of life and health insurers, subject to the provisions of

Section 1B.

Section 10. General Three Percent Diversification, Medium and Lower Grade Investments and Canadian

Investments

A. General Three Percent Diversification

(1) Except as otherwise specified in this Act, an insurer shall not acquire, directly or indirectly

through an investment subsidiary, an investment under this Act if, as a result of and after giving

effect to the investment, the insurer would hold more than three percent (3%) of its admitted

assets in investments of all kinds issued, assumed, accepted, insured or guaranteed by a single

person, or five percent (5%) of its admitted assets in investments in the voting securities of a

depository institution or any company that controls the institution.

(2) This three percent (3%) limitation shall 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.

(3) Asset-backed securities shall not be subject to the limitations of Paragraph (1) of this subsection,

however an insurer shall 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 three percent (3%) of its admitted assets.

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B. Medium and Lower Grade Investments

(1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment

under Sections 11, 14, 17 or counterparty exposure under Section 18D if, as a result of and after

giving effect to the investment:

(a) The aggregate amount of medium and lower grade investments then held by the insurer

would exceed twenty percent (20%) of its admitted assets;

(b) The aggregate amount of lower grade investments then held by the insurer would exceed

ten percent (10%) of its admitted assets;

(c) The aggregate amount of investments rated 5 or 6 by the SVO then held by the insurer

would exceed three percent (3%) of its admitted assets;

(d) The aggregate amount of investments rated 6 by the SVO then held by the insurer would

exceed one percent (1%) of its admitted assets; or

(e) The aggregate amount of medium 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 one percent (1%) of its admitted assets.

(2) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment

under Sections 11, 14, 17 or counterparty exposure under Section 18D if, as a result of and after

giving effect to the investment:

(a) The aggregate amount of medium 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 one percent (1%) of its admitted assets; or

(b) 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 one

half of one percent (.5%) of its admitted assets.

(3) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection,

the insurer shall not thereby be precluded from acquiring investments in other rating categories

subject to the specific and multi-category limits applicable to those investments.

C. Canadian Investments

(1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, a Canadian

investment authorized by this Act, 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 forty percent (40%)

of its admitted assets, or if the aggregate amount of Canadian investments not acquired under

Section 11B then held by the insurer would exceed twenty-five percent (25%) of its admitted

assets.

(2) 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 Paragraph (1) of this subsection shall be

increased by the greater of:

(a) The amount the insurer is required by Canadian law to invest in Canada or to be

denominated in Canadian currency; or

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(b) One hundred fifteen percent (115%) of the amount of its reserves and other obligations

under contracts on lives or risks resident or located in Canada.

Section 11. Rated Credit Instruments

Subject to the limitations of Subsection F of this section, an insurer may acquire rated credit instruments:

A. Subject to the limitations of Section 10B, but not to the limitations of Section 10A, an insurer may acquire

rated credit instruments issued, assumed, guaranteed or insured by:

(1) The United States; or

(2) 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. (1) Subject to the limitations of Section 10B, but not to the limitations of Section 10A, an insurer may

acquire rated credit instruments issued, assumed, guaranteed or insured by:

(a) Canada; or

(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;

(2) However, an insurer shall not acquire an instrument under this subsection 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 would exceed forty percent (40%) of its admitted assets.

C. (1) Subject to the limitations of Section 10B, but not to the limitations of Section 10A, an insurer may

acquire rated credit instruments, excluding asset-backed securities:

(a) Issued by a government money market mutual fund or a listed bond mutual fund;

(b) Issued, assumed, guaranteed or insured by a government sponsored enterprise of the

United States other than those eligible under Subsection A of this section;

(c) Issued, assumed, guaranteed or insured by a state, if the instruments are general

obligations of the state; or

(d) Issued by a multilateral development bank;

(2) However, an insurer shall not acquire an instrument of any one fund, any one enterprise or entity

or any one state under this subsection if, as a result of and after giving effect to the investment, the

aggregate amount of investments then held in any one fund, enterprise or entity or state under this

subsection would exceed ten percent (10%) of its admitted assets.

D. Subject to the limitations of Section 10, 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:

(1) The aggregate amount of preferred stocks then held by the insurer under this subsection does not

exceed twenty percent (20%) of its admitted assets; and

(2) The aggregate amount of preferred stocks then held by the insurer under this subsection which are

not sinking fund stocks or rated P1 or P2 by the SVO does not exceed ten percent (10%) of its

admitted assets.

