(a) Domestic life insurance companies may, directly or indirectly through an investment affiliate, invest their assets and engage in investment practices as follows:
Terms Used In Tennessee Code 56-3-303
Acceptable collateral: means : (A) As to securities lending transactions, and for the purpose of calculating counterparty exposure amount, cash, cash equivalents, letters of credit, direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States, or by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, and as to lending foreign securities, sovereign debt rated NAIC-SVO 1. See Tennessee Code 56-3-302
Admitted assets: means assets permitted to be reported as admitted assets on the statutory financial statement of the insurer most recently required to be filed with the commissioner, but: (A) Excluding the assets of separate accounts, the investments of which are not subject to this part. See Tennessee Code 56-3-302
Affiliate: means , as to any person, another person that, directly or indirectly through one (1) or more intermediaries, controls, is controlled by, or is under common control with the person. See Tennessee Code 56-3-302
Amortization: Paying off a loan by regular installments.
Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
Attorney-in-fact: A person who, acting as an agent, is given written authorization by another person to transact business for him (her) out of court.
Bankruptcy: Refers to statutes and judicial proceedings involving persons or businesses that cannot pay their debts and seek the assistance of the court in getting a fresh start. Under the protection of the bankruptcy court, debtors may discharge their debts, perhaps by paying a portion of each debt. Bankruptcy judges preside over these proceedings.
Business entity: includes a sole proprietorship, corporation, limited liability company, association, general or limited partnership, joint stock company, joint venture, mutual fund, bank, trust, real estate investment trust, joint tenancy or other similar form of business organization, whether organized for-profit or not-for-profit. See Tennessee Code 56-3-302
Capital and surplus: means the sum of the capital and surplus of the insurer required to be shown on the statutory financial statement of the insurer most recently required to be filed with the commissioner. See Tennessee Code 56-3-302
Cash equivalents: means highly rated, highly liquid and readily marketable investments or securities with a remaining term to maturity of one (1) year or less, which includes money market funds as defined in §. See Tennessee Code 56-3-302
Code: includes the Tennessee Code and all amendments and revisions to the code and all additions and supplements to the code. See Tennessee Code 1-3-105
Corporation: A legal entity owned by the holders of shares of stock that have been issued, and that can own, receive, and transfer property, and carry on business in its own name.
Counterparty exposure amount: means : (A) For an over-the-counter derivative instrument not entered into pursuant to a written master agreement which provides for netting of payments owed by the respective parties: (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. See Tennessee Code 56-3-302
Derivative instrument: means any agreement, option or instrument, or any series or combinations of an agreement, option or instrument: (i) To make or take delivery of, or assume or relinquish, a specified amount of one (1) or more underlying interests, or to make a cash settlement in lieu thereof. See Tennessee Code 56-3-302
Derivative instruments: includes options, warrants (not attached to another financial instrument purchased by the insurer), caps, floors, collars, swaps, swaptions, forwards, futures and any other agreements, options or instruments substantially similar thereto, or any series or combinations thereof. See Tennessee Code 56-3-302
Derivative transaction: means a transaction involving the use of one (1) or more derivative instruments. See Tennessee Code 56-3-302
Equity interests: includes common stock, an equity investment in an investment company, other than a money market mutual fund described in §. See Tennessee Code 56-3-302
Escrow: Money given to a third party to be held for payment until certain conditions are met.
Fair market value: The price at which an asset would change hands in a transaction between a willing, informed buyer and a willing, informed seller.
Fixed charges: includes interest on all obligations and amortization of debt discount and expenses. See Tennessee Code 56-3-302
Foreign: when used without limitation, includes all companies formed by authority of any other state or government. See Tennessee Code 56-1-102
Guarantor: A party who agrees to be responsible for the payment of another party's debts should that party default. Source: OCC
Hedging transaction: means a derivative transaction that is entered into and maintained to manage: (A) The risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities, or a portfolio of assets and/or liabilities, that the insurer has acquired or incurred or anticipates acquiring or incurring. See Tennessee Code 56-3-302
Income generation transaction: means a derivative transaction which is entered into to generate income. See Tennessee Code 56-3-302
insurance company: includes all corporations, associations, partnerships, or individuals engaged as principals in the business of insurance. See Tennessee Code 56-1-102
Interest rate: The amount paid by a borrower to a lender in exchange for the use of the lender's money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures. Source: OCC
Jurisdiction: (1) The legal authority of a court to hear and decide a case. Concurrent jurisdiction exists when two courts have simultaneous responsibility for the same case. (2) The geographic area over which the court has authority to decide cases.
Lease: A contract transferring the use of property or occupancy of land, space, structures, or equipment in consideration of a payment (e.g., rent). Source: OCC
Liabilities: The aggregate of all debts and other legal obligations of a particular person or legal entity.
Lien: A claim against real or personal property in satisfaction of a debt.
Market value: means the price for the security or derivative instrument obtained from a generally recognized source or the most recent quotation from the source or, to the extent no generally recognized source exists, the price for the security or derivative instrument as determined pursuant to the terms of the instrument or in good faith by the insurer as can be reasonably demonstrated to the commissioner upon request, plus accrued but unpaid income on the security or derivative instrument to the extent not included in the price as of the date. See Tennessee Code 56-3-302
Mortgage: The written agreement pledging property to a creditor as collateral for a loan.
Mortgage loan: A loan made by a lender to a borrower for the financing of real property. Source: OCC
NAIC: means the National Association of Insurance Commissioners. See Tennessee Code 56-3-302
NAIC-SVO: means the securities valuation office of the National Association of Insurance Commissioners. See Tennessee Code 56-3-302
Obligation: An order placed, contract awarded, service received, or similar transaction during a given period that will require payments during the same or a future period.
