HOUSE BILL No. 5927 April 17, 2002, Introduced by Rep. Richner and referred to the Committee on Insurance and Financial Services. A bill to amend 1956 PA 218, entitled "The insurance code of 1956," by amending sections 901, 912, 916, 917a, 918, 922, 938, 942, and 943 (MCL 500.901, 500.912, 500.916, 500.917a, 500.918, 500.922, 500.938, 500.942, and 500.943), sections 901 and 943 as amended and section 917a as added by 1994 PA 226, section 922 as amended by 1991 PA 79, and section 942 as amended by 1984 PA 90, and by adding section 902. THE PEOPLE OF THE STATE OF MICHIGAN ENACT: 1 Sec. 901. (1) Each insurer authorized to transact the busi- 2 ness of insurance in this state, and each person approved for 3 placement of business by a surplus lines agent pursuant to 4 chapter 19, may loan or invest its funds in any investment, and 5 may buy, sell, hold title to, possess, occupy, pledge, convey, 6 manage, protect, insure, and deal with respect to its 06968'02 DKH 2 1 investments, property, and money to the same extent as any other 2 person or corporation under the laws of this state or of the 3 United States if the insurer has assets in cash or as defined in 4 this chapter in a total amount at least equal to the sum of its 5 liabilities including its reserves as required by this act, plus 6 an amount equal to the lesser of the minimum capital and surplus 7 required to be maintained by sections 408 and 410 or 8 $1,000,000.00. 9 (2) For purposes of meeting the assets required by subsec- 10 tion (1), the following apply: 11 (a) The value of all computers shall not exceed 2% of the 12 assets required by subsection (1) and the value of each computer 13 shall not exceed the original cost of the computer amortized over 14 a period not to exceed53 years. For purposes of this sec- 15 tion, "computer" means an electronic data processing system, com- 16 posed of 1 or more components, that utilizes storage and process- 17 ing mechanization and has a direct automatic means of input and 18 output, including, but not limited to, central processing units, 19 data input/output channels, main storage or memory, and periph- 20 eral devices for systems control, data input, output, or tempo- 21 rary or permanent storage of information, and associated reusable 22 media required by these devices and operating systems software. 23 (b) Title insurers may include their net investment in their 24 title plant. 25 (c) Assets described in sections 946 and 947 that are encum- 26 bered with prior liens that affect the salability of the asset to 27 a material extent shall not be used to satisfy the requirements 06968'02 3 1 of subsection (1). For purposes of this subdivision, liens that 2 do not affect the salability of the asset to a material extent 3 are real estate taxes or assessments that are not delinquent, 4 liens against an asset for which an insurer is insured against 5 loss by title insurance, and any other liens that in the aggre- 6 gate are not in excess of 5% of the fair market value of the 7 asset. Assets described in sections 946 and 947 shall not be 8 used to satisfy more than 20% of the requirements of subsection 9 (1). This subdivision does not apply to assets described in sec- 10 tion 942. 11 (d) Amounts receivable from broker/dealers registered under 12 the securities exchange act of 1934, chapter 404, 48 Stat. 881, 13 or from the issuer of a security or asset in connection with the 14 disposition of assets qualified to satisfy subsection (1) may be 15 included, provided the amount is not more than 5 business days 16 past the date of disposition. 17 (e) Assets not otherwise defined in this chapter may be used 18 as qualified assets for purposes of subsection (1) if the assets 19 are rated investment grade by a securities rating organization 20 approved by the commissioner. 21 (F) NO MORE THAN 20% OF THE ASSETS REQUIRED BY SUBSECTION 22 (1) SHALL BE HIGH-YIELD, HIGH-RISK OBLIGATIONS. AS USED IN THIS 23 SUBDIVISION, "HIGH-YIELD, HIGH-RISK OBLIGATIONS" MEANS OBLIGA- 24 TIONS THAT ARE NOT IN 1 OF THE TOP 2 NUMBERED CLASSIFICATIONS OF 25 BONDS REPORTED IN THE INSURER'S ANNUAL FINANCIAL STATEMENT ON A 26 FORM APPROVED BY THE COMMISSIONER. 06968'02 4 1 (3) The sum of the liabilities and reserves computed for 2 purposes of this section may be reduced by 1 or more of the 3 following: 4 (a) A reinsurance balance recoverable or other credit due 5 from a reinsurer that complies with existing or other applicable 6 rules or orders promulgated or issued by the commissioner, to the 7 extent that the balance recoverable or other credit due may be 8 used to offset a liability as authorized in an insurer's annual 9 statement concerning its affairs filed pursuant to section 438. 10 (b) Policy loans secured by policies included in the liabil- 11 ities and reserves but not in excess of the cash surrender value 12 of the policies. 13 (c) Premium notes secured by letters of credit, security 14 trust funds, or unearned premium reserves. 15 (d) The net amount of insurance premiums and annuity consid- 16 erations booked but deferred and not yet due. Reduction under 17 this subdivision shall not be allowed for credit life and credit 18 accident and health premiums deferred and uncollected, whether 19 individual or group, except as allowed pursuant to 20 subdivision (e). 