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91_SB1115eng SB1115 Engrossed LRB9102645JSpcA 1 AN ACT to amend the Illinois Insurance Code by changing 2 Section 107.06a and adding Article XI 1/2. 3 Be it enacted by the People of the State of Illinois, 4 represented in the General Assembly: 5 Section 5. The Illinois Insurance Code is amended by 6 changing Section 107.06a and adding Article XI 1/2 as 7 follows: 8 (215 ILCS 5/107.06a) (from Ch. 73, par. 719.06a) 9 Sec. 107.06a. Organization under Illinois Insurance 10 Code. 11 (a) After December 31, 1997, a syndicate or limited 12 syndicate, except for a limited syndicate formed as a 13 partnership, may only be organized pursuant to Sections 7, 8, 14 10, 11, 12, 14, 14.1 (other than subsection (d) thereof), 15 15 (other than subsection (d) thereof), 18, 19, 20, 21, 22, 23, 16 25, 27.1, 28, 28.1, 28.2, 29, 30, 31, 32, 32.1, 33, and 35.1 17 and Article X of this Code, to carry on the business of a 18 syndicate, or limited syndicate under Article V-1/2 of this 19 Code; provided that such syndicate or limited syndicate is 20 admitted to the Exchange. 21 (b) After December 31, 1997, syndicates and limited 22 syndicates are subject to the following: 23 (1) Articles I, IIA, VIII, VIII 1/2, X, XI, XI 1/2, 24 XII, XII 1/2, XIII, XIII 1/2, XXIV, XXV (Sections 408 25 and 412 only), and XXVIII (except for Sections 445, 26 445.1, 445.2, 445.3, 445.4, and 445.5) of this Code; 27 (2) Subsections (2) and (3) of Section 155.04 and 28 Sections 13, 132.1 through 140, 141a, 144, 155.01, 29 155.03, 378, 379.1, 393.1, 395, and 396 of this Code; 30 (3) the Reinsurance Intermediary Act; and 31 (4) the Producer Controlled Insurer Act. SB1115 Engrossed -2- LRB9102645JSpcA 1 (c) No other provision of this Insurance Code shall be 2 applicable to any such syndicate or limited syndicate except 3 as provided in this Article V-1/2. 4 (Source: P.A. 89-97, eff. 7-7-95; 90-499, eff. 8-19-97; 5 90-794, eff. 8-14-98.) 6 (215 ILCS 5/Art. XI 1/2 heading new) 7 Article XI 1/2. 8 Protected Cell Companies 9 (215 ILCS 5/179A-1 new) 10 Sec. 179A-1. Short title. This Article may be cited as 11 the Protected Cell Company Law. 12 (215 ILCS 5/179A-5 new) 13 Sec. 179A-5. Purpose. Insurance securitization has been 14 developed as a means of accessing alternative sources of 15 capital and diversifying credit risk in order to enhance an 16 insurance company's ability to both assume risk and stabilize 17 underwriting results. Under the terms of the typical debt 18 instrument underlying an insurance securitization 19 transaction, prepaid principal is repaid to the investor on a 20 specified maturity date with interest, unless a trigger event 21 occurs. The proceeds of the debt instrument both 22 collateralize the insurance company's obligations under 23 specified contracts of insurance if a trigger event occurs, 24 as well as the insurance company's obligation to repay the 25 debt instrument if a trigger event does not occur. 26 Traditionally, insurance securitization transactions have 27 been performed through alien companies in order to utilize 28 efficiencies available to alien companies that are not 29 currently available to domestic companies. In order to 30 create more efficiency in conducting insurance 31 securitization, to allow domestic companies easier access SB1115 Engrossed -3- LRB9102645JSpcA 1 to alternative sources of capital, and to promote the 2 benefits of insurance securitization generally, this Article 3 is required. 4 (215 ILCS 5/179A-10 new) 5 Sec. 179A-10. Definitions. 6 "Company" means protected cell company. 7 "Domestic company" means an insurance company domiciled 8 in the State of Illinois. 9 "General account" means the assets and liabilities of a 10 protected cell company other than protected cell assets and 11 protected cell liabilities. 12 "Indemnity trigger" means a transaction term in which 13 relief of the issuer's obligation to repay investors is 14 triggered by its suffering a specified level of losses under 15 its policies of insurance or reinsurance. 16 "Insurance securitization" means the entering into of 17 debt instruments supported in full by cash or readily 18 marketable securities with investors by a domestic company 19 where repayment of principal or interest, or both, to 20 investors pursuant to the transaction terms is contingent 21 upon the occurrence or nonoccurrence of an event with respect 22 to which the domestic company is exposed to loss under 23 policies or contracts of insurance or reinsurance it has 24 issued. 25 "Market value" has the meaning given that term in Article 26 VIII of this Code (Investments of Domestic Companies). 27 "Protected cell" means an identified pool of assets and 28 liabilities of a domestic company segregated and insulated by 29 means of this Article from the remainder of the company's 30 assets and liabilities. 