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Title 38 - Insurance
The legislative intent is that policyholder obligations and the minimum capital or guaranty fund and surplus required by law must be covered only by assets of unquestioned integrity and stability and that assets in excess of those required to cover policyholder obligations, minimum capital or guaranty funds, and surplus may be invested by insurers at the discretion of the insurers. However, the assets must not be invested in assets prohibited under Section 38-11-90. The purpose of this section is to protect and further the interests of policyholders, claimants, creditors, and the public by providing standards for the development and administration of programs for the investment of the assets of companies organized under this chapter. These standards and the investment programs developed by companies must take into account the safety of the company's principal, investment yield, and growth, stability in the value of the investment, and liquidity necessary to meet the company's expected business needs, and investment diversification.
Application of chapter to domestic, foreign, and alien insurers.
This chapter applies to all domestic insurers. Foreign insurers and United States branches of alien insurers transacting an insurance business in this State shall maintain investments of the same general type and character as specified for domestic insurers, except that investments of substantially the same quality as those specified herein, authorized by the law of the insurer's state of domicile, or state of entry if an alien insurer, may be recognized as eligible investments for purposes of this chapter by the director or his designee in the sound exercise of his discretion.
"Policyholder obligations" defined.
As used in this chapter, unless the context requires otherwise, "policyholder obligations" means those liabilities of the insurer to, or for, its policyholders arising out of its policies and to its creditors and includes the liabilities required to be included in the insurer's annual statement including, but not limited to, (a) the unearned premium reserve, (b) reserves required by applicable mortality or morbidity tables, and (c) claim or loss reserves including incurred but not reported claims. "Policyholder obligations" does not include that portion of the insurer's capital or guaranty fund, or that portion of its surplus, in excess of the minimum capital, or guaranty fund, and surplus required by law for such insurer, or the Asset Valuation Reserve.
Investments must be maintained to cover policyholder obligations, minimum capital or guaranty fund, and surplus.
Every insurer shall have and maintain investments, of the classes described in this section, to the extent of policyholder obligations and minimum capital, or guaranty fund, and surplus less, with respect to insurers other than life insurers, an amount equal to thirty percent of its surplus as regards policyholders. In no event may insurers, other than life insurers, have and maintain investments of the character described below less than an amount equal to seventy percent of policyholder obligations and one hundred percent of the minimum required capital, or guaranty fund, and surplus:
(a) Cash, cash funds, and interest accrued thereon on deposit or in savings accounts, under certificates of deposit, or in any other form, in solvent banks and trust companies which have qualified for the insurance protection afforded by the Federal Deposit Insurance Corporation, but the cash or cash funds are not limited to, or by, the amount of insurance protection.
(b) Premiums in the course of collection, including due and deferred premiums of life insurers, other than from agencies or general agencies effectively owned or controlled by, or owning or controlling, the insurer, not more than three months past due, less commissions payable, and installment premiums to the extent of the unearned premium reserve carried on the policies to which the premiums apply, less commissions payable thereon. However, premium balances not more than ninety days past due from agencies or general agencies effectively owned or controlled by, or owning or controlling, the insurer are considered admitted assets of the insurer to the extent that balances due from the agency or general agency are represented by assets of the kinds described in this section as limited by Section 38-11-50.
(c) Reinsurance recoverables, not more than three months past due from solvent, authorized reinsurers, including deposits made with assuming reinsurers, or held by ceding insurers, under reinsurance agreements, but only to the extent that the deposits are available as offsets against liabilities assumed under the reinsurance agreements.
(d) Bonds, notes, warrants, and other securities which are the direct obligations of the United States or for which the faith and credit of the United States are pledged for the payment of principal and interest.
(e) Obligations or stock, where stated, of the following agencies or instrumentalities of the United States, whether or not such obligations are guaranteed by the government:
(1) Commodity Credit Corporation.
(2) Federal intermediate credit banks.
(3) Federal land banks.
(4) Central Bank for Cooperatives.
(5) Federal home loan banks and their stock.
(6) Federal National Mortgage Association and its stock when acquired in connection with sale of mortgage loans to the Federal National Mortgage Association.
(7) Government National Mortgage Association.
(8) Other agencies or instrumentalities of the United States approved by the director or his designee.
(f) Bonds, notes, warrants, and other securities which are the direct obligations of any state or territory of the United States or of the District of Columbia, or for which the full faith and credit of the state, territory, or District of Columbia have been pledged for the payment of principal and interest.