Obligation: means a note, bond, debenture, trust certificate, equipment trust certificate, production payment, negotiable bank certificate of deposit, bankers' acceptance, asset-backed security, NAIC-SVO credit tenant loan, loan secured by financing a net lease or net leases, and other evidence of indebtedness for the payment of money, or participations, certificates or other evidences of an interest in any of the obligations listed in this subdivision (29), whether constituting a general obligation of the issuer or payable only out of certain revenues or certain funds pledged or otherwise dedicated for payment. See Tennessee Code 56-3-302
Option: means an agreement giving the buyer the right to buy or receive, known as a "call option" sell or deliver, known as a "put option" enter into, extend or terminate or effect a cash settlement based on the actual or expected price, spread, level, performance or value of one (1) or more underlying interests. See Tennessee Code 56-3-302
Over-the-counter derivative instrument: means a derivative instrument entered into with a business entity, other than through a securities exchange, futures exchange, or cleared through a qualified clearinghouse. See Tennessee Code 56-3-302
Person: means an individual, a business entity, a multilateral development bank or a government or quasi-governmental body, such as a political subdivision or a government sponsored enterprise. See Tennessee Code 56-3-302
Potential exposure: means : (A) As to a futures position, the amount of initial margin required for that position. See Tennessee Code 56-3-302
Preferred dividend requirements: means dividends at the maximum prescribed rate on all preferred stock of the same class as that being acquired by the insurance company and on all stock ranking as to dividends on a parity with the dividends or prior to the dividends, whether or not the dividends are cumulative. See Tennessee Code 56-3-302
Real property: Land, and all immovable fixtures erected on, growing on, or affixed to the land.
real property: include lands, tenements and hereditaments, and all rights thereto and interests therein, equitable as well as legal. See Tennessee Code 1-3-105
Reciprocal: means the aggregation of subscribers under a common name. See Tennessee Code 56-16-102
Remainder: An interest in property that takes effect in the future at a specified time or after the occurrence of some event, such as the death of a life tenant.
Securities exchange: means : (A) An exchange registered as a national securities exchange or a securities market registered under the Securities Exchange Act of 1934 (15 U. See Tennessee Code 56-3-302
Settlement: Parties to a lawsuit resolve their difference without having a trial. Settlements often involve the payment of compensation by one party in satisfaction of the other party's claims.
State: includes the several states, the District of Columbia, the Commonwealth of Puerto Rico and the possessions of the United States. See Tennessee Code 56-3-302
Statute: A law passed by a legislature.
Trustee: A person or institution holding and administering property in trust.
Underlying interest: means the assets, liabilities or other interests, or a combination of assets, liabilities or other interests, underlying a derivative instrument, such as any one (1) or more securities, currencies, rates, indices, commodities or derivative instruments. See Tennessee Code 56-3-302
United States: includes the District of Columbia and the several territories of the United States. See Tennessee Code 1-3-105
written: includes printing, typewriting, engraving, lithography, and any other mode of representing words and letters. See Tennessee Code 1-3-105
(1) In obligations, not in default as to principal or interest, that are valid and legally authorized obligations issued, assumed or guaranteed by the United States, or by any state of the United States, or by any county, city, town, village, municipality or district in any state, or by any political subdivision of the county, city, town, village, municipality or district, or by any civil division or public instrumentality of one (1) or more of the governmental units, if, by statutory or other legal requirements applicable to the governmental unit, such obligations are payable, as to both principal and interest, from taxes levied, or by the law required to be levied, upon all taxable property or all taxable income within the jurisdiction of the governmental unit or from adequate special revenues pledged or otherwise appropriated or by the law required to be provided for the purpose of the payment, but not including any obligations payable solely out of special assessments on properties benefited by local improvements;(2) In obligations, or in commercial paper or bankers’ acceptances, or similar evidences of indebtedness customarily issued at a discount from principal value, issued, assumed, or guaranteed by any business entity created or existing under the laws of the United States, or any state of the United States, that are not in default as to principal or interest; provided, that either:
(A) The net earnings of the issuing, assuming or guaranteeing business entity available for its fixed charges for a period of five (5) fiscal years next preceding the date of acquisition by the insurance company have averaged per year not less than one and one half (1.5) times its average annual fixed charges applicable to the period, if during either of the last two (2) years of the period the net earnings have been not less than one and one half (1.5) times its fixed charges for the year; or(B) Either the obligation is or the issuing, assuming or guaranteeing business entity’s or business entities’ long-term obligations are rated one (1) of the four (4) highest grades by any of the nationally recognized statistical rating organizations recognized by the NAIC-SVO or one (1), two (2) or three (3) by the NAIC-SVO;(3) In preferred stock or shares of any business entity created or existing under the laws of the United States or any state of the United States; provided, that:
(A) The aggregate net earnings of the issuing business entity available for its fixed charges and dividends for a period of three (3) fiscal years next preceding the date of acquisition is at least equal to one and one fourth (1.25) times the sum of its aggregate fixed charges, full contingent interest and preferred dividend requirements for the same period or rated one (1) of the four (4) highest grades by any of the nationally recognized statistical rating organizations recognized by the NAIC-SVO or one (1), two (2) or three (3) by the NAIC-SVO; and(B) The investments made under the authority of this subdivision (a)(3) shall not at any time cause the insurance company’s holdings:
(i) Of the preferred stock or shares of any one (1) business entity to exceed two percent (2%) of the admitted assets of the insurance company; or(ii) Of the preferred stock or shares of all business entities to exceed fifteen percent (15%) of the admitted assets of the insurance company;(4)(A) In equity interests of any solvent business entity created or existing under the laws of the United States or of any state of the United States; provided, that:
(i) If the equity interest is a common stock, the business entity has earned, during the period of five (5) fiscal years next preceding the date of acquisition by the insurance company, an aggregate sum available for dividends upon its common stock or shares equal at least to an aggregate sum that would have been sufficient to pay dividends of six percent (6%) per annum upon the par or stated value of all its common stock or shares outstanding during the period;(ii) If the equity interests are in a real estate company, §§ 56-3-305 and 56-3-306 shall apply with respect to the equity interests and to the real property owned by the real estate company, and the amount invested in the equity interests of the real estate company shall be included with the aggregate of all of the insurance company’s holdings and investments for the purposes of § 56-3-305(b);(iii) Investments made under the authority of this subdivision (a)(4)(A) shall not at any time cause the insurance company’s holdings of equity interests in:
(a) Any one (1) business entity to exceed one percent (1%) of the admitted assets of the insurance company; or(b) All business entities to exceed the larger of:
(1) Ten percent (10%) of the admitted assets of the insurance company; or(2) Fifty percent (50%) of the amount by which the capital and surplus of the insurance company exceed the minimum capital and surplus required for the kind of insurance it is authorized to transact in this state; and(iv) For purposes of determining the holdings of the equity interests pursuant to this subdivision (a)(4)(A), the value of the equity interests shall be the value of the equity interests shown on the insurer’s statutory financial statement most recently required to be filed with the commissioner;(B) The commissioner may approve a plan for an insurer to make investments in equity interests of business entities in an aggregate amount not to exceed an additional ten percent (10%) of its admitted assets if the commissioner determines that the plan contains adequate quality and diversification standards;(C) Investments made and transactions entered into pursuant to subdivision (a)(20)(A) shall be included in determining an insurer’s compliance with subdivision (a)(4)(A) and, if the commissioner has approved a plan for the insurer under subdivision (a)(4)(B), subdivision (a)(4)(B) in the aggregate;(5) Upon security of promissory notes amply secured by pledge of any bonds or other securities in which the companies are authorized to invest their funds;(6) Upon the security of their own policies; provided, that the loan upon any policy shall not exceed the amount of loan value provided in § 56-7-2309;(7) In the obligations, and/or stock where stated, of the following agencies of the government of the United States, whether or not the obligations are guaranteed by the government:
(A) Commodity credit corporation;(B) Federal intermediate credit banks;(C) Federal land banks;(D) Banks for cooperatives;(E) Federal home loan banks, and stock of such banks;(F) Federal national mortgage association, and stock of the federal national mortgage association, when acquired in connection with sale of mortgage loans to the association; and(G) Any other similar agency of the government of the United States and of similar financial quality;(8) In lawfully authorized bonds or other evidences of indebtedness issued or guaranteed by the International Bank for Reconstruction and Development, or the Inter-American Development Bank, the African Development Bank and the Asian Development Bank; provided, that the aggregate amount of the insurance company’s investment under this subdivision (a)(8) shall not exceed five percent (5%) of the admitted assets of the insurance company;(9) In shares in federally insured building and loan and savings and loan institutions; provided, that the aggregate of investments under this subdivision (a)(9) shall not exceed one percent (1%) of the admitted assets of the insurance company;(10) In other types of investments and transactions, in addition to those authorized by this section or other sections of the code, subject to the approval of the commissioner. An insurer shall not be required to have exhausted its authority to make investments or engage in transactions under subdivision (a)(15) prior to seeking any approval from the commissioner under this subdivision (a)(10). Any investment made or transaction entered into by an insurer pursuant to approval from the commissioner under this subdivision (a)(10) shall not be required to be taken into account in determining compliance with subdivision (a)(15);(11)(A) Subject to subdivision (a)(11)(C), in loans, or participations in loans, secured by first mortgages, or second mortgages so long as the insurer holds the first mortgages that are senior to the second mortgages, upon improved, unencumbered real property, or upon leasehold estates in improved real property in the United States, not exceeding, however, seventy-five percent (75%) of the value of the property or leasehold estate, repayable in not more than thirty (30) years;(B) All loans secured by leasehold estates must provide for amortization of principal at least once in each year in amounts sufficient to completely amortize the loan at least twenty-one (21) years prior to expiration of the lease term, inclusive of the term or terms which may be provided by an enforceable option or options of renewal;(C)Real property and leasehold estates shall not be deemed to be encumbered within the meaning of this section by reason of the existence of unpaid assessments and taxes not delinquent, mineral, oil or timber rights, easements or rights-of-way for public highways, private roads, railroads, telegraph, telephone, electric light and power lines, drains, sewers or other similar easements or rights-of-way, liens for service and maintenance of water rights when not delinquent, party wall agreements, building restrictions, or other restrictive covenants or conditions, or leases under which rents or profits are reserved to the owner, if in any event the security for the loan is a first lien, or is a second lien so long as the insurer also holds the first lien that is senior to the second lien, upon the real property or leasehold estate and if there is no condition or right of reentry or forfeiture under which, in the case of real property other than leaseholds, the lien can be cut off, subordinated or otherwise disturbed, or under which, in the case of leaseholds, the insurance company is unable to continue the lease in force for the duration of the loan;(D) A loan guaranteed or insured in full by the Administrator of Veterans’ Affairs pursuant to the Servicemen’s Readjustment Act of 1944 (38 U.S.C. §§ 3701–3725), may be subject to a prior encumbrance insured by the federal housing administrator or commissioner, and the foregoing limitations in respect to value and repayment shall not apply to a loan that is:
(i) Insured by, or for which a commitment to insure has been made by, the federal housing administrator or commissioner pursuant to the National Housing Act (12 U.S.C. § 371 et seq.);(ii) Guaranteed by the administrator of veterans’ affairs pursuant to the Servicemen’s Readjustment Act of 1944, except that, if only a portion of a loan is so guaranteed, the limitation of value shall apply to the portion not so guaranteed; or(iii) Insured by the administrator pursuant to the Servicemen’s Readjustment Act of 1944;(12) In purchase money mortgages or like securities received by the insurance company upon the sale or exchange of real property acquired pursuant to § 56-3-305;(13)(A) In obligations of persons organized under the laws of the United States or any state of the United States, secured by assignment of lease or leases, or the rentals payable under the leases, of real or personal property, or both, to:
(i) The United States or any state of the United States, or any county, city, town, village, municipality or district in the state or any political subdivision of the county, city, town, village, municipality or district or any civil division or public instrumentality of one (1) or more of the governmental entities; or(ii) One (1) or more persons created or existing under the laws of the United States, or of any state; provided, that:
(a) The fixed rentals assigned shall be sufficient to repay the indebtedness within the unexpired term of the lease, exclusive of the term that may be provided by an enforceable option of renewal;(b) The lessee or guarantor of the lease or leases has not defaulted in payment of principal of or interest on any of its bonds, notes, debentures, or other evidences of indebtedness during the five (5) fiscal years immediately preceding the date of the investment;(c) The net earnings of each lessee or guarantor of the lease under this subdivision (a)(13)(A)(ii) available for its fixed charges for a period of five (5) fiscal years next preceding the date of acquisition by the insurance company have averaged per year not less than one and one half (1.5) times its average annual fixed charges applicable to the period and during either of the last two (2) years of the period the net earnings have been not less than one and one half (1.5) times its fixed charges for the year or is rated one (1) of the four (4) highest grades by any of the nationally recognized statistical rating organizations recognized by the NAIC-SVO or one (1), two (2) or three (3) by the NAIC-SVO; and(d) A first lien on the interest of the lessor in the unencumbered property so leased is obtained as additional security for the indebtedness;(B) Notwithstanding subdivision (a)(13)(A), any NAIC-SVO credit tenant loan that meets the requirements of subdivision (a)(2) shall be qualified under subdivision (a)(2);(14) In the purchase and ownership of vessels, vehicles, or rolling stock used or useful for the transportation of persons, goods, products or commodities, or of machinery or equipment used by manufacturing, processing or financial establishments, or of communications equipment used by radio or television stations, or of store fixtures used by retail establishments, which transportation equipment, or machinery or equipment, or communications equipment or store fixtures are or will become subject to contracts for the sale or use thereof under which contractual payments are to be made that may reasonably be expected to return the principal of, and provide earnings on, the investment within the anticipated useful life of the property, the anticipated useful life to be not less than five (5) years. The aggregate of the company’s investments under this subdivision (a)(14) shall not exceed three percent (3%) of the company’s admitted assets;(15) In loans, investments or transactions in addition to those authorized under other subdivisions of this subsection (a) or under other sections of this code, notwithstanding any limitations or prohibitions contained in § 56-3-305(a)(5) that might otherwise be applicable; provided, that for the purposes of subdivision (a)(11) and this subdivision (a)(15), that the portion of a loan, or participation in the loan, secured by a mortgage upon real property that does not exceed seventy-five percent (75%) of the value of the property shall be deemed to be a permitted investment under subdivision (a)(11) and the remainder of the loan, or participation in the loan, may be deemed to be made under this subdivision (a)(15); and provided further, that for the purposes of § 56-3-305(a)(5)(B), that the portion of an investment in a single piece or adjoining pieces of real property acquired or held under the authority of § 56-3-305(a)(5) that does not exceed two percent (2%) of the company’s admitted assets shall be deemed to be a permitted investment under subdivision (a)(5), and the remainder of the investment shall be deemed to be made under this subdivision (a)(15); and provided, further, that if any investments made or transactions entered into under any other subdivision of this section or § 56-3-304 exceed the limits specified in any other subdivision of this section or § 56-3-304, then the excess portion of the investment or transaction shall be an investment or transaction under this subdivision (a)(15). Any loan, investment or transaction originally made under this subdivision (a)(15) that would subsequently, if it were then being made, qualify as an authorized investment or transaction under another subdivision of this subsection (a) or under another section of this code shall thenceforth be deemed to be an authorized investment or transaction under the other subdivision or section. The aggregate of the company’s loans, investments and transactions under this subdivision (a)(15) shall not exceed the lesser of:
(A) Ten percent (10%) of the company’s admitted assets; or(B) The amount by which the capital and surplus of the company exceed the minimum capital and surplus required to form a new company to do the kind or kinds of insurance business the company is authorized to transact in this state; provided, that the limitations established by subdivisions (a)(15)(A) and this subdivision (a)(15)(B) in no event shall be less than five percent (5%) of the admitted assets of the company;(16) In investment pools that:
(A) Invest only in:
(i) Obligations that an insurer may acquire under this section or § 56-3-304 that are rated one (1) of the four (4) highest grades by any of the nationally recognized statistical rating organizations recognized by the NAIC-SVO or one (1) or two (2) by the NAIC-SVO and have:
(a) A remaining term to maturity of three hundred ninety-seven (397) days or less or a put that entitles the holder to receive the principal amount of the obligation, which put may be exercised through maturity at specified intervals not exceeding three hundred ninety-seven (397) days; or(b) A remaining term to maturity of three (3) years or less and a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London InterBank Offered Rate (LIBOR) or commercial paper) and is subject to no maximum limit, if the obligations do not have an interest rate that varies inversely to market interest rate changes;(ii) Securities lending, repurchase and reverse repurchase transactions that meet the requirements of subdivision (a)(18); and(iii) Money market mutual funds as authorized in subdivision (a)(17); provided, that this short-term investment pool shall not acquire investments in any one business entity that exceed ten percent (10%) of the total assets of the investment pool;(B) Invest only in investments that an insurer may acquire under this section or § 56-3-304, if the insurer’s proportionate interest in the amount invested in these investments does not exceed the applicable limits of this section and § 56-3-304, and the aggregate amount of all investments in the other investment pools may not exceed twenty-five percent (25%) of the insurer’s admitted assets;(C) An insurer shall not acquire an investment in an investment pool under this subdivision (a)(16) if, after giving effect to the investment, the aggregate amount of investments in all investment pools then held by the insurer would exceed thirty-five percent (35%) of its admitted assets;(D) For an investment in an investment pool to be qualified under this subdivision (a)(16), the investment pool shall not:
(i) Acquire securities issued, assumed, guaranteed or insured by the insurer or an affiliate of the insurer; or(ii) Borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions;(E) For an investment pool to be qualified under this subdivision (a)(16):
(i) The manager of the investment pool shall:
(a) Be organized under the laws of the United States or a state of the United States or the District of Columbia and designated as the pool manager in a pooling agreement; and(b) Be the insurer, an affiliated insurer, a business entity affiliated with the insurer, a custodian bank, a business entity registered under the Investment Advisors Act of 1940 (15 U.S.C. §§ 80a-1 et seq.), or any similar, applicable state statute, or, in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-fact, or in the case of a United States branch of an alien insurer, its United States manager or affiliates or subsidiaries of its United States manager;(ii) The pool manager or an entity designated by the pool manager of the type set forth in subdivision (a)(16)(E)(i)(b) shall maintain detailed accounting records setting forth:
(a) The cash receipts and disbursements reflecting each participant’s proportionate investment in the investment pool;(b) A complete description of all underlying assets of the investment pool, including amount, interest rate, maturity date, if any, and other appropriate designations; and(c) Other records that, on a daily basis, allow third parties to verify each participant’s investments in the investment pool;(iii) The assets of the investment pool shall be held in one (1) or more accounts, in the name or on behalf of the investment pool, either under a custody agreement or trust agreement with a custodian bank or at the principal office of the pool manager. The applicable agreement shall:
(a)State and recognize the claims and rights of each participant;(b) Acknowledge that the underlying assets of the investment pool are held solely for the benefit of each participant in proportion to the aggregate amount of its investments in the investment pool; and(c) Contain an agreement that the underlying assets of the investment pool shall not be commingled with the general assets of the custodian bank or any other person;(F) The pooling agreement for each investment pool shall be in writing and shall provide that:
(i) The insurer, its subsidiaries, affiliates or any pension or profit sharing plan of the insurer, its subsidiaries and affiliates or, in the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States manager, and any unaffiliated insurer shall, at all times, hold one hundred percent (100%) of the interests in the investment pool;(ii) The underlying assets of the investment pool shall not be commingled with the general assets of the pool manager or any other person;(iii) In proportion to the aggregate amount of each pool participant’s interest in the investment pool:
(a) Each participant owns an undivided interest in the underlying assets of the investment pool; and(b) The underlying assets of the investment pool are held solely for the benefit of each participant;(iv) A participant, or in the event of the participant’s insolvency, bankruptcy, or receivership, its trustee, receiver, conservator or other successor-in-interest, may withdraw all or any portion of its investment from the investment pool under the terms of the pooling agreement;(v) Withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds shall occur within a reasonable and customary period thereafter; provided, that in the case of publicly traded securities, settlement shall not exceed five (5) business days, and in the case of all other securities and investments, settlement shall not exceed ten (10) business days. Distributions under this subdivision (a)(16) shall be calculated in each case net of all then applicable fees and expenses of the investment pool. The pooling agreement shall provide that the pool manager shall distribute to a participant, at the discretion of the pool manager:
(a) In cash, the then fair market value of the participant’s pro rata share of each underlying asset of the investment pool;(b) In kind, a pro rata share of each underlying asset; or(c) In a combination of cash and in-kind distributions, a pro rata share in each underlying asset; and(vi) The pool manager shall make the records of the investment pool available for inspection by the commissioner; and(G) An investment in an investment pool shall not be deemed to be an investment under subsection (b). The formation of an investment pool shall be subject to the reporting requirements of chapter 11 of this title, but investments in and withdrawals and distributions from an investment pool shall not be subject to the reporting requirements;(17)(A) In money market mutual funds as defined by 17 C.F.R. § 270.2a-7 under the Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.), that may be either of the following:
(i) Government money market mutual fund that is a money market mutual fund that:
(a) Invests only in obligations issued, guaranteed or insured by the federal government of the United States or collateralized repurchase agreements composed of these obligations; and(b) Qualifies for investment without a reserve under the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC or, if it is no longer being published, the successor publication to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC; or(ii) Class one (1) money market mutual fund that is a money market mutual fund that qualifies for investment using the bond class one (1) reserve factor under the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC or, if it is no longer being published, the successor publication to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC;(B) For purposes of complying with this subdivision (a)(17), money market funds qualifying for listing within these categories must conform to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC or, if it is no longer being published, the successor publication to the the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC;(18) In securities lending transactions, either directly, or through a custodian bank, or through an agent approved by the commissioner, repurchase transactions, reverse repurchase transactions and dollar roll transactions, subject to the following conditions:
(A) The insurer shall enter into a written agreement for all transactions that shall require each transaction, except dollar roll transactions, to terminate no more than one (1) year from its inception;(B) Cash received in a transaction under this subdivision (a)(18) shall be invested in accordance with subsection (a) or § 56-3-304 and in a manner that recognizes the liquidity needs of the transaction or used by the insurer for its general corporate purposes. For so long as the transaction remains outstanding, the insurer, its agent or custodian shall maintain, as to acceptable collateral received in a transaction under this subsection (a), either physically or through the book entry systems of the Federal Reserve, Depository Trust Company, Participants Trust Company or other securities depositories approved by the commissioner:
(i) Possession of the acceptable collateral;(ii) A perfected security interest in the acceptable collateral; or(iii) In the case of a jurisdiction outside of the United States, title to, or rights of a secured creditor to, the acceptable collateral; and(C) The limitations of subdivision (a)(19) shall not apply to the business entity counterparty exposure created by transactions under this subdivision (a)(18). An insurer shall not enter into a transaction under this subdivision (a)(18) if, as a result of and after giving effect to the transaction:
(i) The aggregate amount of securities then loaned, sold to or purchased from any one (1) business entity counterparty under this subdivision (a)(18) would exceed five percent (5%) of its admitted assets. In calculating the amount sold to or purchased from a business entity counterparty under repurchase or reverse repurchase transactions, effect may be given to netting provisions under a master written agreement; or(ii) The aggregate amount of all securities then loaned, sold to or purchased from all business entities under this subdivision (a)(18) would exceed forty percent (40%) of its admitted assets;(D) The amount of collateral required for securities lending, repurchase and reverse repurchase transactions is the amount required pursuant to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC or, if it is no longer being published, the successor publication to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC;(19)(A) Except as otherwise authorized by subdivisions (a)(4)(B), (10), (15), (16)(A), (17), (18), (22) and (24), an insurer may under this section and § 56-3-304 acquire obligations of, preferred stock or an equity interest in or incur counterparty exposure amounts to any one business entity, or as to asset-backed