Download this document in MS Word 97 format

NO. 84. AN ACT RELATING TO INVESTMENTS OF INSURANCE COMPANIES.

(H.607)

It is hereby enacted by the General Assembly of the State of Vermont:

Sec. 1. 8 V.S.A. § 3461 is amended to read:

§ 3461. DEFINITIONS

* * *

(1) “Admitted assets” means assets permitted to be reported as admitted assets on the annual statutory financial statement of the insurer for the next preceding year or as shown by a current financial statement.

*[(1)]*(2) *[The words "appraised"]* “Appraised” or "appraised value" when used in connection with real estate shall refer to appraisals made or examined and approved by an insurer or its agents. An insurer shall have the right to make one or more renewals or extensions of a loan secured by real estate provided any renewal or extension is based upon a reexamination of the facts and upon an appraisal made within three years. *[(3) "Fixed charges" shall be construed to include interest on funded and unfunded debt, amortization of debt discount and expense, and rentals for leased properties. If net income is determined from a consolidated statement, "fixed charges" shall include payments to minority interests and the fixed dividend requirements of the subsidiaries, but not including intercompany requirements or payments.]*

(3) “Asset-backed security” means a security or other instrument, excluding a mutual fund, evidencing an interest in, or the right to receive payments from, or payable from distributions on, an admitted asset, a pool of admitted assets or specifically divisible cash flows which are legally transferred to a trust or another special purpose bankruptcy-remote business entity, on the following conditions:

(A) The trust or other business entity is established solely for the purpose of acquiring specific types of admitted assets or rights to cash flows, issuing securities and other instruments representing an interest in or right to receive cash flows from those admitted assets or rights, and engaging in activities required to service the admitted assets or rights and any credit enhancement or support features held by the trust or other business entity; and

(B) The admitted assets of the trust or other business entity consist solely of interest bearing obligations or other contractual obligations representing the right to receive payment from the cash flows from the admitted assets or rights. However, the existence of credit enhancements, such as letters of credit or guarantees, or support features such as swap agreements, shall not cause a security or other instrument to be ineligible as an asset-backed security.

(4) “Canada” means Canada, any province of Canada or any political subdivision of Canada.

(5) “Cap” means an agreement obligating the seller to make payments to the buyer, with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number, sometimes called the strike rate or strike price.

(6) "Class one bond mutual fund" means a mutual fund that at all times qualifies for investment using applicable SVO standards.

(7) “Class one money market mutual fund” means a money market mutual fund that at all times qualifies for investment using applicable SVO standards.

(8) “Collar” means an agreement to receive payments as the buyer of an option, cap or floor and to make payments as the seller of a different option, cap or floor.

(9) "Counterparty exposure amount" means:

(A) The net amount of credit risk attributable to a derivative instrument entered into with a business entity other than through a qualified exchange, qualified foreign exchange or cleared through a qualified clearinghouse. Such derivative instruments are hereinafter referred to as "over-the-counter derivative instruments". The amount of credit risk equals:

(i) The market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or

(ii) Zero, if the liquidation of the derivative instrument would not result in a final cash payment to the insurer.

(B) If over-the-counter derivative instruments are entered into under a written master agreement which provides for netting of payments owed by the respective parties, and the domiciliary jurisdiction of the counterparty is either within the United States or, if not within the United States, within a foreign jurisdiction listed in the Purposes and Procedures of the Securities Valuation Office as eligible for netting, the net amount of credit risk shall be the greater of zero or the net sum of:

(i) The market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment to the insurer; and

(ii) The market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment by the insurer to the business entity.

(C) For open transactions, market value shall be determined at the end of the most recent quarter of the insurer’s fiscal year, and shall be reduced by the market value of acceptable collateral held by the insurer or placed in escrow by one or both parties.

(10) "Covered" means that an insurer owns or can immediately acquire, through the exercise of options, warrants or conversion rights already owned, the underlying interest in order to fulfill or secure its obligations under a call option, cap or floor it has written or has set aside under a custodial or escrow agreement cash or cash equivalents with a market value equal to the amount required to fulfill its obligations under a put option it has written, in an income generation transaction.

(11) “Derivative instrument” means an agreement, option, instrument or a series or combination thereof:

(A) to make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests or to make a cash settlement in lieu thereof; or

(B) that has a price, performance, value or cash flow based primarily upon the actual or expected price, level, performance, value or cash flow of one or more underlying interests. Derivative instruments include options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, futures and any other agreements, options or instruments substantially similar thereto or any series or combination thereof and any agreements, options or instruments permitted under this chapter. Derivative instruments shall not include an investment authorized under subdivisions (1) through (14) and (16) through (29) of section 3463 of this title.

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

*[(2)]*(13) "Direct" when used in connection with "obligation" means that a designated obligor shall be primarily liable on the instrument representing the obligation.