21 (e) Amounts receivable from an agent, agency, policyholder, 22 or other person that does not have control of more than 10% of 23 all the insurer's agents' balances, and that is not affiliated 24 with the insurer on policies with an effective date not more than 25 1 month old to the extent that the amounts are offset by unearned 26 premium reserves on the same policies. 06968'02 5 1 (f) Amounts receivable from a person to the extent the 2 amounts offset liabilities or amounts payable to that person. 3 Receivables and payables with respect to reinsurance may be 4 allowed so long as the reinsurance contract has a right of offset 5 provision. A reduction under this subdivision shall not be 6 allowed for agents' balances or uncollected premiums as defined 7 by subdivision (e). 8 (4) Assets, liabilities, and reserves under subsection (1) 9 shall exclude assets, liabilities, and reserves included in sepa- 10 rate accounts established in accordance with section 925. The 11 value of income due and accrued in respect to assets required by 12 subsection (1) may be included in the total amount. The assets 13 shall not be valued at more than the actual value as ascertained 14 in a manner approved by the commissioner, except those assets 15 described in sections 912, 914, 918, 934, 938, and 942 that have 16 a fixed term and rate, if amply secured and not in default as to 17 principal and interest which may be valued as follows: if pur- 18 chased at par, the par value; if purchased above or below par, on 19 the basis of the purchase price adjusted so as to bring the value 20 to par at maturity and so as to yield in the meantime the effec- 21 tive rate of interest at which the purchase was made. The pur- 22 chase price shall not be taken at a higher figure than the actual 23 market value at the time of purchase. 24 (5) The commissioner may permit other assets not specifi- 25 cally described in this section to be used as qualified assets 26 for purposes of subsection (1), as long as the assets are 27 financially equivalent to those assets described in sections 910 06968'02 6 1 to 947, are approved by the commissioner as adequate as to 2 quality and liquidity to secure the liabilities they support, and 3 are valued in a manner approved by the commissioner. 4 (6) No more than 5% of the assets required by subsection (1) 5 shall be invested in, loaned to, receivable from, secured by, 6 leased or rented to, or deposited with 1 person or 1 group of 7 affiliated persons or invested in 1 parcel of real estate. In 8 calculating this restriction, the following apply: 9 (a) For purposes of this section, each issue of 10 mortgage-backed securities secured by residential mortgage pools 11 and rated investment grade by a securities rating organization 12 approved by the commissioner, and each issue of asset-backed 13 security rated investment grade by a securities rating organiza- 14 tion approved by the commissioner, shall be considered a separate 15 person regardless of other obligations issued by the same or 16 affiliated issuer. 17 (b) This restriction does not apply to mortgage-related 18 securities issued by the federal home loan mortgage corporation 19 or the federal national mortgage association. 20 (c) This restriction does not apply to the extent that the 21 principal and interest are fully guaranteed by the United States 22 or any state. 23 (d) This restriction does not apply to assets invested in, 24 loaned to, receivable from, secured by, leased or rented to, or 25 deposited with an affiliate of the insurer that is authorized to 26 transact insurance in any state or Canada. 06968'02 7 1 (e) For an alien insurer that is an insurer authorized to 2 transact the business of life insurance, for purposes of this 3 subsection the 5% restriction applies to the total assets of the 4 insurer, excluding assets included in separate accounts, as 5 reported in the total business annual statement filed by the 6 insurer with its domiciliary authority. 7 (f) This restriction does not apply to the value of a nonin- 8 surance affiliate that is owned solely by the insurer as 9 described in subsection (7)(c). 10 (g) This restriction does not apply to the value of a nonin- 11 surance affiliate that is not owned solely by the insurer if the 12 value of the noninsurance affiliate is determined in accordance 13 with procedures approved by the commissioner and if the invest- 14 ment in the noninsurance affiliate is approved by the commis- 15 sioner as adequate in quality and liquidity to secure the liabil- 16 ities of the insurer. 17 (7) The assets referred to in subsection (1) shall not 18 include assets invested in, loaned to, receivable from, secured 19 by, leased or rented to, or deposited with a person that is, 20 directly or indirectly, owned or controlled by the insurer or 21 that, directly or indirectly, owns, controls, or is affiliated 22 with the insurer as control is defined in section 115, except as 23 follows: 24 (a) Amounts receivable from, secured by, leased or rented 25 to, or deposited with an insurer affiliated with the insurer may 26 be included if the amount receivable is not more than 90 days 27 past due and its affiliated insurer complies with this section. 06968'02 8 1 (b) Amounts invested in an affiliated publicly traded 2 investment company that is registered and regulated under the 3 investment company act of 1940, title I of chapter 686, 54 4 Stat. 789, 15 U.S.C.80a-1 to 80a-6480a-1 TO 80a-3 AND 80a-4 5 TO 80a-64, may be included. 