securities, secured by or evidencing an interest in a single asset or pool of assets, but not to exceed three percent (3%) of the insurer’s admitted assets; and provided, that investments and transactions that are subject to subdivisions (a)(3)(B)(i), (a)(4)(A)(iii)(a) and (a)(20)(B) shall be taken into account in determining compliance with this subdivision (a)(19)(A);(B) Notwithstanding subdivision (a)(19)(A), asset-backed securities, not in default as to principal or interest, that are issued, assumed, or guaranteed by the United States, or that are required to be considered to be obligations issued by the United States by the federal Secondary Mortgage Market Enhancement Act of 1984 (12 U.S.C. § 1701 et seq.), shall not be subject to the limitations of subdivision (a)(19)(A);(20) Except as otherwise authorized by subdivisions (a)(10), (15), (18), (22) and (24), an insurer shall not, under this section or § 56-3-304, acquire an obligation of, or preferred stock or an equity interest in or incur a counterparty exposure amount to any person, or as to asset-backed securities, secured by or evidencing an interest in a single asset or pool of assets, if after giving effect to the investment or transaction:
(A) The aggregate amount of the obligations, preferred stock, equity interests and counterparty exposure amounts then held by the insurer that are rated NAIC-SVO 4 or an equivalent rating by any of the nationally recognized statistical rating organizations recognized by the NAIC-SVO would exceed five percent (5%) of its admitted assets; and(B) Investments made and transactions entered into under the authority of this subdivision (a)(20) shall not at any time cause:
(i) The insurance company’s holdings of obligations of preferred stock or equity interests in any one (1) business entity to exceed one percent (1%) of the insurance company’s admitted assets;(ii) The insurance company’s holdings of asset-backed securities secured by or evidencing an interest in a single asset or pool of assets to exceed one percent (1%) of the insurance company’s admitted assets; and(iii) The insurance company’s aggregate counterparty exposure amounts with respect to any one (1) business entity to exceed one percent (1%) of the insurance company’s admitted assets;(21) In hedging transactions, income generation transactions and replication transactions as follows:
(A) Prior to entering into any derivative transaction, the board of directors of the insurer shall approve a derivative instruments use plan that:
(i) Describes investment objectives and risk constraints, such as counterparty exposure amounts;(ii) Defines permissible transactions including identification of the risks that may be hedged, the assets or liabilities that may be replicated and permissible types of income generation transactions; and(iii) Requires compliance with internal control procedures;(B) The insurer shall establish written internal control procedures that provide for:
(i) A quarterly report to the board of directors that reviews:
(a) All derivative transactions entered into, outstanding or closed out;(b) The results and effectiveness of the derivative instruments program; and(c) The credit risk exposure to each counterparty for over-the-counter derivative transactions based upon the counterparty exposure amount;(ii) A system for determining whether hedging, income generation and/or replication strategies utilized have been effective;(iii) A system of regular reports, not less frequently than monthly, to management including:
(a) A description of all derivative transactions entered into, outstanding or closed out during the period since the last report;(b) The purpose of each outstanding derivative transaction;(c) A performance review of the derivative instruments program; and(d) The counterparty exposure amounts for over-the-counter derivative transactions;(iv) Written authorizations that identify the responsibilities and limitations of authority of persons authorized to effect and maintain derivative transactions;(v) Documentation appropriate for each transaction including:
(a) The purpose of the transaction;(b) The assets or liabilities to which the transaction relates;(c) The specific derivative instrument used in the transaction;(d) For over-the-counter derivative instrument transactions, the name of the counterparty and the counterparty exposure amount; and(e) For exchange-traded derivative instruments, the name of the exchange and the name of the firm that handled the transaction;(C) Whenever the derivative transactions entered into under this subdivision (a)(21) are not in compliance with this subdivision (a)(21) or, if continued, may now or subsequently create a hazardous financial condition of the insurer that affects its policyholders, creditors or the general public, the commissioner may, after notice and an opportunity for a hearing, order the insurer to take such action as may be reasonably necessary to rectify the noncompliance or the hazardous financial condition, or prevent an impending hazardous financial condition from occurring;(D) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of subdivisions (a)(19) and (a)(20);(E)(i)(a) Prior to entering into hedging transactions, an insurer must obtain the commissioner’s approval of the insurer’s plan regarding the use of hedging transactions; provided, that an insurer that has obtained the commissioner’s approval to enter into hedging transactions prior to July 1, 1998, shall not be required to obtain the commissioner’s approval of the plan;(b) Subject to subdivision (a)(21)(E)(i)(a), an insurer may enter into hedging transactions under this subdivision (a)(21)(E), if as a result of and after giving effect to each transaction:
(1) The aggregate statutory financial statement value of all outstanding options, other than collars, caps, floors, swaptions and warrants not attached to another financial instrument purchased by the insurer, pursuant to this subdivision (a)(21)(E), does not exceed seven and one half percent (7.5%) of its admitted assets;(2) The aggregate statutory financial statement value of all outstanding options, other than collars, swaptions, warrants, caps and floors written by the insurer pursuant to this subdivision (a)(21)(E) does not exceed three percent (3%) of its admitted assets; and(3) The aggregate potential exposure of all outstanding collars, swaps, forwards and futures entered into or acquired by the insurer pursuant to this subdivision (a)(21)(E) does not exceed six and one half percent (6.5%) of its admitted assets;(ii) With respect to hedging transactions, an insurer shall be able to demonstrate to the commissioner, upon request, the intended hedging characteristics and effectiveness of the hedging transaction or combination of hedging transactions through cash flow testing, duration analysis or other appropriate analysis;(F) Subject to the commissioner’s prior approval of the insurer’s plan regarding use of income generation transactions, an insurer may enter into an income generation transaction if:
(i) As a result of and after giving effect to the transaction, the aggregate statutory financial statement value of admitted assets that are then subject to call or that generate the cash flows for payments required to be made by the insurer under caps and floors sold by the insurer and then outstanding under this subdivision (a)(21)(F), plus the statutory financial statement value of admitted assets underlying derivative instruments then subject to calls sold by the insurer and outstanding under this subdivision (a)(21)(F), plus the purchase price of assets subject to puts then outstanding under this subdivision (a)(21)(F) does not exceed ten percent (10%) of its admitted assets; and(ii) The transaction is one (1) of the following types and meets the other requirements specified below that are applicable to these types of transactions:
(a) Sales of call options on assets; provided, that the insurer holds or has a currently exercisable right to acquire the underlying assets during the entire period that the option is outstanding;(b) Sales of put options on assets; provided, that the insurer holds sufficient cash, cash equivalents or interests in a short-term investment pool to purchase the underlying assets upon exercise during the entire period that the option is outstanding, and has the ability to hold the underlying assets in its portfolio. If the total market value of all put options sold by the insurer exceeds two percent (2%) of the insurer’s admitted assets, the insurer shall set aside pursuant to a custodial or escrow agreement cash or cash equivalents having a market value equal to the amount of its put option obligations in excess of two percent (2%) of the insurer’s admitted assets during the entire period the option is outstanding;(c) Sales of call options on derivative instruments, including swaptions; provided, that the insurer holds or has a currently exercisable right to acquire assets generating the cash flow to make any payments for which the insurer is liable pursuant to the underlying derivative instruments during the entire period that the call options are outstanding and has the ability to enter into the underlying derivative transactions for its portfolio; and(d) Sales of caps and floors; provided, that the insurer holds or has a currently exercisable right to acquire assets generating the cash flow to make any payments for which the insurer is liable pursuant to the caps and floors during the entire period that the caps and floors are outstanding;(G) Subject to the commissioner’s prior approval of the insurer’s plan regarding use of replication transactions, an insurer may enter into replication transactions; provided, that:
(i) The insurer would otherwise be authorized under this part to invest its funds in the asset being replicated; and(ii) The asset being replicated is subject to all the provisions and limitations on the making of the replicated asset specified in this part with respect to investments by the insurer as if the transaction constituted a direct investment by the insurer in the replicated asset;(H) An insurer may purchase or sell one (1) or more derivative instruments to offset, in whole or in part, any derivative instrument previously purchased or sold, as the case may be, without regard to the quantitative limitations of this subsection (a); provided, that the offsetting transaction utilizes the same type of derivative instrument as the derivative instrument being offset; and(I) Each derivative instrument shall be:
(i) Traded on a securities exchange;(ii) Entered into with, or guaranteed by, a person;(iii) Issued or written by or entered into with the issuer of the underlying interest on which the derivative instrument is based; or(iv) In the case of futures, traded through a broker that is registered as a futures commission merchant under the Commodity Exchange Act (7 U.S.C. § 1 et seq.), or that has received exemptive relief from registration under rule 30.10 promulgated under the Commodity Exchange Act;(22)(A) Nothing in this part prohibits the acquisition by an insurer of additional obligations, securities, or other assets if received as a dividend or as a distribution of assets, nor does this part apply to securities, obligations, or other assets accepted incident to the workout, adjustment, restructuring or similar realization of any kind of investment or transaction when deemed by the insurer’s board of directors or by a committee appointed by the board of directors to be in the best interests of the insurer, if the investment or transaction had previously been authorized, nor does this part apply to assets acquired pursuant to a lawful agreement of bulk reinsurance if the assets constituted legal and authorized investments for the ceding company. No obligation, security or other asset acquired as authorized by this subdivision (a)(22) need be qualified under any other subdivision of this section or section of this code; provided, that all assets acquired pursuant to this subdivision (a)(22) shall be subject to the applicable accounting and valuation requirements that are contained in this code;(B)(i) Subject to subdivision (a)(22)(C), if a domestic life insurance company, pursuant to a merger or consolidation, acquires an investment or transaction that was an authorized investment or transaction of the company that was merged or consolidated with the domestic life insurance company but does not qualify as an authorized investment or transaction under this part at the time the merger or consolidation occurs, regardless of whether or not the investment or transaction would be authorized under subdivision (a)(15), then the investment or transaction shall be an authorized investment or transaction under this subdivision (a)(22)(B), and shall not be required to be applied toward the limitations contained in subdivision (a)(15), for a period of five (5) years after the date on which the merger or consolidation occurs, after which period it shall no longer be an authorized investment or transaction under this subdivision (a)(22)(B), unless within the five-year period:
(a) The investment or transaction qualifies as an authorized investment or transaction under another subdivision of this subsection (a) or another section of this code, including, without limitation, subdivision (a)(15) if the domestic life insurance company so elects;(b) The commissioner authorizes the investment or transaction in the plan of merger or consolidation approved by the commissioner;(c) The commissioner, upon request of the insurer, authorizes an extension of the five-year time period; or(d) The commissioner approves the investment or transaction pursuant to this subdivision (a)(22)(B);(ii) The aggregate amount of a domestic life insurance company’s investments and transactions under this subdivision (a)(22)(B), excluding investments and transactions authorized under any of subdivisions (a)(22)(B)(i)(a), (b) and (d), shall not exceed twenty-five percent (25%) of the domestic life insurance company’s capital and surplus after giving effect to the merger or consolidation;(C) If a domestic life insurance company, pursuant to a merger or consolidation, acquires a mortgage loan, or participation in the mortgage loan, that would have been authorized under subdivision (a)(11), and under subdivision (a)(15) as to the portion of the mortgage loan, if any, that exceeded seventy-five percent (75%) of the value of the property, at the time the company that was merged or consolidated with the domestic life insurance company invested in the mortgage loan, or participation in the mortgage loan, then the mortgage loan, or participation in the mortgage loan, shall be authorized under subdivision (a)(11), and under subdivision (a)(15) as to the portion of the mortgage loan, if any, that exceeded seventy-five percent (75%) of the value of the property;(D) The commissioner shall have full discretion in selecting a method for calculating values of investments and transactions that an insurer acquires through a merger or consolidation; provided, that the method is consistent with any applicable provisions of this code and any applicable valuation method that the NAIC is currently using at that time with respect to investments and transactions; if there is a conflict between a provision of this code and an NAIC valuation method, the provision of this code shall control;(23) The qualification or disqualification of an investment under one (1) subdivision of this section or section of this code does not prevent its qualification in whole or in part under another section of this code, and an investment authorized by more than one (1) section of this code may be held under whichever authorizing