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90_SB0801sam001
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1 AMENDMENT TO SENATE BILL 801
2 AMENDMENT NO. . Amend Senate Bill 801 by replacing
3 the title with the following:
4 "AN ACT concerning investment practices of insurance
5 companies."; and
6 by replacing everything after the enacting clause with the
7 following:
8 "Section 5. The Illinois Insurance Code is amended by
9 adding Sections 126.1, 126.2, 126.3, 126.4, 126.5, 126.6,
10 126.7, 126.8, 126.9, 126.10, 126.11, 126.12, 126.13, 126.14,
11 126.15, 126.16, 126.17, 126.18, 126.19, 126.20, 126.21,
12 126.22, 126.23, 126.24, 126.25, 126.26, 126.27, 126.28,
13 126.29, 126.30, 126.31, and 126.32 and headings for Parts 1,
14 2, and 3 of Article VIII as follows:
15 (215 ILCS 5/Art. VIII, Part 1, heading new)
16 1. GENERAL PROVISIONS
17 (215 ILCS 5/126.1 new)
18 Sec. 126.1. Purpose and scope.
19 A. Purpose. The purpose of this Article is to protect
20 the interests of insureds by promoting insurer solvency and
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1 financial strength. This will be accomplished through the
2 application of investment standards that facilitate a
3 reasonable balance of the following objectives:
4 (1) To preserve principal;
5 (2) To assure reasonable diversification as to type of
6 investment, issuer and credit quality; and
7 (3) To allow insurers to allocate investments in a
8 manner consistent with principles of prudent investment
9 management to achieve an adequate return so that obligations
10 to insureds are adequately met and financial strength is
11 sufficient to cover reasonably foreseeable contingencies.
12 B. Scope. This Article shall apply only to investments
13 and investment practices of domestic insurers and United
14 States branches of alien insurers entered through this state.
15 This Article shall not apply to separate accounts of an
16 insurer except to the extent that the provisions of Article
17 XIV 1/2 so provide.
18 (215 ILCS 5/126.2 new)
19 Sec. 126.2. Definitions. For purposes of this Article:
20 A. "Acceptable collateral" means:
21 (1) As to securities lending transactions, and for the
22 purpose of calculating counterparty exposure amount, cash,
23 cash equivalents, letters of credit, direct obligations of,
24 or securities that are fully guaranteed as to principal and
25 interest by, the government of the United States or any
26 agency of the United States, or by the Federal National
27 Mortgage Association or the Federal Home Loan Mortgage
28 Corporation, and as to lending foreign securities, sovereign
29 debt rated 1 by the SVO;
30 (2) As to repurchase transactions, cash, cash
31 equivalents and direct obligations of, or securities that are
32 fully guaranteed as to principal and interest by, the
33 government of the United States or an agency of the United
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1 States, or by the Federal National Mortgage Association or
2 the Federal Home Loan Mortgage Corporation; and
3 (3) As to reverse repurchase transactions, cash and cash
4 equivalents.
5 B. "Acceptable private mortgage insurance" means
6 insurance written by a private insurer protecting a mortgage
7 lender against loss occasioned by a mortgage loan default and
8 issued by a licensed mortgage insurance company, with an SVO
9 1 designation or a rating issued by a nationally recognized
10 statistical rating organization equivalent to an SVO 1
11 designation, that covers losses to an 80% loan-to-value
12 ratio.
13 C. "Accident and health insurance" means protection
14 which provides payment of benefits for covered sickness or
15 accidental injury, excluding credit insurance, disability
16 insurance, accidental death and dismemberment insurance and
17 long-term care insurance.
18 D. "Accident and health insurer" means a licensed life
19 or health insurer or health service corporation whose
20 insurance premiums and required statutory reserves for
21 accident and health insurance constitute at least 95% of
22 total premium considerations or total statutory required
23 reserves, respectively.
24 E. "Admitted assets" means assets defined by Section 3.1
25 of this Code permitted to be reported as admitted assets on
26 the statutory financial statement of the insurer most
27 recently required to be filed with the Director, but
28 excluding assets of separate accounts, the investments of
29 which are not subject to the provisions of this Article
30 except to the extent that the provisions of Article XIV 1/2
31 so provide.
32 F. "Affiliate" means, as to any person, another person
33 that, directly or indirectly through one or more
34 intermediaries, controls, is controlled by, or is under
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1 common control with the person.
2 G. "Asset-backed security" means a security or other
3 instrument, excluding shares in a mutual fund, evidencing an
4 interest in, or the right to receive payments from, or
5 payable from distributions on, an asset, a pool of assets or
6 specifically divisible cash flows which are legally
7 transferred to a trust or another special purpose
8 bankruptcy-remote business entity, on the following
9 conditions:
10 (1) The trust or other business entity is established
11 solely for the purpose of acquiring specific types of assets
12 or rights to cash flows, issuing securities and other
13 instruments representing an interest in or right to receive
14 cash flows from those assets or rights, and engaging in
15 activities required to service the assets or rights and any
16 credit enhancement or support features held by the trust or
17 other business entity; and
18 (2) The assets of the trust or other business entity
19 consist solely of interest bearing obligations or other
20 contractual obligations representing the right to receive
21 payment from the cash flows from the assets or rights.
22 However, the existence of credit enhancements, such as
23 letters of credit or guarantees, or support features such as
24 swap agreements, shall not cause a security or other
25 instrument to be ineligible as an asset-backed security.
26 H. "Business entity" includes a sole proprietorship,
27 corporation, limited liability company, association,
28 partnership, joint stock company, joint venture, mutual fund,
29 trust, joint tenancy or other similar form of business
30 organization, whether organized for profit or not for profit.
31 I. "Cap" means an agreement obligating the seller to
32 make payments to the buyer, with each payment based on the
33 amount by which a reference price or level or the performance
34 or value of one or more underlying interests exceeds a
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1 predetermined number, sometimes called the strike rate or
2 strike price.
3 J. "Capital and surplus" means the sum of the capital
4 and surplus of the insurer required to be shown on the
5 statutory financial statement of the insurer most recently
6 required to be filed with the Director.
7 K. "Cash equivalents" means short-term, highly rated and
8 highly liquid investments or securities readily convertible
9 to known amounts of cash without penalty and so near maturity
10 that they present insignificant risk of change in value. Cash
11 equivalents include government money market mutual funds and
12 class one money market mutual funds. For purposes of this
13 definition:
14 (1) "Short-term" means investments with a remaining term
15 to maturity of 90 days or less; and
16 (2) "Highly rated" means an investment rated "P-1" by
17 Moody's Investors Service, Inc., or "A-1" by Standard and
18 Poor's division of The McGraw Hill Companies, Inc. or its
19 equivalent rating by a nationally recognized statistical
20 rating organization recognized by the SVO.
21 L. "Class one bond mutual fund" means a mutual fund that
22 at all times qualifies for investment using the bond class
23 one reserve factor under the Purposes and Procedures of the
24 Securities Valuation Office or any successor publication.
25 M. "Class one money market mutual fund" means a money
26 market mutual fund that at all times qualifies for investment
27 using the bond class one reserve factor under the Purposes
28 and Procedures of the Securities Valuation Office or any
29 successor publication.
30 N. "Code" means the Illinois Insurance Code.
31 O. "Collar" means an agreement to receive payments as
32 the buyer of an option, cap or floor and to make payments as
33 the seller of a different option, cap or floor.
34 P. "Commercial mortgage loan" means a mortgage loan,
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1 other than a residential mortgage loan.
2 Q. "Construction loan" means a loan of less than 3 years
3 in term, made for financing the cost of construction of a
4 building or other improvement to real estate, that is secured
5 by the real estate.
6 R. "Control" means the possession, directly or
7 indirectly, of the power to direct or cause the direction of
8 the management and policies of a person, whether through the
9 ownership of voting securities, by contract (other than a
10 commercial contract for goods or nonmanagement services), or
11 otherwise, unless the power is the result of an official
12 position with or corporate office held by the person. Control
13 shall be presumed to exist if a person, directly or
14 indirectly, owns, controls, holds with the power to vote or
15 holds proxies representing 10% or more of the voting
16 securities of another person. This presumption may be
17 rebutted by a showing that control does not exist in fact.
18 The Director may determine, after furnishing all interested
19 persons notice and an opportunity to be heard and making
20 specific findings of fact to support the determination, that
21 control exists in fact, notwithstanding the absence of a
22 presumption to that effect.
23 S. "Counterparty exposure amount" means:
24 (1) The amount of credit risk attributable to a
25 derivative instrument entered into with a business entity
26 other than through a qualified exchange, qualified foreign
27 exchange, or cleared through a qualified clearinghouse
28 ("over-the-counter derivative instrument"). The amount of
29 credit risk equals:
30 (a) The market value of the over-the-counter derivative
31 instrument if the liquidation of the derivative instrument
32 would result in a final cash payment to the insurer; or
33 (b) Zero if the liquidation of the derivative instrument
34 would not result in a final cash payment to the insurer.
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1 (2) If over-the-counter derivative instruments are
2 entered into under a written master agreement which provides
3 for netting of payments owed by the respective parties, and
4 the domicile of the counterparty is either within the United
5 States or if not within the United States, within a foreign
6 jurisdiction listed in the Purposes and Procedures of the
7 Securities Valuation Office as eligible for netting, the net
8 amount of credit risk shall be the greater of zero or the net
9 sum of:
10 (a) The market value of the over-the-counter derivative
11 instruments entered into under the agreement, the liquidation
12 of which would result in a final cash payment to the insurer;
13 and
14 (b) The market value of the over-the-counter derivative
15 instruments entered into under the agreement, the liquidation
16 of which would result in a final cash payment by the insurer
17 to the business entity.
18 (3) For open transactions, market value shall be
19 determined at the end of the most recent quarter of the
20 insurer's fiscal year and shall be reduced by the market
21 value of acceptable collateral held by the insurer or placed
22 in escrow by one or both parties.
23 T. "Covered" means that an insurer owns or can
24 immediately acquire, through the exercise of options,
25 warrants or conversion rights already owned, the underlying
26 interest in order to fulfill or secure its obligations under
27 a call option, cap or floor it has written, or has set aside,
28 pursuant to a custodial or escrow agreement, cash or cash
29 equivalents with a market value equal to the amount required
30 to fulfill its obligations under a put option it has written,
31 in an income generation transaction.
32 U. "Credit tenant loan" means a mortgage loan which is
33 made primarily in reliance on the credit standing of a major
34 tenant, structured with an assignment of the rental payments
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1 to the lender with real estate pledged as collateral in the
2 form of a first lien.
3 V. (1) "Derivative instrument" means an agreement,
4 option, instrument or a series or combination thereof:
5 (a) To make or take delivery of, or assume or
6 relinquish, a specified amount of one or more underlying
7 interests, or to make a cash settlement in lieu thereof; or
8 (b) That has a price, performance, value or cash flow
9 based primarily upon the actual or expected price, level,
10 performance, value or cash flow of one or more underlying
11 interests.
12 (2) Derivative instruments include options, warrants
13 used in a hedging transaction and not attached to another
14 financial instrument, caps, floors, collars, swaps, forwards,
15 futures and any other agreements, options or instruments
16 substantially similar thereto or any series or combination
17 thereof and any agreements, options or instruments permitted
18 under rules adopted under Section 126.8. Derivative
19 instruments shall not include an investment authorized by
20 Sections 126.11 through 126.17, 126.19 and 126.24 through
21 126.30.
22 W. "Derivative transaction" means a transaction
23 involving the use of one or more derivative instruments.
24 X. "Direct" or "directly," when used in connection with
25 an obligation, means the designated obligor is primarily
26 liable on the instrument representing the obligation.
27 Y. "Dollar roll transaction" means 2 simultaneous
28 transactions with settlement dates no more than 96 days
29 apart, so that in one transaction an insurer sells to a
30 business entity, and in the other transaction the insurer is
31 obligated to purchase from the same business entity,
32 substantially similar securities of the following types:
33 (1) Asset-backed securities issued, assumed or
34 guaranteed by the Government National Mortgage Association,
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1 the Federal National Mortgage Association or the Federal Home
2 Loan Mortgage Corporation or their respective successors; and
3 (2) Other asset-backed securities referred to in Section
4 106 of Title I of the Secondary Mortgage Market Enhancement
5 Act of 1984 (15 U.S.C. 77r1), as amended.
6 Z. "Domestic jurisdiction" means the United States,
7 Canada, any state, any province of Canada or any political
8 subdivision of any of the foregoing.
9 AA. "Equity interest" means any of the following that
10 are not rated credit instruments: common stock; preferred
11 stock; trust certificate; equity investment in an investment
12 company other than a money market mutual fund or a class one
13 bond mutual fund; investment in a common trust fund of a bank
14 regulated by a federal or state agency; an ownership interest
15 in minerals, oil or gas, the rights to which have been
16 separated from the underlying fee interest in the real estate
17 where the minerals, oil or gas are located; instruments which
18 are mandatorily, or at the option of the issuer, convertible
19 to equity; limited partnership interests and those general
20 partnership interests authorized under Section 126.5(D)
21 member interests in limited liability companies; warrants or
22 other rights to acquire equity interests that are created by
23 the person that owns or would issue the equity to be
24 acquired; or instruments that would be rated credit
25 instruments except for the provisions of subsection RRR(2) of
26 this Section.
27 BB. "Equivalent securities" means:
28 (1) In a securities lending transaction, securities that
29 are identical to the loaned securities in all features
30 including the amount of the loaned securities, except as to
31 certificate number if held in physical form, but if any
32 different security shall be exchanged for a loaned security
33 by recapitalization, merger, consolidation or other corporate
34 action, the different security shall be deemed to be the
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1 loaned security;
2 (2) In a repurchase transaction, securities that are
3 identical to the purchased securities in all features
4 including the amount of the purchased securities, except as
5 to the certificate number if held in physical form; or
6 (3) In a reverse repurchase transaction, securities that
7 are identical to the sold securities in all features
8 including the amount of the sold securities, except as to the
9 certificate number if held in physical form.
10 CC. "Floor" means an agreement obligating the seller to
11 make payments to the buyer in which each payment is based on
12 the amount by which a predetermined number, sometimes called
13 the floor rate or price, exceeds a reference price, a level,
14 or the performance or value of one or more underlying
15 interests.
16 DD. "Foreign currency" means a currency other than that
17 of a domestic jurisdiction.
18 EE. (1) "Foreign investment" means an investment in a
19 foreign jurisdiction, or an investment in a person, real
20 estate or asset domiciled in a foreign jurisdiction, that is
21 substantially of the same type as those eligible for
22 investment under this Article, other than under Sections
23 126.17 and 126.30. An investment shall not be deemed to be
24 foreign if the issuing person, qualified primary credit
25 source or qualified guarantor is a domestic jurisdiction or a
26 person domiciled in a domestic jurisdiction, unless:
27 (a) The issuing person is a shell business entity; and
28 (b) The investment is not assumed, accepted, guaranteed,
29 or insured or otherwise backed by a domestic jurisdiction or
30 a person, that is not a shell business entity, domiciled in a
31 domestic jurisdiction.
32 (2) For purposes of this definition:
33 (a) "Shell business entity" means a business entity
34 having no economic substance, except as a vehicle for owning
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1 interests in assets issued, owned or previously owned by a
2 person domiciled in a foreign jurisdiction;
3 (b) "Qualified guarantor" means a guarantor against
4 which an insurer has a direct claim for full and timely
5 payment, evidenced by a contractual right for which an
6 enforcement action can be brought in a domestic jurisdiction;
7 and
8 (c) "Qualified primary credit source" means the credit
9 source to which an insurer looks for payment as to an
10 investment and against which an insurer has a direct claim
11 for full and timely payment, evidenced by a contractual right
12 for which an enforcement action can be brought in a domestic
13 jurisdiction.
14 FF. "Foreign jurisdiction" means a jurisdiction other
15 than a domestic jurisdiction.
16 GG. "Forward" means an agreement (other than a future)
17 to make or take delivery of, or effect a cash settlement
18 based on the actual or expected price, level, performance or
19 value of, one or more underlying interests.
20 HH. "Future" means an agreement, traded on a qualified
21 exchange or qualified foreign exchange, to make or take
22 delivery of, or effect a cash settlement based on the actual
23 or expected price, level, performance or value of, one or
24 more underlying interests and includes an insurance future.
25 II. "Government money market mutual fund" means a money
26 market mutual fund that at all times:
27 (1) Invests only in obligations issued, guaranteed, or
28 insured by the federal government of the United States or
29 collateralized repurchase agreements composed of these
30 obligations; and
31 (2) Qualifies for investment without a reserve under the
32 Purposes and Procedures of the Securities Valuation Office or
33 any successor publication.
34 JJ. "Government sponsored enterprise" means a:
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1 (1) Governmental agency; or
2 (2) Corporation, limited liability company, association,
3 partnership, joint stock company, joint venture, trust or
4 other entity or instrumentality organized under the laws of
5 any domestic jurisdiction to accomplish a public policy or
6 other governmental purpose.
7 KK. "Guaranteed or insured," when used in connection
8 with an obligation acquired under this Article, means the
9 guarantor or insurer has agreed to:
10 (1) Perform or insure the obligation of the obligor or
11 purchase the obligation; or
12 (2) Be unconditionally obligated until the obligation is
13 repaid to maintain in the obligor a minimum net worth, fixed
14 charge coverage, stockholders' equity or sufficient liquidity
15 to enable the obligor to pay the obligation in full.