6 (c) The value of a noninsurance affiliate that is owned 7 solely by the insurer may be included. The value of the nonin- 8 surance affiliate shall be the value of all assets qualifying 9 under this section in excess of the assets required by this sec- 10 tion, but shall not exceed the value determined by the securities 11 valuation office of the national association of insurance 12 commissioners. In support of the noninsurance affiliate's value, 13 the insurer shall submit to the commissioner an audited financial 14 statement for the noninsurance affiliate supplemented with a list 15 of qualifying assets and associated values. 16 (d) Amounts invested in a noninsurance affiliate that is not 17 owned solely by the insurer may be included if the investment in 18 the noninsurance affiliate is approved by the commissioner as 19 adequate in quality and liquidity to secure the liabilities of 20 the insurer. The value of the noninsurance affiliate shall be 21 the value determined in accordance with procedures adopted by the 22 commissioner. 23 (e) The assets required by subsection (1) may include the 24 value of amounts invested in or loaned to an affiliate authorized 25 to transact insurance in any state or in Canada in an amount 26 equal to the assets that would qualify for compliance with this 27 section that are held by the affiliate and are in excess of the 06968'02 9 1 amount of assets that would be required for the affiliate by this 2 section, prorated to reflect the extent of the insurer's invest- 3 ment in or loans to the affiliate. QUALIFIED ASSETS FOR PURPOSES 4 OF SUBSECTION (1) INCLUDE LOANS, OTHER THAN SURPLUS NOTES, TO AN 5 AFFILIATE AUTHORIZED TO TRANSACT INSURANCE IN ANY STATE OR IN 6 CANADA PROVIDED THAT THE AFFILIATE HAS ASSETS IN EXCESS OF THE 7 AMOUNT OF ASSETS THAT ARE REQUIRED FOR THE AFFILIATE UNDER SUB- 8 SECTION (1). WITH THE COMMISSIONER'S APPROVAL, SURPLUS NOTES MAY 9 BE TREATED AS AN INVESTMENT FOR PURPOSES OF THIS SECTION. 10 (f) Amounts loaned to a noninsurance affiliatethat is11owned solely by the insurermay be included if the loans are 12 rated investment grade by a securities rating organization 13 approved by the commissioner. The insurer shall submit documen- 14 tation satisfactory to the commissioner in support of the invest- 15 ment grade rating. 16 (8) An insurer may comply with this section if the insurer 17 elects to provide alternative security to Michigan policyholders 18 and claimants satisfactory to the commissioner or elects to 19 deposit funds or securities of the kind described in section 912, 20 or other securities acceptable to the commissioner, registered in 21 the name of the state treasurer of Michigan, designated as exclu- 22 sively held and deposited for the sole benefit of Michigan poli- 23 cyholders, claimants, and creditors pursuant to section 8141a, in 24 an amount, at market value, considered adequate by the commis- 25 sioner to secure Michigan policyholders, but not less than the 26 greater of the aggregate sum of 100% of Michigan direct unpaid 27 losses and unpaid loss adjustment expense plus 100% of Michigan 06968'02 10 1 direct unearned premiums and policy and contract reserves or the 2 direct premiums written in Michigan during the most recent 12 3 months available in filed statements. Direct unpaid losses and 4 unpaid loss adjustment expenses shall include a provision for 5 incurred but not reported losses and associated loss adjustment 6 expense. The deposit shall be a special deposit and shall be 7 subject to special deposit claims for the benefit of Michigan 8 policyholders and claimants pursuant to section 8141a. The 9 deposit of funds required by this subsection shall be increased 10 by adjustment each quarter. A decrease to the deposited fund may 11 be made annually only upon a satisfactory showing by the insurer 12 to the commissioner that a decrease in the deposit is justified. 13 The commissioner may require the special deposits set forth in 14 this subsection as a condition for any insurer to transact insur- 15 ance in this state if the commissioner finds that a special 16 deposit is necessary for the protection of Michigan policyholders 17 and claimants. 18 (9) Compliance with subsection (1) is the obligation of each 19 insurer, fund, or fraternal benefit society authorized to trans- 20 act the business of insurance in this state. Failure to comply 21 shall limit the insurer, fund, or fraternal benefit society under 22 the remainder of this act. If, at any time following compliance 23 with the requirements of this section, an insurer, fund, or fra- 24 ternal benefit society fails to maintain compliance, the commis- 25 sioner shall notify the insurer, fund, or fraternal benefit soci- 26 ety that it has failed to maintain compliance with this section. 27 Within 30 business days after notification by the commissioner of 06968'02 11 1 noncompliance with the provisions of this section, an insurer 2 shall file a plan to restore compliance with this section. 