section of this code the insurer elects. An investment or transaction qualified under any section of this code at the time it was acquired or entered into by the insurer shall continue to be qualified under that section of this code. An investment, in whole or in part, may be transferred from time to time, at the election of the insurer, to the authority of any section of this code under which it then qualifies, whether or not it originally qualified under that section of this code;(24) Notwithstanding other subdivisions of this section and § 56-3-304, an insurer may acquire an investment in or enter into a transaction with a business entity in which the insurer already holds one (1) or more investments or with which the insurer has entered into one (1) or more transactions if the investment is acquired or the transaction is entered into in order to protect an investment or transaction previously made in or with that business entity, but the aggregate amount of investments and transactions so acquired and entered into may not exceed five percent (5%) of the insurer’s capital and surplus; and(25) The percentage authorizations and limitations set forth in any or all of this section and §§ 56-3-304 and 56-3-305, but subject to § 56-3-306, shall apply only at the time of the original acquisition of an investment or at the time a transaction is entered into, and shall not be applicable to the insurer or the investment or transaction thereafter except as provided in subdivision (a)(23). In addition, any investment or transaction, once qualified under any subsection of this section, shall remain qualified notwithstanding any refinancing, restructuring or modification of the investment or transaction; provided, that the insurer shall not engage in any refinancing, restructuring or modification of any investment or transaction for the purpose of circumventing the requirements or limitations of this part. The commissioner shall have full discretion to value investments and transactions that an insurer holds at the time of an examination of the insurer using a method of calculating the values that the commissioner selects in the commissioner’s discretion; provided, that the method is consistent with any applicable provisions of this code and any applicable valuation method that the NAIC is currently using at the time with respect to investments and transactions. If there is a conflict between a provision of this code and an NAIC valuation method, the provision of this code shall control. Notwithstanding this subdivision (a)(25), if the commissioner determines that the continued operation of an insurer may be hazardous to its policyholders, its creditors or the general public, then the commissioner may issue an order consistent with applicable statutes requiring the insurer to limit or withdraw from certain investments or transactions or discontinue certain practices as to investments or transactions to the extent the commissioner deems necessary.(b)(1) A domestic life insurance company at the time of original issue or at any other time may acquire one (1) or more subsidiaries, subject to the limitations in subdivision (b)(2). The subsidiaries may conduct any kind of lawful business and their authority to do so shall not be limited by reason of the fact that they are subsidiaries of a domestic insurer.(2) The acquisition of subsidiaries by a domestic life insurer shall be subject to the following:
(A) Except as provided in subdivisions (b)(2)(B) and (C), the aggregate amount that may be invested in subsidiaries in the form of common stock, preferred stock or debt obligations shall not exceed the amount by which the capital and surplus of the insurer exceed the minimum capital and surplus required to form a new company to do the kind or kinds of insurance business the insurer is authorized to transact in this state. If the subsidiary to be acquired is one (1) or more insurance companies formed under the laws of a foreign country, the total amount of holding in the foreign companies shall not exceed three percent (3%) of the admitted assets of the domestic life insurance company and shall be included for purposes of the overall limitation on amounts of investments in subsidiaries;(B) A domestic life insurer may invest in excess of the amount permitted in subdivision (b)(2)(A) in the common stock, preferred stock or debt obligations of one (1) or more investment subsidiaries, subject to the limitations in subdivision (a)(15) and, with the approval of the commissioner, a domestic life insurer may invest any amount in excess of the amount permitted in subdivision (b)(2)(A) in common stock, preferred stock or debt obligations of one (1) or more subsidiaries; provided, that after the investment, the insurer’s surplus as regards policyholders shall be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs; and(C) If the subsidiary acquired by a domestic life insurer is engaged exclusively in holding title to or holding title to and managing or developing real property, the amount of the insurer’s investment in the real property shall not be included in calculating the aggregate limit on investments in subsidiaries; provided, that the amount invested in the subsidiary is included with the aggregate of all the insurer’s holdings for purposes of § 56-3-305(b), and the real property owned by the subsidiary shall be subject to § 56-3-305(a)(5).(3) Investments in common stock, preferred stock or debt obligations of subsidiaries made pursuant to this subsection (b) shall not be limited by or be subject to any of the otherwise applicable authorizations, restrictions or limitations applicable to the investments of domestic life insurers, except as provided in subdivision (b)(2)(C).(4) Whether any investment pursuant to this subsection (b) meets the applicable requirements of this subsection (b) shall be determined on a pro forma basis immediately after the investment is made, taking into account:
(A) The capital and surplus of the insurer and the minimum capital and surplus required at that time for a new company to do the same kind or kinds of insurance business the insurer is authorized to transact in this state;(B) The then outstanding principal balance on all previous investments in debt obligations of subsidiaries; and(C) The original cost or the current book value, whichever is lower, of all previous investments in the common or preferred stock of subsidiaries.(5) If the insurer ceases to own more than fifty percent (50%) of the stock of a subsidiary, it shall dispose of any investment in the subsidiary made pursuant to this section within three (3) years from the time of cessation of the requisite percentage of ownership, or within a further time that the commissioner prescribes, unless at any time after the investment has been made, the investment has become a permitted investment under any other law governing investments of domestic life insurance companies.(c) Any investment held by an insurer on or transaction entered into by an insurer prior to March 30, 1998, that was legally authorized at the time it was made, acquired or entered into or that the insurer was authorized to hold or engage in immediately prior to March 30, 1998, but that does not conform to the requirements of this section or § 56-3-304, may continue to be held by or engaged in and considered as an authorized investment or authorized transaction of the insurer; provided, that the investment or transaction is disposed of at its maturity date, if any, or within the time prescribed by the law under which it was acquired, if any; and provided further, in no event shall this subsection (c) alter the legal or accounting status of the investment or transaction.(d) For purposes of this section, “subsidiary” means a corporation in which the insurer owns and holds more than fifty percent (50%) of the voting stock of the corporation.