31 "Protected cell account" means a specifically identified 32 bank or custodial account established by a protected cell 33 company for the purpose of physically segregating the SB1115 Engrossed -4- LRB9102645JSpcA 1 protected cell assets of one protected cell from the 2 protected cell assets of other protected cells and from the 3 assets of the protected cell company's general account. 4 "Protected cell assets" means all assets identified with 5 and attributable to a specific protected cell of a protected 6 cell company, including assets physically segregated in a 7 protected cell account. 8 "Protected cell liabilities" means all liabilities 9 identified with and attributable to a specific protected cell 10 of a protected cell company. Protected cell liabilities 11 include liabilities representing the insurance obligations of 12 the protected cell as well as obligations of the protected 13 cell arising out of any insurance securitization transactions 14 of the protected cell. 15 "Protected cell company" means a domestic company which 16 has one or more protected cells. 17 (215 ILCS 5/179A-15 new) 18 Sec. 179A-15. Establishment of protected cells. A 19 domestic company may, with the prior written approval by the 20 Director of a plan of operation submitted by the domestic 21 company with respect to each protected cell, establish one or 22 more protected cells. Upon the written approval by the 23 Director of the plan of operation, which shall include, but 24 not be limited to, the specific business and investment 25 objectives of the protected cell, the company may, in 26 accordance with the approved plan of operation, attribute to 27 the protected cell amounts both reflective of insurance 28 obligations with respect to its insurance business and assets 29 to fund those obligations. A protected cell shall have its 30 own distinct name or designation, which shall include the 31 words "protected cell". The company shall transfer all assets 32 attributable to a protected cell to one or more separately 33 established and identified protected cell accounts bearing SB1115 Engrossed -5- LRB9102645JSpcA 1 the name or designation of that protected cell. Protected 2 cell assets shall be held in the protected cell accounts for 3 the purpose of satisfying the obligations of that protected 4 cell. All sales, exchanges, transfers, or other attributions 5 of assets and liabilities between a protected cell and the 6 general account or other protected cells shall be in 7 accordance with the plan of operation approved by the 8 Director or shall be otherwise approved by the Director. 9 Unless otherwise approved by the Director, no sale, exchange, 10 transfer, or other attribution of assets or liabilities may 11 be made by a company between any of its protected cells or 12 between the company's general account and one or more of its 13 protected cells unless, in the case of an attribution to a 14 protected cell, the attribution is made solely to establish 15 the protected cell or, in the case of an attribution from a 16 protected cell to the company's general account, the 17 attribution is made solely to support the company's insurance 18 obligations that are the subject of the business of the 19 protected cell. Any sale, exchange, transfer, or other 20 attribution of assets and liabilities between the general 21 account and a protected cell, between 2 or more protected 22 cells of the company, or from investors in the form of 23 principal on a debt instrument issued by a protected cell 24 shall be in cash or in readily marketable securities with 25 established market values unless otherwise approved in 26 advance in writing by the Director. 27 The creation of a protected cell does not create, in 28 respect of that protected cell, a legal person separate from 29 the company. Amounts attributed to a protected cell under 30 this Article, including assets transferred to a protected 31 cell account, are owned by the company and the company may 32 not be, nor hold itself out to be, a trustee with respect to 33 those protected cell assets of that protected cell account. 34 Notwithstanding the foregoing, the company may allow for a SB1115 Engrossed -6- LRB9102645JSpcA 1 security interest to attach to protected cell assets or a 2 protected cell account when in favor of a creditor of the 3 protected cell and otherwise allowed under applicable law. 4 Nothing in this Article shall be construed to prohibit 5 the company from contracting with or arranging for an 6 investment advisor, commodity trading advisor, or other third 7 party to manage the protected cell assets of a protected 8 cell, provided that all remuneration, expenses, and other 9 compensation of the third party advisor or manager are 10 payable from the protected cell assets of that protected cell 11 and not from the protected cell assets of other protected 12 cells or the assets of the company's general account. 