(g) Bonds, notes, warrants, and other securities which are valid and legally authorized obligations, issued, assumed, or guaranteed by any county, city, town, village, municipality, or district of any state or territory of the United States, or by any political subdivision thereof, or by any civil division or public instrumentality of the United States, any state or territory of the United States, or any county, city, town, or district of any state or territory, if, by statutory or other legal requirements applicable thereto, such obligations are payable, both as to principal and interest, from taxes levied, or required by such law to be levied, upon all taxable property or taxable income within the jurisdiction of the governmental unit, or from special revenues pledged or otherwise appropriated or by law required to be appropriated for the purpose of the payment, but not including any obligations payable solely out of special assessments on properties benefitted by local improvements. However, obligations payable out of special revenues pledged or otherwise appropriated or required by law to be appropriated for the purpose of the payment, are eligible for purposes of this section only if the obligations are eligible for amortization in accordance with regulations promulgated by the director after notice and hearing.
(h) Bonds, notes, warrants, or other securities of Canada, or of any of its provinces, or of any municipality in Canada, if the municipal obligations are required or permitted to be amortized in the annual statement prescribed by law, or any bonds fully guaranteed by Canada, or any of its provinces or municipalities, if the bonds are payable in lawful money of the United States or Canada.
(i) Bonds, notes, or debentures of solvent corporations existing under the laws of the United States or any of its states or territories, the District of Columbia, Canada, or any of its provinces, if the obligations are qualified under any of the following:
(1) Obligations which are secured by adequate collateral security and bear fixed interest if, during each of the last two, and one additional year, of the five fiscal years next preceding the date of acquisition by the insurer, the net earnings of the issuing, assuming, or guaranteeing corporation available for its fixed charges have not been less than one and one-fourth times the total of its fixed charges for that year. In determining the adequacy of collateral security not more than one-third of the total value of the required collateral may consist of stock other than preferred or guaranteed stocks. The director or his designee may approve the collateral as adequate notwithstanding that more than one third of the total value of the required collateral consists of stocks other than preferred or guaranteed stocks if he finds the collateral to be adequate otherwise and states, in writing, his reasons for so finding.
(2) Fixed interest-bearing obligations other than those described in (1) above, if the net earnings of the issuing, assuming, or guaranteeing corporation available for its fixed charges for a period of five fiscal years next preceding the date of acquisition by the insurer have averaged per year not less than one and one-half times its annual fixed charges applicable to that period and during the last two years of the period the net earnings have been not less than one and one-half times its fixed charges for those years. Notwithstanding the failure of an issuing corporation to meet the test with respect to its fixed interest-bearing obligations as provided in this item, the obligations must be considered to be eligible hereunder if they are secured or guaranteed by leases or other contracts as long as the guaranteeing, leasing, or contracting corporation fulfills the requirements of this section with respect to its fixed interest obligations.
(3) Adjustment income or other contingent interest obligations if the net earnings of the issuing, assuming, or guaranteeing corporation available for its fixed charges for a period of five fiscal years next preceding the date of acquisition by the insurer have averaged per year not less than one and one-half times the sum of its average annual fixed charges and its average annual maximum contingent interest applicable to that period and if during each of the last two years of the period the net earnings have been not less than one and one-half times the sum of its fixed charges and maximum contingent interest for those years. As used herein, "net earnings available for fixed charges" means net income after deducting operating and maintenance expenses, taxes other than federal and state income taxes, depreciation, and depletion, but excluding extraordinary nonrecurring items of income or expenses appearing in the regular financial statement of the corporation. "Fixed charges" includes interest on funded and unfunded debt and amortization of debt discount.
(4) If a life insurer, in obligations, or in commercial paper or bankers' acceptances, or similar evidences of indebtedness customarily issued at a discount from principal value, issued, assumed, or guaranteed by any business entity created or existing under the laws of the United States, or any state, which are not in default as to principal or interest; provided, that either the obligation is or the issuing, assuming or guaranteeing business entity's or business entities' long-term obligations are rated one of the four highest grades by any of the nationally recognized statistical rating organizations recognized by the NAIC-SVO or one or two by the NAIC-SVO.
As used in this subitem, "business entity" means a sole proprietorship, corporation, limited liability company, association, general or limited partnership, joint stock company, joint venture, mutual fund, bank, trust, real estate investment trust, joint tenancy, or other similar form of business organization, whether organized for-profit or not-for-profit.
As used in this subitem, "obligation" means a bond, note, debenture, trust certificate including an equipment trust certificate, production payment, negotiable bank certificate of deposit, bankers' acceptance, asset-backed security, credit tenant loan, loan secured by financing a net lease or 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.