16 LL. "Hedging transaction" means a derivative transaction
17 which is entered into and maintained to reduce:
18 (1) The risk of a change in the value, yield, price,
19 cash flow or quantity of assets or liabilities which the
20 insurer has acquired or incurred or anticipates acquiring or
21 incurring; or
22 (2) The currency exchange rate risk or the degree of
23 exposure as to assets or liabilities which an insurer has
24 acquired or incurred or anticipates acquiring or incurring.
25 MM. "High grade investment" means a rated credit
26 instruments rated 1, 2, P1, P2, PSF1 or PSF2 by the SVO.
27 NN. "Income" means, as to a security, interest, accrual
28 of discount, dividends or other distributions, such as
29 rights, tax or assessment credits, warrants and distributions
30 in kind.
31 OO. "Income generation transaction" means (1) a
32 derivative transaction involving the writing of covered call
33 options, covered put options, covered caps or covered floors
34 that is intended to generate income or enhance return, or (2)
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1 such other derivative transactions as may be specified to
2 constitute income generation transactions in rules adopted
3 pursuant to Section 126.8.
4 PP. "Initial margin" means the amount of cash,
5 securities or other consideration initially required to be
6 deposited to establish a futures position.
7 QQ. "Insurance future" means a future relating to an
8 index or pool that is based on insurance-related items.
9 RR. "Insurance futures option" means an option on an
10 insurance future.
11 SS. "Investment company" means an investment company as
12 defined in Section 3(a) of the Investment Company Act of 1940
13 (15 U.S.C. 80a-1 et seq.), as amended, and a person
14 described in Section 3(c) of that Act.
15 TT. "Investment company series" means an investment
16 portfolio of an investment company that is organized as a
17 series company and to which assets of the investment company
18 have been specifically allocated.
19 UU. "Investment practices" means transactions of the
20 types described in Section 126.16, 126.18, 126.29 or 126.31.
21 VV. "Investment subsidiary" means a subsidiary of an
22 insurer engaged or organized to engage exclusively in the
23 ownership and management of assets authorized as investments
24 for the insurer if such subsidiary agrees to limit its
25 investment in any asset so that its investments will not
26 cause the amount of the total investment of the insurer to
27 exceed any of the investment limitations or avoid any other
28 provisions of this Article applicable to the insurer. As used
29 in this subsection, the total investment of the insurer shall
30 include:
31 (1) Direct investment by the insurer in an asset; and
32 (2) The insurer's proportionate share of an investment
33 in an asset by an investment subsidiary of the insurer, which
34 shall be calculated by multiplying the amount of the
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1 subsidiary's investment by the percentage of the insurer's
2 ownership interest in the subsidiary.
3 WW. "Investment strategy" means the techniques and
4 methods used by an insurer to meet its investment objectives,
5 such as active bond portfolio management, passive bond
6 portfolio management, interest rate anticipation, growth
7 investing and value investing.
8 XX. "Letter of credit" means a clean, irrevocable and
9 unconditional letter of credit issued or confirmed by, and
10 payable and presentable at, a financial institution on the
11 list of financial institutions meeting the standards for
12 issuing letters of credit under the Purposes and Procedures
13 of the Securities Valuation Office or any successor
14 publication. To constitute acceptable collateral for the
15 purposes of Sections 126.16 and 126.29, a letter of credit
16 must have an expiration date beyond the term of the subject
17 transaction.
18 YY. "Limited liability company" means a business
19 organization, excluding partnerships and ordinary business
20 corporations, organized or operating under the laws of the
21 United States or any state thereof that limits the personal
22 liability of investors to the equity investment of the
23 investor in the business entity.
24 ZZ. "Lower grade investment" means a rated credit
25 instrument rated 4, 5, 6, P4, P5, P6, PSF4, PSF5, or PSF6 by
26 the SVO.
27 AAA. "Market value" means:
28 (1) As to cash and letters of credit, the amounts
29 thereof; and
30 (2) As to a security as of any date, the price for the
31 security on that date obtained from a generally recognized
32 source or the most recent quotation from such a source or, to
33 the extent no generally recognized source exists, the price
34 for the security as determined in good faith by the insurer,
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1 plus accrued but unpaid income thereon to the extent not
2 included in the price as of that date.
3 BBB. "Medium grade investment" means a rated credit
4 instrument rated 3, P3, or PSF 3 by the SVO.
5 CCC. "Money market mutual fund" means a mutual fund that
6 meets the conditions of 17 Code of Federal Regulations Par.
7 270.2a-7, under the Investment Company Act of 1940 (15 U.S.C.
8 80a-1 et seq.), as amended or renumbered.
9 DDD. "Mortgage loan" means an obligation secured by a
10 mortgage, deed of trust, trust deed or other consensual lien
11 on real estate.
12 EEE. "Multilateral development bank" means an
13 international development organization of which the United
14 States is a member.
15 FFF. "Mutual fund" means an investment company or, in
16 the case of an investment company that is organized as a
17 series company, an investment company series, that, in either
18 case, is registered with the United States Securities and
19 Exchange Commission under the Investment Company Act of 1940
20 (15 U.S.C. 80a-1 et seq.), as amended.
21 GGG. "NAIC" means the National Association of Insurance
22 Commissioners.
23 HHH. "Obligation" means a bond, note, debenture, trust
24 certificate including an equipment trust certificate,
25 production payment, negotiable bank certificate of deposit,
26 bankers' acceptance, credit tenant loan, loan secured by
27 financing net leases and other evidence of indebtedness for
28 the payment of money (or participations, certificates or
29 other evidences of an interest in any of the foregoing),
30 whether constituting a general obligation of the issuer or
31 payable only out of certain revenues or certain funds pledged
32 or otherwise dedicated for payment.
33 III. "Option" means an agreement giving the buyer the
34 right to buy or receive (a "call option"), sell or deliver (a
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1 "put option"), enter into, extend or terminate or effect a
2 cash settlement based on the actual or expected price, level,
3 performance or value of one or more underlying interests and
4 includes an insurance futures option.
5 JJJ. "Person" means an individual, a business entity, a
6 multilateral development bank or a government or quasi
7 governmental body, such as a political subdivision or a
8 government sponsored enterprise.
9 KKK. "Potential exposure" means the amount determined in
10 accordance with the NAIC Annual Statement Instructions.
11 LLL. "Preferred stock" means preferred, preference or
12 guaranteed stock of a business entity authorized to issue the
13 stock, that has a preference in liquidation over the common
14 stock of the business entity.
15 MMM. "Qualified bank" means:
16 (1) A national bank, state bank or trust company that at
17 all times is no less than adequately capitalized as
18 determined by standards adopted by United States banking
19 regulators and that either is regulated by state banking laws
20 or is a member of the Federal Reserve System; or
21 (2) A bank or trust company incorporated or organized
22 under the laws of a country other than the United States that
23 is regulated as a bank or trust company by that country's
24 government or an agency thereof and that at all times is no
25 less than adequately capitalized as determined by the
26 standards adopted by international banking authorities.
27 NNN. "Qualified business entity" means a business entity
28 that is:
29 (1) An issuer of obligations or preferred stock that are
30 rated 1 or 2 by the SVO or an issuer of obligations,
31 preferred stock or derivative instruments that are rated the
32 equivalent of 1 or 2 by the SVO or by a nationally recognized
33 statistical rating organization recognized by the SVO; or
34 (2) A primary dealer in United States government
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1 securities, recognized by the Federal Reserve Bank of New
2 York.
3 OOO. "Qualified clearinghouse" means a clearinghouse
4 for, and subject to the rules of, a qualified exchange or a
5 qualified foreign exchange, which provides clearing services,
6 including acting as a counterparty to each of the parties to
7 a transaction such that the parties no longer have credit
8 risk as to each other.
9 PPP. "Qualified exchange" means:
10 (1) A securities exchange registered as a national
11 securities exchange, or a securities market regulated under
12 the Securities Exchange Act of 1934 (15 U.S.C. 78 et seq.),
13 as amended;
14 (2) A board of trade or commodities exchange designated
15 as a contract market by the Commodity Futures Trading
16 Commission or any successor thereof;
17 (3) Private Offerings, Resales and Trading through
18 Automated Linkages (PORTAL);
19 (4) A designated offshore securities market as defined
20 in Securities Exchange Commission Regulation S, 17 C.F.R.
21 Part 230, as amended; or
22 (5) A qualified foreign exchange.
23 QQQ. "Qualified foreign exchange" means a foreign
24 exchange, board of trade or contract market located outside
25 the United States, its territories or possessions:
26 (1) That has received regulatory comparability relief
27 under Commodity Futures Trading Commission (CFTC) Rule 30.10
28 (as set forth in Appendix C to Part 30 of the CFTC's
29 Regulations, 17 C.F.R. Part 30);
30 (2) That is, or its members are, subject to the
31 jurisdiction of a foreign futures authority that has received
32 regulatory comparability relief under CFTC Rule 30.10 (as set
33 forth in Appendix C to Part 30 of the CFTC's Regulations, 17
34 C.F.R. Part 30) as to futures transactions in the
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1 jurisdiction where the exchange, board of trade or contract
2 market is located; or
3 (3) Upon which foreign stock index futures contracts are
4 listed that are the subject of no-action relief issued by the
5 CFTC's Office of General Counsel, provided that an exchange,
6 board of trade or contract market that qualifies as a
7 "qualified foreign exchange" only under this subsection shall
8 only be a "qualified foreign exchange" as to foreign stock
9 index futures contracts that are the subject of no-action
10 relief.
11 RRR. (1) "Rated credit instrument" means an obligation
12 or other instrument which gives its holder a contractual
13 right to receive cash or another rated credit instrument from
14 another entity, if the instrument:
15 (a) Is rated or required to be rated by the SVO;
16 (b) In the case of an instrument with a maturity of 397
17 days or less, is issued, guaranteed, or insured by an entity
18 that is rated by, or another instrument of such entity is
19 rated by, the SVO or by a nationally recognized statistical
20 rating organization recognized by the SVO;
21 (c) In the case of an instrument with a maturity of 90
22 days or less, the instrument has been issued, assumed,
23 accepted, guaranteed, or insured by a qualified bank;
24 (d) Is a share of a class one bond mutual fund; or
25 (e) Is a share of a money market mutual fund.
26 (2) However, "rated credit instrument" does not mean:
27 (a) An instrument that is mandatorily, or at the option
28 of the issuer, convertible to an equity interest; or
29 (b) A security that has a par value and whose terms
30 provide that the issuer's net obligation to repay all or part
31 of the security's par value is determined by reference to the
32 performance of an equity, a commodity, a foreign currency or
33 an index of equities, commodities, foreign currencies or
34 combinations thereof.
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1 SSS. "Real estate" means:
2 (1) (a) Real property;
3 (b) Interests in real property, such as leaseholds,
4 minerals and oil and gas that have not been separated from
5 the underlying fee interest;
6 (c) Improvements and fixtures located on or in real
7 property; and
8 (d) The seller's equity in a contract providing for a
9 deed of real estate.
10 (2) As to a mortgage on a leasehold estate, real estate
11 shall include the leasehold estate only if it has an
12 unexpired term (including renewal options exercisable at the
13 option of the lessee) extending beyond the scheduled maturity
14 date of the obligation that is secured by a mortgage on the
15 leasehold estate by a period equal to at least 20% of the
16 original term of the obligation or 10 years, whichever is
17 greater.
18 TTT. "Replication transaction" means a derivative
19 transaction that is intended to replicate the performance of
20 one or more assets that an insurer is authorized to acquire
21 under this Article. A derivative transaction that is entered
22 into as a hedging transaction shall not be considered a
23 replication transaction.
24 UUU. "Repurchase transaction" means a transaction in
25 which an insurer purchases securities from a business entity
26 that is obligated to repurchase the purchased securities or
27 equivalent securities from the insurer at a specified price,
28 either within a specified period of time or upon demand.
29 VVV. "Required liabilities" means total liabilities
30 required to be reported on the statutory financial statement
31 of the insurer most recently required to be filed with the
32 Director.
33 WWW. "Residential mortgage loan" means a loan primarily
34 secured by a mortgage on real estate improved with a one to
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1 four family residence.
2 XXX. "Reverse repurchase transaction" means a
3 transaction in which an insurer sells securities to a
4 business entity and is obligated to repurchase the sold
5 securities or equivalent securities from the business entity
6 at a specified price, either within a specified period of
7 time or upon demand.
8 YYY. "Secured location" means the contiguous real estate
9 owned by one person.
10 ZZZ. "Securities lending transaction" means a
11 transaction in which securities are loaned by an insurer to a
12 business entity that is obligated to return the loaned
13 securities or equivalent securities to the insurer, either
14 within a specified period of time or upon demand.
15 AAAA. "Series company" means an investment company that
16 is organized as a series company, as defined in Rule 18f-2(a)
17 adopted under the Investment Company Act of 1940 (15 U.S.C.
18 80a-1 et seq.), as amended.
19 BBBB. "Sinking fund stock" means preferred stock that:
20 (1) Is subject to a mandatory sinking fund or similar
21 arrangement that will provide for the redemption (or open
22 market purchase) of the entire issue over a period not longer
23 than 40 years from the date of acquisition; and
24 (2) Provides for mandatory sinking fund installments (or
25 open market purchases) commencing not more than 10.5 years
26 from the date of issue, with the sinking fund installments
27 providing for the purchase or redemption, on a cumulative
28 basis commencing 10 years from the date of issue, of at least
29 2.5% per year of the original number of shares of that issue
30 of preferred stock.
31 CCCC. "Special rated credit instrument" means a rated
32 credit instrument that is:
33 (1) An instrument that is structured so that, if it is
34 held until retired by or on behalf of the issuer, its rate of
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1 return, based on its purchase cost and any cash flow stream
2 possible under the structure of the transaction, may become
3 negative due to reasons other than the credit risk associated
4 with the issuer of the instrument; however, a rated credit
5 instrument shall not be a special rated credit instrument
6 under this subsection if it is:
7 (a) A share in a class one bond mutual fund;
8 (b) An instrument, other than an asset-backed security,
9 with payments of par value fixed as to amount and timing, or
10 callable but in any event payable only at par or greater, and
11 interest or dividend cash flows that are based on either a
12 fixed or variable rate determined by reference to a specified
13 rate or index;
14 (c) An instrument, other than an asset-backed security,
15 that has a par value and is purchased at a price no greater
16 than 110% of par;
17 (d) An instrument, including an asset-backed security,
18 whose rate of return would become negative only as a result
19 of a prepayment due to casualty, condemnation or economic
20 obsolescence of collateral or change of law;
21 (e) An asset-backed security that relies on collateral
22 that meets the requirements of subparagraph (b) of this
23 paragraph, the par value of which collateral:
24 (i) Is not permitted to be paid sooner than one half of
25 the remaining term to maturity from the date of acquisition;
26 (ii) Is permitted to be paid prior to maturity only at a
27 premium sufficient to provide a yield to maturity for the
28 investment, considering the amount prepaid and reinvestment
29 rates at the time of early repayment, at least equal to the
30 yield to maturity of the initial investment; or
31 (iii) Is permitted to be paid prior to maturity at a
32 premium at least equal to the yield of a treasury issue of
33 comparable remaining life; or
34 (f) An asset-backed security that relies on cash flows
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1 from assets that are not prepayable at any time at par, but
2 is not otherwise governed by subparagraph (e) of this
3 paragraph, if the asset-backed security has a par value
4 reflecting principal payments to be received if held until
5 retired by or on behalf of the issuer and is purchased at a
6 price no greater than 105% of such par amount.
7 (2) An asset-backed security that:
8 (a) Relies on cash flows from assets that are prepayable
9 at par at any time;
10 (b) Does not make payments of par that are fixed as to
11 amount and timing; and
12 (c) Has a negative rate of return at the time of
13 acquisition if a prepayment threshold assumption is used with
14 such prepayment threshold assumption defined as either:
15 (i) Two (2) times the prepayment expectation reported by
16 a recognized, publicly available source as being the median
17 of expectations contributed by broker dealers or other
18 entities, except insurers, engaged in the business of selling
19 or evaluating such securities or assets. The prepayment
20 expectation used in this calculation shall be, at the
21 insurer's election, the prepayment expectation for
22 pass-through securities of the Federal National Mortgage
23 Association, the Federal Home Loan Mortgage Corporation, the
24 Government National Mortgage Association, or for other assets
25 of the same type as the assets that underlie the asset-
26 backed security, in either case with a gross weighted average
27 coupon comparable to the gross weighted average coupon of the
28 assets that underlie the asset-backed security; or
29 (ii) Another prepayment threshold assumption specified
30 by the Director by rule promulgated under Section 126.8.
31 (3) For purposes of subparagraph 2 of this subsection,
32 if the asset-backed security is purchased in combination with
33 one or more other asset-backed securities that are supported
34 by identical underlying collateral, the insurer may calculate
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1 the rate of return for these specific combined asset-backed
2 securities in combination. The insurer must maintain
3 documentation demonstrating that such securities were
4 acquired and are continuing to be held in combination.