13 A domestic company that is a protected cell company shall 14 establish such administrative and accounting procedures as 15 are necessary to properly identify the one or more protected 16 cells of the company and the protected cell assets and 17 protected cell liabilities attributable thereto. It shall be 18 the duty of the directors of a protected cell company to (i) 19 keep protected cell assets and protected cell liabilities 20 separate and separately identifiable from the assets and 21 liabilities of the company's general account and (ii) to keep 22 protected cell assets and protected cell liabilities 23 attributable to one protected cell separate and separately 24 identifiable from protected cell assets and protected cell 25 liabilities attributable to other protected cells. 26 Notwithstanding the foregoing, and subject to the provisions 27 of Section 179A-35, the remedy of tracing shall be applicable 28 to protected cell assets when commingled with protected cell 29 assets of other protected cells or the assets of the 30 company's general account. 31 (215 ILCS 5/179A-20 new) 32 Sec. 179A-20. Use and operation of protected cells. 33 Unless otherwise approved by the Director, the company shall, SB1115 Engrossed -7- LRB9102645JSpcA 1 when establishing a protected cell, attribute to the 2 protected cell assets with a value at least equal to the 3 reserves and other insurance liabilities attributed to that 4 protected cell. The protected cell assets of any protected 5 cell may not be charged with liabilities arising out of any 6 other business the company may conduct. All contracts or 7 other documentation reflecting the obligations of a 8 protected cell to the general account shall clearly indicate 9 that only the assets of the protected cell are available for 10 the obligations of the protected cell. 11 Unless otherwise approved by the Director, assets 12 attributed to a protected cell must be valued at their 13 market value on the date of valuation, or if there is no 14 readily available market, then as provided in the contract or 15 the rules or other written agreement applicable to the 16 protected cell. 17 The income, gains, and losses, realized or unrealized, 18 from protected cell assets and protected cell liabilities 19 must be credited to or charged against the protected cell 20 without regard to other income, gains, or losses of the 21 company, including income, gains, or losses of other 22 protected cells. Amounts attributed to a protected cell and 23 accumulations thereon may be invested and reinvested without 24 regard to any requirements or limitations of Article VIII of 25 this Code (Investments of Domestic Companies), and the 26 investments in a protected cell or cells may not be taken 27 into account in applying the investment limitations otherwise 28 applicable to the investments of the company. 29 A protected cell company shall, in respect of any of its 30 protected cells, engage in fully funded indemnity-triggered 31 insurance securitization to support in full the protected 32 cell liabilities attributable to that protected cell. A 33 transaction that is not fully funded is prohibited. An 34 insurance securitization that is not indemnity-triggered and SB1115 Engrossed -8- LRB9102645JSpcA 1 does not support in full the protected cell obligations of a 2 protected cell shall be prohibited absent specific permission 3 by the Director in accordance with the authority granted 4 under Section 179A-45 and the guidance of the National 5 Association of Insurance Commissioners, as such guidance is 6 developed. A protected cell may pay interest or other 7 consideration on any outstanding debt or other obligation 8 attributable to that protected cell, and nothing in this 9 paragraph shall be construed or interpreted to prevent a 10 protected cell from entering into a swap agreement or other 11 transaction that has the effect of guaranteeing such interest 12 or other consideration. 13 In all cases in which a protected cell engages in an 14 insurance securitization, the financial instrument effecting 15 such transaction shall contain provisions identifying the 16 protected cell to which the transaction will be attributed. 17 In addition, the financial instrument shall clearly disclose 18 that the assets of that protected cell are only available 19 to pay the obligations of that protected cell. 20 Notwithstanding the foregoing, and subject to the provisions 21 of this Article and any other applicable law or rule, the 22 failure to include such language in the financial instrument 23 shall not be used as the sole basis by creditors, reinsurers, 24 or other claimants to circumvent the provisions of this 25 Article. 26 At the cessation of business of a protected cell, the 27 protected cell company shall voluntarily wind up the 28 protected cell in accordance with a plan approved by the 29 Director. 30 (215 ILCS 5/179A-25 new) 31 Sec. 179A-25. Reach of creditors and other claimants. 