(j) Preferred or guaranteed stocks or shares, other than common stocks, of solvent institutions existing under the laws of the United States or of any of its states, districts, or territories, if all of the prior obligations and prior preferred stocks, if any, of the institution at the date of acquisition by the insurer are eligible as investments under this chapter and if qualified under either of:
(1) Preferred stocks or shares are considered qualified if both of these requirements are met:
(i) The net earnings of the institution available for its fixed charges for a period of five fiscal years next preceding the date of acquisition by the insurer shall have averaged per year not less than one and one-half times the sum of its average annual fixed charges, if any, its average annual maximum contingent interest, if any, and its average annual preferred dividend requirements applicable to the period; and
(ii) During each of the last two years of the period the net earnings must have been not less than one and one-half times the sum of its fixed charges, contingent interest, and preferred dividend requirements. 'Preferred dividend requirements' means cumulative or noncumulative dividends whether paid or not.
(2) Guaranteed stocks or shares are considered qualified if the assuming or guaranteeing institution meets the requirements of Section 38-11-40(i)(2) construed to include as a fixed charge the amount of guaranteed dividends of the issue or the rental covering the guarantee of the dividends.
(k) If a life insurer, loans to policyholders upon pledge of the policy as collateral security, amounts not exceeding the cash surrender values of the policies, or loans against pledge or assignment of any of its supplementary contracts or other contracts or obligations, as long as the loan is adequately secured by pledges or assignments.
(l) If a life insurer, bonds, or evidences of debts secured by first mortgages or deeds of trust on improved unencumbered real property or the equity of the seller of any of this property in the contract for a deed covering the entire balance due on a bona fide sale of property located in the United States or any of its states or territories or the District of Columbia; but no mortgage loan or investment in the equity of the seller in the contract for deed may exceed at the time of acquisition seventy-five percent of the fair market value of the property. Real estate is not considered to be encumbered within the meaning of this chapter by reason of the existence of taxes or assessments which are not delinquent, instruments creating or reserving mineral, oil, or timber rights, rights-of-way, joint driveways, sewer rights, rights in walls, nor by reason of building restrictions or other restrictive covenants, nor when the real estate is subject to lease in whole or in part whereby rents or profits are reserved to the owner if in any event the security for the loan or investment is a first lien upon the real estate. The value of any mineral, oil, timber, or similar right reserved may not be included in the fair market value of the property.
(m) If a life insurer, evidences of debt secured by first mortgages or deeds of trust upon leasehold estates running for a term not less than ten years beyond the maturity of the loan as made or as extended, in improved real property, otherwise unencumbered, if the mortgagee is entitled to be subrogated to all rights under the leasehold. No investment under this item may exceed seventy-five percent of the fair market value of the leasehold estate.
(n) If a life insurer, bonds or notes secured by mortgage or trust deed guaranteed or insured as to principal in whole or in part by the Administrator of Veterans' Affairs pursuant to the provisions of Title III of an Act of Congress of the United States of June 22, 1944, entitled the "Service Men's Readjustment Act of 1944", as amended, or bonds or notes secured by mortgage or trust deed guaranteed or insured by the Federal Housing Administration under the terms of an Act of Congress of the United States of June 27, 1936, entitled the 'National Housing Act', as amended.
(o) Land and buildings to the extent used and occupied for home office purposes together with other real estate as is required for the insurer's convenient transaction of its business at net value plus improvements less normal depreciation.
(p) If a life insurer, improved unencumbered real estate for the production of income or property now under lease or being constructed under a definite agreement providing for lease to solvent institutions, individuals, or governmental agencies for governmental, professional, commercial, residential, or industrial purposes other than agricultural, horticultural, ranch, mining, mineral, or oil purposes at net value plus improvements less normal depreciation; however, upon approval by the director or his designee, the real estate investment may be encumbered or need not be under lease.
(q) Loans secured by pledge of collateral determined by the director or his designee to be adequate and appropriate for investment of policyholder obligation funds of the insurer.
(r) Common stocks of any solvent corporation incorporated under the laws of the United States or any state, or Canada, or any of its provinces, if the stocks of the corporation are listed or admitted to trading on a securities exchange located in the United States, which exchange is approved or recognized by the Securities and Exchange Commission of the United States or if the stocks are listed in the Manual on Valuation of Securities issued by the Committee on Valuation of Securities of the National Association of Insurance Commissioners.