5 DDDD. "State" means a state, territory or possession of
6 the United States of America, the District of Columbia or the
7 Commonwealth of Puerto Rico.
8 EEEE. "Substantially similar securities" means
9 securities that meet all criteria for substantially similar
10 specified in the NAIC Accounting Practices and Procedures
11 Manual, as amended, and in an amount that constitutes good
12 delivery form as determined from time to time by the PSA The
13 Bond Market Trade Association.
14 FFFF. "Subsidiary" means, as to any person, an affiliate
15 controlled by such person, directly or indirectly through one
16 or more intermediaries.
17 GGGG. "SVO" means the Securities Valuation Office of the
18 NAIC or any successor office established by the NAIC.
19 HHHH. "Swap" means an agreement to exchange or to net
20 payments at one or more times based on the actual or expected
21 price, level, performance or value of one or more underlying
22 interests.
23 IIII. "Underlying interest" means the assets,
24 liabilities, other interests or a combination thereof
25 underlying a derivative instrument, such as any one or more
26 securities, currencies, rates, indices, commodities or
27 derivative instruments.
28 JJJJ. "Unrestricted surplus" means the amount by which
29 total admitted assets exceed 125% of the insurer's required
30 liabilities.
31 KKKK. "Warrant" means an instrument that gives the
32 holder the right to purchase an underlying financial
33 instrument at a given price and time or at a series of prices
34 and times outlined in the warrant agreement. Warrants may be
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1 issued alone or in connection with the sale of other
2 securities, for example, as part of a merger or
3 recapitalization agreement, or to facilitate divestiture of
4 the securities of another business entity.
5 (215 ILCS 5/126.3 new)
6 Sec. 126.3. General investment qualifications.
7 A. Insurers may acquire, hold or invest in investments
8 or engage in investment practices as set forth in this
9 Article. Insurers may also acquire, hold or invest in
10 investments not conforming to the requirements of this
11 Article that are not otherwise prohibited by this Code.
12 Investments not conforming to this Article shall not be
13 admitted assets unless they are acquired under other
14 authority of this Code.
15 B. Subject to subsection C of this Section, an insurer
16 shall not acquire or hold an investment as an admitted asset
17 unless at the time of acquisition it is:
18 (1) Eligible for the payment or accrual of interest or
19 discount (whether in cash or other forms of income or
20 securities), eligible to receive dividends or other
21 distributions or is otherwise income producing; or
22 (2) Acquired under Section 126.15B, 126.15C, 126.16,
23 126.18, 126.20, 126.28C, 126.29, 126.31, or 126.32 or under
24 the authority of Sections of the Code other than this
25 Article.
26 C. An insurer may acquire or hold as admitted assets
27 investments that do not otherwise qualify as provided in this
28 Article if the insurer has not acquired them for the purpose
29 of circumventing any limitations contained in this Article,
30 if the insurer acquires the investments in the following
31 circumstances and the insurer complies with the provisions of
32 Sections 126.5 and 126.7 as to the investments:
33 (1) As payment on account of existing indebtedness or in
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1 connection with the refinancing, restructuring or workout of
2 existing indebtedness, if taken to protect the insurer's
3 interest in that investment;
4 (2) As realization on collateral for indebtedness;
5 (3) In connection with an otherwise qualified investment
6 or investment practice, as interest on or a dividend or other
7 distribution related to the investment or investment practice
8 or in connection with the refinancing of the investment, in
9 each case for no additional or only nominal consideration;
10 (4) Under a lawful and bona fide agreement of
11 recapitalization or voluntary or involuntary reorganization
12 in connection with an investment held by the insurer; or
13 (5) Under a bulk reinsurance, merger or consolidation
14 transaction approved by the Director if the assets constitute
15 admissible investments for the ceding, merged or consolidated
16 companies.
17 D. An investment or portion of an investment acquired by
18 an insurer under subsection C of this Section shall become a
19 nonadmitted asset 3 years (or 5 years in the case of mortgage
20 loans and real estate) from the date of its acquisition,
21 unless within that period the investment has become a
22 qualified investment under a Section of this Article other
23 than subsection C of this Section, but an investment acquired
24 under an agreement of bulk reinsurance, merger or
25 consolidation may be qualified for a longer period if so
26 provided in the plan for reinsurance, merger or consolidation
27 as approved by the Director. Upon application by the insurer
28 and a showing that the nonadmission of an asset held under
29 subsection C of this Section would injure the interests of
30 the insurer, the Director may extend the period for
31 admissibility for an additional reasonable period of time.
32 E. Except as provided in subsections F and H of this
33 Section, an investment shall qualify under this Article if,
34 on the date the insurer committed to acquire the investment
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1 or on the date of its acquisition, it would have qualified
2 under this Article. For the purposes of determining
3 limitations contained in this Article, an insurer shall give
4 appropriate recognition to any commitments to acquire
5 investments.
6 F. (1) An investment held as an admitted asset by an
7 insurer on the effective date of this Article which qualified
8 under Article VIII shall remain qualified as an admitted
9 asset under this Article.
10 (2) Each specific transaction constituting an investment
11 practice of the type described in this Article that was
12 lawfully entered into by an insurer and was in effect on the
13 effective date of this Article shall continue to be permitted
14 under this Article until its expiration or termination under
15 its terms.
16 G. Unless otherwise specified, an investment limitation
17 computed on the basis of an insurer's admitted assets or
18 capital and surplus shall relate to the amount required to be
19 shown on the statutory balance sheet of the insurer most
20 recently required to be filed (annual or last quarter) with
21 the Director. Solely for purposes of computing any limitation
22 under this Article based upon admitted assets, the insurer
23 shall deduct from the amount of its admitted assets the
24 amount of the liability recorded on such statutory balance
25 sheet for:
26 (1) The return of acceptable collateral received in a
27 reverse repurchase transaction or a securities lending
28 transaction;
29 (2) Cash received in a dollar roll transaction; and
30 (3) The amount reported as borrowed money in such
31 statutory balance sheet to the extent not included in
32 paragraphs (1) and (2) of this subsection.
33 H. An investment qualified, in whole or in part, for
34 acquisition or holding as an admitted asset may be qualified
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1 or requalified at the time of acquisition or a later date, in
2 whole or in part, under any other Section, if the relevant
3 conditions contained in the other Section are satisfied at
4 the time of qualification or requalification.
5 I. An insurer shall maintain documentation demonstrating
6 that investments were acquired in accordance with this
7 Article, and specifying the Section of this Article under
8 which they were acquired.
9 J. An insurer shall not enter into an agreement to
10 purchase securities in advance of their issuance for resale
11 to the public as part of a distribution of the securities by
12 the issuer or otherwise guarantee the distribution, except
13 that an insurer may acquire privately placed securities with
14 registration rights.
15 K. Notwithstanding the provisions of this Article, the
16 Director, for good cause, may order an insurer to nonadmit,
17 limit, dispose of, withdraw from or discontinue an investment
18 or investment practice in accordance with Article XXIV. The
19 authority of the Director under this subsection is in
20 addition to any other authority of the Director.
21 (215 ILCS 5/126.4 new)
22 Sec. 126.4. Authorization of investments by the board of
23 directors.
24 A. Within 3 months after the effective date of this
25 amendatory Act of 1997, an insurer's board of directors shall
26 adopt a written plan for acquiring and holding investments
27 and for engaging in investment practices that specifies
28 guidelines as to the quality, maturity and diversification of
29 investments and other specifications including investment
30 strategies intended to assure that the investments and
31 investment practices are appropriate for the business
32 conducted by the insurer, its liquidity needs and its capital
33 and surplus. The board shall review and assess the insurer's
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1 technical investment and administrative capabilities and
2 expertise before adopting a written plan concerning an
3 investment strategy or investment practice.
4 B. Investments acquired and held under this Article
5 shall be acquired and held under the supervision and
6 direction of the board of directors of the insurer. The board
7 of directors shall evidence by formal resolution, at least
8 annually, that it has determined whether all investments have
9 been made in accordance with delegations, standards,
10 limitations and investment objectives prescribed by the board
11 or a committee of the board charged with the responsibility
12 to direct its investments.
13 C. On no less than a quarterly basis, and more often if
14 deemed appropriate, an insurer's board of directors or
15 committee of the board of directors shall:
16 (1) Receive and review a summary report on the insurer's
17 investment portfolio, its investment activities and
18 investment practices engaged in under delegated authority, in
19 order to determine whether the investment activity of the
20 insurer is consistent with its written plan; and
21 (2) Review and revise, as appropriate, the written plan.
22 D. In discharging its duties under this Section, the
23 board of directors shall require that records of any
24 authorizations or approvals, other documentation as the board
25 may require and reports of any action taken under authority
26 delegated under the plan referred to in subsection A of this
27 Section shall be made available on a regular basis to the
28 board of directors.
29 E. In discharging their duties under this Section, the
30 directors of an insurer shall perform their duties in good
31 faith and with that degree of care that ordinarily prudent
32 individuals in like positions would use under similar
33 circumstances.
34 F. If an insurer does not have a board of directors, all
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1 references to the board of directors in this Article shall be
2 deemed to be references to the governing body of the insurer
3 having authority equivalent to that of a board of directors.
4 (215 ILCS 5/126.5 new)
5 Sec. 126.5. Prohibited investments. An insurer shall
6 not, directly or indirectly:
7 A. Invest in an obligation or security or make a
8 guarantee for the benefit of or in favor of an officer or
9 director of the insurer, except as provided in Section 126.6;
10 B. Invest in an obligation or security, make a guarantee
11 for the benefit of or in favor of, or make other investments
12 in a business entity of which 10% or more of the voting
13 securities or equity interests are owned directly or
14 indirectly by or for the benefit of one or more officers or
15 directors of the insurer, except pursuant to a transaction
16 entered into in compliance with Section 131.20a of this Code
17 or provided in Section 126.6;
18 C. Engage on its own behalf or through one or more
19 affiliates in a transaction or series of transactions
20 designed to evade the prohibitions of this Article;
21 D. (1) Invest in a partnership as a general partner,
22 except that an insurer may make an investment as a general
23 partner:
24 (a) If all other partners in the partnership are
25 subsidiaries of the insurer or other insurance company
26 affiliates of the insurer;
27 (b) For the purpose of:
28 (i) Meeting cash calls committed to prior to the
29 effective date of this Article;
30 (ii) Completing those specific projects or activities of
31 the partnership in which the insurer was a general partner as
32 of the effective date of this Article that had been
33 undertaken as of that date; or
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1 (iii) Making capital improvements to property owned by
2 the partnership on the effective date of this Article if the
3 insurer was a general partner as of that date; or
4 (c) In accordance with Section 126.3C;
5 (2) This subsection shall not prohibit a subsidiary or
6 other affiliate of the insurer from becoming a general
7 partner; or
8 E. Invest in or lend its funds upon the security of
9 shares of its own stock, except as authorized by other
10 provisions of this Code. However, no such shares shall be
11 admitted assets of the insurer.
12 (215 ILCS 5/126.6 new)
13 Sec. 126.6. Loans to officers and directors.
14 A. (1) Except as provided in Section 126.6B, an insurer
15 shall not directly or indirectly, unless it has notified the
16 Director in writing of its intention to enter into the
17 transaction at least 30 days prior thereto, or any shorter
18 period as the Director may permit, and the Director has not
19 disapproved it within that period:
20 (a) Make a loan to or other investment in an officer or
21 director of the insurer or a person in which the officer or
22 director has any direct or indirect financial interest;
23 (b) Make a guarantee for the benefit of or in favor of
24 an officer or director of the insurer or a person in which
25 the officer or director has any direct or indirect financial
26 interest; or
27 (c) Enter into an agreement for the purchase or sale of
28 property from or to an officer or director of the insurer or
29 a person in which the officer or director has any direct or
30 indirect financial interest.
31 (2) For purposes of this Section, an officer or director
32 shall not be deemed to have a financial interest by reason of
33 an interest that is held directly or indirectly through the
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1 ownership of equity interests representing less than 2% of
2 all outstanding equity interests issued by a person that is a
3 party to the transaction, or solely by reason of that
4 individual's position as a director or officer of a person
5 that is a party to the transaction.
6 (3) This subsection does not permit an investment that
7 is prohibited by Section 126.5.
8 (4) This subsection does not apply to a transaction
9 between an insurer and any of its subsidiaries or affiliates
10 that is entered into in compliance with Section 131.20a of
11 this Code, other than a transaction between an insurer and
12 its officer or director.
13 B. An insurer may make, without the prior written
14 approval of the Director:
15 (1) Policy loans in accordance with the terms of the
16 policy or contract and Section 126.19;
17 (2) Advances to officers or directors for expenses
18 reasonably expected to be incurred in the ordinary course of
19 the insurer's business or guarantees associated with credit
20 or charge cards issued or credit extended for the purpose of
21 financing these expenses;
22 (3) Loans secured by the principal residence of an
23 existing or new officer of the insurer made in connection
24 with the officer's relocation at the insurer's request, if
25 the loans comply with the requirements of Section 126.15 or
26 126.28 and the terms and conditions otherwise are the same as
27 those generally available from unaffiliated third parties;
28 (4) Secured loans to an existing or new officer of the
29 insurer made in connection with the officer's relocation at
30 the insurer's request, if the loans:
31 (a) Do not have a term exceeding 2 years;
32 (b) Are required to finance mortgage loans outstanding
33 at the same time on the prior and new residences of the
34 officer;
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1 (c) Do not exceed an amount equal to the equity of the
2 officer in the prior residence; and
3 (d) Are required to be fully repaid upon the earlier of
4 the end of the 2 year period or the sale of the prior
5 residence; and
6 (5) Loans and advances to officers or directors made in
7 compliance with state or federal law specifically related to
8 the loans and advances by a regulated non-insurance
9 subsidiary or affiliate of the insurer in the ordinary course
10 of business and on terms no more favorable than available to
11 other customers of the entity.
12 (215 ILCS 5/126.7 new)
13 Sec. 126.7. Valuation of investments. For the purposes
14 of this Article, the value or amount of an investment
15 acquired or held, or an investment practice engaged in, under
16 this Article, unless otherwise specified in this Code, shall
17 be the value at which assets of an insurer are required to be
18 reported for statutory accounting purposes as determined in
19 accordance with procedures prescribed in published accounting
20 and valuation standards of the NAIC, including the Purposes
21 and Procedures of the Securities Valuation Office, the
22 Valuation of Securities manual, the Accounting Practices and
23 Procedures manual, the Annual Statement Instructions or any
24 successor valuation procedures officially adopted by the
25 NAIC.
26 (215 ILCS 5/126.8 new)
27 Sec. 126.8. Rules. The Director may, in accordance with
28 Section 401 of this Code, promulgate rules implementing the
29 provisions of this Article.
30 (215 ILCS 5/Art. VIII, Part 2 heading new)
31 2. LIFE AND HEALTH INSURERS
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1 (215 ILCS 5/126.9 new)
2 Sec. 126.9. Applicability. This Part shall apply to the
3 investments and investment practices of companies authorized
4 to transact business under Class 1 of Section 4 of this Code
5 and other companies whose investments and investment
6 practices are regulated as life insurers under this Code,
7 subject to the provisions of Section 126.1B.
8 (215 ILCS 5/126.10 new)
9 Sec. 126.10. General 3% diversification, medium and
10 lower grade investments, and Canadian investments.
11 A. General 3% diversification.
12 (1) Except as otherwise specified in this Article, an
13 insurer shall not acquire, directly or indirectly through an
14 investment subsidiary, an investment under this Article if,
15 as a result of and after giving effect to the investment, the
16 insurer would hold more than 3% of its admitted assets in
17 investments of all kinds issued, assumed, accepted,
18 guaranteed, or insured by a single person.
19 (2) This 3% limitation shall not apply to the aggregate
20 amounts insured by a single financial guaranty insurer with
21 the highest generic rating issued by a nationally recognized
22 statistical rating organization.
23 (3) Asset-backed securities shall not be subject to the
24 limitations of paragraph (1) of this subsection, however,
25 except as permitted by subsection A(4) of this Section, an
26 insurer shall not acquire an asset-backed security if, as a
27 result of and after giving effect to the investment, the
28 aggregate amount of asset-backed securities secured by or
29 evidencing an interest in a single asset or single pool of
30 assets held by a trust or other business entity, then held by
31 the insurer would exceed 3% of its admitted assets.
32 (4) A company's investments in mortgage related
33 securities, as defined by the Secondary Mortgage Market
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1 Enhancement Act of 1984 (United States Public Law 98-440) [12
2 U.S.C. 24, 1451, 1454 et seq.], that are backed by any single
3 pool of mortgages and made pursuant to the authority of that
4 Act, shall not exceed 5% of its admitted assets.
5 B. Medium and lower grade investments.
6 (1) An insurer shall not acquire, directly or indirectly
7 through an investment subsidiary, an investment under
8 Sections 126.11, 126.14, and 126.17 or counterparty exposure
9 under Section 126.18D if, as a result of and after giving
10 effect to the investment:
11 (a) The aggregate amount of medium and lower grade
12 investments then held by the insurer would exceed 20% of its
13 admitted assets;
14 (b) The aggregate amount of lower grade investments then
15 held by the insurer would exceed 10% of its admitted assets;
16 (c) The aggregate amount of investments rated 5 or 6 by
17 the SVO then held by the insurer would exceed 3% of its
18 admitted assets;
19 (d) The aggregate amount of investments rated 6 by the
20 SVO then held by the insurer would exceed 1% of its admitted
21 assets; or
22 (e) The aggregate amount of medium and lower grade
23 investments then held by the insurer that receive as cash
24 income less than the equivalent yield for Treasury issues
25 with a comparative average life, would exceed 1% of its
26 admitted assets.