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E. Subject to the limitations of Section 10, in addition to those investments eligible under Subsections A, B, C

and D of this section, an insurer may acquire rated credit instruments that are not foreign investments.

F. An insurer shall 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 five percent (5%) of its admitted assets.

Drafting Note: In states which have not adopted Secondary Mortgage Market Enhancement Act of 1984, as amended (SMMEA) override legislation,

obligations of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and other mortgage-backed or mortgage related securities

as defined in Section 106 of Title I of SMMEA (15 U.S.C. § 77r-1) may be invested in to the same extent as allowed under Section 11A, whether or not they

are rated credit instruments authorized in Section 11A. Appropriate changes to Section 11 or other Sections of this Act may be necessary.

Section 12. Insurer Investment Pools

A. An insurer may acquire investments in investment pools that:

(1) Invest only in:

(a) Obligations that are rated 1 or 2 by the SVO or have an equivalent of an SVO 1 or 2

rating (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) by a nationally recognized statistical

rating organization recognized by the SVO and have:

(i) A remaining maturity of 397 days or less or a put that entitles the holder to

receive the principal amount of the obligation which put may be exercised

through maturity at specified intervals not exceeding 397 days; or

(ii) A remaining maturity of three (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

(LIBOR) 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;

(b) Government money market mutual funds; or

(c) Securities lending, repurchase and reverse repurchase transactions that meet all the

requirements of Section 16, except the quantitative limitations of Section 16D; or

(2) Invest only in investments which an insurer may acquire under this Act, if the insurer’s

proportionate interest in the amount invested in these investments does not exceed the applicable

limits of this Act.

B. For an investment in an investment pool to be qualified under this Act, the investment pool shall not:

(1) Acquire securities issued, assumed, guaranteed or insured by the insurer or an affiliate of the

insurer;

(2) Borrow or incur any indebtedness for borrowed money, except for securities lending and

repurchase transactions that meet the requirements of Section 16 except the quantitative

limitations of Section 16D; or

(3) 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 ten percent (10%) of the total assets of the

investment pool.

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C. The limitations of Section 10A shall not apply to an insurer’s investment in an investment pool, however

an insurer shall 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:

(1) In any one investment pool would exceed ten percent (10%) of its admitted assets;

(2) In all investment pools investing in investments permitted under Subsection A(2) of this section

would exceed twenty-five percent (25%) of its admitted assets; or

(3) In all investment pools would exceed thirty-five percent (35%) of its admitted assets.

D. For an investment in an investment pool to be qualified under this Act, the manager of the investment pool

shall:

(1) Be organized under the laws of the United States or a state and designated as the pool manager in

a pooling agreement;

(2) Be the insurer, an affiliated insurer or a business entity affiliated with the insurer, a qualified bank,

a business entity registered under the Investment Advisors Act of 1940 (15 U.S.C. §§ 80a-1 et

seq.), as amended or, in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-

fact, or 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;

(3) Compile and maintain detailed accounting records setting forth:

(a) The cash receipts and disbursements reflecting each participant’s proportionate

investment in the investment pool;

(b) A complete description of all underlying assets of the investment pool (including

amount, interest rate, maturity date (if any) and other appropriate designations); and

(c) Other records which, on a daily basis, allow third parties to verify each participant’s

investment in the investment pool; and

(4) 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

shall:

(a) State and recognize the claims and rights of each participant;

(b) 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

(c) Contain an agreement that the underlying assets of the investment pool shall not be

commingled with the general assets of the custodian qualified bank or any other person.

E. The pooling agreement for each investment pool shall be in writing and shall provide that:

(1) An insurer and its affiliated insurers or, in the case of an investment pool investing solely in

investments permitted under Subsection A(1) of this section, the insurer and its subsidiaries,

affiliates or any pension or profit sharing plan of the insurer, its subsidiaries and affiliates or, in

the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States

manager, shall, at all times, hold one hundred percent (100%) of the interests in the investment

pool;

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(2) The underlying assets of the investment pool shall not be commingled with the general assets of

the pool manager or any other person;

(3) In proportion to the aggregate amount of each pool participant’s interest in the investment pool:

(a) Each participant owns an undivided interest in the underlying assets of the investment

pool; and

(b) The underlying assets of the investment pool are held solely for the benefit of each

participant;

(4) 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;

(5) Withdrawals may be made on demand without penalty or other assessment on any business day,

but settlement of funds shall occur within a reasonable and customary period thereafter not to

exceed five (5) business days. Distributions under this paragraph shall be calculated in each case

net of all then applicable fees and expenses of the investment pool. The pooling agreement shall

provide that the pool manager shall distribute to a participant, at the discretion of the pool

manager:

(a) In cash, the then fair market value of the participant’s pro rata share of each underlying

asset of the investment pool;

(b) In kind, a pro rata share of each underlying asset; or

(c) In a combination of cash and in kind distributions, a pro rata share in each underlying

asset; and

(6) The pool manager shall make the records of the investment pool available for inspection by the

commissioner.