(14) "Domestic jurisdiction" means the United States, any state of the United States or any political subdivision of any of the foregoing.

(15) “Equity interest” means any of the following that are not rated credit instruments:

(A) Common stock;

(B) Preferred stock;

(C) Trust certificate;

(D) Equity investment in an investment company other than a money market mutual fund or a class one bond mutual fund;

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

(F) An ownership interest in minerals, oil or gas, the rights to which have been separated from the underlying fee interest in the real estate where the minerals, oil or gas is located;

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

(H) Limited partnership interests;

(I) Member interests in limited liability companies;

(J) Warrants or other rights to acquire equity interests that are created by the person that owns or would issue the equity to be acquired; or

(K) Instruments that would be rated credit instruments except for the provisions of subdivision (39)(B) of this section.

(16) "Floor" means an agreement obligating the seller to make payments to the buyer in which each payment is based on the amount by which a predetermined number, sometimes called the floor rate or price, exceeds a reference price, level, performance or value of one or more underlying interests.

(17)(A) “Foreign investment” means an investment in a foreign jurisdiction, or an investment in a person, real estate or asset domiciled in a foreign jurisdiction, that is substantially of the same type as those eligible for investment under this subchapter, other than under subdivision 3463(28). An investment shall not be deemed to be foreign if the issuing person, qualified primary credit source or qualified guarantor is a domestic jurisdiction or Canada or a person domiciled in a domestic jurisdiction or Canada, unless:

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

(ii) The investment is not assumed, accepted, guaranteed or insured or otherwise backed by a domestic jurisdiction or Canada or a person that is not a shell business entity domiciled in a domestic jurisdiction or Canada.

(B) For purposes of this definition:

(i) “Qualified guarantor” means a guarantor against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction or Canada.

(ii) “Qualified primary credit source” means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction or Canada.

(iii) “Shell business entity” means a business entity having no economic substance except as a vehicle for owning interests in assets issued, owned or previously owned by a person domiciled in a foreign jurisdiction.

(18) “Foreign jurisdiction” means a jurisdiction other than a domestic jurisdiction or Canada.

(19) “Forward" means an agreement (other than a future) to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests.

(20) “Future” means an agreement, traded on a qualified exchange or qualified foreign exchange, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests.

*[(4)]*(21) "Guaranteed" means that the guarantor will perform the obligation of the obligor or will purchase the obligation to the extent of the guaranty.

(22) “Hedging transaction” means a derivative transaction which is entered into and maintained to reduce:

(A) the risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities which the insurer has acquired or incurred or anticipates acquiring or incurring; or

(B) the currency exchange rate risk or the degree of exposure as to assets or liabilities which an insurer has acquired or incurred or anticipates acquiring or incurring.

(23) “High grade investment” means a rated credit instrument rated 1 or 2 by the SVO or that meets and continues to meet the conditions for exemption as provided in section 3461d of this title.

(24) “Income generation transaction” means a derivative transaction involving the writing of covered call options, covered put options, covered caps or covered floors that is intended to generate income or enhance return.

*[(5)]*(25) “Institution” *[shall be construed as a corporation, a joint stock association, a business trust, an unincorporated association, a cooperative, or a business joint venture]* or "business entity" includes a sole proprietorship, corporation, limited liability company, association, partnership, joint stock company, joint venture, mutual fund, trust, joint tenancy or other similar form of business organization, whether organized for profit or not-for-profit.

(26) “Lower grade investment” or "Lower grade obligation" means a rated credit instrument rated 4, 5 or 6 by the SVO.

(27) “Medium grade investment” or "Medium grade obligation" means a rated credit instrument rated 3 by the SVO.

(28) “Money market mutual fund” means a mutual fund that meets the conditions of 17 Code of Federal Regulations Par. 270.2a-7, under the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 et seq.), as amended or renumbered.

*[(6)]*(29) *["Mortgage" shall include a trust deed securing an obligation or a security interest in the case of personal property.]* "Mortgage loan" means an obligation secured by a mortgage, deed of trust, trust deed or other consensual lien on real estate.

(30) “Mutual fund” means an investment company or, in the case of an investment company that is organized as a series company, an investment company series that, in either case, is registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 et seq.), as amended.

(31) “NAIC” means the National Association of Insurance Commissioners.

*[(8)]*(32) "Obligation" *[shall be construed as interest bearing bonds, debentures, notes or other evidences of indebtedness]* means a bond, note, debenture, trust certificate, including an equipment certificate, production payment, negotiable bank certificate of deposit, bankers’ acceptance, credit tenant plan, loan secured by financing net leases and other evidence of indebtedness for the payment of money (or participations, certificates or other evidences of interest in any of the foregoing). *[(9) "Preferred dividend requirements" shall be construed as dividends payable on preferred stock outstanding in the hands of the public, whether actually paid or not.]*

(33) “Option” means an agreement giving the buyer the right to buy or receive (a “call option”), sell or deliver (a “put option”), enter into, extend or terminate or effect a cash settlement based on the actual or expected price, level, performance or value of one or more underlying interests.