27 (2) An insurer shall not acquire, directly or indirectly
28 through an investment subsidiary, an investment under
29 Sections 126.11, 126.14, and 126.17 or counterparty exposure
30 under Section 126.18D if, as a result of and after giving
31 effect to the investment:
32 (a) The aggregate amount of medium and lower grade
33 investments issued, assumed, accepted, guaranteed, or insured
34 by any one person or, as to asset-backed securities secured
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1 by or evidencing an interest in a single asset or pool of
2 assets, then held by the insurer would exceed 1% of its
3 admitted assets; or
4 (b) The aggregate amount of lower grade investments
5 issued, assumed, accepted, guaranteed, or insured by any one
6 person or, as to asset- backed securities secured by or
7 evidencing an interest in a single asset or pool of assets,
8 then held by the insurer would exceed 0.5% of its admitted
9 assets.
10 (3) If an insurer attains or exceeds the limit of any
11 one rating category referred to in this subsection, the
12 insurer shall not thereby be precluded from acquiring
13 investments in other rating categories subject to the
14 specific and multi-category limits applicable to those
15 investments.
16 C. Canadian investments.
17 (1) An insurer shall not acquire, directly or indirectly
18 through an investment subsidiary, a Canadian investment
19 authorized by this Article, if as a result of and after
20 giving effect to the investment, the aggregate amount of
21 these investments then held by the insurer would exceed 40%
22 of its admitted assets, or if the aggregate amount of
23 Canadian investments not acquired under Section 126.11B then
24 held by the insurer would exceed 25% of its admitted assets.
25 (2) However, as to an insurer that is authorized to do
26 business in Canada or that has outstanding insurance, annuity
27 or reinsurance contracts on lives or risks resident or
28 located in Canada and denominated in Canadian currency, the
29 limitations of paragraph (1) of this subsection shall be
30 increased by the greater of:
31 (a) The amount the insurer is required by Canadian law
32 to invest in Canada or to be denominated in Canadian
33 currency; or
34 (b) 115% of the amount of its reserves and other
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1 obligations under contracts on lives or risks resident or
2 located in Canada.
3 (215 ILCS 5/126.11 new)
4 Sec. 126.11. Rated credit instruments. Subject to the
5 limitations of subsection F of this Section, an insurer may
6 acquire rated credit instruments:
7 A. Subject to the limitations of Section 126.10B, but
8 not to the limitations of Section 126.10A, except for that of
9 subsection (4) of Section 126.10A, an insurer may acquire
10 rated credit instruments issued, assumed, guaranteed, or
11 insured by:
12 (1) The United States; or
13 (2) A government sponsored enterprise of the United
14 States, if the instruments of the government sponsored
15 enterprise are assumed, guaranteed, or insured by the United
16 States or are otherwise backed or supported by the full faith
17 and credit of the United States.
18 B. (1) Subject to the limitations of Section 126.10B,
19 but not to the limitations of Section 126.10A, an insurer may
20 acquire rated credit instruments issued, assumed, guaranteed,
21 or insured by:
22 (a) Canada; or
23 (b) A government sponsored enterprise of Canada, if the
24 instruments of the government sponsored enterprise are
25 assumed, guaranteed, or insured by Canada or are otherwise
26 backed or supported by the full faith and credit of Canada;
27 (2) However, an insurer shall not acquire an instrument
28 under this subsection if, as a result of and after giving
29 effect to the investment, the aggregate amount of investments
30 then held by the insurer under this subsection would exceed
31 40% of its admitted assets.
32 C. (1) Subject to the limitations of Section 126.10B,
33 but not to the limitations of Section 126.10A, an insurer may
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1 acquire rated credit instruments, excluding asset-backed
2 securities:
3 (a) Issued by a government money market mutual fund, a
4 class one money market mutual fund or a class one bond mutual
5 fund;
6 (b) Issued, assumed, guaranteed, or insured by a
7 government sponsored enterprise of the United States other
8 than those eligible under subsection A of this Section;
9 (c) Issued, assumed, guaranteed, or insured by a state,
10 if the instruments are general obligations of the state; or
11 (d) Issued by a multilateral development bank;
12 (2) However, an insurer shall not acquire an instrument
13 of any one fund, any one enterprise or entity or any one
14 state under this subsection if, as a result of and after
15 giving effect to the investment, the aggregate amount of
16 investments then held by the insurer in any one fund,
17 enterprise, entity, or state under this subsection would
18 exceed 10% of its admitted assets.
19 D. Subject to the limitations of Section 126.10, an
20 insurer may acquire preferred stocks that are not foreign
21 investments and that meet the requirements of rated credit
22 instruments if, as a result of and after giving effect to the
23 investment:
24 (1) The aggregate amount of preferred stocks then held
25 by the insurer under this subsection does not exceed 33 1/3%
26 of its admitted assets; and
27 (2) The aggregate amount of preferred stocks then held
28 by the insurer under this subsection which are not sinking
29 fund stocks or rated P1 or P2 by the SVO does not exceed 15%
30 of its admitted assets.
31 E. Subject to the limitations of Section 126.10, in
32 addition to those investments eligible under subsections A,
33 B, C and D of this Section, an insurer may acquire rated
34 credit instruments that are not foreign investments.
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1 F. An insurer shall not acquire special rated credit
2 instruments under this Section if, as a result of and after
3 giving effect to the investment, the aggregate amount of
4 special rated credit instruments then held by the insurer
5 would exceed 5% of its admitted assets. The Director may, by
6 rule, identify certain special rated credit instruments that
7 will be exempt from the limitation imposed by this
8 subsection.
9 (215 ILCS 5/126.12 new)
10 Sec. 126.12. Insurer investment pools.
11 A. An insurer may acquire investments in investment
12 pools that:
13 (1) Invest only in:
14 (a) Obligations that are rated 1 or 2 by the SVO or have
15 an equivalent of an SVO 1 or 2 rating (or, in the absence of
16 a 1 or 2 rating or equivalent rating, the issuer has
17 outstanding obligations with an SVO 1 or 2 or equivalent
18 rating) by a nationally recognized statistical rating
19 organization recognized by the SVO and have:
20 (i) A remaining maturity of 397 days or less or a put
21 that entitles the holder to receive the principal amount of
22 the obligation which put may be exercised through maturity at
23 specified intervals not exceeding 397 days; or
24 (ii) A remaining maturity of 3 years or less and a
25 floating interest rate that resets no less frequently than
26 quarterly on the basis of a current short-term index (federal
27 funds, prime rate, treasury bills, London InterBank Offered
28 Rate (LIBOR) or commercial paper) and is subject to no
29 maximum limit, if the obligations do not have an interest
30 rate that varies inversely to market interest rate changes;
31 (b) Government money market mutual funds or class one
32 money market mutual funds; or
33 (c) Securities lending, repurchase, and reverse
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1 repurchase transactions that meet all the requirements of
2 Section 126.16, except the quantitative limitations of
3 Section 126.16D; or
4 (2) Invest only in investments which an insurer may
5 acquire under this Article, if the insurer's proportionate
6 interest in the amount invested in these investments when
7 combined with amount of such investments made directly or
8 indirectly through an investment subsidiary or other insurer
9 investment pool permitted under this subsection does not
10 exceed the applicable limits of this Article for such
11 investments.
12 B. For an investment in an investment pool to be
13 qualified under this Article, the investment pool shall not:
14 (1) Acquire securities issued, assumed, guaranteed or
15 insured by the insurer or an affiliate of the insurer;
16 (2) Borrow or incur any indebtedness for borrowed money,
17 except for securities lending and reverse repurchase
18 transactions that meet the requirements of Section 126.16
19 except the quantitative limitations of Section 126.16D; or
20 (3) Acquire an investment if, as a result of such
21 transaction, the aggregate value of securities then loaned or
22 sold to, purchased from or invested in any one business
23 entity under this Section would exceed 10% of the total
24 assets of the investment pool.
25 C. The limitations of Section 126.10A shall not apply to
26 an insurer's investment in an investment pool, however an
27 insurer shall not acquire an investment in an investment pool
28 under this Section if, as a result of and after giving effect
29 to the investment, the aggregate amount of investments then
30 held by the insurer under this Section:
31 (1) In all investment pools investing in investments
32 permitted under subsection A(2) of this Section would exceed
33 25% of its admitted assets; or
34 (2) In all investment pools would exceed 35% of its
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1 admitted assets.
2 D. For an investment in an investment pool to be
3 qualified under this Article, the manager of the investment
4 pool shall:
5 (1) Be organized under the laws of the United States or
6 a state and designated as the pool manager in a pooling
7 agreement;
8 (2) Be the insurer, an affiliated insurer or a business
9 entity affiliated with the insurer, a qualified bank, a
10 business entity registered under the Investment Advisors Act
11 of 1940 (15 U.S.C. 80a-1 et seq.), as amended or, in the
12 case of a reciprocal insurer or interinsurance exchange, its
13 attorney-in-fact, or in the case of a United States branch of
14 an alien insurer, its United States manager or an affiliate
15 or subsidiary of its United States manager;
16 (3) Be responsible for the compilation and maintenance
17 of detailed accounting records setting forth:
18 (a) The cash receipts and disbursements reflecting each
19 participant's proportionate investment in the investment
20 pool;
21 (b) A complete description of all underlying assets of
22 the investment pool (including amount, interest rate,
23 maturity date (if any) and other appropriate designations);
24 and
25 (c) Other records which, on a daily basis, allow third
26 parties to verify each participant's investment in the
27 investment pool; and
28 (4) Maintain the assets of the investment pool in one or
29 more accounts, in the name of or on behalf of the investment
30 pool, under a custody agreement with a qualified bank. The
31 custody agreement shall:
32 (a) State and recognize the claims and rights of each
33 participant;
34 (b) Acknowledge that the underlying assets of the
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1 investment pool are held solely for the benefit of each
2 participant in proportion to the aggregate amount of its
3 investments in the investment pool; and
4 (c) Contain an agreement that the underlying assets of
5 the investment pool shall not be commingled with the general
6 assets of the custodian qualified bank or any other person.
7 E. The pooling agreement for each investment pool shall
8 be in writing and shall provide that:
9 (1) An insurer and its affiliated insurers or, in the
10 case of an investment pool investing solely in investments
11 permitted under subsection A(1) of this Section, the insurer
12 and its subsidiaries, affiliates or any pension or profit
13 sharing plan of the insurer, its subsidiaries and affiliates
14 or, in the case of a United States branch of an alien
15 insurer, affiliates or subsidiaries of its United States
16 manager, shall, at all times, hold 100% of the interests in
17 the investment pool;
18 (2) The underlying assets of the investment pool shall
19 not be commingled with the general assets of the pool manager
20 or any other person;
21 (3) In proportion to the aggregate amount of each pool
22 participant's interest in the investment pool:
23 (a) Each participant owns an undivided interest in the
24 underlying assets of the investment pool; and
25 (b) The underlying assets of the investment pool are
26 held solely for the benefit of each participant;
27 (4) A participant, or in the event of the participant's
28 insolvency, bankruptcy or receivership, its trustee, receiver
29 or other successor-in-interest, may withdraw all or any
30 portion of its investment from the investment pool under the
31 terms of the pooling agreement;
32 (5) Withdrawals may be made on demand without penalty or
33 other assessment on any business day, but settlement of funds
34 shall occur within a reasonable and customary period
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1 thereafter not to exceed 10 business days. Distributions
2 under this paragraph shall be calculated in each case net of
3 all then applicable fees and expenses of the investment pool.
4 The pooling agreement shall provide that the pool manager
5 shall distribute to a participant, at the discretion of the
6 pool manager:
7 (a) In cash, the then fair market value of the
8 participant's pro rata share of each underlying asset of the
9 investment pool;
10 (b) In kind, a pro rata share of each underlying asset;
11 or
12 (c) In a combination of cash and in kind distributions,
13 a pro rata share in each underlying asset; and
14 (6) The pool manager shall make the records of the
15 investment pool available for inspection by the Director.
16 (7) Transactions between a domestic insurer and an
17 affiliated insurer investment pool shall not be subject to
18 the requirements of Section 131.20a of this Code.
19 (215 ILCS 5/126.13 new)
20 Sec. 126.13. Equity interests.
21 A. Subject to the limitations of Section 126.10, an
22 insurer may acquire directly or indirectly through an
23 investment subsidiary, equity interests in business entities
24 organized under the laws of any domestic jurisdiction.
25 B. An insurer shall not acquire directly or indirectly
26 through an investment subsidiary an investment under this
27 Section if, as a result of and after giving effect to the
28 investment, the aggregate amount of investments then held by
29 the insurer under this Section would exceed 20% of its
30 admitted assets. Except for mutual funds, the amount of
31 equity interests then held by the insurer that are not listed
32 on a qualified exchange would exceed 5% of its admitted
33 assets. An accident and health insurer shall not be subject
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1 to this Section but shall be subject to the same aggregate
2 limitation on equity interests as a property and casualty
3 insurer under Section 126.26 and also to the provisions of
4 Section 126.22 of this Article.
5 C. An insurer shall not acquire under this Section any
6 investments that the insurer may acquire under Section
7 126.15.
8 D. An insurer shall not short sell equity interests
9 unless the insurer covers the short sale by owning the equity
10 interest or an unrestricted right to the equity interest
11 exercisable within 6 months of the short sale.
12 (215 ILCS 5/126.14 new)
13 Sec. 126.14. Tangible personal property under lease.
14 A. (1) Subject to the limitations of Section 126.10, an
15 insurer may acquire tangible personal property or equity
16 interests therein located or used wholly or in part within a
17 domestic jurisdiction either directly or indirectly through
18 limited partnership interests and general partnership
19 interests not otherwise prohibited by Section 126.5D, joint
20 ventures, stock of an investment subsidiary or membership
21 interests in a limited liability company, trust certificates,
22 or other similar instruments.
23 (2) Investments acquired under paragraph (1) of this
24 subsection shall be eligible only if:
25 (a) The property is subject to a lease or other
26 agreement with a person whose rated credit instruments in the
27 amount of the purchase price of the personal property the
28 insurer could then acquire under Section 126.11; and
29 (b) The lease or other agreement provides the insurer
30 the right to receive rental, purchase or other fixed payments
31 for the use or purchase of the property, and the aggregate
32 value of the payments, together with the estimated residual
33 value of the property at the end of its useful life and the
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1 estimated tax benefits to the insurer resulting from
2 ownership of the property, shall be adequate to return the
3 cost of the insurer's investment in the property, plus a
4 return deemed adequate by the insurer.
5 B. The insurer shall compute the amount of each
6 investment under this Section on the basis of the out of
7 pocket purchase price and applicable related expenses paid by
8 the insurer for the investment, net of each borrowing made to
9 finance the purchase price and expenses, to the extent the
10 borrowing is without recourse to the insurer.
11 C. An insurer shall not acquire directly or indirectly
12 through an investment subsidiary an investment under this
13 Section if, as a result of and after giving effect to the
14 investment, the aggregate amount of all investments then held
15 by the insurer under this Section would exceed:
16 (1) 2% of its admitted assets ; or
17 (2) 0.5% of its admitted assets as to any single item of
18 tangible personal property.
19 D. For purposes of determining compliance with the
20 limitations of Section 126.10, investments acquired by an
21 insurer under this Section shall be aggregated with those
22 acquired under Section 126.11, and each lessee of the
23 property under a lease referred to in this Section shall be
24 deemed the issuer of an obligation in the amount of the
25 investment of the insurer in the property determined as
26 provided in subsection B of this Section.
27 E. Nothing in this Section is applicable to tangible
28 personal property lease arrangements between an insurer and
29 its subsidiaries and affiliates under a cost sharing
30 arrangement or agreement permitted under Article VIII 1/2.
31 (215 ILCS 5/126.15 new)
32 Sec. 126.15. Mortgage loans and real estate.
33 A. Mortgage loans.
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1 (l) Subject to the limitations of Section 126.10, an
2 insurer may acquire, either directly or indirectly through
3 limited partnership interests and general partnership
4 interests not otherwise prohibited by Section 126.5D, joint
5 ventures, stock of an investment subsidiary or membership
6 interests in a limited liability company, trust certificates,
7 or other similar instruments, obligations secured by
8 mortgages on real estate situated within a domestic
9 jurisdiction, but a mortgage loan which is secured by other
10 than a first lien shall not be acquired under this subsection
11 (1) unless the insurer is the holder of the first lien. The
12 obligations held by the insurer and any obligations with an
13 equal lien priority, shall not, at the time of acquisition of
14 the obligation, exceed:
15 (a) 90% of the fair market value of the real estate, if
16 the mortgage loan is secured by a purchase money mortgage or
17 like security received by the insurer upon disposition of the
18 real estate;
19 (b) 80% of the fair market value of the real estate, if
20 the mortgage loan requires immediate scheduled payment in
21 periodic installments of principal and interest, has an
22 amortization period of 30 years or less and periodic payments
23 made no less frequently than annually. Each periodic payment
24 shall be sufficient to assure that at all times the
25 outstanding principal balance of the mortgage loan shall be
26 not greater than the outstanding principal balance that would
27 be outstanding under a mortgage loan with the same original
28 principal balance, with the same interest rate and requiring
29 equal payments of principal and interest with the same
30 frequency over the same amortization period. Mortgage loans
31 permitted under this subsection are permitted notwithstanding
32 the fact that they provide for a payment of the principal
33 balance prior to the end of the period of amortization of the
34 loan. For residential mortgage loans, the 80% limitation may
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1 be increased to 97% if acceptable private mortgage insurance
2 has been obtained; or
3 (c) 75% of the fair market value of the real estate for
4 mortgage loans that do not meet the requirements of
5 subparagraph (a) or (b) of this paragraph.