Section 13. Equity Interests

A. Subject to the limitations of Section 10, an insurer may acquire equity interests in business entities

organized under the laws of any domestic jurisdiction.

B. An insurer shall 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

twenty percent (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 five percent (5%) of its admitted assets. An accident

and health insurer shall not be subject to this section but shall be subject to the same aggregate limitation

on equity interests as a property and casualty insurer under Section 26 and also to the provisions of Section

22 of this Act.

C. An insurer shall not acquire under this section any investments that the insurer may acquire under Section

15.

D. An insurer shall 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 six (6) months of the

short sale.

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Section 14. Tangible Personal Property Under Lease

A. (1) Subject to the limitations of Section 10, an insurer may acquire tangible personal property or

equity interests therein 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 5D, joint ventures, stock of an investment subsidiary or

membership interests in a limited liability company, trust certificates or other similar instruments.

(2) Investments acquired under Paragraph (1) of this subsection shall be eligible only if:

(a) 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 11; and

(b) 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, shall be adequate to return the cost of the insurer’s investment in the property,

plus a return deemed adequate by the insurer.

B. 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.

C. An insurer shall 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:

(1) Two percent (2%) of its admitted assets ; or

(2) One half of one percent (.5%) of its admitted assets as to any single item of tangible personal

property.

D. For purposes of determining compliance with the limitations of Section 10, investments acquired by an

insurer under this section shall be aggregated with those acquired under Section 11, and each lessee of the

property under a lease referred to in this section shall be deemed the issuer of an obligation in the amount

of the investment of the insurer in the property determined as provided in Subsection B of this section.

E. 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 [insert

reference to holding company law].

Section 15. Mortgage Loans and Real Estate

A. Mortgage Loans

(l) Subject to the limitations of Section 10, an insurer may acquire, either directly, indirectly through

limited partnership interests and general partnership interests not otherwise prohibited by Section

5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability

company, trust certificates, or other similar instruments, obligations secured by mortgages on real

estate situated within a domestic jurisdiction, but a mortgage loan which is secured by other than a

first lien shall 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, shall not, at the time of acquisition

of the obligation, exceed:

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(a) Ninety percent (90%) of the fair market value of the real estate, if the mortgage loan is

secured by a purchase money mortgage or like security received by the insurer upon

disposition of the real estate;

(b) Eighty percent (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 thirty (30) years or less and periodic payments made no

less frequently than annually. Each periodic payment shall be sufficient to assure that at

all times the outstanding principal balance of the mortgage loan shall be 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 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 eighty percent (80%)

limitation may be increased to ninety-seven percent (97%) if acceptable private mortgage

insurance has been obtained; or

(c) Seventy-five percent (75%) of the fair market value of the real estate for mortgage loans

that do not meet the requirements of Subparagraphs (a) or (b) of this paragraph.

(2) For purposes of Paragraph (1) of this subsection, 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 or guaranteed by the Administrator of Veterans

Affairs, or their successors.

(3) A mortgage loan that is held by an insurer under Section 3F or 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 successor publication

shall continue to qualify as a mortgage loan under this Act.

(4) Subject to the limitations of Section 10, credit lease transactions that do not qualify for investment

under Section 11 with the following characteristics shall be exempt from the provisions of

Paragraph (1) of this subsection:

(a) The loan amortizes over the initial fixed lease term at least in 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 whose rated credit instruments have a SVO 1 or 2

designation or a comparable rating from a nationally recognized statistical rating

organization recognized by the SVO as 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.

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B. Income Producing Real Estate

(1) 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 5D, joint ventures, stock of an investment subsidiary or

membership interests in a limited liability company, trust certificates, or other similar instruments.

The real estate shall be income producing or intended for improvement or development for

investment purposes under an existing program (in which case the real estate shall be deemed to

be income producing).

(2) The real estate may be subject to mortgages, liens or other encumbrances, the amount of which

shall, 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 D(2) and D(3) of this

section.