(34) "Potential exposure" means the amount determined in accordance with the NAIC Annual Statement Instructions.

(35) “Qualified bank” means:

(A) A national bank, state bank or trust company that at all times is no less than adequately capitalized as determined by standards adopted by United States banking regulators, and that is either regulated by state banking laws or is a member of the Federal Reserve System; or

(B) A bank or trust company incorporated or organized under the laws of a country other than the United States that is regulated as a bank or trust company by that country’s government or an agency thereof, and that at all times is no less than adequately capitalized as determined by the standards adopted by international banking authorities.

(36) "Qualified clearinghouse" means a clearinghouse for, and subject to the rules of, a qualified exchange or a qualified foreign exchange, which provides clearing services, including acting as a counterparty to each of the parties to a transaction, such that the parties no longer have credit risk as to each other.

(37) “Qualified exchange” means:

(A) A securities exchange registered as a national securities exchange or a securities market regulated under the Securities Exchange Act of 1934 (15 U.S.C. §§ 78 et seq.), as amended;

(B) A board of trade or commodities exchange designated as a contract market by the Commodity Futures Trading Commission or any successor thereof;

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

(D) A designated offshore securities market as defined in Securities Exchange Commission Regulation S, 17 C.F.R. Part 230, as amended; or

(E) A qualified foreign exchange.

(38) “Qualified foreign exchange” means a foreign exchange, board of trade or contract market located outside the United States, its territories or possessions:

(A) That has received regulatory comparability relief under Commodity Futures Trading Commission (CFTC) Rule 30.10 (as set forth in Appendix C to Part 30 of the CFTC’s Regulations, 17 C.F.R. Part 30);

(B) That is, or its members are, subject to the jurisdiction of a foreign futures authority that has received regulatory comparability relief under CFTC Rule 30.10 (as set forth in Appendix C to Part 30 of the CFTC’s Regulations, 17 C.F.R. Part 30) as to futures transactions in the jurisdiction where the exchange, board of trade or contract market is located; or

(C) Upon which foreign stock index futures contracts are listed that are the subject of no-action relief issued by the CFTC’s Office of General Counsel, provided that an exchange, board of trade or contract market that qualifies as a “qualified foreign exchange” only under this subdivision shall only be a “qualified foreign exchange” as to foreign stock index futures contracts that are the subject of no-action relief.

(39)(A) “Rated credit instrument” means a contractual right to receive cash or another rated credit instrument from another entity, which instrument:

(i) is rated or required to be rated by the SVO or meets and continues to meet the conditions for exemption as provided in section 3461d of this title;

(ii) in the case of an instrument with a maturity of 397 days or less, is issued, guaranteed or insured by an entity that is rated by, or another obligation of such entity is rated by, the SVO or by a nationally-recognized statistical rating organization recognized by the SVO;

(iii) in the case of an instrument with a maturity of 90 days or less, is issued by a qualified bank;

(iv) is a share of a class one bond mutual fund; or

(v) is a share of a money market mutual fund.

(B) “Rated credit instrument” does not mean:

(i) an instrument that is mandatorily or, at the option of the issuer, convertible to an equity interest; or

(ii) a security that has a par value and whose terms provide that the issuer’s net obligation to repay all or part of the security’s par value is determined by reference to the performance of an equity, a commodity, a foreign currency or an index of equities, commodities, foreign currencies or combinations thereof.

(40) “Special rated credit instrument” means a rated credit instrument that is:

(A) An instrument that is structured so that, if it is held until retired by or on behalf of the issuer, its rate of return, based on its purchase cost and any cash flow stream possible under the structure of the transaction, may become negative due to reasons other than the credit risk associated with the issuer of the instrument; however, a rated credit instrument shall not be a special rated credit instrument under this subdivision if it is:

(i) A share in a class one bond mutual fund;

(ii) An instrument, other than an asset-backed security, with payments of par value fixed as to amount and timing, or callable but in any event payable only at par or greater, and interest or dividend cash flows that are based on either a fixed or variable rate determined by reference to a specified rate or index;

(iii) An instrument, other than an asset-backed security, that has a par value, and is purchased at a price no greater than one hundred ten percent (110%) of par;

(iv) An instrument, including an asset-backed security, whose rate of return would become negative only as a result of a prepayment due to casualty, condemnation or economic obsolescence of collateral or change of law;

(v) An asset-backed security that relies on collateral that meets the requirements of subdivision (ii) of this subdivision (40)(A), the par value of which collateral:

(I) Is not permitted to be paid sooner than one-half of the remaining term to maturity from the date of acquisition;

(II) Is permitted to be paid prior to maturity only at a premium sufficient to provide a yield to maturity for the investment, considering the amount prepaid and reinvestment rates at the time of early repayment, at least equal to the yield to maturity of the initial investment; or

(III) Is permitted to be paid prior to maturity at a premium at least equal to the yield of a treasury issue of comparable remaining life; or

(vi) An asset-backed security that relies on cash flows from assets that are not prepayable at any time at par, but is not otherwise governed by subdivision (v) of this subdivision (40)(A), if the asset-backed security has a par value reflecting principal payments to be received if held until retired by or on behalf of the issuer, and is purchased at a price no greater than one hundred five percent (105%) of such par amount.