3 Failure of the insurer to file a plan shall create a presumption 4 that the insurer is not safe, reliable, and entitled to public 5 confidence. The commissioner, upon written request by the insur- 6 er, may grant a period of time within which to restore 7 compliance. The period of time may be granted only if the com- 8 missioner is satisfied the insurer is safe, reliable, and enti- 9 tled to public confidence; is satisfied the insurer would suffer 10 a material financial loss from an immediate forced conversion of 11 its assets; and approves the plan filed by the insurer for 12 restoring compliance within the time granted. If the plan is not 13 approved by the commissioner, or if the plan is approved, and, at 14 the end of 1 year the insurer still does not comply with the 15 requirements of this section, the commissioner may grant addi- 16 tional time to comply, or the commissioner may suspend, revoke, 17 or limit the certificate of authority of the insurer pursuant to 18 section 436. 19 (10) The requirements of this section constitute a discrete 20 determination of financial solidity and liquidity and are not 21 intended to apply to other provisions of this act with respect to 22 financial condition or to the accounting practices and procedures 23 governing the preparation of financial statements pursuant to 24 section 438. 25 SEC. 902. (1) EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 942, 26 943(2), AND 946(4), THIS CHAPTER DOES NOT PROHIBIT THE INVESTMENT 27 OF A DOMESTIC INSURER'S CAPITAL AND SURPLUS IN ANY ASSET 06968'02 12 1 OTHERWISE PERMITTED TO BE HELD BY ANY OTHER PERSON OR CORPORATION 2 UNDER THE LAWS OF THIS STATE, PROVIDED THE DOMESTIC INSURER MAIN- 3 TAINS QUALIFIED ASSETS AS DESCRIBED IN THIS CHAPTER IN THE 4 AMOUNTS SPECIFIED IN SECTION 901. 5 (2) AS USED IN THIS SECTION, "QUALIFIED ASSETS" MEANS CASH 6 AND THOSE ASSETS DESCRIBED IN SECTIONS 910 TO 947. 7 Sec. 912. (1) An insurer may invest its funds AS FOLLOWS: 8 (a) In the bonds or other evidences of indebtedness of the 9 United States, or of the dominion of Canada, or any state, 10 province, or territory or public instrumentality of the United 11 States, or the dominion of Canada, or in the valid public debt, 12 bonds, or other evidence of indebtedness of any city, county, 13 township, village, school district, or any other political subdi- 14 vision having the power to levy taxes, of any state or territory 15 of the United States or province of the dominion of Canada, if 16 the state, province, municipality, or other political subdivision 17 has not, in the 3 years preceding the time of such investment, 18 failed to pay its debt or any partthereofOF ITS DEBT or the 19 interest duethereonON THE DEBT, or any partthereofOF THE 20 INTEREST DUE ON THE DEBT. Delay, not exceeding 6 months, in the 21 payment of any installment of principal or interest shall not be 22 construed as failure to pay. 23 (b) In the bonds or other evidences of indebtedness of any 24 political subdivision of the United States, or any state or 25 countythereinIN THE UNITED STATES, or any agency, public 26 instrumentality, or authority created by the United States, or 27 any state or countythereinIN THE UNITED STATES, or any 06968'02 13 1 political subdivisionthereofOF THE STATE OR COUNTY, if, by 2 statutory or other legal requirements,suchTHOSE obligations 3 are payable, as to both principal and interest, from adequate 4 special revenues pledged or otherwise appropriated or by law 5 required to be provided for the purpose ofsuchpayment. 6 (c) Insuchgovernmental securities of this or any foreign 7 government, or governmental subdivisions or authorities or 8 instrumentalities,thereofnot otherwise provided forherein,9as may be first approved by the commissioner andIN THIS SECTION 10 subject tosuchTHE limitationsas are hereinIN SUBDIVISIONS 11 (A) AND (B) prescribed for othergovernment and municipal12 GOVERNMENTAL securities. 13 (2) A DOMESTIC INSURER'S INVESTMENT IN GOVERNMENTAL SECURI- 14 TIES IS SUBJECT TO THE LIMITATIONS IN SECTION 901(2)(F). 15 Sec. 916.WheneverIF any agency or corporationshall16beIS established by the federal government,with authority 17 to purchase, discount, or loan money upon the security of real 18 estate mortgages butrequiresREQUIRING membership or ownership 19 of capital stock insuchTHAT federal agency or corporationin20order thatFOR any insurer organized under the laws of this 21 statemayTO avail itself of the full privileges of selling, 22 rediscounting, or borrowing money uponsuchTHOSE mortgages, 23 thensuch insurer shall be authorized to buy not exceeding such24 QUALIFIED ASSETS FOR PURPOSES OF SECTION 901 INCLUDE THE amount 25 ofsuchcapital stockasTHAT is required bysuchTHE fed- 26 eral law or the rules of the governing body ofsuchTHE federal 27 agency or corporation. 06968'02 14 1 Sec. 917a. (1) As used in this section: 2 (a) "Asset-backed securities" means securities, other than 3 those governed by section 917, representing loans to, participa- 4 tions in loans to, or equity interests in a person that has as 5 its primary activity the acquisition and holding of assets, 6 directly or through a trustee, for the benefit of its debt or 7 equity holders and includes, but is not limited to, structured 8 securities, pass-through certificates, and other securitized 9 obligations. 10 (b) "Assets" means pools of assets consisting of either 11 interest bearing obligations or contractual obligations repre- 12 senting the right to receive payment from the assets. 