6 (2) For purposes of paragraph (1) of this subsection,
7 the amount of an obligation required to be included in the
8 calculation of the loan-to-value ratio may be reduced to the
9 extent the obligation is insured by the Federal Housing
10 Administration or guaranteed by the Administrator of Veterans
11 Affairs, or their successors.
12 (3) Subject to the limitations of Section 126.10, an
13 insurer may acquire, either directly or indirectly through
14 limited partnership interests and general partnership
15 interests not otherwise prohibited by Section 126.5D, joint
16 ventures, stock of an investment subsidiary or membership
17 interests in a limited liability company, trust certificates,
18 or other similar instruments, obligations secured by a second
19 mortgage on real estate situated within a domestic
20 jurisdiction, other than as authorized in subsection (1) of
21 this Section 126.15. The obligation held by the insurer
22 shall be the sole second lien priority obligation and shall
23 not, at the time of acquisition of the obligation, exceed 70%
24 of the amount by which the fair market value of the real
25 estate exceeds the amount outstanding under the first
26 mortgage.
27 (4) A mortgage loan that is held by an insurer under
28 Section 126.3F or acquired under this Section and is
29 restructured in a manner that meets the requirements of a
30 restructured mortgage loan in accordance with the NAIC
31 Accounting Practices and Procedures Manual or successor
32 publication shall continue to qualify as a mortgage loan
33 under this Article.
34 (5) Subject to the limitations of Section 126.10, credit
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1 lease transactions that do not qualify for investment under
2 Section 126.11 with the following characteristics shall be
3 exempt from the provisions of paragraph (1) of this
4 subsection:
5 (a) The loan amortizes over the initial fixed lease term
6 at least in an amount sufficient so that the loan balance at
7 the end of the lease term does not exceed the original
8 appraised value of the real estate;
9 (b) The lease payments cover or exceed the total debt
10 service over the life of the loan;
11 (c) A tenant or its affiliated entity, whose rated
12 credit instruments have a SVO 1 or 2 designation or a
13 comparable rating from a nationally recognized statistical
14 rating organization recognized by the SVO, has a full faith
15 and credit obligation to make the lease payments;
16 (d) The insurer holds or is the beneficial holder of a
17 first lien mortgage on the real estate;
18 (e) The expenses of the real estate are passed through
19 to the tenant, excluding exterior, structural, parking and
20 heating, ventilation and air conditioning replacement
21 expenses, unless annual escrow contributions, from cash flows
22 derived from the lease payments, cover the expense shortfall;
23 and
24 (f) There is a perfected assignment of the rents due
25 pursuant to the lease to, or for the benefit of, the insurer.
26 B. Income producing real estate.
27 (1) An insurer may acquire, manage and dispose of real
28 estate situated in a domestic jurisdiction either directly or
29 indirectly through limited partnership interests and general
30 partnership interests not otherwise prohibited by Section
31 126.5D, joint ventures, stock of an investment subsidiary or
32 membership interests in a limited liability company, trust
33 certificates, or other similar instruments. The real estate
34 shall be income producing or intended for improvement or
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1 development for investment purposes under an existing program
2 (in which case the real estate shall be deemed to be income
3 producing).
4 (2) The real estate may be subject to mortgages, liens
5 or other encumbrances, the amount of which shall, to the
6 extent that the obligations secured by the mortgages, liens
7 or encumbrances are without recourse to the insurer, be
8 deducted from the amount of the investment of the insurer in
9 the real estate for purposes of determining compliance with
10 subsections D(2) and D(3) of this Section.
11 C. Real estate for the accommodation of business.
12 An insurer may acquire, manage, and dispose of real
13 estate for the convenient accommodation of the insurer's
14 (which may include its affiliates) business operations,
15 including home office, branch office and field office
16 operations.
17 (1) Real estate acquired under this subsection may
18 include excess space for rent to others, if the excess space,
19 valued at its fair market value, would otherwise be a
20 permitted investment under subsection B of this Section and
21 is so qualified by the insurer;
22 (2) The real estate acquired under this subsection may
23 be subject to one or more mortgages, liens or other
24 encumbrances, the amount of which shall, to the extent that
25 the obligations secured by the mortgages, liens or
26 encumbrances are without recourse to the insurer, be deducted
27 from the amount of the investment of the insurer in the real
28 estate for purposes of determining compliance with subsection
29 D(4) of this Section; and
30 (3) For purposes of this subsection, business operations
31 shall not include that portion of real estate used for the
32 direct provision of health care services by an accident and
33 health insurer for its insureds. An insurer may acquire real
34 estate used for these purposes under subsection B of this
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1 Section.
2 D. Quantitative limitations.
3 (1) An insurer shall not acquire an investment under
4 subsection A of this Section if, as a result of and after
5 giving effect to the investment, the aggregate amount of all
6 investments then held by the insurer under subsection A of
7 this Section would exceed:
8 (a) 1% of its admitted assets in mortgage loans covering
9 any one secured location;
10 (b) 0.25% of its admitted assets in construction loans
11 covering any one secured location; or
12 (c) 2% of its admitted assets in construction loans in
13 the aggregate.
14 (2) An insurer shall not acquire an investment under
15 subsection B of this Section if, as a result of and after
16 giving effect to the investment and any outstanding
17 guarantees made by the insurer in connection with the
18 investment, the aggregate amount of investments then held by
19 the insurer under subsection B of this Section plus the
20 guarantees then outstanding would exceed:
21 (a) 1% of its admitted assets in one parcel or group of
22 contiguous parcels of real estate, except that this
23 limitation shall not apply to that portion of real estate
24 used for the direct provision of health care services by an
25 accident and health insurer for its insureds, such as
26 hospitals, medical clinics, medical professional buildings or
27 other health facilities used for the purpose of providing
28 health services; or
29 (b) 15% of its admitted assets in the aggregate, but not
30 more than 5% of its admitted assets in real estate to be
31 improved or developed.
32 (3) An insurer shall not acquire an investment under
33 subsections A or B of this Section if, as a result of and
34 after giving effect to the investment and any guarantees made
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1 by the insurer in connection with the investment, the
2 aggregate amount of all investments then held by the insurer
3 under subsections A and B of this Section plus the guarantees
4 then outstanding would exceed 45% of its admitted assets.
5 However, an insurer may exceed this limitation by no more
6 than 30% of its admitted assets if:
7 (a) This increased amount is invested only in
8 residential mortgage loans;
9 (b) The insurer has no more than 10% of its admitted
10 assets invested in mortgage loans other than residential
11 mortgage loans;
12 (c) The loan-to-value ratio of each residential mortgage
13 loan does not exceed 60% at the time the mortgage loan is
14 qualified under this increased authority, and the fair market
15 value is supported by an appraisal no more than 2 years old,
16 prepared by an independent appraiser;
17 (d) A single mortgage loan qualified under this
18 increased authority shall not exceed 0.5% of its admitted
19 assets;
20 (e) The insurer files with the Director, and receives
21 approval from the Director for, a plan that is designed to
22 result in a portfolio of residential mortgage loans that is
23 sufficiently geographically diversified; and
24 (f) The insurer agrees to file annually with the
25 Director records that demonstrate that its portfolio of
26 residential mortgage loans is geographically diversified in
27 accordance with the plan.
28 (4) The limitations of Section 126.10 shall not apply to
29 an insurer's acquisition of real estate under subsection C of
30 this Section. An insurer shall not acquire real estate under
31 subsection C of this Section if, as a result of and after
32 giving effect to the acquisition, the aggregate amount of
33 real estate then held by the insurer under subsection C of
34 this Section would exceed 10% of its admitted assets. With
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1 the permission of the Director, additional amounts of real
2 estate may be acquired under subsection C of this Section.
3 (215 ILCS 5/126.16 new)
4 Sec. 126.16. Securities lending and repurchase, reverse
5 repurchase, and dollar roll transactions. An insurer may
6 enter into securities lending, repurchase, reverse
7 repurchase, and dollar roll transactions with business
8 entities, subject to the following requirements:
9 A. The insurer's board of directors shall adopt a
10 written plan that is consistent with the requirements of the
11 written plan in Section 126.4A that specifies guidelines and
12 objectives to be followed, such as:
13 (1) A description of how cash received will be invested
14 or used for general corporate purposes of the insurer;
15 (2) Operational procedures to manage interest rate risk,
16 counterparty default risk, the conditions under which
17 proceeds from reverse repurchase transactions may be used in
18 the ordinary course of business and the use of acceptable
19 collateral in a manner that reflects the liquidity needs of
20 the transaction; and
21 (3) The extent to which the insurer may engage in these
22 transactions.
23 B. The insurer shall enter into a written agreement for
24 all transactions authorized in this Section other than dollar
25 roll transactions. The written agreement shall require that
26 each transaction terminate no more than one year from its
27 inception or upon the earlier demand of the insurer. The
28 agreement shall be with the business entity counterparty, but
29 for securities lending transactions, the agreement may be
30 with an agent acting on behalf of the insurer, if the agent
31 is a qualified business entity, and if the agreement:
32 (1) Requires the agent to enter into separate agreements
33 with each counterparty that are consistent with the
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1 requirements of this Section; and
2 (2) Prohibits securities lending transactions pursuant
3 to agreement with the agent or its affiliates.
4 C. Cash received in a transaction under this Section
5 shall be invested in accordance with this Article and in a
6 manner that recognizes the liquidity needs of the transaction
7 or used by the insurer for its general corporate purposes.
8 For so long as the transaction remains outstanding, the
9 insurer, its agent or custodian shall maintain, as to
10 acceptable collateral received in a transaction under this
11 Section, either physically or through the book entry systems
12 of the Federal Reserve, Depository Trust Company,
13 Participants Trust Company or other securities depositories
14 approved by the Director:
15 (1) Possession of the acceptable collateral;
16 (2) A perfected security interest in the acceptable
17 collateral; or
18 (3) In the case of a jurisdiction outside of the United
19 States, title to, or rights of a secured creditor to, the
20 acceptable collateral.
21 D. The limitations of Sections 126.10 and 126.17 shall
22 not apply to the business entity counterparty exposure
23 created by transactions under this Section. For purposes of
24 calculations made to determine compliance with this
25 subsection, no effect will be given to the insurer's future
26 obligation to resell securities, in the case of a repurchase
27 transaction, or to repurchase securities, in the case of a
28 reverse repurchase transaction. An insurer shall not enter
29 into a transaction under this Section if, as a result of and
30 after giving effect to the transaction:
31 (1) The aggregate amount of securities then loaned or
32 sold to, or purchased from, any one business entity
33 counterparty under this Section would exceed 5% of its
34 admitted assets. In calculating the amount sold to or
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1 purchased from a business entity counterparty under
2 repurchase or reverse repurchase transactions, effect may be
3 given to netting provisions under a master written agreement;
4 or
5 (2) The aggregate amount of all securities then loaned,
6 sold to or purchased from all business entities under this
7 Section would exceed 40% of its admitted assets.
8 E. In a dollar roll transaction, the insurer shall
9 receive cash in an amount at least equal to the market value
10 of the securities transferred by the insurer in the
11 transaction as of the transaction date.
12 F. The Director may promulgate reasonable rules for
13 investments and transactions under this Section including,
14 but not limited to, rules which impose financial solvency
15 standards, valuation standards, and reporting requirements.
16 (215 ILCS 5/126.17 new)
17 Sec. 126.17. Foreign investments and foreign currency
18 exposure.
19 A. Subject to the limitations of Section 126.10, an
20 insurer may acquire directly or indirectly through an
21 investment subsidiary, foreign investments, or engage in
22 investment practices with persons of or in foreign
23 jurisdictions, of substantially the same types as those that
24 an insurer is permitted to acquire under this Article, other
25 than of the type permitted under Section 126.12, if, as a
26 result and after giving effect to the investment:
27 (1) The aggregate amount of foreign investments then
28 held by the insurer under this subsection does not exceed 20%
29 of its admitted assets; and
30 (2) The aggregate amount of foreign investments then
31 held by the insurer under this subsection in a single foreign
32 jurisdiction does not exceed 10% of its admitted assets as to
33 a foreign jurisdiction that has a sovereign debt rating of
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1 SVO 1 or 3% of its admitted assets as to any other foreign
2 jurisdiction.
3 B. Subject to the limitations of Section 126.10, an
4 insurer may acquire investments, or engage in investment
5 practices denominated in foreign currencies, whether or not
6 they are foreign investments acquired under subsection A of
7 this Section, or additional foreign currency exposure as a
8 result of the termination or expiration of a hedging
9 transaction with respect to investments denominated in a
10 foreign currency, if, as a result of and after giving effect
11 to the transaction:
12 (1) The aggregate amount of investments then held by the
13 insurer under this subsection denominated in foreign
14 currencies does not exceed 10% of its admitted assets; and
15 (2) The aggregate amount of investments then held by the
16 insurer under this subsection denominated in the foreign
17 currency of a single foreign jurisdiction does not exceed 10%
18 of its admitted assets as to a foreign jurisdiction that has
19 a sovereign debt rating of SVO 1 or 3% of its admitted assets
20 as to any other foreign jurisdiction.
21 (3) However, an investment shall not be considered
22 denominated in a foreign currency if the acquiring insurer
23 enters into one or more contracts in transactions permitted
24 under Section 126.18 in which the business entity
25 counterparty agrees to exchange, or grants to the insurer the
26 option to exchange, all payments made on the foreign currency
27 denominated investment (or amounts equivalent to the payments
28 that are or will be due to the insurer in accordance with the
29 terms of such investment) for United States currency during
30 the period the contract or contracts are in effect to
31 insulate the insurer against loss caused by diminution of the
32 value of payments owed to the insurer due to future changes
33 in currency exchange rates.
34 C. In addition to investments permitted under
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1 subsections A and B of this Section, an insurer that is
2 authorized to do business in a foreign jurisdiction, and that
3 has outstanding insurance, annuity or reinsurance contracts
4 on lives or risks resident or located in that foreign
5 jurisdiction and denominated in foreign currency of that
6 jurisdiction, may acquire foreign investments respecting that
7 foreign jurisdiction, and may acquire investments denominated
8 in the currency of that jurisdiction, subject to the
9 limitations of Section 126.10. However, investments made
10 under this subsection in obligations of foreign governments,
11 their political subdivisions and government sponsored
12 enterprises shall not be subject to the limitations of
13 Section 126.10 if those investments carry an SVO rating of 1
14 or 2. The aggregate amount of investments acquired by the
15 insurer under this subsection shall not exceed the greater
16 of:
17 (1) The amount the insurer is required by the law of the
18 foreign jurisdiction to invest in the foreign jurisdiction;
19 or
20 (2) 115% of the amount of its reserves, net of
21 reinsurance, and other obligations under the contracts on
22 lives or risks resident or located in the foreign
23 jurisdiction.
24 D. In addition to investments permitted under
25 subsections A and B of this Section, an insurer that is not
26 authorized to do business in a foreign jurisdiction, but
27 which has outstanding insurance, annuity or reinsurance
28 contracts on lives or risks resident or located in that
29 foreign jurisdiction and denominated in foreign currency of
30 that jurisdiction, may acquire foreign investments respecting
31 that foreign jurisdiction, and may acquire investments
32 denominated in the currency of that jurisdiction subject to
33 the limitations of Section 126.10. However, investments made
34 under this subsection in obligations of foreign governments,
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1 their political subdivisions and government sponsored
2 enterprises shall not be subject to the limitations of
3 Section 126.10 if those investments carry an SVO rating of 1
4 or 2. The aggregate amount of investments acquired by the
5 insurer under this subsection shall not exceed 105% of the
6 amount of its reserves, net of reinsurance, and other
7 obligations under the contracts on lives or risks resident or
8 located in the foreign jurisdiction.
9 E. Investments acquired under this Section shall be
10 aggregated with investments of the same types made under all
11 other Sections of this Article, and in a similar manner, for
12 purposes of determining compliance with the limitations, if
13 any, contained in the other Sections. Investments in
14 obligations of foreign governments, their political
15 subdivisions and government sponsored enterprises of these
16 persons, except for those exempted under subsections C and D
17 of this Section, shall be subject to the limitations of
18 Section 126.10.
19 (215 ILCS 5/126.18 new)
20 Sec. 126.18. Derivative transactions. An insurer may,
21 directly or indirectly through an investment subsidiary,
22 engage in derivative transactions under this Section under
23 the following conditions :
24 A. General conditions.
25 (1) An insurer may use derivative instruments under this
26 Section to engage in hedging transactions and income
27 generation transactions.