32 Protected cell assets shall only be available to the 33 creditors of the company who are creditors in respect of that SB1115 Engrossed -9- LRB9102645JSpcA 1 protected cell and shall thereby be entitled, in conformity 2 with the provisions of this Article, to have recourse to the 3 protected cell assets attributable to that protected cell, 4 and shall be absolutely protected from the creditors of the 5 company who are not creditors in respect of that protected 6 cell and who, accordingly, shall not be entitled to have 7 recourse to the protected cell assets attributable to that 8 protected cell. Creditors of a protected cell shall not be 9 entitled to have recourse against the protected cell assets 10 of other protected cells or the assets of the company's 11 general account. 12 When an obligation of a protected cell company to a 13 person arises from a transaction, or is otherwise imposed, in 14 respect of a protected cell, (i) that obligation of the 15 company shall extend only to, and the person shall, in 16 respect of that obligation, be entitled to have recourse only 17 to the protected cell assets attributable to that protected 18 cell and (ii) that obligation of the company shall not extend 19 to, and that person shall not, in respect of that obligation, 20 be entitled to have recourse to the protected cell assets of 21 any other protected cell or the assets of the company's 22 general account. 23 When an obligation of a protected cell company relates 24 solely to the general account, the obligation of the company 25 shall extend only to, and that creditor shall, in respect of 26 that obligation, be entitled to have recourse only to, the 27 company's general account. 28 A protected cell shall only be authorized to assume an 29 insurance obligation directly from another protected cell of 30 the company or the company's general account, and under no 31 circumstances shall a protected cell be authorized to issue 32 insurance or reinsurance policies or contracts directly to 33 policyholders or reinsureds or have any obligation to the 34 policyholders of the company's general account. The SB1115 Engrossed -10- LRB9102645JSpcA 1 activities and obligations of a protected cell are not 2 subject to the provisions of Article XXXIII1/2 (Illinois Life 3 and Health Guaranty Association Law) or Article XXXIV 4 (Illinois Insurance Guaranty Fund), and protected cells shall 5 not be assessed by or otherwise be required to contribute to 6 any guaranty fund or guaranty association in this State. 7 Nothing in this provision shall affect the activities or 8 obligations of a company's general account. 9 In no event shall the establishment of one or more 10 protected cells alone constitute or be deemed to be a 11 fraudulent conveyance, an intent by the company to defraud 12 creditors, or the carrying out of business by the company for 13 any other fraudulent purpose. 14 (215 ILCS 5/179A-30 new) 15 Sec. 179A-30. Rehabilitation and liquidation of 16 protected cell companies. Notwithstanding any contrary 17 provision in this Code, the rules promulgated under this 18 Code, or any other applicable law or rule, upon any order of 19 rehabilitation, conservation, or liquidation of a domestic 20 company that is a protected cell company, the receiver shall 21 be bound to deal with the company's assets and liabilities, 22 including protected cell assets and protected cell 23 liabilities, in accordance with the requirements set forth in 24 this Article. 25 With respect to amounts recoverable under any insurance 26 securitization entered into or outstanding in any protected 27 cell of a protected cell company, the amount recoverable by 28 the receiver shall not be reduced or diminished as a result 29 of the entry of an order of rehabilitation, conservation, or 30 liquidation with respect to the protected cell company or any 31 of its protected cells notwithstanding any provisions to the 32 contrary in the financial instrument governing such insurance 33 securitization. SB1115 Engrossed -11- LRB9102645JSpcA 1 (215 ILCS 5/179A-35 new) 2 Sec. 179A-35. Penalties. Any person violating the 3 provisions of this Article shall be subject to any and all 4 enforcement procedures either currently employed or 5 subsequently promulgated by the Department including, but not 6 limited to, the imposition of fines, sanctions or civil 7 penalties, or an order to cease and desist from the 8 establishment of additional protected cells. 9 (215 ILCS 5/179A-40 new) 10 Sec. 179A-40. No transaction of an insurance business. 11 No insurance securitization effected under the provisions of 12 this Article shall be deemed to be an insurance policy or 13 contract of insurance and no investor in a securitization 14 transaction shall, by sole means of such investment, be 15 required to be licensed as an insurance company in the State 16 of Illinois. 17 (215 ILCS 5/179A-45 new) 18 Sec. 179A-45. Rules. The Director may promulgate 19 reasonable rules as may be necessary to effectuate the 20 purposes of this Article. 21 Section 99. Effective date. This Act takes effect upon 22 becoming law.