(s) Any investment not specifically included herein nor prohibited under Section 38-11-90, if and to the extent as, the director or his designee finds the investment appropriate for investment of policyholder obligations funds. This finding is to be based upon the standards prescribed by Section 38-11-10.
(t) If a life insurer, foreign investments, other than Canadian investments, of substantially the same types as those that an insurer is permitted to acquire under this chapter.
Limitations on investments made under Section 38-11-40.
(A) Investments made by insurers to cover policyholder obligations and their minimum capital or guaranty fund and surplus required by law, provided in Section 38-11-40, are subject to:
(1) None of the securities in Section 38-11-40 are eligible for the purposes of that section if, within five years immediately preceding, the obligor has defaulted in the payment of principal or interest on its bonds, warrants, or other securities.
(2) With respect to investments under Section 38-11-40(g), not more than twenty percent of the insurer's policyholder obligations may be invested in the securities of a county, city, town, village, municipality, or district of a state or territory of the United States or its political subdivisions or a civil division or public instrumentality of the United States. However, this limitation does not apply to an investment which qualifies for sinking fund purposes under the laws of this State.
(3) Investments in Section 38-11-40(h) may not exceed ten percent of the insurer's policyholder obligations.
(4) Investments in Section 38-11-40(i)(1), (2), and(3) in the aggregate may not exceed sixty-six and two-thirds percent of the insurer's policyholder obligations. However, investments in Section 38-11-40(i)(4) may exceed sixty-six and two-thirds percent of the insurer's policyholder obligations. Not more than ten percent of the insurer's policyholder obligations may be invested in one investment under Section 38-11-40(i).
(5) Investments in Section 38-11-40(j) may not exceed fifteen percent of the insurer's policyholder obligations.
(6) Investments in Section 38-11-40(l), (m), and (n) may not exceed in the aggregate sixty-six and two-thirds percent of the insurer's policyholder obligations, nor, with respect to investments under these items, may more than ten percent of the insurer's policyholder obligations be invested in one investment or in one project, subdivision, or transaction or series of related transactions.
(7) Investments in Section 38-11-40(o) may not exceed ten percent of the insurer's policyholder obligations.
(8) Investments in Section 38-11-40(p) may not exceed ten percent of the insurer's policyholder obligations. Where a life insurer does not, wholly or in part, avail itself of Section 38-11-40(o), as limited by Section 38-11-50(A)(7), the investments under Section 38-11-40(p) may be increased to the extent of the unused portion, but the life insurer's investments under Section 38-11-40(p) may not exceed fifteen percent of the insurer's policyholder obligations. However, this limitation does not apply to real estate acquired by bona fide mortgage foreclosure if the insurer has had title to the real estate for less than five years.
(9) Investments in Section 38-11-40(q) may not exceed ten percent of the insurer's policyholder obligations.
(10) Investments in Section 38-11-40(r) may not exceed ten percent of the insurer's policyholder obligations.
(11) Investments authorized under Section 38-11-40(s) may not exceed ten percent of the insurer's policyholder obligations.
(12) Investments authorized pursuant to Section 38-11-40(t) may not exceed twenty percent of the insurer's policyholder obligations, and the aggregate amount of such investments in a single foreign jurisdiction may not exceed ten percent of its policyholder obligations as to a foreign jurisdiction that has a sovereign debt rating of SVO1, or an equivalent rating by a nationally recognized statistical rating organization recognized by the SVO, or three percent of its policyholder obligations as to any other foreign jurisdiction.
(B) For purposes of the limitations contained in this section:
(1) Except as otherwise provided in item (2), investments in Section 38-11-40 must be valued in accordance with stated values or standards published by the Securities Valuation Office of the National Association of Insurance Commissioners in its Valuations of Securities Manual. Investments for which the National Association of Insurance Commissioners has not published valuations or standards must be valued as follows:
(a) Obligations having a fixed term and rate, if not in default as to principal or interest, must be valued, if purchased at par, at the par value and, if purchased above or below par, on the basis of the purchase price adjusted so as to bring the value to par at maturity and so as to yield in the meantime the effective rate of interest at which the purchase was made.
(b) Common, preferred, or guaranteed stocks must be valued at their market value or, at the option of the company, may be valued at the purchase price if it is less than market value.
(c) Other securities investments must be valued in accordance with regulations promulgated pursuant to subsection (D).
(2) Investments not provided for in item (1), including real property, must be valued in accordance with regulations promulgated pursuant to subsection (D), but they must not be valued at more than their purchase price. Purchase price for real property includes capitalized permanent improvements less depreciation spread evenly over the life of the property or, at the option of the company, less depreciation computed on a basis permitted under the Internal Revenue Code and its regulations. Investments affected by permanent declines in value must be valued at not more than their market value. However, mortgage loans may be valued at amortized value.