28 (2) An insurer shall not use derivative instruments for
29 a replication transaction until the Director promulgates
30 reasonable rules which set forth methods of disclosure and
31 reserving for risk-based capital and asset valuation reserve
32 for these investments. Any asset being replicated is subject
33 to all the provisions and limitations on the making thereof
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1 specified in this Article with respect to investments by the
2 insurer as if the transaction constituted a direct investment
3 by the insurer in the replicated asset.
4 (3) An insurer shall be able to demonstrate to the
5 Director the intended hedging characteristics and the ongoing
6 effectiveness of the derivative transaction or combination of
7 the transactions through cash flow testing or other
8 appropriate analyses.
9 (4) The Director may promulgate reasonable rules for
10 investments and transactions under this Section including,
11 but not limited to, rules which impose financial solvency
12 standards, valuation standards, and reporting requirements.
13 B. Limitations on hedging transactions.
14 An insurer may enter into hedging transactions under this
15 Section if, as a result of and after giving effect to the
16 transaction :
17 (1) The aggregate statement value of options, caps,
18 floors and warrants not attached to another financial
19 instrument purchased and used in hedging transactions then
20 engaged in by the insurer does not exceed 7.5% of its
21 admitted assets;
22 (2) The aggregate statement value of options, caps and
23 floors written in hedging transactions then engaged in by the
24 insurer does not exceed 3% of its admitted assets; and
25 (3) The aggregate potential exposure of collars, swaps,
26 forwards and futures used in hedging transactions then
27 engaged in by the insurer does not exceed 6.5% of its
28 admitted assets.
29 C. Limitations on income generation transactions.
30 An insurer may enter into the following types of income
31 generation transactions subject to the quantitative limits of
32 Section 126.18, subsection C(5):
33 (1) Sales of covered call options on noncallable fixed
34 income securities, callable fixed income securities if the
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1 option expires by its terms prior to the end of the
2 noncallable period or derivative instruments based on fixed
3 income securities;
4 (2) Sales of covered call options on equity securities,
5 if the insurer holds in its portfolio, or can immediately
6 acquire through the exercise of options, warrants or
7 conversion rights already owned, the equity securities
8 subject to call during the complete term of the call option
9 sold;
10 (3) Sales of covered puts on investments that the
11 insurer is permitted to acquire under this Article, if the
12 insurer has escrowed, or entered into a custodian agreement
13 segregating, cash or cash equivalents with a market value
14 equal to the amount of its purchase obligations under the put
15 during the complete term of the put option sold;
16 (4) Sales of covered caps or floors, if the insurer
17 holds in its portfolio the investments generating the cash
18 flow to make the required payments under the caps or floors
19 during the complete term that the cap or floor is
20 outstanding; or
21 (5) If as a result of and after giving effect to the
22 transactions, the aggregate statement value of the fixed
23 income assets that are subject to call or that generate the
24 cash flows for payments under the caps or floors, plus the
25 face value of fixed income securities underlying a derivative
26 instrument subject to call, plus the amount of the purchase
27 obligations under the puts, does not exceed 10% of its
28 admitted assets.
29 D. Counterparty exposure. An insurer shall include all
30 counterparty exposure amounts in determining compliance with
31 the limitations of Section 126.10.
32 E. Additional transactions. Pursuant to rules
33 promulgated under Section 126.8, the Director may approve
34 additional transactions involving the use of derivative
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1 instruments in excess of the limits of subsection B of this
2 Section or for other risk management purposes, but
3 replication transactions shall not be permitted for other
4 than risk management purposes.
5 (215 ILCS 5/126.19 new)
6 Sec. 126.19. Policy loans. A life insurer may lend to a
7 policyholder on the security of the cash surrender value of
8 the policyholder's policy a sum not exceeding the legal
9 reserve that the insurer is required to maintain on the
10 policy.
11 (215 ILCS 5/126.20 new)
12 Sec. 126.20. Additional investment authority.
13 A. Solely for the purpose of acquiring investments that
14 exceed the quantitative limitations of Sections 126.10
15 through 126.17, an insurer may acquire under this subsection
16 an investment, or engage in investment practices described in
17 Section 126.16, but an insurer shall not acquire an
18 investment, or engage in investment practices described in
19 Section 126.16, under this subsection if, as a result of and
20 after giving effect to the transaction:
21 (1) The aggregate amount of investments then held by an
22 insurer under this subsection would exceed 3% of its admitted
23 assets; or
24 (2) The aggregate amount of investments as to one
25 limitation in Sections 126.10 through 126.17 then held by the
26 insurer under this subsection would exceed 1% of its admitted
27 assets.
28 B. (1) In addition to the authority provided under
29 subsection A of this Section, an insurer may acquire under
30 this subsection an investment of any kind, or engage in
31 investment practices described in Section 126.16, that are
32 not specifically prohibited by this Article, without regard
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1 to the categories, conditions, standards or other limitations
2 of Sections 126.10 through 126.17 if, as a result of and
3 after giving effect to the transaction, the aggregate amount
4 of investments then held under this subsection would not
5 exceed the lesser of:
6 (a) 10% of its admitted assets; or
7 (b) 75% of its capital and surplus.
8 (2) However, an insurer shall not acquire any investment
9 or engage in any investment practice under this subsection
10 if, as a result of and after giving effect to the
11 transaction, the aggregate amount of all investments in any
12 one person then held by the insurer under this subsection
13 would exceed 3% of its admitted assets.
14 C. In addition to the investments acquired under
15 subsections A and B of this Section, an insurer may acquire
16 under this subsection an investment of any kind, or engage in
17 investment practices described in Section 126.16, that are
18 not specifically prohibited by this Article without regard to
19 any limitations of Sections 126.10 through 126.17 if:
20 (1) The Director grants prior approval;
21 (2) The insurer demonstrates that its investments are
22 being made in a prudent manner and that the additional
23 amounts will be invested in a prudent manner; and
24 (3) As a result of and after giving effect to the
25 transaction the aggregate amount of investments then held by
26 the insurer under this subsection does not exceed the greater
27 of:
28 (a) 25% of its capital and surplus; or
29 (b) 100% of capital and surplus less 10% of its admitted
30 assets.
31 D. Under this Section, an insurer shall not acquire or
32 engage in an investment practice prohibited under Section
33 126.5 or an investment that is a derivative transaction.
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1 (215 ILCS 5/Art. VII, Part 3 heading new)
2 3. PROPERTY AND CASUALTY INSURERS
3 (215 ILCS 5/126.21 new)
4 Sec. 126.21. Applicability. This Part 3 shall apply to
5 the investments and investment practices of property and
6 casualty insurers authorized to transact the kinds of
7 insurance in either or both Class 2 or Class 3 of Section 4
8 of this Code, subject to the provisions of Section 126.1B.
9 (215 ILCS 5/126.22 new)
10 Sec. 126.22. Reserve requirements.
11 A. Reserve requirements.
12 (1) Subject to all other limitations and requirements
13 of this Article, a property and casualty insurer shall
14 maintain an amount at least equal to 100% of adjusted loss
15 reserves and loss adjustment expense reserves, 100% of
16 adjusted unearned premium reserves and 100% of statutorily
17 required policy and contract reserves in:
18 (a) Cash and cash equivalents;
19 (b) High and medium grade investments that qualify under
20 Sections 126.24 or 126.25;
21 (c) Equity interests that qualify under Section 126.26
22 and that are traded on a qualified exchange;
23 (d) Investments of the type set forth in Section 126.30
24 if the investments are rated in the highest generic rating
25 category by a nationally recognized statistical rating
26 organization recognized by the SVO for rating foreign
27 jurisdictions and if any foreign currency exposure is
28 effectively hedged through the maturity date of the
29 investments;
30 (e) Qualifying investments of the type set forth in
31 subparagraphs (b), (c) or (d) of this paragraph that are
32 acquired under Section 126.32;
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1 (f) Interest and dividends receivable on qualifying
2 investments of the type set forth in subparagraphs (a)
3 through (e) of this subsection; or
4 (g) Reinsurance recoverable on paid losses.
5 (2) Reserve Requirement Amount
6 (a) For purposes of determining the amount of assets to
7 be maintained under this subsection, the calculation of
8 adjusted loss reserves and loss adjustment expense reserves,
9 adjusted unearned premium reserves and statutorily required
10 policy and contract reserves shall be based on the amounts
11 reported as of the most recent annual or quarterly statement
12 date.
13 (b) Adjusted loss reserves and loss adjustment expense
14 reserves shall be equal to the sum of the amounts derived
15 from the following calculations:
16 (i) The result of each amount reported by the insurer as
17 losses and loss adjustment expenses unpaid for each accident
18 year for each individual line of business; multiplied by
19 (ii) The discount factor that is applicable to the line
20 of business and accident year published by the Internal
21 Revenue Service under Internal Revenue Code Section 846 (26
22 U.S.C. 846), as amended, for the calendar year that
23 corresponds to the most recent annual statement of the
24 insurer; minus
25 (iii) Accrued retrospective premiums discounted by an
26 average discount factor. The discount factor shall be
27 calculated by dividing the losses and loss adjustment
28 expenses unpaid after discounting (the product of Items (i)
29 and (ii) in this subparagraph) by loss and loss adjustment
30 expense reserves before discounting Item (i) of this
31 subparagraph.
32 (iv) For purposes of these calculations, the losses and
33 loss adjustment expenses unpaid shall be determined net of
34 anticipated salvage and subrogation, and gross of any
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1 discount for the time value of money or tabular discount.
2 (c) Adjusted unearned premium reserves shall be equal to
3 the result of the following calculation:
4 (i) The amount reported by the insurer as unearned
5 premium reserves; minus
6 (ii) The admitted asset amounts reported by the insurer
7 as:
8 (I) Premiums in and agents' balances in the course of
9 collection, accident and health premiums due and unpaid and
10 uncollected premiums for accident and health premiums;
11 (II) Premiums, agents' balances and installments booked
12 but deferred and not yet due;
13 (III) Bills receivable, taken for premium; and
14 (IV) Equities and deposits in pools and associations.
15 (d) Statutorily required policy and contract reserves
16 shall also include contingency reserves required for mortgage
17 guaranty insurers, municipal bond insurers, and other
18 financial guaranty insurers.
19 B. Monitoring and reporting. A property and casualty
20 insurer shall supplement its annual statement with a
21 reconciliation and summary of its assets and reserve
22 requirements as required in subsection A of this Section. A
23 reconciliation and summary showing that an insurer's assets
24 as required in subsection A of this Section are greater than
25 or equal to its undiscounted reserves referred to in
26 subsection A of this Section shall be sufficient to satisfy
27 this requirement. Upon prior notification, the Director may
28 require an insurer to submit such a reconciliation and
29 summary with any quarterly statement filed during the
30 calendar year.
31 C. Notification requirements and mandatory safeguards.
32 If a property and casualty insurer's assets and reserves do
33 not comply with subsection A of this Section, the insurer
34 shall notify the Director immediately of the amount by which
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1 the reserve requirements exceed the annual statement value of
2 the qualifying assets, explain why the deficiency exists and
3 within 30 days of the date of the notice propose a plan of
4 action to remedy the deficiency.
5 D. Authority of the Director.
6 (1) If the Director determines that an insurer is not in
7 compliance with subsection A of this Section, the Director
8 shall require the insurer to eliminate the condition causing
9 the noncompliance within a specified time from the date the
10 notice of the Director's requirement is mailed or delivered
11 to the insurer.
12 (2) If an insurer fails to comply with the Director's
13 requirement under paragraph (1) of this subsection, the
14 insurer is deemed to be in hazardous financial condition, and
15 the Director shall take one or more of the actions authorized
16 by law as to insurers in hazardous financial condition.
17 E. An insurer subject to this Section must comply with
18 the requirements of this Section after December 31, 1997.
19 (215 ILCS 5/126.23 new)
20 Sec. 126.23. General 5% diversification, medium and
21 lower grade investments, and Canadian investments.
22 A. General 5% diversification.
23 (1) Except as otherwise specified in this Article, an
24 insurer shall not acquire directly or indirectly through an
25 investment subsidiary an investment under this Article if, as
26 a result of and after giving effect to the investment, the
27 insurer would hold more than 5% of its admitted assets in
28 investments of all kinds issued, assumed, accepted,
29 guaranteed, or insured by a single person.
30 (2) This 5% limitation shall not apply to the aggregate
31 amounts insured by a single financial guaranty insurer with
32 the highest generic rating issued by a nationally recognized
33 statistical rating organization.
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1 (3) Asset-backed securities shall not be subject to the
2 limitations of paragraph (1) of this subsection, however,
3 except as permitted by subsection A(4) of this Section, an
4 insurer shall not acquire an asset-backed security if, as a
5 result of and after giving effect to the investment, the
6 aggregate amount of asset-backed securities secured by or
7 evidencing an interest in a single asset or single pool of
8 assets held by a trust or other business entity, then held by
9 the insurer would exceed 5% of its admitted assets.
10 (4) A company's investments in mortgage related
11 securities, as defined by the Secondary Mortgage Market
12 Enhancement Act of 1984 (United States Public Law 98-440, 12
13 U.S.C. 24, 1451, 1454 et seq.), that are backed by any single
14 pool of mortgages and made pursuant to the authority of that
15 Act, shall not exceed 5% of its admitted assets.
16 B. Medium and lower grade investments.
17 (1) An insurer shall not acquire, directly or indirectly
18 through an investment subsidiary, an investment under
19 Sections 126.4, 126.27, and 126.30 or counterparty exposure
20 under Section 126.31D if, as a result of and after giving
21 effect to the investment:
22 (a) The aggregate amount of all medium and lower grade
23 investments then held by the insurer would exceed 20% of its
24 admitted assets;
25 (b) The aggregate amount of lower grade investments then
26 held by the insurer would exceed 10% of its admitted assets;
27 (c) The aggregate amount of investments rated 5 or 6 by
28 the SVO then held by the insurer would exceed 5% of its
29 admitted assets;
30 (d) The aggregate amount of investments rated 6 by the
31 SVO then held by the insurer would exceed 1% of its admitted
32 assets; or
33 (e) The aggregate amount of lower grade investments then
34 held by the insurer that receive as cash income less than the
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1 equivalent yield for Treasury issues with a comparative
2 average life, would exceed 1% of its admitted assets.
3 (2) An insurer shall not acquire, directly or indirectly
4 through an investment subsidiary, an investment under
5 Sections 126.24, 126.27, and 126.30 or counterparty exposure
6 under Section 126.31D if, as a result of and after giving
7 effect to the investment:
8 (a) The aggregate amount of medium and lower grade
9 investments issued, assumed, accepted, guaranteed, or insured
10 by any one person or, as to asset-backed securities secured
11 by or evidencing an interest in a single asset or pool of
12 assets, then held by the insurer would exceed 1% of its
13 admitted assets; or
14 (b) The aggregate amount of lower grade investments
15 issued, assumed, accepted, guaranteed, or insured by any one
16 person or, as to asset- backed securities secured by or
17 evidencing an interest in a single asset or pool of assets,
18 then held by the insurer would exceed 0.5% of its admitted
19 assets.
20 (3) If an insurer attains or exceeds the limit of any
21 one rating category referred to in this subsection, the
22 insurer shall not thereby be precluded from acquiring
23 investments in other rating categories subject to the
24 specific and multi-category limits applicable to those
25 investments.
26 C. Canadian investments.
27 (1) An insurer shall not acquire, directly or indirectly
28 through an investment subsidiary, any Canadian investments
29 authorized by this Article, if as a result of and after
30 giving effect to the investment, the aggregate amount of
31 these investments then held by the insurer would exceed 40%
32 of its admitted assets, or if the aggregate amount of
33 Canadian investments not acquired under Section 126.24B then
34 held by the insurer would exceed 25% of its admitted assets.
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1 (2) However, as to an insurer that is authorized to do
2 business in Canada or that has outstanding insurance, annuity
3 or reinsurance contracts on lives or risks resident or
4 located in Canada and denominated in Canadian currency, the
5 limitations of paragraph (1) of this subsection shall be
6 increased by the greater of:
7 (a) The amount the insurer is required by Canadian law
8 to invest in Canada or to be denominated in Canadian
9 currency; or
10 (b) 125% of the amount of its reserves and other
11 obligations under contracts on risks resident or located in
12 Canada.
13 (215 ILCS 5/126.24 new)
14 Sec. 126.24. Rated credit instruments. Subject to the
15 limitations of subsection F of this Section, an insurer may
16 acquire rated credit instruments:
17 A. Subject to the limitations of Section 126.23B, but
18 not to the limitations of Section 126.23A except for the
19 limitation of subsection (4) of Section 126.23A, an insurer
20 may acquire rated credit instruments issued, assumed,
21 guaranteed, or insured by:
22 (1) The United States; or
23 (2) A government sponsored enterprise of the United
24 States, if the instruments of the government sponsored
25 enterprise are assumed, guaranteed, or insured by the United
26 States or are otherwise backed or supported by the full faith
27 and credit of the United States.
28 B. (1) Subject to the limitations of Section 126.23B,
29 but not to the limitations of Section 126.23A, an insurer may
30 acquire rated credit instruments issued, assumed, guaranteed,
31 or insured by:
32 (a) Canada; or
33 (b) A government sponsored enterprise of Canada, if the
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1 instruments of the government sponsored enterprise are
2 assumed, guaranteed, or insured by Canada or are otherwise
3 backed or supported by the full faith and credit of Canada;
4 (2) However, an insurer shall not acquire an instrument
5 under this subsection if, as a result of and after giving
6 effect to the investment, the aggregate amount of investments
7 then held by the insurer under this subsection would exceed
8 40% of its admitted assets.