(B) An asset-backed security that:

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

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

(iii) Has a negative rate of return at the time of acquisition if a prepayment threshold assumption is used with such prepayment threshold assumption defined as either:

(I) Two times the prepayment expectation reported by a recognized, publicly available source as being the median of expectations contributed by broker dealers or other entities, except insurers, engaged in the business of selling or evaluating such securities or assets. The prepayment expectation used in this calculation shall be, at the insurer's election, the prepayment expectation for pass-through securities of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or for other assets of the same type as the assets that underlie the asset-backed security, in either case with a gross weighted average coupon comparable to the gross weighted average coupon of the assets that underlie the asset-backed security; or

(II) Another prepayment threshold assumption specified by the commissioner by regulation.

(C) For purposes of subdivision (B) of this subdivision (40), if the asset-backed security is purchased in combination with one or more other asset-backed securities that are supported by identical underlying collateral, the insurer may calculate the rate of return for these specific combined asset-backed securities in combination. The insurer must maintain documentation demonstrating that such securities were acquired and are continuing to be held in combination.

*[(10)]*(41) "State of the United States" means any state of the United States of America, and the District of Columbia, and the Commonwealth of Puerto Rico.

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

(43) “Swap” means an agreement to exchange or to net payments at one or more times based on the actual or expected price, level, performance or value of one or more underlying interests.

(44) “Underlying interest” means the assets, liabilities, other interests or a combination thereof underlying a derivative instrument, such as any one or more securities, currencies, rates, indices, commodities or derivative instruments.

(45) “Warrant” means an instrument that gives the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement. Warrants may be issued alone or in connection with the sale of other securities, for example, as part of a merger or recapitalization agreement or to facilitate divestiture of the securities of another business entity.

Sec. 2. 8 V.S.A. § 3461a is added to read:

§ 3461a. GENERAL LIMITATIONS AND DIVERSIFICATION

REQUIREMENTS FOR PROPERTY AND CASUALTY,

FINANCIAL GUARANTY AND MORTGAGE GUARANTY

INSURERS

(a) General five percent diversification.

(1) Except as otherwise specified in this subchapter, a domestic property and casualty, financial guaranty or mortgage guaranty insurer shall not acquire directly or indirectly through an investment subsidiary an investment under this subchapter if, as a result of and after giving effect to the investment, the insurer would hold more than five percent (5%) of its admitted assets in investments of all kinds issued, assumed, accepted, insured or guaranteed by a single person.

(2) This five percent (5%) limitation shall not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally-recognized statistical rating organization.

(3) Asset-backed securities shall not be subject to the limitations of subdivision (1) of this subsection; however, an insurer shall not acquire an asset-backed security if, as a result of and after giving effect to the investment, the aggregate amount of asset-backed securities secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity then held by the insurer would exceed five percent (5%) of its admitted assets.

(b) An insurer subject to this section shall comply with applicable regulations addressing investments in lower and medium grade obligations.

(c) Canadian investments.

(1) An insurer subject to this section shall not acquire, directly or indirectly through an investment subsidiary, any Canadian investments authorized by this subchapter, if, as a result of and after giving effect to the investment, the aggregate amount of these investments then held by the insurer would exceed forty percent (40%) of its admitted assets or if the aggregate amount of Canadian investments not acquired under subdivision 3461c(2) of this subchapter then held by the insurer would exceed twenty-five percent (25%) of its admitted assets.

(2) However, as to an insurer that is authorized to do business in Canada or that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in Canada and denominated in Canadian currency, the limitations of subdivision (1) of this subsection shall be increased by the greater of:

(A) The amount the insurer is required by Canadian law to invest in Canada or to be denominated in Canadian currency; or

(B) One hundred twenty-five percent (125%) of the amount of its reserves and other obligations under contracts on risks resident or located in Canada.

Sec. 3. 8 V.S.A. § 3461b is added to read:

§ 3461b. GENERAL LIMITATIONS AND DIVERSIFICATION

REQUIREMENTS FOR LIFE AND HEALTH INSURERS

(a) General three percent diversification.

(1) Except as otherwise specified in this subchapter, a domestic life and health insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under this subchapter if, as a result of and after giving effect to the investment, the insurer would hold more than three percent (3%) of its admitted assets in investments of all kinds issued, assumed, accepted, insured or guaranteed by a single person.