C. Real Estate for the Accommodation of Business

An insurer may acquire, manage, and dispose of real estate for the convenient accommodation of the

insurer’s (which may include its affiliates) business operations, including home office, branch office and

field office operations.

(1) Real estate acquired under this subsection 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 B of this section and is so qualified by the insurer;

(2) The real estate acquired under this subsection may be subject to one or more mortgages, liens or

other encumbrances, the amount of which shall, 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 D(4) of this section; and

(3) For purposes of this subsection, business operations shall 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 B of this

section.

D. Quantitative Limitations

(1) An insurer shall not acquire an investment under Subsection A of 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 Subsection A of this section would exceed:

(a) One percent (1%) of its admitted assets in mortgage loans covering any one secured

location;

(b) One quarter of one percent (.25%) of its admitted assets in construction loans covering

any one secured location; or

(c) Two percent (2%) of its admitted assets in construction loans in the aggregate.

(2) An insurer shall not acquire an investment under Subsection B of this section 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 B of this section plus the guarantees then outstanding would exceed:

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(a) One percent (1%) of its admitted assets in one parcel or group of contiguous parcels of

real estate, except that this limitation shall 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

(b) Fifteen percent (15%) of its admitted assets in the aggregate, but not more than five

percent (5%) of its admitted assets as to properties that are to be improved or developed.

(3) An insurer shall not acquire an investment under Subsections A or B of this section if, as a result

of and after giving effect to the investment and any guarantees made by the insurer in connection

with the investment, the aggregate amount of all investments then held by the insurer under

Subsections A and B of this section plus the guarantees then outstanding would exceed forty-five

percent (45%) of its admitted assets. However, an insurer may exceed this limitation by no more

than thirty percent (30%) of its admitted assets if:

(a) This increased amount is invested only in residential mortgage loans;

(b) The insurer has no more than ten percent (10%) of its admitted assets invested in

mortgage loans other than residential mortgage loans;

(c) The loan-to-value ratio of each residential mortgage loan does not exceed sixty percent

(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 two (2) years old, prepared

by an independent appraiser;

(d) A single mortgage loan qualified under this increased authority shall not exceed one half

of one percent (0.5%) of its admitted assets;

(e) 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

(f) 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.

(4) The limitations of Section 10 shall not apply to an insurer’s acquisition of real estate under

Subsection C of this section. An insurer shall not acquire real estate under Subsection C of this

section 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 C of this section would exceed ten percent (10%)

of its admitted assets. With the permission of the commissioner, additional amounts of real estate

may be acquired under Subsection C of this section.

Section 16. Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions

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 in Section 4A that specifies guidelines and objectives to be followed, such as:

(1) A description of how cash received will be invested or used for general corporate purposes of the

insurer;

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(2) Operational procedures to manage interest rate risk, counterparty default risk, the conditions under

which proceeds from 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

(3) 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 shall require that each transaction terminate no more than

one year from its inception or upon the earlier demand of the insurer. The agreement shall 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:

(1) Requires the agent to enter into separate agreements with each counterparty that are consistent

with the requirements of this section; and

(2) Prohibits securities lending transactions under the agreement with the agent or its affiliates.

C. Cash received in a transaction under this section shall be invested in accordance with this Act and in a

manner that recognizes the liquidity needs of the transaction or used by the insurer for its general corporate

purposes. For so long as the transaction remains outstanding, the insurer, 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:

(1) Possession of the acceptable collateral;

(2) A perfected security interest in the acceptable collateral; or

(3) 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 10 and 17 shall 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, no effect will be given to the insurer’s future obligation to resell securities, in the case of a

reverse repurchase transaction, or to repurchase securities, in the case of a repurchase transaction. An

insurer shall not enter into a transaction under this section if, as a result of and after giving effect to the

transaction:

(1) The aggregate amount of securities then loaned, sold to or purchased from any one business entity

counterparty under this section would exceed five percent (5%) of its 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; or

(2) The aggregate amount of all securities then loaned, sold to or purchased from all business entities

under this section would exceed forty percent (40%) of its 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 percent 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 shall 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, at least equals 102 percent of the market value of the

loaned securities.

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F. In a 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 ninety-five percent (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 ninety-five percent (95%) of the market value of the

securities so transferred, the business entity counterparty shall 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, at least equals ninety-five percent (95%) of the market value of the

transferred securities.