9 C. (1) Subject to the limitations of Section 126.23B,
10 but not to the limitations of Section 126.23A, an insurer may
11 acquire rated credit instruments, excluding asset-backed
12 securities:
13 (a) Issued by a government money market mutual fund, a
14 class one money market mutual fund or a class one bond mutual
15 fund;
16 (b) Issued, assumed, guaranteed, or insured by a
17 government sponsored enterprise of the United States other
18 than those eligible under subsection A of this Section;
19 (c) Issued, assumed, guaranteed, or insured by a state,
20 if the instruments are general obligations of the state; or
21 (d) Issued by a multilateral development bank.
22 (2) However, an insurer shall not acquire an instrument
23 of any one fund, any one enterprise or entity, or any one
24 state under this subsection if, as a result of and after
25 giving effect to the investment, the aggregate amount of
26 investments then held by the insurer in any one fund,
27 enterprise, entity, or state under this subsection would
28 exceed 10% of its admitted assets.
29 D. Subject to the limitations of Section 126.23, an
30 insurer may acquire preferred stocks that are not foreign
31 investments and that meet the requirements of rated credit
32 instruments if, as a result of and after giving effect to the
33 investment:
34 (1) The aggregate amount of preferred stocks then held
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1 by the insurer under this subsection does not exceed 33 1/3%
2 of its admitted assets; and
3 (2) The aggregate amount of preferred stocks then held
4 by the insurer under this subsection which are not sinking
5 fund stocks or rated P1 or P2 by the SVO does not exceed 15%
6 of its admitted assets.
7 E. Subject to the limitations of Section 126.23 in
8 addition to those investments eligible under subsections A,
9 B, C and D of this Section, an insurer may acquire rated
10 credit instruments that are not foreign investments.
11 F. An insurer shall not acquire special rated credit
12 instruments under this Section if, as a result of and after
13 giving effect to the investment, the aggregate amount of
14 special rated credit instruments then held by the insurer
15 would exceed 5% of its admitted assets.
16 (215 ILCS 5/126.25 new)
17 Sec. 126.25. Insurer investment pools.
18 A. An insurer may acquire investments in investment
19 pools that:
20 (1) Invest only in:
21 (a) Obligations that are rated 1 or 2 by the SVO or have
22 an equivalent of an SVO 1 or 2 rating (or, in the absence of
23 a 1 or 2 rating or equivalent rating, the issuer has
24 outstanding obligations with an SVO 1 or 2 or equivalent
25 rating) by a nationally recognized statistical rating
26 organization recognized by the SVO and have:
27 (i) A remaining maturity of 397 days or less or a put
28 that entitles the holder to receive the principal amount of
29 the obligation which put may be exercised through maturity at
30 specified intervals not exceeding 397 days; or
31 (ii) A remaining maturity of 3 years or less and a
32 floating interest rate that resets no less frequently than
33 quarterly on the basis of a current short-term index (federal
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1 funds, prime rate, treasury bills, London InterBank Offered
2 Rate (LIBOR) or commercial paper) and is subject to no
3 maximum limit, if the obligations do not have an interest
4 rate that varies inversely to market interest rate changes;
5 (b) Government money market mutual funds or class one
6 money market mutual funds; or
7 (c) Securities lending, repurchase, and reverse
8 repurchase, transactions that meet all the requirements of
9 Section 126.29, except the quantitative limitations of
10 Section 126.29D; or
11 (2) Invest only in investments which an insurer may
12 acquire under this Article, if the insurer's proportionate
13 interest in the amount invested in these investments when
14 combined with amounts of such investments made directly or
15 indirectly through an investment subsidiary or other insurer
16 investment pool permitted under this subsection does not
17 exceed the applicable limits of this Article for such
18 investments.
19 B. For an investment in an investment pool to be
20 qualified under this Article, the investment pool shall not:
21 (1) Acquire securities issued, assumed, guaranteed, or
22 insured by the insurer or an affiliate of the insurer;
23 (2) Borrow or incur any indebtedness for borrowed money,
24 except for securities lending and reverse repurchase
25 transactions that meet the requirements of Section 126.29
26 except the quantitative limitations of Section 126.29D; or
27 (3) Acquire an investment if, as a result of such
28 transaction, the aggregate value of securities then loaned or
29 sold to, purchased from or invested in any one business
30 entity under this Section would exceed 10% of the total
31 assets of the investment pool.
32 C. The limitations of Section 126.23A shall not apply to
33 an insurer's investment in an investment pool, however an
34 insurer shall not acquire an investment in an investment pool
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1 under this Section if, as a result of and after giving effect
2 to the investment, the aggregate amount of investments then
3 held by the insurer under this Section:
4 (1) In all investment pools investing in investments
5 permitted under subsection A(2) of this Section would exceed
6 25% of its admitted assets; or
7 (2) In all investment pools would exceed 40% of its
8 admitted assets.
9 D. For an investment in an investment pool to be
10 qualified under this Article, the manager of the investment
11 pool shall:
12 (1) Be organized under the laws of the United States or
13 a state and designated as the pool manager in a pooling
14 agreement;
15 (2) Be the insurer, an affiliated insurer or a business
16 entity affiliated with the insurer, a qualified bank, a
17 business entity registered under the Investment Advisors Act
18 of 1940 (15 U.S.C. 80a-1 et seq.), as amended or, in the
19 case of a reciprocal insurer or interinsurance exchange, its
20 attorney-in-fact, or in the case of a United States branch of
21 an alien insurer, its United States manager or an affiliate
22 or subsidiary of its United States manager;
23 (3) Be responsible for the compilation and maintenance
24 of detailed accounting records setting forth:
25 (a) The cash receipts and disbursements reflecting each
26 participant's proportionate investment in the investment
27 pool;
28 (b) A complete description of all underlying assets of
29 the investment pool (including amount, interest rate,
30 maturity date (if any) and other appropriate designations);
31 and
32 (c) Other records which, on a daily basis, allow third
33 parties to verify each participant's investment in the
34 investment pool; and
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1 (4) Maintain the assets of the investment pool in one or
2 more accounts, in the name of or on behalf of the investment
3 pool, under a custody agreement with a qualified bank. The
4 custody agreement shall:
5 (a) State and recognize the claims and rights of each
6 participant;
7 (b) Acknowledge that the underlying assets of the
8 investment pool are held solely for the benefit of each
9 participant in proportion to the aggregate amount of its
10 investments in the investment pool; and
11 (c) Contain an agreement that the underlying assets of
12 the investment pool shall not be commingled with the general
13 assets of the custodian qualified bank or any other person.
14 E. The pooling agreement for each investment pool shall
15 be in writing and shall provide that:
16 (1) An insurer and its affiliated insurers or, in the
17 case of an investment pool investing solely in investments
18 permitted under subsection A(1) of this Section, the insurer
19 and its subsidiaries, affiliates or any pension or profit
20 sharing plan of the insurer, its subsidiaries and affiliates
21 or, in the case of a United States branch of an alien
22 insurer, affiliates or subsidiaries of its United States
23 manager, shall, at all times, hold 100% of the interests in
24 the investment pool;
25 (2) The underlying assets of the investment pool shall
26 not be commingled with the general assets of the pool manager
27 or any other person;
28 (3) In proportion to the aggregate amount of each pool
29 participant's interest in the investment pool:
30 (a) Each participant owns an undivided interest in the
31 underlying assets of the investment pool; and
32 (b) The underlying assets of the investment pool are
33 held solely for the benefit of each participant;
34 (4) A participant, or in the event of the participant's
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1 insolvency, bankruptcy or receivership, its trustee, receiver
2 or other successor-in-interest, may withdraw all or any
3 portion of its investment from the investment pool under the
4 terms of the pooling agreement;
5 (5) Withdrawals may be made on demand without penalty or
6 other assessment on any business day, but settlement of funds
7 shall occur within a reasonable and customary period
8 thereafter not to exceed 10 business days. Distributions
9 under this paragraph shall be calculated in each case net of
10 all then applicable fees and expenses of the investment pool.
11 The pooling agreement shall provide that the pool manager
12 shall distribute to a participant, at the discretion of the
13 pool manager:
14 (a) In cash, the then fair market value of the
15 participant's pro rata share of each underlying asset of the
16 investment pool;
17 (b) In kind, a pro rata share of each underlying asset;
18 or
19 (c) In a combination of cash and in kind distributions,
20 a pro rata share in each underlying asset; and
21 (6) The pool manager shall make the records of the
22 investment pool available for inspection by the Director.
23 (7) Except for the formation of the investment pool,
24 transactions between a domestic insurer and an affiliated
25 insurer investment pool shall not be subject to the
26 requirements of Section 131.20a of this Code.
27 (215 ILCS 5/126.26 new)
28 Sec. 126.26. Equity Interests.
29 A. Subject to the limitations of Section 126.23, an
30 insurer may acquire directly, or indirectly through an
31 investment subsidiary, equity interests in business entities
32 organized under the laws any domestic jurisdiction.
33 B. An insurer shall not acquire directly, or indirectly
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1 through an investment subsidiary, an investment under this
2 Section if, as a result of and after giving effect to the
3 investment, the aggregate amount of investments then held by
4 the insurer under this Section would exceed the greater of
5 25% of its admitted assets or 100% of its surplus as regards
6 policyholders.
7 C. An insurer shall not acquire under this Section any
8 investments that the insurer may acquire under Section
9 126.28.
10 D. An insurer shall not short sell equity interests
11 unless the insurer covers the short sale by owning the equity
12 interest or an unrestricted right to the equity interest
13 exercisable within 6 months of the short sale.
14 (215 ILCS 5/126.27 new)
15 Sec. 126.27. Tangible personal property under lease.
16 A. (1) Subject to the limitations of Section 126.23, an
17 insurer may acquire tangible personal property or equity
18 interests therein located or used wholly or in part within a
19 domestic jurisdiction either directly or indirectly through
20 limited partnership interests and general partnership
21 interests not otherwise prohibited by Section 126.5D, joint
22 ventures, stock of an investment subsidiary or membership
23 interests in a limited liability company, trust certificates,
24 or other similar instruments.
25 (2) Investments acquired under paragraph (1) of this
26 subsection shall be eligible only if:
27 (a) The property is subject to a lease or other
28 agreement with a person whose rated credit instruments in the
29 amount of the purchase price of the personal property the
30 insurer could then acquire under Section 126.24; and
31 (b) The lease or other agreement provides the insurer
32 the right to receive rental, purchase or other fixed payments
33 for the use or purchase of the property, and the aggregate
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1 value of the payments, together with the estimated residual
2 value of the property at the end of its useful life and the
3 estimated tax benefits to the insurer resulting from
4 ownership of the property, shall be adequate to return the
5 cost of the insurer's investment in the property, plus a
6 return deemed adequate by the insurer.
7 B. The insurer shall compute the amount of each
8 investment under this Section on the basis of the out of
9 pocket purchase price and applicable related expenses paid by
10 the insurer for the investment, net of each borrowing made to
11 finance the purchase price and expenses, to the extent the
12 borrowing is without recourse to the insurer.
13 C. An insurer shall not acquire directly or indirectly
14 through an investment subsidiary an investment under this
15 Section if, as a result of and after giving effect to the
16 investment, the aggregate amount of all investments then held
17 by the insurer under this Section would exceed:
18 (1) 2% of its admitted assets; or
19 (2) 0.5% of its admitted assets as to any single item of
20 tangible personal property.
21 D. For purposes of determining compliance with the
22 limitations of Section 126.23, investments acquired by an
23 insurer under this Section shall be aggregated with those
24 acquired under Section 126.24, and each lessee of the
25 property under a lease referred to in this Section shall be
26 deemed the issuer of an obligation in the amount of the
27 investment of the insurer in the property determined as
28 provided in subsection B of this Section.
29 E. Nothing in this Section is applicable to tangible
30 personal property lease arrangements between an insurer and
31 its subsidiaries and affiliates under a cost sharing
32 arrangement or agreement permitted under Section
33 131.20a(1)(a)(iv) of this Code.
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1 (215 ILCS 5/126.28 new)
2 Sec. 126.28. Mortgage loans and real estate.
3 A. Mortgage loans.
4 (l) Subject to the limitations of Section 126.23, an
5 insurer may acquire, either directly or indirectly through
6 limited partnership interests and general partnership
7 interests not otherwise prohibited by Section 126.5D, joint
8 ventures, stock of an investment subsidiary or membership
9 interests in a limited liability company, trust certificates,
10 or other similar instruments, obligations secured by
11 mortgages on real estate situated within a domestic
12 jurisdiction, but a mortgage loan which is secured by other
13 than a first lien shall not be acquired under this subsection
14 (1) unless the insurer is the holder of the first lien. The
15 obligations held by the insurer and any obligations with an
16 equal lien priority, shall not, at the time of acquisition of
17 the obligation, exceed:
18 (a) 90% of the fair market value of the real estate, if
19 the mortgage loan is secured by a purchase money mortgage or
20 like security received by the insurer upon disposition of the
21 real estate;
22 (b) 80% of the fair market value of the real estate, if
23 the mortgage loan requires immediate scheduled payment in
24 periodic installments of principal and interest, has an
25 amortization period of 30 years or less and periodic payments
26 made no less frequently than annually. Each periodic payment
27 shall be sufficient to assure that at all times the
28 outstanding principal balance of the mortgage loan shall be
29 not greater than the outstanding principal balance which
30 would be outstanding under a mortgage loan with the same
31 original principal balance, with the same interest rate and
32 requiring equal payments of principal and interest with the
33 same frequency over the same amortization period. Mortgage
34 loans permitted under this subsection are permitted
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1 notwithstanding the fact that they provide for a payment of
2 the principal balance prior to the end of the period of
3 amortization of the loan. For residential mortgage loans, the
4 80% limitation may be increased to 97% if acceptable private
5 mortgage insurance has been obtained; or
6 (c) 75% of the fair market value of the real estate for
7 mortgage loans that do not meet the requirements of
8 subparagraph (a) or (b) of this paragraph.
9 (2) For purposes of Paragraph (1) of this subsection,
10 the amount of an obligation required to be included in the
11 calculation of the loan-to-value ratio may be reduced to the
12 extent the obligation is insured by the Federal Housing
13 Administration or guaranteed by the Administrator of Veterans
14 Affairs, or their successors.
15 (3) Subject to the limitations of Section 126.23, an
16 insurer may acquire, either directly or indirectly through
17 limited partnership interests and general partnership
18 interests not otherwise prohibited by Section 126.5D, joint
19 ventures, stock of an investment subsidiary or membership
20 interests in a limited liability company, trust certificates,
21 or other similar instruments, obligations secured by a second
22 mortgage on real estate situated within a domestic
23 jurisdiction, other than as authorized in subsection (1) of
24 this Section 126.28. The obligation held by the insurer shall
25 be the sole second lien priority obligation and shall not, at
26 the time of acquisition of the obligation, exceed 70% of the
27 amount by which the fair market value of the real estate
28 exceeds the amount outstanding under the first mortgage.
29 (4) A mortgage loan that is held by an insurer under
30 Section 126.3F or acquired under this Section and is
31 restructured in a manner that meets the requirements of a
32 restructured mortgage loan in accordance with the NAIC
33 Accounting Practices and Procedures Manual or successor
34 publication shall continue to qualify as a mortgage loan
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1 under this Article.
2 (5) Subject to the limitations of Section 126.23, credit
3 lease transactions that do not qualify for investment under
4 Section 126.24 with the following characteristics shall be
5 exempt from the provisions of paragraph (1) of this
6 subsection:
7 (a) The loan amortizes over the initial fixed lease term
8 at least in an amount sufficient so that the loan balance at
9 the end of the lease term does not exceed the original
10 appraised value of the real estate;
11 (b) The lease payments cover or exceed the total debt
12 service over the life of the loan;
13 (c) A tenant or its affiliated entity, whose rated
14 credit instruments have a SVO 1 or 2 designation or a
15 comparable rating from a nationally recognized statistical
16 rating organization recognized by the SVO, has a full faith
17 and credit obligation to make the lease payments;
18 (d) The insurer holds or is the beneficial holder of a
19 first lien mortgage on the real estate;
20 (e) The expenses of the real estate are passed through
21 to the tenant, excluding exterior, structural, parking and
22 heating, ventilation and air conditioning replacement
23 expenses, unless annual escrow contributions, from cash flows
24 derived from the lease payments, cover the expense shortfall;
25 and
26 (f) There is a perfected assignment of the rents due
27 pursuant to the lease to, or for the benefit of, the insurer.
28 B. Income producing real estate.
29 (1) An insurer may acquire, manage and dispose of real
30 estate situated in a domestic jurisdiction either directly or
31 indirectly through limited partnership interests and general
32 partnership interests not otherwise prohibited by Section
33 126.5D, joint ventures, stock of an investment subsidiary or
34 membership interests in a limited liability company, trust
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1 certificates, or other similar instruments. The real estate
2 shall be income producing or intended for improvement or
3 development for investment purposes under an existing program
4 (in which case the real estate shall be deemed to be income
5 producing).