13 (c) "Structured securities" means asset-backed securities 14 that have been divided into 2 or more classes where the payment 15 of interest on or principal of any class of the securities has 16 been allocated in a manner that may not be directly proportional 17 to interest or principal received by the issuer of the securities 18 on the underlying assets. 19 (d) "Pass-through certificate" means an asset-backed securi- 20 ty, whether or not mortgage-related, where the payment of inter- 21 est or principal on the security is directly proportional to 22 interest or principal received by the issuer of the security on 23 the underlying assets. 24 (2)Subject to the limitations prescribed in25section 901(6), an insurer may invest inQUALIFIED ASSETS FOR 26 PURPOSES OF SECTION 901 INCLUDE asset-backed securities that are 27 rated investment grade by a securities rating organization 06968'02 15 1 approved by the commissioner. Asset-backed securities that are 2 secured by or represent an undivided interest in a single asset 3 or pool of assets or in the cash flows generated by those assets, 4 including without limitation, structured securities and 5 pass-through certificates, are subject to all the limitations 6 prescribed by this chapter for investments not guaranteed by the 7 full faith and credit of the United States. 8 Sec. 918.An insurer may invest inQUALIFIED ASSETS FOR 9 PURPOSES OF SECTION 901 INCLUDE lawfully authorized obligations 10 issued, assumed, or guaranteed by any solvent institution created 11 or existing under the laws of the United States or of any state, 12 district, or territorythereofOF THE UNITED STATES, or ofthe13Dominion ofCanada or any provincethereof, whichOF CANADA, 14 THAT are not in default as to principal or interest andwhich15 THAT are qualified under any of the following clauses: 16 (A)(1)Obligations secured by the mortgage of property or 17 the pledge of adequate collateral if, during any 3, including the 18 last 2, of the 5 fiscal years next preceding the time of invest- 19 ment, the net earnings of the issuing, assuming, or guaranteeing 20 institution available for fixed charges, as determined in accord- 21 ance with standard accounting practice,shallhave been not 22 less than the total of its fixed charges for such year on an 23 overall basis nor less than 1-1/2 times its fixed charges for 24 such year on a priority basis after excluding interest require- 25 ments on obligations junior to such issue as to security.;26 (B)(2)In equipment trust certificates of railroad 27 companies organized under the laws of any state of the United 06968'02 16 1 States or ofthe Dominion ofCanada or of any province 2thereofOF CANADA, payable within 20 years from their date of 3 issue, in annual orsemi-annualSEMIANNUAL installments, begin- 4 ning not later than the fifth year after such date, and which 5 certificates are a first lien on the specific equipment pledged 6 as security for the paymentthereofwhich are either the direct 7 obligations ofsuchTHE railroad companies or guaranteed by 8 them, or are executed by trustees holding title to the equipment. 9;10 (C)(3)Fixed interest bearing obligations other than 11 those described inclauses (1) and (2) aboveSUBDIVISIONS (A) 12 AND (B), if the net earnings of the issuing, assuming, or guaran- 13 teeing institution available for fixed charges during each of any 14 3, including the last 2, of the 5 fiscal years next preceding the 15 time of investment, shall have been not less than 1-1/2 times the 16 total of its fixed charges for such year. 17 Sec. 922.(1) Except as otherwise provided in18subsection (2), anAN insurer may purchase stocks, bonds, and 19 other evidence of indebtedness of solvent corporations as 20 approved by its board of directors or a committee of the board 21 entrusted with the investment of the company's funds. The 22 insurer may hold the stocks, bonds, and other evidences of 23 indebtedness as an investment. 24(2) A domestic life insurer shall not invest more than 20%25of its assets in high-yield, high-risk obligations.26(3) As used in this section, "high-yield, high-risk27obligations" means obligations that are not in 1 of the top 206968'02 17 1numbered classifications of bonds reported in the domestic life2insurer's annual financial statement on a form approved by the3commissioner.4 Sec. 938.An insurer may invest fundsQUALIFIED ASSETS 5 FOR PURPOSES OF SECTION 901 INCLUDE ALL OF THE FOLLOWING: 6 (A)(1) In anyANY negotiable paper or other evidence of 7 indebtedness secured by any of the classes of securities in which 8suchinsurance companies may lawfully investtheirfunds pur- 9 suant to sections 912(federal, state, municipal, and foreign10government obligations)and 918.(obligations of solvent cor-11porations and institutions).12 (B)(2) Upon negotiableNEGOTIABLE notes secured by pledge 13 of stock of national or state banks, which have a surplus equal 14 in amount to 25% of the paid in capital stock: Provided, That15suchPROVIDED THOSE loansshallDO not exceed 85% of the 16 market value of the stock,andthatthe total amount of the 17 loan on bank secured collateralshallDOES not exceed 15% of 18 the capital and surplus of the insurance company. 19 (C)(3) IfFOR other than a life insurer,inloans 20 secured as collateral by corporate stocks and securities eligible 21 for investment under section 922(corporate stocks, bonds),but 22 no loan shall be made of more than 50% of the fair market value 23 ofsuchTHOSE stocks and securities. 