(2) This three percent (3%) limitation shall not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally-recognized statistical rating organization.

(3) Asset-backed securities shall not be subject to the limitations of subdivision (1) of this subsection; however, an insurer shall not acquire an asset-backed security if, as a result of and after giving effect to the investment, the aggregate amount of asset-backed securities secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity then held by the insurer would exceed three percent (3%) of its admitted assets.

(b) An insurer subject to this section shall comply with applicable regulations addressing investments in lower and medium grade obligations.

(c) Canadian investments.

(1) An insurer subject to this section shall not acquire, directly or indirectly through an investment subsidiary, a Canadian investment authorized by this subchapter if, as a result of and after giving effect to the investment, the aggregate amount of these investments then held by the insurer would exceed forty percent (40%) of its admitted assets or if the aggregate amount of Canadian investments not acquired under subdivision 3461c(2) of this title then held by the insurer would exceed twenty-five percent (25%) of its admitted assets.

(2) However, as to an insurer that is authorized to do business in Canada or that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in Canada and denominated in Canadian currency, the limitations of subdivision (1) of this subsection shall be increased by the greater of:

(A) The amount the insurer is required by Canadian law to invest in Canada or to be denominated in Canadian currency; or

(B) One hundred fifteen percent (115%) of the amount of its reserves and other obligations under contracts on lives or risks resident or located in Canada.

Sec. 4. 8 V.S.A. § 3461c is added to read:

§ 3461c. RATED CREDIT INVESTMENTS

Subject to the limitations of subdivision (6) of this section, an insurer may acquire rated credit instruments.

(1) Subject to applicable limitations of subsection 3461a(b) or 3461b(b) of this subchapter, but not the limitations of subsection 3461a(a) or 3461b(a), an insurer may acquire rated credit instruments issued, assumed, guaranteed or insured by:

(A) The United States; or

(B) A government-sponsored enterprise of the United States, if the instruments of the government-sponsored enterprise are assumed, guaranteed or insured by the United States or are otherwise backed or supported by the full faith and credit of the United States.

(2) Subject to applicable limitations of subsection 3461a(b) or 3461b(b) of this subchapter, but not the limitations of subsection 3461a(a) or 3461b(a), an insurer may acquire rated credit instruments issued, assumed, guaranteed or insured by:

(A) Canada; or

(B) A government-sponsored enterprise of Canada, if the instruments of the government-sponsored enterprise are assumed, guaranteed or insured by Canada or are otherwise backed or supported by the full faith and credit of Canada;

(C) An insurer shall not acquire an instrument under this subdivision if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subdivision would exceed forty percent (40%) of its admitted assets.

(3)(A) Subject to applicable limitations of subsection 3461a(b) or 3461b(b) of this subchapter, but not the limitations of subsection 3461a(a) or 3461b(a), an insurer may acquire rated credit instruments, excluding asset-backed securities:

(i) Issued by a government money market mutual fund, a class one money market mutual fund or a class one bond mutual fund;

(ii) Issued, assumed, guaranteed or insured by a government-sponsored enterprise of the United States other than those eligible under subdivision (i) of this subdivision (3)(A);

(iii) Issued, assumed, guaranteed or insured by a state, if the instruments are general obligations of the state; or

(iv) Issued by a multilateral development bank.

(B) However, an insurer shall not acquire an instrument of any one fund, any one enterprise or entity or any one state under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held in any one fund, enterprise or entity or state under this subdivision would exceed ten percent (10%) of its admitted assets.

(4) Subject to the applicable limitations of section 3461a or 3461b of this subchapter, an insurer may acquire preferred stocks that are not foreign investments and that meet the requirements of rated credit instruments if, as a result of and after giving effect to the investment:

(A) The aggregate amount of preferred stocks then held by the insurer under this subdivision does not exceed twenty percent (20%) of its admitted assets; and

(B) The aggregate amount of preferred stocks then held by the insurer under this subdivision which are not sinking fund stocks or rated P1 or P2 by the SVO does not exceed ten percent (10%) of its admitted assets or does not meet or continue not to meet the conditions for exemption as provided in section 3461d of this title.

(5) Subject to the applicable limitations of section 3461a or 3461b of this subchapter, in addition to those investments eligible under subdivisions (1), (2), (3) and (4) of this section, an insurer may acquire rated credit instruments that are not foreign investments.

(6) An insurer shall not acquire special rated credit instruments under this section if, as a result of and after giving effect to the investment, the aggregate amount of special rated credit instruments then held by the insurer would exceed five percent (5%) of its admitted assets.

Sec. 5. 8 V.S.A. § 3461d is added to read:

§ 3461d. REGISTRATION OR FILING EXEMPTION

Notwithstanding the provisions of any other section of subchapter 4 of this chapter, an insurer shall not be required to register or file with the SVO any security that meets and continues to meet the conditions for exemption for certain nationally-recognized statistical rating organization rated securities consistent with the Purposes and Procedures Manual of the NAIC Securities Valuation Office, as amended from time to time.