6 (2) The real estate may be subject to mortgages, liens
7 or other encumbrances, the amount of which shall, to the
8 extent that the obligations secured by the mortgages, liens
9 or encumbrances are without recourse to the insurer, be
10 deducted from the amount of the investment of the insurer in
11 the real estate for purposes of determining compliance with
12 subsections D(2) and D(3) of this Section.
13 C. Real estate for the accommodation of business.
14 An insurer may acquire, manage, and dispose of real
15 estate for the convenient accommodation of the insurer's
16 (which may include its affiliates) business operations,
17 including home office, branch office and field office
18 operations.
19 (1) Real estate acquired under this subsection may
20 include excess space for rent to others, if the excess space,
21 valued at its fair market value, would otherwise be a
22 permitted investment under subsection B of this Section and
23 is so qualified by the insurer;
24 (2) The real estate acquired under this subsection may
25 be subject to one or more mortgages, liens or other
26 encumbrances, the amount of which shall, to the extent that
27 the obligations secured by the mortgages, liens or
28 encumbrances are without recourse to the insurer, be deducted
29 from the amount of the investment of the insurer in the real
30 estate for purposes of determining compliance with subsection
31 D(4) of this Section; and
32 (3) For purposes of this subsection, business operations
33 shall not include that portion of real estate used for the
34 direct provision of health care services by an insurer whose
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1 insurance premiums and required statutory reserves for
2 accident and health insurance constitute at least 95% of
3 total premium considerations or total statutory required
4 reserves, respectively. An insurer may acquire real estate
5 used for these purposes under subsection B of this Section.
6 D. Quantitative limitations.
7 (1) An insurer shall not acquire an investment under
8 subsection A of this Section if, as a result of and after
9 giving effect to the investment, the aggregate amount of all
10 investments then held by the insurer under subsection A of
11 this Section would exceed:
12 (a) 1% of its admitted assets in mortgage loans covering
13 any one secured location;
14 (b) 0.25% of its admitted assets in construction loans
15 covering any one secured location; or
16 (c) 1% of its admitted assets in construction loans in
17 the aggregate.
18 (2) An insurer shall not acquire an investment under
19 subsection B of this Section if, as a result of and after
20 giving effect to the investment and any outstanding
21 guarantees made by the insurer in connection with the
22 investment, the aggregate amount of investments then held by
23 the insurer under subsection B of this Section plus the
24 guarantees then outstanding would exceed:
25 (a) 1% of its admitted assets in any one parcel or group
26 of contiguous parcels of real estate, except that this
27 limitation shall not apply to that portion of real estate
28 used for the direct provision of health care services by an
29 insurer whose insurance premiums and required statutory
30 reserves for accident and health insurance constitute at
31 least 95% of total premium considerations or total statutory
32 required reserves, respectively, such as hospitals, medical
33 clinics, medical professional buildings or other health
34 facilities used for the purpose of providing health services;
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1 or
2 (b) The lesser of 10% of its admitted assets or 40% of
3 its surplus as regards policyholders in the aggregate, except
4 for an insurer whose insurance premiums and required
5 statutory reserves for accident and health insurance
6 constitute at least 95% of total premium considerations or
7 total statutory required reserves, respectively, this
8 limitation shall be increased to 15% of its admitted assets
9 in the aggregate.
10 (3) An insurer shall not acquire an investment under
11 subsection A or B of this Section if, as a result of and
12 after giving effect to the investment and any guarantees it
13 has made in connection with the investment, the aggregate
14 amount of all investments then held by the insurer under
15 subsections A and B of this Section plus the guarantees then
16 outstanding would exceed 25% of its admitted assets.
17 (4) The limitations of Section 126.23 shall not apply to
18 an insurer's acquisition of real estate under subsection C of
19 this Section. An insurer shall not acquire real estate under
20 subsection C of this Section if, as a result of and after
21 giving effect to the acquisition, the aggregate amount of all
22 real estate then held by the insurer under subsection C of
23 this Section would exceed 10% of its admitted assets. With
24 the permission of the Director, additional amounts of real
25 estate may be acquired under subsection C of this Section.
26 (215 ILCS 5/126.29 new)
27 Sec. 126.29. Securities lending and repurchase, reverse
28 repurchase, and dollar roll transactions. An insurer may
29 enter into securities lending, repurchase, reverse
30 repurchase, and dollar roll transactions with business
31 entities, subject to the following requirements:
32 A. The insurer's board of directors shall adopt a
33 written plan that is consistent with the requirements of the
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1 written plan in Section 126.4A that specifies guidelines and
2 objectives to be followed, such as:
3 (1) A description of how cash received will be invested
4 or used for general corporate purposes of the insurer;
5 (2) Operational procedures to manage interest rate risk,
6 counterparty default risk, the conditions under which
7 proceeds from reverse repurchase transactions may be used in
8 the ordinary course of business and the use of acceptable
9 collateral in a manner that reflects the liquidity needs of
10 the transaction; and
11 (3) The extent to which the insurer may engage in these
12 transactions.
13 B. The insurer shall enter into a written agreement for
14 all transactions authorized in this Section other than dollar
15 roll transactions. The written agreement shall require that
16 each transaction terminate no more than one year from its
17 inception or upon the earlier demand of the insurer. The
18 agreement shall be with the business entity counterparty, but
19 for securities lending transactions, the agreement may be
20 with an agent acting on behalf of the insurer, if the agent
21 is a qualified business entity, and if the agreement:
22 (1) Requires the agent to enter into separate agreements
23 with each counterparty that are consistent with the
24 requirements of this Section; and
25 (2) Prohibits securities lending transactions pursuant
26 to agreement with the agent or its affiliates.
27 C. Cash received in a transaction under this Section
28 shall be invested in accordance with this Article and in a
29 manner that recognizes the liquidity needs of the transaction
30 or used by the insurer for its general corporate purposes.
31 For so long as the transaction remains outstanding, the
32 insurer, its agent or custodian shall maintain, as to
33 acceptable collateral received in a transaction under this
34 Section, either physically or through the book entry systems
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1 of the Federal Reserve, Depository Trust Company,
2 Participants Trust Company or other securities depositories
3 approved by the Director:
4 (1) Possession of the acceptable collateral;
5 (2) A perfected security interest in the acceptable
6 collateral; or
7 (3) In the case of a jurisdiction outside of the United
8 States, title to, or rights of a secured creditor to, the
9 acceptable collateral.
10 D. The limitations of Sections 126.23 and 126.30 shall
11 not apply to the business entity counterparty exposure
12 created by transactions under this Section. For purposes of
13 calculations made to determine compliance with this
14 subsection, no effect will be given to the insurer's future
15 obligation to resell securities, in the case of a repurchase
16 transaction, or to repurchase securities, in the case of a
17 reverse repurchase transaction. An insurer shall not enter
18 into a transaction under this Section if, as a result of and
19 after giving effect to the transaction:
20 (1) The aggregate amount of securities then loaned or
21 sold to, or purchased from, any one business entity
22 counterparty under this Section would exceed 5% of its
23 admitted assets. In calculating the amount sold to or
24 purchased from a business entity counterparty under
25 repurchase or reverse repurchase transactions, effect may be
26 given to netting provisions under a master written agreement;
27 or
28 (2) The aggregate amount of all securities then loaned,
29 sold to or purchased from all business entities under this
30 Section would exceed 40% of its admitted assets but the
31 limitation of this subsection shall not apply to reverse
32 repurchase transactions for so long as the borrowing is used
33 to meet operational liquidity requirements resulting from an
34 officially declared catastrophe and subject to a plan
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1 approved by the Director.
2 E. In a dollar roll transaction, the insurer shall
3 receive cash in an amount at least equal to the market value
4 of the securities transferred by the insurer in the
5 transaction as of the transaction date.
6 F. The Director may promulgate reasonable rules for
7 investments and transactions under this Section including,
8 but not limited to, rules which impose financial solvency
9 standards, valuation standards, and reporting requirements.
10 (215 ILCS 5/126.30 new)
11 Sec. 126.30. Foreign investments and foreign currency
12 exposure.
13 A. Subject to the limitations of Section 126.23, an
14 insurer may acquire directly or indirectly through an
15 investment subsidiary, foreign investments, or engage in
16 investment practices with persons of or in foreign
17 jurisdictions, of substantially the same types as those that
18 an insurer is permitted to acquire under this Article, other
19 than of the type permitted under Section 126.25, if, as a
20 result and after giving effect to the investment:
21 (1) The aggregate amount of foreign investments then
22 held by the insurer under this subsection does not exceed 20%
23 of its admitted assets; and
24 (2) The aggregate amount of foreign investments then
25 held by the insurer under this subsection in a single foreign
26 jurisdiction does not exceed 10% of its admitted assets as to
27 a foreign jurisdiction that has a sovereign debt rating of
28 SVO 1 or 5% of its admitted assets as to any other foreign
29 jurisdiction.
30 B. Subject to the limitations of Section 126.23, an
31 insurer may acquire investments, or engage in investment
32 practices denominated in foreign currencies, whether or not
33 they are foreign investments acquired under subsection A of
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1 this Section, or additional foreign currency exposure as a
2 result of the termination or expiration of a hedging
3 transaction with respect to investments denominated in a
4 foreign currency, if, as a result of and after giving effect
5 to the transaction:
6 (1) The aggregate amount of investments then held by the
7 insurer under this subsection denominated in foreign
8 currencies does not exceed 15% of its admitted assets; and
9 (2) The aggregate amount of investments then held by the
10 insurer under this subsection denominated in the foreign
11 currency of a single foreign jurisdiction does not exceed 10%
12 of its admitted as to a foreign jurisdiction that has a
13 sovereign debt rating of SVO 1 or 5% of its admitted assets
14 as to any other foreign jurisdiction.
15 (3) However, an investment shall not be considered
16 denominated in a foreign currency if the acquiring insurer
17 enters into one or more contracts in transactions permitted
18 under Section 126.31 in which the business entity
19 counterparty agrees to exchange, or grants to the insurer the
20 option to exchange, all payments made on the foreign currency
21 denominated investment (or amounts equivalent to the payments
22 that are or will be due to the insurer in accordance with the
23 terms of such investment) for United States currency during
24 the period the contract or contracts are in effect to
25 insulate the insurer against loss caused by diminution of the
26 value of payments owed to the insurer due to future changes
27 in currency exchange rates.
28 C. In addition to investments permitted under
29 subsections A and B of this Section, an insurer that is
30 authorized to do business in a foreign jurisdiction, and that
31 has outstanding insurance, annuity or reinsurance contracts
32 on lives or risks resident or located in that foreign
33 jurisdiction and denominated in foreign currency of that
34 jurisdiction, may acquire foreign investments respecting that
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1 foreign jurisdiction, and may acquire investments denominated
2 in the currency of that jurisdiction, subject to the
3 limitations of Section 126.23. However, investments made
4 under this subsection in obligations of foreign governments,
5 their political subdivisions and government sponsored
6 enterprises shall not be subject to the limitations of
7 Section 126.23 if those investments carry an SVO rating of 1
8 or 2. The aggregate amount of investments acquired by the
9 insurer under this subsection shall not exceed the greater
10 of:
11 (1) The amount the insurer is required by law to invest
12 in the foreign jurisdiction; or
13 (2) 125% of the amount of its reserves, net of
14 reinsurance, and other obligations under the contracts.
15 D. In addition to investments permitted under
16 subsections A and B of this Section, an insurer that is not
17 authorized to do business in a foreign jurisdiction but which
18 has outstanding insurance, annuity or reinsurance contracts
19 on lives or risks resident or located in a foreign
20 jurisdiction and denominated in foreign currency of that
21 jurisdiction, may acquire foreign investments respecting that
22 foreign jurisdiction, and may acquire investments denominated
23 in the currency of that jurisdiction subject to the
24 limitations set forth of Section 126.24. However, investments
25 made under this subsection in obligations of foreign
26 governments, their political subdivisions and government
27 sponsored enterprises shall not be subject to the limitations
28 of Section 126.23 if those investments carry an SVO rating of
29 1 or 2. The aggregate amount of investments acquired by the
30 insurer under this subsection shall not exceed 105% of the
31 amount of its reserves, net of reinsurance, and other
32 obligations under the contracts on risks resident or located
33 in the foreign jurisdiction.
34 E. Investments acquired under this Section shall be
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1 aggregated with investments of the same types made under all
2 other Sections of this Article, and in a similar manner, for
3 purposes of determining compliance with the limitations, if
4 any, contained in the other Sections. Investments in
5 obligations of foreign governments, their political
6 subdivisions and government sponsored enterprises of these
7 persons, except for those exempted under subsections C and D
8 of this Section, shall be subject to the limitations of
9 Section 126.23.
10 (215 ILCS 5/126.31 new)
11 Sec. 126.31. Derivative transactions. An insurer may,
12 directly or indirectly through an investment subsidiary,
13 engage in derivative transactions under this Section under
14 the following conditions :
15 A. General conditions.
16 (1) An insurer may use derivative instruments under this
17 Section to engage in hedging transactions and income
18 generation transactions.
19 (2) An insurer shall not use derivative instruments for
20 a replication transaction until the Director promulgates
21 reasonable rules which set forth methods of disclosure and
22 reserving for risk-based capital and asset valuation reserve
23 for these investments. Any asset being replicated is subject
24 to all the provisions and limitations on the making thereof
25 specified in this Article with respect to investments by the
26 insurer as if the transaction constituted a direct investment
27 by the insurer in the replicated asset.
28 (3) An insurer shall be able to demonstrate to the
29 Director the intended hedging characteristics and the ongoing
30 effectiveness of the derivative transaction or combination of
31 transactions through cash flow testing or other appropriate
32 analyses.
33 (4) The Director may promulgate reasonable rules for
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1 investments and transactions under this Section including,
2 but not limited to, rules which impose financial solvency
3 standards, valuation standards, and reporting requirements.
4 B. Limitations on hedging transactions.
5 An insurer may enter into hedging transactions under this
6 Section if, as a result of and after giving effect to the
7 transaction :
8 (1) The aggregate statement value of options, caps,
9 floors and warrants not attached to another financial
10 instrument purchased and used in hedging transactions then
11 engaged in by the insurer does not exceed 7.5% of its
12 admitted assets;
13 (2) The aggregate statement value of options, caps and
14 floors written in hedging transactions then engaged in by the
15 insurer does not exceed 3% of its admitted assets; and
16 (3) The aggregate potential exposure of collars, swaps,
17 forwards and futures used in hedging transactions then
18 engaged in by the insurer does not exceed 6.5% of its
19 admitted assets.
20 C. Limitations on income generation transactions.
21 An insurer may enter into the following types of income
22 generation transactions subject to the quantitative limits of
23 subsection C(4):
24 (1) Sales of covered call options on noncallable fixed
25 income securities, callable fixed income securities if the
26 option expires by its terms prior to the end of the
27 noncallable period or derivative instruments based on fixed
28 income securities;
29 (2) Sales of covered call options on equity securities,
30 if the insurer holds in its portfolio, or can immediately
31 acquire through the exercise of options, warrants or
32 conversion rights already owned, the equity securities
33 subject to call during the complete term of the call option
34 sold;
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1 (3) Sales of covered puts on investments that the
2 insurer is permitted to acquire under this Article, if the
3 insurer has escrowed, or entered into a custodian agreement
4 segregating, cash or cash equivalents with a market value
5 equal to the amount of its purchase obligations under the put
6 during the complete term of the put option sold; or
7 (4) If as a result of and after giving effect to the
8 transactions, the aggregate statement value of the fixed
9 income assets that are subject to call plus the face value of
10 fixed income securities underlying a derivative instrument
11 subject to call, plus the amount of the purchase obligations
12 under the puts, does not exceed 10% of its admitted assets.
13 D. Counterparty exposure. An insurer shall include all
14 counterparty exposure amounts in determining compliance with
15 the limitations of Section 126.23.
16 E. Additional transactions. Pursuant to rules
17 promulgated under Section 126.8, the Director may approve
18 additional transactions involving the use of derivative
19 instruments in excess of the limits of subsection B of this
20 Section or for other risk management purposes, but
21 replication transactions shall not be permitted for other
22 than risk management purposes.
23 (215 ILCS 5/126.32 new)
24 Sec. 126.32. Additional investment authority.
25 A. Under this Section, an insurer may acquire
26 investments or engage in investment practices of any kind
27 that are not specifically prohibited by this Section 126.5
28 and are not derivative instruments without regard to any
29 limitation in Sections 126.23 through 126.30, but an insurer
30 shall not acquire an investment or engage in an investment
31 practice under this Section if, as a result of and after
32 giving effect to the transaction, the aggregate amount of the
33 investments then held by the insurer under this Section would
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1 exceed the greater of:
2 (1) Its unrestricted surplus; or
3 (2) The lesser of:
4 (a) 10% of its admitted assets; or
5 (b) 50% of its surplus as regards policyholders.
6 B. An insurer shall not acquire any investment or engage
7 in any investment practice under subsection A(2) of this
8 Section if, as a result of and after giving effect to the
9 transaction the aggregate amount of all investments in any
10 one person then held by the insurer under that subsection
11 would exceed 5% of its admitted assets.
12 (215 ILCS 5/124 rep. through 5/125.24a rep.)
13 Section 10. The Illinois Insurance Code is amended by
14 repealing Sections 124 through 125.24a.
15 Section 99. Effective date. This Act takes effect upon
16 becoming law.".