G. In a dollar roll transaction, the insurer shall 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 reverse repurchase transaction, the insurer shall receive as acceptable collateral transferred securities

having a market value at least equal to 102 percent 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 percent of the

purchase price paid by the insurer, the business entity counterparty shall 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, at least equals 102 percent of the purchase price. Securities

acquired by an insurer in a reverse repurchase transaction shall not be sold in a repurchase transaction,

loaned in a securities lending transaction or otherwise pledged.

Drafting Note: Subsections E, F, and H of this section contain requirements that at the time of drafting this model act were contained in the Purposes and

Procedures of the Investmeent Analysis Office. However, concomitant with the drafting of this model act, a separate task force was considering a revised

publication which did not contain these requirements inasmuch as the SVO considered these requirements as accounting-type rules which were deemed not

suitable to such a publication. Moreover, another working group was developing a draft of a revised accounting manual but had not considered proposing

separate accounting guidance regarding these requirements. Instead, the accounting manual implicitly referred to the requirements stipulated in this model

act. Pending the results of consideration of these requirements by the three groups, in concert, these requirements have been included in this model act. If

after due consideration, these requirements are included in the revised accounting manual as representative of statutory accounting principles or, in the

alternative, are inserted in the revised Purposes and Procedures of the Investment Analysis Office, then States may opt not to codify these requirements

within their insurer investment code.

Section 17. Foreign Investments and Foreign Currency Exposure

A. Subject to the limitations of Section 10, an insurer may acquire foreign investments, or engage in

investment practices with persons of or in foreign jurisdictions, of substantially the same types as those that

an insurer is permitted to acquire under this Act, other than of the type permitted under Section 12, if, as a

result and after giving effect to the investment:

(1) The aggregate amount of foreign investments then held by the insurer under this subsection does

not exceed twenty percent (20%) of its admitted assets; and

(2) The aggregate amount of foreign investments then held by the insurer under this subsection in a

single foreign jurisdiction does not exceed ten percent (10%) of its admitted assets as to a foreign

jurisdiction that has a sovereign debt rating of SVO 1 or three percent (3%) of its admitted assets

as to any other foreign jurisdiction.

B. Subject to the limitations of Section 10, an insurer may acquire investments, or engage in investment

practices denominated in foreign currencies, whether or not they are foreign investments acquired under

Subsection A of this section, 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:

(1) The aggregate amount of investments then held by the insurer under this subsection denominated

in foreign currencies does not exceed ten percent (10%) of its admitted assets; and

(2) The aggregate amount of investments then held by the insurer under this subsection denominated

in the foreign currency of a single foreign jurisdiction does not exceed ten percent (10%) of its

admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or three

percent (3%) of its admitted assets as to any other foreign jurisdiction.

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(3) However, an investment shall not be considered denominated in a foreign currency if the

acquiring insurer enters into one or more contracts in transactions permitted under Section 18 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 which

effectively insulates the investment cash flows against future changes in currency exchange rates

during the period the contract or contracts are in effect.

C. In addition to investments permitted under Subsections A and B of this section, 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 10. However, investments made under this subsection in obligations of foreign governments, their

political subdivisions and government sponsored enterprises shall not be subject to the limitations of

Section 10 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments

acquired by the insurer under this subsection shall not exceed the greater of:

(1) The amount the insurer is required by the law of the foreign jurisdiction to invest in the foreign

jurisdiction; or

(2) One hundred fifteen percent (115%) 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.

D. In addition to investments permitted under Subsections A and B of this section, an insurer that is not

authorized to do business in a foreign jurisdiction, but which 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 10. However, investments made under this subsection in obligations of foreign governments, their

political subdivisions and government sponsored enterprises shall not be subject to the limitations of

Section 10 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments

acquired by the insurer under this subsection shall not exceed 105 percent 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.

E. Investments acquired under this section shall be aggregated with investments of the same types made under

all other sections of this Act, and in a similar manner, for purposes of determining compliance with the

limitations, if any, contained in the other sections. Investments in obligations of foreign governments, their

political subdivisions and government sponsored enterprises of these persons, except for those exempted

under Subsections C and D of this section, shall be subject to the limitations of Section 10.

Section 18. Derivative Transactions

An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section

under the following conditions :

A. General Conditions

(1) An insurer may use derivative instruments under this section to engage in hedging transactions

and certain income generation transactions, as these terms may be further defined in regulations

promulgated by the commissioner.

(2) An insurer shall 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.

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B. Limitations on Hedging Transactions

An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to

the transaction:

(1) 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 seven and one

half percent (7.5%) of its admitted assets;

(2) The aggregate statement value of options, caps and floors written in hedging transactions does not

exceed three percent (3%) of its admitted assets; and

(3) The aggregate potential exposure of collars, swaps, forwards and futures used in hedging

transactions does not exceed six and one-half percent (6.5%) of its admitted assets.