Sec. 6. 8 V.S.A. § 3463 is amended to read:

§ 3463. --DOMESTIC INSURERS

(a) Subject to the provisions of sections 3461a, 3461b and 3461c of this title, a *[A]* domestic insurer may prudently invest its assets in any of the following:

* * *

(11) Corporate obligations. Fixed interest and variable interest bearing obligations issued, assumed or guaranteed by any solvent institution *[created or existing under the laws of the United States or of any state, district or territory thereof]*, whether or not secured, which are not in default as to principal or interest *[(A) if the net income available for fixed charges of such institution for a period of five fiscal years immediately preceding such investment shall have averaged per year not less than one and one-half times its annual fixed charges applicable to such period, and during either of the last two years of such period such net income shall have been not less than one and one-half times its fixed charges for such year, or (B) if such obligations at the time of investment are rated within the first four grades by a nationally recognized investment rating agency; provided, that not to exceed five percent of the assets of any insurer may be invested in such obligations of any one institution]* and that have been or will be registered with the SVO or that meet and continue to meet the conditions for exemption as provided in section 3461d of this title.

*[(12) Preferred stock or shares. The preferred stock or shares of any solvent institution created or existing under the laws of the United States or of any state, district or territory thereof subject to the follows:]* *[(A) All prior obligations and all prior stocks or shares, if any, of such institution must be eligible for investment under this subchapter.]* *[(B) The net income available for fixed charges of such institution for a period of five fiscal years immediately preceding such investment shall have averaged per year not less than one and one-half times the sum of its average annual fixed charges, if any, its average annual maximum contingent interest, if any, and its average annual preferred divided requirements.]* *[(C) The net income of such institution available for fixed charges during either of the last two years of the said five year period shall also have been not less than one and one-half times the sum of its fixed charges, contingent interest and preferred dividend requirements for such year.]* *[(D) The total amount invested by an insurer in preferred stock or shares shall not when added to any investment it may have in guaranteed stocks or shares exceed fifteen percent of its admitted assets nor shall it own more than five percent of the total issued and outstanding preferred or guaranteed stock of any corporation.]* *[(13) Common stocks. The common stock or shares or equity interest of any solvent institution, created or existing under the laws of the United States or of any state, district or territory thereof, provided that:]* *[(A) Such corporation (i) has paid cash dividends on such class of stock during each of the past five years preceding the time of purchase or (ii) shall have earned, during each of such years, an aggregate sum available for dividends upon such stock which would have been sufficient, after all fixed charges and obligations, to pay dividends upon all shares of such class of stock outstanding during each of such years of four percent per annum computed upon book value as of the close of each of such years. In the case of the stock of a corporation resulting from or formed by merger, consolidation, acquisition or otherwise less than five years prior to such purchase, each consecutive year next preceding the effective date of such merger, consolidation or acquisition during which dividends or other distribution of profits shall have been paid by any one or more of its constituent or predecessor institutions in an aggregate amount sufficient to have paid dividends on that class of stock of the existing corporation whose stock is to be purchased, had such corporation then been in existence, shall be deemed a year during which dividends have been paid on such class of stocks and the earnings of such constituent or predecessor institutions available for dividends during each of such years may be included as earnings of the existing corporation whose stock is to be purchased for each of such years; provided, however, that nothing herein contained shall prohibit the purchase of stock of any class which is preferred, as to dividends, over any class the purchase of which is not prohibited by this subdivision; and provided further, that no purchase of its own stock shall be made by any life insurance company except for the purpose of the retirement of such stock or except as specifically permitted by any law of this state applicable by its terms only to life insurance companies.]* *[(B) No insurer shall invest in any common stocks or shares of any institution in excess of ten percent of the total issued and outstanding common stocks or shares of such institution, provided that this limitation shall not apply to subdivision 27(A) of this section or section 3436 of this title.]* *[(C) The aggregate invested under this section shall not exceed ten percent of the admitted assets of a domestic insurer or fifty percent of surplus whichever is greater, excluding from this limitation investments in subsidiaries. ]*

(12) Equity interests.

(A) An insurer may acquire equity interests in business entities organized under the laws of any domestic jurisdiction or Canada.

(B) A life and health insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subdivision would exceed twenty percent (20%) of its admitted assets or the amount of equity interests then held by the insurer that are not listed on a qualified exchange would exceed five percent (5%) of its admitted assets. An accident and health insurer shall not be subject to this section but shall be subject to the same aggregate limitation on equity interests as a property and casualty insurer under subdivision (C) of this subdivision (12).

(C) A property and casualty insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section would exceed the greater of twenty-five percent (25%) of its admitted assets or one hundred percent (100%) of its surplus as regards policyholders.