24 Sec. 942. (1) An insurer may invest in real estate loans 25 secured by first liens upon improved or income bearing real 26 estate, including also improved farmland and improved business 27 and residential properties,;orwhichTHAT are secured by 06968'02 18 1 first mortgages or deeds of trust on leasehold estates having an 2 unexpired term equivalent to the term of the mortgage, inclusive 3 of the term or termswhichTHAT may be provided by enforceable 4 options of renewal.; vacantVACANT property, at least 60% of 5 which is under contract of sale and the contract or contracts in 6 connection therewith trusteed or pledged as additional collater- 7 al,shall be consideredIS income bearing real estate within 8 the meaning of this section. 9 (2) Real estateshall not be deemed to beIS NOT encum- 10 bered within the meaning of this sectionwhenBECAUSE IT IS 11 subject to lease in whole or in partwherebyAND rents or prof- 12 its are reserved to the owner;orwhenBECAUSE IT IS subject 13 to an easement for a right of way. 14 (3) A loan secured by real estate shall be in the form of 15 obligations secured by mortgage, trust deed, or other such 16 instrument upon real estate, and an insurer may purchase an obli- 17 gation so secured when the entire amount of the obligation is 18 sold to the insurer, except that an insurer may purchase a part 19 of an obligation if the investment of each participant is not 20 less than $50,000.00 at the time of the insurer's investment, if 21 all other participants are insurers, banks, or savings and loan 22 associations, and if the entire indebtedness of which participa- 23 tion is a part would qualify under the provisions of this sec- 24 tion, and either the insurer holds a senior participation, giving 25 it substantially the rights of a first mortgagee, or each partic- 26 ipation is of equal rank. 06968'02 19 1 (4)The amountEXCEPT AS OTHERWISE PROVIDED IN THIS 2 SUBSECTION, ANY PORTION of a loanshall not exceedTHAT EXCEEDS 3 66-2/3% of the appraised value, at the time of the loan, of the 4 real estate constituting or offered as security andsuch a loan5shall not be made for a longer term than 5 years; except that (a)6aANY LOAN THE TERM OF WHICH EXCEEDS 5 YEARS IS NOT A QUALIFIED 7 ASSET FOR PURPOSES OF SECTION 901. HOWEVER, THE FOLLOWING LOANS 8 ARE QUALIFIED ASSETS FOR THE PURPOSES OF SECTION 901: 9 (A) A loan on land improved with permanent buildings used 10 for agriculture or pasturemay be madein an amount not to 11 exceed 75% of the appraised value, at the time of the loan, of 12 the real estate constituting or offered as security if the loan 13 is secured by an amortized mortgage, deed of trust, or other 14 instrument under the terms of which the installment payments are 15 sufficient to amortize on not to exceed an annual basis of 40% or 16 more of the principal of the loan within a period of not more 17 than 10 years., (b) a18 (B) A loan on single family residential propertymay be19madein an amount not to exceed 80% of the appraised value, at 20 the time of the loan, of the real estate offered as security, if 21 the loan is secured by a mortgage, deed of trust, or other 22 instrument for a term of not more than 35 years., and (c)23loans may be made24 (C) SUBJECT TO SUBSECTION (6), A LOAN ON MULTIFAMILY RESI- 25 DENTIAL PROPERTY IN AN AMOUNT NOT TO EXCEED 85% OF THE APPRAISED 26 VALUE, AT THE TIME OF THE LOAN, OF THE REAL ESTATE OFFERED AS 06968'02 20 1 SECURITY, IF THE LOAN IS SECURED BY A MORTGAGE, DEED OF TRUST, OR 2 OTHER INSTRUMENT FOR A TERM OF NOT MORE THAN 35 YEARS. 3 (D) A LOAN in an amount not to exceed 75% of the appraised 4 value of the real estate offered as security and for a term not 5 longer than 35 years, if the real estate is improved if it is not 6 used for agriculture or pasture, and if the loan is secured by a 7 mortgage, deed of trust, or other instrument for a term of not 8 more than 35 years. 9 (5) Theforegoinglimitations and restrictionsshallIN 10 SUBSECTION (4) DO not apply to real estate loanswhichTHAT are 11 insured under the provisions of title 2 of the national housing 12 act, CHAPTER 847, 48 STAT. 1246, 12 U.S.C. 1707 TO 1709, 1710 TO 13 1715g, 1715k TO 1715r, 1715t TO 1715z-1, by the federal housing 14 administration,orto loans insured under the Canadian national 15 housing act of 1954 by the central mortgage and housing corpora- 16 tion,norOR to real estate loanswhichTHAT are guaranteed 17 as to principal by the United States government or Canadian gov- 18 ernment or an agency or instrumentalitythereofOF THE UNITED 19 STATES OR CANADIAN GOVERNMENT. 20 (6) IF THE TOTAL AMOUNT OF MULTIFAMILY RESIDENTIAL LOANS 21 THAT EXCEED 75% OF THE APPRAISED VALUE OF THE REAL ESTATE OFFERED 22 AS SECURITY FOR THOSE LOANS IS GREATER THAN 20% OF AN INSURER'S 23 MORTGAGE PORTFOLIO, THE PORTION OF THOSE LOANS THAT EXCEED 75% OF 24 THE APPRAISED VALUE SHALL NOT BE TREATED AS A QUALIFIED ASSET FOR 25 PURPOSES OF SECTION 901. 