C. Limitations on Income Generation Transactions

An insurer may only enter into the following types of income generation transactions 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 puts, does not exceed ten percent (10%) of its admitted assets:

(1) Sales of covered call options on non-callable 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;

(2) 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;

(3) Sales of covered puts on investments that the insurer is permitted to acquire under this Act, if the

insurer has escrowed, 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 during the

complete term of the put option sold; or

(4) 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.

D. Counterparty Exposure

An insurer shall include all counterparty exposure amounts in determining compliance with the limitations

of Section 10.

E. Additional Transactions

Pursuant to regulations promulgated under Section 8, the commissioner may approve additional

transactions involving the use of derivative instruments in excess of the limits of Subsection B of this

section or for other risk management purposes under regulations promulgated by the commissioner, but

replication transactions shall not be permitted for other than risk management purposes.

Section 19. 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.

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Section 20. Additional Investment Authority

A. Solely for the purpose of acquiring investments that exceed the quantitative limitations of Sections 10

through 17, an insurer may acquire under this subsection an investment, or engage in investment practices

described in Section 16, but an insurer shall not acquire an investment, or engage in investment practices

described in Section 16, under this subsection if, as a result of and after giving effect to the transaction:

(1) The aggregate amount of investments then held by an insurer under this subsection would exceed

three percent (3%) of its admitted assets; or

(2) The aggregate amount of investments as to one limitation in Sections 10 through 17 then held by

the insurer under this subsection would exceed one percent (1%) of its admitted assets.

B. (1) In addition to the authority provided under Subsection A of this section, an insurer may acquire

under this subsection an investment of any kind, or engage in investment practices described in

Section 16, that are not specifically prohibited by this Act, without regard to the categories,

conditions, standards or other limitations of Sections 10 through 17 if, as a result of and after

giving effect to the transaction, the aggregate amount of investments then held under this

subsection would not exceed the lesser of:

(a) Ten percent (10%) of its admitted assets; or

(b) Seventy-five percent (75%) of its capital and surplus.

(2) However, an insurer shall not acquire any investment or engage in any investment practice under

this subsection 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 would exceed

three percent (3%) of its admitted assets.

C. In addition to the investments acquired under Subsections A and B of this section, an insurer may acquire

under this subsection an investment of any kind, or engage in investment practices described in Section 16,

that are not specifically prohibited by this Act without regard to any limitations of Sections 10 through 17

if:

(1) The commissioner grants prior approval;

(2) 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

(3) As a result of and after giving effect to the transaction the aggregate amount of investments then

held by the insurer under this subsection does not exceed the greater of:

(a) Twenty-five percent (25%) of its capital and surplus; or

(b) One hundred percent (100%) of capital and surplus less ten percent (10%) of its admitted

assets.

D. An investment prohibited under Section 5, not permitted under Section 18 or additional derivative

instruments acquired under Section 18 shall not be acquired under this section.

ARTICLE III. PROPERTY AND CASUALTY, FINANCIAL GUARANTY AND

MORTGAGE GUARANTY INSURERS

Section 21. Applicability

This Article shall apply to the investments and investment practices of property and casualty, financial guaranty and

mortgage guaranty insurers, subject to the provisions of Section 1B.

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Section 22. Reserve Requirements

A. Reserve Requirements

(1) Subject to all other limitations and requirements of this Act, a property and casualty, financial

guaranty, mortgage guaranty or accident and health insurer shall maintain an amount at least equal

to one hundred percent (100%) of adjusted loss reserves and loss adjustment expense reserves,

one hundred percent (100%) of adjusted unearned premium reserves and one hundred percent

(100%) of statutorily required policy and contract reserves in:

(a) Cash and cash equivalents;

(b) High and medium grade investments that qualify under Sections 24 or 25;

(c) Equity interests that qualify under Section 26 and that are traded on a qualified exchange;

(d) Investments of the type set forth in Section 30 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 Subparagraphs (b), (c) or (d) of this

paragraph that are acquired under Section 32;

(f) Interest and dividends receivable on qualifying investments of the type set forth in

Subparagraphs (a) through (e) of this subsection; or

(g) Reinsurance recoverable on paid losses.