(C) An investment, including real property, not purchased by a company but acquired in satisfaction of a debt or otherwise must be valued in accordance with the applicable procedures for that type of investment contained in this section. For purposes of applying the valuation procedures, the purchase price is the market value at the time the investment is acquired or, for an investment acquired in satisfaction of debt, the amount of the debt including interest, taxes, and expenses, whichever is less.
(D) The director shall promulgate regulations for determining and calculating values to be used in financial statements submitted to the department of Insurance for investments not subject to published National Association of Insurance Commissioner's valuation standards.
Consolidated statement by insurer owning eighty percent or more of stock of another insurer.
An insurer owning not less than eighty percent of all classes of the outstanding stock of one or more other insurers transacting an insurance business may, for the purposes of complying with Section 38-11-40, so comply on the basis of a consolidated statement. However, every subsidiary must fully comply with the requirements of Section 38-11-40.
Notice to Commissioner of noncompliance with chapter; suspension or revocation of license; certain investments excepted.
An insurer not in compliance with the requirements imposed by this chapter shall within thirty days notify the department. Upon being notified, or upon otherwise ascertaining noncompliance, the director or his designee shall order the insurer to make good the deficiency within thirty days, and he shall, upon failure of the insurer to do so, revoke or suspend the license of the insurer until the deficiency has been made good. However, if noncompliance results from the acquisition of the property or security through foreclosure or otherwise results from a default in a loan or other obligation and the acquisition has been rendered necessary in order to protect the investment or avoid greater loss, the director or his designee may further extend the period not to exceed one hundred eighty days if the insurer establishes that the extension is necessary, that it will not prejudice the policyholders and that the insurer has, in good faith, entered upon a course of action calculated to terminate the noncompliance on or before the expiration of the extended period.
Further, investments in real estate and mortgage loans on real estate already made and recognized as admitted assets as of December 31, 1970, are not affected by the restrictions and limitations of this chapter, and are considered as assets covering policyholder obligations and minimum capital, or guaranty fund, and surplus required by law.
Authority required for making loans and investments.
No insurer may make any loan or investment, except the policy loans of a life insurer, or any sale or exchange unless authorized, approved, or ratified by its board of directors or other governing body or by a committee charged by the board of directors, other governing body, or the bylaws with the duty of making the investment, loan, sale, or exchange. The minutes of the committee must be submitted to the board of directors or other governing body at the next meeting of the board of directors or other governing body.
Investments in and loans upon certain securities prohibited.
No insurer may invest any of its funds in or lend any of its funds upon the security of:
(a) Issued shares of its own capital stock except with the written permission of the director or his designee which may be granted, at his discretion, where the purpose of the acquisition is in connection with a lawful plan for mutualization of the insurer, or in furtherance of a retirement, pension, or incentive program for officers or employees of the insurer, which plan has been approved by the stockholders, or if otherwise the acquisition is shown to be for the benefit of all stockholders; but in no event may shares so acquired be admissible as an asset or shown as an asset in any financial statement of the insurer.
(b) Securities issued by a corporation which is insolvent at the time of the proposed investment except upon the written approval of the director or his designee.
(c) Securities which will subject the insurer to any assessment other than for taxes or wages.
(d) Any investment or security which is found by the director or his designee to be designed to evade any prohibition of this chapter.
Certain assets considered admitted assets; valuation.
The assets enumerated in Section 38-11-40 and other assets not prohibited under Section 38-11-90 nor required to be scheduled as nonadmitted assets in the annual statement, as prescribed by the director or his designee, are considered admitted assets and all these assets must be valued in accordance with the standards prescribed in Section 38-11-50 (B),(C), and (D).
Valuation of other investments.
All investments of insurers authorized to do business in this State, for which no rule or method of valuation has been otherwise provided, must be valued in the discretion of the director or his designee at their fair market value, appraised value, or at amounts determined by the director or his designee as their fair market value. If any valuation of an investment by an insurer appears to be an unreasonable estimate of its true value, the director or his designee has the authority to cause the investment to be appraised, and the appraised value must be substituted as the true value. The appraisal must be made by two disinterested and competent persons, one to be appointed by the director and one to be appointed by the insurer. In the event these two persons fail to agree, they shall appoint a third disinterested and competent person, and the estimate of the value of the investment, as arrived at by these three persons, must be substituted as the true value.