(D) An insurer shall not acquire under this section any investments that the insurer may acquire under subdivisions (19) through (25) of this section.

(E) An insurer shall not short sell equity investments unless the insurer covers the short sale by owning the equity investment or an unrestricted right to the equity instrument exercisable within six (6) months of the short sale.

(13) Asset-backed securities. An insurer’s investment in the asset-backed securities secured by or representing an interest in a single asset or pool of assets held by a trust or other business entity shall not exceed five percent (5%) of the insurer’s admitted assets.

(14) Stock and obligations of mortgage companies.

(A) Stock and obligations of any solvent institution created or existing under the laws of the United States or of any state thereof which is engaged primarily in the business of making, originating, purchasing or otherwise acquiring or investing in, and servicing, or selling or otherwise disposing of, loans secured by mortgages on real property located in the United States, whether for its own account or as mortgage loan correspondent for others, or both, provided that immediately prior to such investment by a domestic insurer, such institution shall be acting as, or shall be under a contract to act as, a mortgage loan correspondent for such insurer.

(B) The amount invested under this subdivision in any one such institution shall not exceed one-tenth of one percent of the admitted assets of such insurer. The cost of any investment made under this subdivision when added to the aggregate cost of all other investments made under this subdivision and then held by such insurer shall not exceed one-half of one percent of the admitted assets of such insurer.

*[(15) Investment companies or trusts. The securities of any open-end management type investment company or investment trust registered with the federal securities and exchange commission under the Investment Company Act of 1940 as from time to time amended, if such investment company or trust has assets of not less than $25,000,000.00 as at date of investment by the insurer. The amount invested in any one company or trust shall not exceed two percent of the assets of such company or trusts nor shall the aggregate amount so invested exceed three percent of the admitted assets of such insurer.]*

(15) Derivative investments and transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this subdivision, on the following conditions:

(A) General conditions.

(i) An insurer may use derivative instruments under this subchapter to engage in hedging transactions and certain income generation transactions.

(ii) An insurer shall be able to demonstrate to the commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of the transactions through cash flow testing or other appropriate analyses.

(B) Limitations on hedging transactions. An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to the transaction:

(i) The aggregate statement value of options, caps, floors and warrants not attached to another financial instrument purchased and used in hedging transactions does not exceed seven and one-half percent (7½%) of its admitted assets;

(ii) The aggregate statement value of options, caps and floors written in hedging transactions does not exceed three percent (3%) of its admitted assets; or

(iii) The aggregate potential exposure of collars, swaps, forwards and futures used in hedging transactions does not exceed six and one-half percent (6½%) of its admitted assets.

(C) Limitations on income generation transactions. An insurer may enter into the following types of income generation transactions if, as a result of and after giving effect to the transactions, the aggregate statement value of the fixed income assets that are subject to call or that generate the cash flows for payments under the caps or floors, plus the face value of fixed income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the puts, does not exceed ten percent (10%) of its admitted assets:

(i) Sales of covered call options on noncallable fixed income securities, callable fixed income securities if the option expires by its terms prior to the end of the noncallable period or derivative instruments based on fixed income securities;

(ii) Sales of covered call options on equity securities if the insurer holds in its portfolio or can immediately acquire through the exercise of options, warrants or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold; or

(iii) Sales of covered puts on investments that the insurer is permitted to acquire under this subchapter if the insurer has escrowed or entered into a custodian agreement, segregating cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put during the complete term of the put option sold; or

(iv) Sales of covered caps or floors if the insurer holds in its portfolio the investments generating the cash flow to make the required payments under the caps or floors during the complete term that the cap or floor is outstanding.

(D) Counterparty exposure. An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of sections 3461a and 3461b of this title.

* * *

(28) Foreign investments. Investments in foreign *[countries]* jurisdictions subject to the following:

*[(A) Investments in Canada which are substantially of the same kinds, classes and investment grades as those eligible for investment under this chapter; but the aggregate amount of such investments which are held at any time by any such insurer shall not exceed ten percent of its total admitted assets except where a greater amount is permitted pursuant to the following subdivision (B) in which case the provisions of this subdivision (A) shall not be applicable.]* *[(B)]*(A) Any domestic insurer which is authorized to do business in a foreign *[country]* jurisdiction or possession of the United States or which has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in a foreign *[country]* jurisdiction or possession of the United States may invest in, or otherwise acquire or loan upon securities and investments in such foreign *[country]* jurisdiction or possession which are substantially of the same kind, classes and investment grades as those eligible for investment under the provisions of this chapter; but the aggregate amount of such investments in a foreign *[country]* jurisdiction or a possession of the United States and of cash in the currency of such *[country]* jurisdiction or possession which is at any time held by such insurer shall not*[, except as provided in subdivision (A)]* exceed one and one-half times the amount of its reserves and other obligations under such contracts or the amounts which such insurer is required by law to invest in such *[country]* jurisdiction or possession*[, whichever shall be greater]*. *[(C)]*(B) In addition to the foreign investments permitted under*[ the next preceding subdivisions]* subdivision (A) *[and (B)]* of this subdivision (28), any domestic insurer may invest or otherwise acquire or loan upon securities and investments in foreign countries which are substantially of the same kinds, classes and investment grades as those eligible for investment under this chapter; but:

(i) *[the]* The aggregate amount of such investments made pursuant to this subdivision *[(C)]*(B) shall not exceed *[five]* 20 percent of its admitted assets; and

(ii) The aggregate amount of foreign investments then held by the insurer under this subdivision in a single foreign jurisdiction shall not exceed ten percent (10%) of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or five percent (5%) of its admitted assets as to any other foreign jurisdiction (three percent (3%) in the case of life and health insurers). Of the investments permitted under this subdivision, the aggregate amount of investments denominated in foreign currencies may not exceed fifteen percent (15%) of the insurer’s admitted assets (ten percent (10%) in the case of life and health insurers). Such investments denominated in the foreign currency of a single foreign jurisdiction which has a sovereign debt rating of SVO 1 may not exceed ten percent (10%) of the insurer’s admitted assets. Such investments denominated in the foreign currency of a single foreign jurisdiction which does not have a sovereign debt rating of SVO 1 may not exceed five percent (5%) of the insurer’s admitted assets (three percent (3%) in the case of life and health insurers).

(b) Investments in subsidiaries are subject to section 3862 of this title and are not subject to any other investment limitations contained in this subchapter.

* * *

Sec. 7. REPEAL

8 V.S.A. §§ 3436 and 3466 are repealed.

Sec. 8. 8 V.S.A. § 3467(d) is added to read:

(d) An investment instrument not specifically qualified under this subchapter shall be deemed to qualify under this subchapter, based on the underlying nature of the actual securities that comprise such investment instrument subject to the prior written permission of the commissioner.

Sec. 9. 8 V.S.A. § 3682(b)(1) is amended and (f) is added to read:

(b) In addition to investments in common stock, preferred stock, debt obligations and other securities permitted under all other sections of this title, a domestic insurer may also:

(1) Invest, in common stock, preferred stock, debt obligations, and other securities of one or more subsidiaries, amounts which do not exceed the lesser of five percent of such insurer's assets or *[fifty]* 50 percent of such insurer's surplus as regards policyholders, provided that after such investments the insurer's surplus as regards policyholders will be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs. In calculating the amount of such investments, investments made under subsection (a) of this section shall be excluded for all insurers, except to the extent provided in subsection (f) of this section, and there shall be included:

(A) total net monies or other consideration expended and obligations assumed in the acquisition or formation of a subsidiary, including all organizational expenses and contributions to capital and surplus of such subsidiary whether or not represented by the purchase of capital stock or issuance of other securities, and

(B) all amounts expended in acquiring additional common stock, preferred stock, debt obligations, and other securities and all contributions to the capital or surplus, of a subsidiary subsequent to its acquisition or formation;

(f) Nothing in this section shall modify or negate any contractual obligation undertaken by a mutual insurance holding company reorganizing under subchapter 3A of chapter 101 of this title.

Sec. 10. 8 V.S.A. § 6002(a) is amended to read:

(a) Any captive insurance company, when permitted by its articles of association, charter, or other organizational document, may apply to the commissioner for a license to do any and all insurance comprised in subdivisions (1), (2), (3)(A)-(C), (3)(E)-(R) and (4)-(9) of section 3301(a) of this title and may grant annuity contracts as defined in section 3717 of this title; provided, however, that:

* * *

Sec. 11. 8 V.S.A. § 6014(a) is amended to read:

(a) Each captive insurance company shall pay to the commissioner of taxes, in the month of February of each year, a tax at the rate of four-tenths of one percent on the first 20 million dollars and three-tenths of one percent on the next 20 million dollars and two-tenths of one percent on the next 20 million dollars and seventy-five thousandths of one percent on each dollar thereafter on the direct premiums collected or contracted for on policies or contracts of insurance written by the captive insurance company during the year ending December 31 next preceding, after deducting from the direct premiums subject to the tax the amounts paid to policyholders as return premiums which shall include dividends on unabsorbed premiums or premium deposits returned or credited to policyholders; provided, however, that no tax shall be due or payable as to considerations received for annuity contracts.

Sec. 12. REPORT

At least once in every five years, the department of banking, insurance, securities, and health care administration shall submit a report to the general assembly on new developments with regard to insurance company investments and whether statutory changes are necessary to ensure that domestic insurance companies will be able to utilize the full range of prudent investments.

Sec. 13. EFFECTIVE DATE

This act shall take effect from passage except that Sec. 5 shall take effect on January 1, 2000 and shall apply to securities of the insurers acquired after that date. Secs. 10 and 11 are intended to clarify existing law.

Approved: April 19, 2000