(2) Reserve Requirement Amount

(a) For purposes of determining the amount of assets to be maintained under this subsection,

the calculation of adjusted loss reserves and loss adjustment expense reserves, adjusted

unearned premium reserves and statutorily required policy and contract reserves shall 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 shall 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 shall be calculated by dividing the losses and loss adjustment

expenses unpaid after discounting (the product of Items (i) and (ii) in this

subparagraph) by loss and loss adjustment expense reserves before discounting

Item (i) of this subparagraph.

(iv) For purposes of these calculations, the losses and loss adjustment expenses

unpaid shall be determined net of anticipated salvage and subrogation, and gross

of any discount for the time value of money or tabular discount.

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(c) Adjusted unearned premium reserves shall be equal to the result of the following

calculation:

(i) The amount reported by the insurer as unearned premium reserves; minus

(ii) The admitted asset amounts reported by the insurer as:

(I) 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;

(II) Premiums, agents’ balances and installments booked but deferred and

not yet due; and

(III) Bills receivable, taken for premium.

Drafting Note: The amounts to be subtracted are the amounts allowed to be reported as admitted assets on lines 9.1, 9.2 and 11 of page 2 of the Property and

Casualty Annual Statement, line 15 of page 2 of the Life and Accident and Health Annual Statement, or line 9 of the Hospital Medical and Dental Service or

Indemnity Corporations Annual Statement in accordance with the applicable Annual Statement Instructions and the applicable Accounting Practices and

Procedures Manual of the NAIC and like amounts reported in quarterly statements.

(d) Statutorily required policy and contract reserves also shall include, in the case of a

financial guaranty insurer, the amounts required by [cite sections of the code that require

contingency reserves and any other reserves that are not covered by the terms “loss

reserves,” “loss adjustment expense reserves” and “unearned premium reserves” for

financial guaranty insurers] and, in the case of a mortgage guaranty insurer, the amounts

required by [cite sections of the code that require contingency reserves and any other

reserves that are not covered by the terms “loss reserves,” “loss adjustment expense

reserves” and “unearned premium reserves” for mortgage guaranty insurers] and, in the

case of an accident and health insurer, the amounts required by [cite sections of the code

that require additional or contingency reserves and any other reserves that are not

covered by the terms “loss reserves,” “loss adjustment expense reserves” and “unearned

premium reserves” for accident and health insurers].

B. Monitoring and Reporting

A property and casualty, financial guaranty, mortgage guaranty or accident and health insurer shall

supplement its annual statement with a reconciliation and summary of its assets and reserve requirements

as required in Subsection A of this section. A reconciliation and summary showing that an insurer’s assets

as required in Subsection A of this section are greater than or equal to its undiscounted reserves referred to

in Subsection A of this section shall be sufficient to satisfy this requirement. Upon prior notification, the

commissioner may require an insurer to submit such a reconciliation and summary with any quarterly

statement filed during the calendar year.

Drafting Note: The supplement to the annual statement is not intended to be a new exhibit to the NAIC Annual Statement blank. This filing is a state

specific filing required by those states adopting this Model Act. Upon adoption by a significant number of states, a change to the NAIC Annual Statement

blank to incorporate this exhibit may be considered.

C. Notification Requirements and Mandatory Safeguards

If a property and casualty, financial guaranty, mortgage guaranty or accident and health insurer’s assets

and reserves do not comply with Subsection A of this section, 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 thirty (30) days of the date of the notice

propose a plan of action to remedy the deficiency.

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D. Authority of the Commissioner

(1) If the commissioner determines that an insurer is not in compliance with Subsection A of this

section, 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.

(2) If an insurer fails to comply with the commissioner’s requirement under Paragraph (1) of this

subsection, the insurer is deemed to be in hazardous financial condition, and the commissioner

shall take one or more of the actions authorized by law as to insurers in hazardous financial

condition.

Section 23. General Five Percent Diversification, Medium and Lower Grade Investments and Canadian

Investments

A. General Five Percent Diversification

(1) Except as otherwise specified in this Act, an insurer shall not acquire directly or indirectly through

an investment subsidiary an investment under this Act if, as a result of and after giving effect to

the investment, the insurer would hold more than five percent (5%) of its admitted assets in

investments of all kinds issued, assumed, accepted, insured or guaranteed by a single person.

(2) This five percent (5%) limitation shall 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.

(3) Asset-backed securities shall not be subject to the limitations of paragraph (1) of this subsection,

however an insurer shall 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 five percent (5%) of its admitted assets.