26 (7)(5)An insurer shall not make any such loan unless an 27 appraisalshall haveHAS been made in writing by a competent 06968'02 21 1 appraiser appointed or employed by the insurer and filed with the 2 investment committee authorized to approve the loan. 3 (8)(6) An insurer may purchaseQUALIFIED ASSETS FOR THE 4 PURPOSES OF SECTION 901 INCLUDE a loan or certificate of partici- 5 pation secured by a loan made on a single-family residential 6 property in an amount not to exceed 95% of the appraised value, 7 at the time of the loan, of the real estate offered as security, 8 if the loan is secured by a mortgage, deed of trust, or other 9 instrument for a term of not more than 35 years, and the loan is 10 insured by a private mortgage insurer approved by the federal 11 home loan mortgage corporation and the federal national mortgage 12 association and is licensed to do business in the state of 13 Michigan. 14 (9)(7) An insurer may invest inQUALIFIED ASSETS FOR THE 15 PURPOSES OF SECTION 901 INCLUDE real estate loanswhichTHAT do 16 not qualify as first mortgages asdefinedDESCRIBED in subsec- 17 tions (1) and (3).if the totalTOTAL investments THAT MAY BE 18 TREATED AS QUALIFIED ASSETS under this subsectiondoSHALL not 19 exceed 25% of the insurer's total investments in real estate 20 loans asdefinedDESCRIBED in subsections (1) and (3). 21 (10) A DOMESTIC INSURER SHALL NOT INVEST IN ANY REAL ESTATE 22 LOAN THAT EXCEEDS THE APPRAISED VALUE LIMITATIONS UNDER SUBSEC- 23 TION (4), (6), OR (8) UNLESS THE REAL ESTATE LOAN IS THE RESULT 24 OF A RESTRUCTURING OF AN EXISTING REAL ESTATE LOAN AND THE 25 INSURER PROVIDES WRITTEN NOTICE TO THE COMMISSIONER ON OR BEFORE 26 THE DATE OF THE RESTRUCTURING. IF THE LOANS UNDER THIS 27 SUBSECTION EXCEED 5% OF AN INSURER'S ASSETS WITHIN ANY 12-MONTH 06968'02 22 1 PERIOD, NO OTHER LOANS MAY BE MADE PURSUANT TO THIS SUBSECTION 2 EXCEPT WITH THE COMMISSIONER'S PRIOR APPROVAL. 3 (11) A DOMESTIC INSURER SHALL NOT INVEST MORE THAN 20% OF 4 ITS MORTGAGE PORTFOLIO IN MULTIFAMILY RESIDENTIAL MORTGAGES THAT 5 EXCEED 75% OF THE APPRAISED VALUE, AT THE TIME OF THE LOAN, OF 6 THE REAL ESTATE OFFERED AS SECURITY. 7 Sec. 943.(1) An insurer may invest in financial futures8contracts issued under terms and conditions regulated by a fed-9eral regulatory agency, subject to all of the following:10(a) The terms and conditions required by the commissioner by11rules promulgated under subsection (3).12(b) An insurer shall not enter into a financial futures con-13tract except as a hedging transaction.14(c) An insurer shall not have a margin outstanding from15futures positions authorized under this section of more than 10%16of the excess of the insurer's total capital and surplus over the17minimum capital and surplus requirements that must be met by a18new stock or mutual company to qualify for a certificate of19authority to write the kind of insurance that the insurer is20authorized to write.21(2) An insurer may invest in put options and call options on22financial instruments issued under terms and conditions regulated23by a national securities exchange registered under the securities24exchange act of 1934, chapter 404, 48 Stat. 881, or any board of25trade designated as a contract market by the commodity futures26trading commission subject to all of the following:06968'02 23 1(a) Except as provided in subdivision (b), an insurer shall2not write a call option on either securities it does not own or3in an amount greater than securities that it presently owns.4(b) For call options on financial futures contracts and5stock or bond index contracts where it is not feasible to own the6underlying security, an insurer may write a call option only in7connection with a hedging transaction.8(c) An insurer shall not write a put option unless its obli-9gations under the put option are fully secured by a deposit by10the insurer with a bank or other custodian of cash or cash11equivalents.12(d) An insurer shall not maintain as open positions autho-13rized under this subsection more than 10% of the excess of the14insurer's total capital and surplus over the minimum capital and15surplus requirements that must be met by a new stock or mutual16company to qualify for a certificate or authority to write the17kind of insurance that the company is authorized to write.18 (1) QUALIFIED ASSETS FOR PURPOSES OF SECTION 901 INCLUDE 19 DERIVATIVE INSTRUMENTS ONLY IF THE INSURER IS ABLE TO DEMONSTRATE 20 TO THE COMMISSIONER THROUGH CASH FLOW TESTING OR OTHER APPROPRI- 21 ATE ANALYSES BOTH THE INTENDED HEDGING CHARACTERISTICS AND THE 22 ONGOING EFFECTIVENESS OF THE DERIVATIVE TRANSACTION OR COMBINA- 23 TION OF TRANSACTIONS. 24 (2) BEFORE ENGAGING IN A DERIVATIVE TRANSACTION AND WITH 25 BOARD OF DIRECTOR APPROVAL, A DOMESTIC INSURER SHALL DO ALL OF 26 THE FOLLOWING: 06968'02 24 1 (A) ESTABLISH WRITTEN GUIDELINES TO BE USED FOR EFFECTING OR 2 MAINTAINING DERIVATIVE TRANSACTIONS. THE GUIDELINES SHALL BE 3 AVAILABLE TO THE COMMISSIONER ON REQUEST AND SHALL MEET ALL OF 4 THE FOLLOWING: 5 (i) ADDRESS INVESTMENT OR, IF APPLICABLE, UNDERWRITING 6 OBJECTIVES AND RISK CONSTRAINTS, SUCH AS CREDIT RISK LIMITS. 7 (ii) ADDRESS PERMISSIBLE DERIVATIVE TRANSACTIONS AND THE 8 RELATIONSHIP OF THOSE TRANSACTIONS TO ITS OPERATIONS. 9 (iii) REQUIRE COMPLIANCE WITH INTERNAL CONTROL PROCEDURES. 10 (B) HAVE A SYSTEM FOR DETERMINING WHETHER A DERIVATIVE 11 INSTRUMENT USED IN A HEDGING OR REPLICATION TRANSACTION IS 12 EFFECTIVE. 13 (C) HAVE A CREDIT RISK MANAGEMENT SYSTEM FOR 14 OVER-THE-COUNTER DERIVATIVE TRANSACTIONS THAT MEASURES CREDIT 15 RISK EXPOSURE USING COUNTER PARTY EXPOSURE AMOUNT. 