B. Medium and Lower Grade Investments

(1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment

under Sections 24, 27, 30 or counterparty exposure under Section 31D if, as a result of and after

giving effect to the investment:

(a) The aggregate amount of all medium and lower grade investments then held by the

insurer would exceed twenty percent (20%) of its admitted assets;

(b) The aggregate amount of lower grade investments then held by the insurer would exceed

ten percent (10%) of its admitted assets;

(c) The aggregate amount of investments rated 5 or 6 by the SVOthen held by the insurer

would exceed five percent (5%) of its admitted assets;

(d) The aggregate amount of investments rated 6 by the SVO then held by the insurer would

exceed one percent (1%) of its admitted assets; or

(e) The aggregate amount of medium 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 one percent (1%) of its admitted assets.

(2) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment

under Sections 24, 27, 30 or counterparty exposure under Section 31D if, as a result of and after

giving effect to the investment:

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(a) The aggregate amount of medium 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 one percent (1%) of its admitted assets; or

(b) 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 one

half of one percent (.5%) of its admitted assets.

(3) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection,

the insurer shall not thereby be precluded from acquiring investments in other rating categories

subject to the specific and multi-category limits applicable to those investments.

C. Canadian Investments

(1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, any Canadian

investments authorized by this Act, 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 forty percent (40%)

of its admitted assets, or if the aggregate amount of Canadian investments not acquired under

Section 24B then held by the insurer would exceed twenty-five percent (25%) of its admitted

assets.

(2) 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 Paragraph (1) of this subsection shall be

increased by the greater of:

(a) The amount the insurer is required by Canadian law to invest in Canada or to be

denominated in Canadian currency; or

(b) One hundred twenty-five percent (125%) of the amount of its reserves and other

obligations under contracts on risks resident or located in Canada.

Section 24. Rated Credit Instruments

Subject to the limitations of Subsection F of this section, an insurer may acquire rated credit instruments:

A. Subject to the limitations of Section 23B, but not to the limitations of Section 23A, an insurer may acquire

rated credit instruments issued, assumed, guaranteed or insured by:

(1) The United States; or

(2) 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. (1) Subject to the limitations of Section 23B, but not to the limitations of Section 23A, an insurer may

acquire rated credit instruments issued, assumed, guaranteed or insured by:

(a) Canada; or

(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;

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(2) However, an insurer shall not acquire an instrument under this subsection 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 would exceed forty percent (40%) of its admitted assets.

C. (1) Subject to the limitations of Section 23B, but not to the limitations of Section 23A, an insurer may

acquire rated credit instruments, excluding asset-backed securities:

(a) Issued by a government money market mutual fund or a listed bond mutual fund;

(b) Issued, assumed, guaranteed or insured by a government sponsored enterprise of the

United States other than those eligible under Subsection A of this section;

(c) Issued, assumed, guaranteed or insured by a state, if the instruments are general

obligations of the state; or

(d) Issued by a multilateral development bank.

(2) However, an insurer shall not acquire an instrument of any one fund, any one enterprise or entity,

or any one state under this subsection if, as a result of and after giving effect to the investment, the

aggregate amount of investments then held in any one fund, enterprise or entity or state under this

subsection would exceed ten percent (10%) of its admitted assets.

D. Subject to the limitations of Section 23, 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:

(1) The aggregate amount of preferred stocks then held by the insurer under this subsection does not

exceed twenty percent (20%) of its admitted assets; and

(2) The aggregate amount of preferred stocks then held by the insurer under this subsection which are

not sinking fund stocks or rated P1 or P2 by the SVO does not exceed ten percent (10%) of its

admitted assets.

E. Subject to the limitations of Section 23 in addition to those investments eligible under Subsections A, B, C

and D of this section, an insurer may acquire rated credit instruments that are not foreign investments.

F. An insurer shall 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 five percent (5%) of its admitted assets.

Drafting Note: In states which have not adopted Secondary Mortgage Market Enhancement Act of 1984, as amended (SMMEA) override legislation,

obligations of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and other mortgage-backed or mortgage related securities

as defined in Section 106 of Title I of SMMEA (15 U.S.C. § 77r-1) may be invested in to the same extent as allowed under Section 24A, whether or not they

are rated credit instruments authorized in Section 24A. Appropriate changes to Section 24 or other Sections of this Act may be necessary.

Section 25. Insurer Investment Pools

A. An insurer may acquire investments in investment pools that:

(1) Invest only in:

(a) Obligations that are rated 1 or 2 by the SVO or have an equivalent of an SVO 1 or 2

rating (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) by a nationally recognized statistical

rating organization recognized by the SVO and have:

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