16 (D) DETERMINE WHETHER THE INSURER HAS ADEQUATE PROFESSIONAL 17 PERSONNEL, TECHNICAL EXPERTISE, AND SYSTEMS TO IMPLEMENT INVEST- 18 MENT PRACTICES INVOLVING DERIVATIVES. 19 (E) DETERMINE THAT THE DERIVATIVE PROGRAM IS PRUDENT AND 20 THAT THE LEVEL OF RISK IS APPROPRIATE FOR THE INSURER GIVEN THE 21 LEVEL OF CAPITALIZATION AND EXPERTISE AVAILABLE TO THE INSURER. 22 (3) EXCEPT AS PROVIDED IN SECTION 222(7), WRITTEN GUIDELINES 23 PREPARED PURSUANT TO SUBSECTION (2), IF FURNISHED TO THE COMMIS- 24 SIONER, ARE CONFIDENTIAL AND PRIVILEGED, ARE NOT SUBJECT TO THE 25 FREEDOM OF INFORMATION ACT, 1976 PA 442, MCL 15.231 TO 15.246, 26 ARE NOT SUBJECT TO SUBPOENA, AND ARE NOT SUBJECT TO DISCOVERY OR 27 ADMISSIBLE IN EVIDENCE IN ANY PRIVATE CIVIL ACTION. 06968'02 25 1 (4)(3)The commissioner may promulgate rules pursuant to 2 the administrative procedures act of 1969,Act No. 306 of the3Public Acts of 1969, being sections 24.201 to 24.328 of the4Michigan Compiled Laws1969 PA 306, MCL 24.201 TO 24.328, to 5 implement this section, including, but not limited to, the estab- 6 lishment of all of the following: 7 (a) Financial solvency standards. 8 (b) Valuation standards. 9 (c) Reporting requirements. 10(4) Each domestic insurer shall develop written guidelines11that establish the policy objectives of management in investing12in financial futures contracts, permissible financial futures13contract strategies, the relationship of those strategies to the14insurer's operations, and how such strategies reduce the15insurer's net investment rate exposure.16(5) As used in this section:17(a) "Financial futures contract" means an exchange-traded18agreement to make or take delivery of, or to make a cash settle-19ment instead of delivery of, a specified amount of financial20instruments on a specified date or period of time, under terms21and conditions regulated by the commodity futures trading22commission.23(b) "Hedging transaction" means bona fide hedging transac-24tions and positions as defined in section 1.3 of the general reg-25ulations under the commodity exchange act, C.F.R. 1.3, pursuant26to section 4a of the commodity exchange act, chapter 369, 4927Stat. 1492, 7 U.S.C. 6a, and as certified by the commissioner.06968'02 26 1(c) "Margin" means any type of deposit or settlement made or2required to be made with a futures commission merchant, clearing-3house, or safekeeping agent to ensure performance of the terms of4the financial futures contract.5 (5) AN INSURER SHALL INCLUDE ALL COUNTER PARTY EXPOSURE 6 AMOUNTS IN DETERMINING COMPLIANCE WITH THE LIMITATIONS IN 7 SECTION 901(6). 8 (6) IN MEASURING THE NET AMOUNT OF CREDIT RISK EXPOSURE 9 USING COUNTER PARTY EXPOSURE AMOUNT, ALL OF THE FOLLOWING APPLY: 10 (A) THE NET AMOUNT OF CREDIT RISK EQUALS THE MARKET VALUE OF 11 THE OVER-THE-COUNTER DERIVATIVE INSTRUMENT IF THE LIQUIDATION OF 12 THE DERIVATIVE INSTRUMENT WOULD RESULT IN A FINAL CASH PAYMENT TO 13 THE INSURER OR ZERO IF THE LIQUIDATION OF THE DERIVATIVE INSTRU- 14 MENT WOULD NOT RESULT IN A FINAL CASH PAYMENT TO THE INSURER. 15 (B) IF OVER-THE-COUNTER DERIVATIVE INSTRUMENTS ARE ENTERED 16 INTO PURSUANT TO A WRITTEN MASTER AGREEMENT THAT PROVIDES FOR 17 NETTING OF PAYMENTS OWED BY THE RESPECTIVE PARTIES, AND THE DOMI- 18 CILIARY JURISDICTION OF THE COUNTER PARTY IS EITHER WITHIN THE 19 UNITED STATES OR, IF NOT WITHIN THE UNITED STATES, WITHIN A FOR- 20 EIGN JURISDICTION APPROVED AS ELIGIBLE FOR NETTING, THE NET 21 AMOUNT OF CREDIT RISK IS THE GREATER OF ZERO OR THE NET SUM OF 22 THE MARKET VALUE OF THE OVER-THE-COUNTER DERIVATIVE INSTRUMENTS 23 ENTERED INTO PURSUANT TO THE AGREEMENT, THE LIQUIDATION OF WHICH 24 WOULD RESULT IN A FINAL CASH PAYMENT TO THE INSURER AND THE 25 MARKET VALUE OF THE OVER-THE-COUNTER DERIVATIVE INSTRUMENTS 26 ENTERED INTO PURSUANT TO THE AGREEMENT, THE LIQUIDATION OF WHICH 06968'02 27 1 WOULD RESULT IN A FINAL CASH PAYMENT BY THE INSURER TO THE 2 BUSINESS ENTITY. 3 (7) AS USED IN SUBSECTION (6), MARKET VALUE SHALL BE DETER- 4 MINED FOR OPEN TRANSACTIONS AT THE END OF THE MOST RECENT QUARTER 5 OF THE INSURER'S FISCAL YEAR AND SHALL BE REDUCED BY THE MARKET 6 VALUE OF ACCEPTABLE COLLATERAL HELD BY THE INSURER OR PLACED IN 7 ESCROW BY 1 OR BOTH PARTIES. 8 (8) AS USED IN THIS SECTION: 9 (A) "CAP" MEANS AN AGREEMENT OBLIGATING THE SELLER TO MAKE 10 PAYMENTS TO THE BUYER WITH EACH PAYMENT BASED ON THE AMOUNT BY 11 WHICH A REFERENCE PRICE OR LEVEL OR THE PERFORMANCE OR VALUE OF 1 12 OR MORE UNDERLYING INTERESTS EXCEEDS A PREDETERMINED NUMBER, 13 SOMETIMES CALLED THE STRIKE RATE OR STRIKE PRICE. 14 (B) "COLLAR" MEANS AN AGREEMENT TO RECEIVE PAYMENTS AS THE 15 BUYER OF AN OPTION, CAP, OR FLOOR, AND TO MAKE PAYMENTS AS THE 16 SELLER OF A DIFFERENT OPTION, CAP, OR FLOOR. 17 (C) "COLLATERALIZED MORTGAGE OBLIGATION" MEANS AN 18 ASSET-BACKED SECURITY THAT HAS CASH FLOWS ORIGINATING DIRECTLY OR 19 INDIRECTLY FROM UNDERLYING MORTGAGE ASSETS. 20 (D) "COUNTER PARTY EXPOSURE AMOUNT" MEANS THE NET AMOUNT OF 21 CREDIT RISK ATTRIBUTABLE TO A DERIVATIVE INSTRUMENT ENTERED INTO 22 WITH A BUSINESS ENTITY OTHER THAN THROUGH A QUALIFIED EXCHANGE OR 23 QUALIFIED FOREIGN EXCHANGE OR CLEARED THROUGH A QUALIFIED CLEAR- 24 INGHOUSE SUCH AS AN OVER-THE-COUNTER DERIVATIVE INSTRUMENT. 25 (E) "DERIVATIVE INSTRUMENT" MEANS ANY AGREEMENT, OPTION, OR 26 INSTRUMENT, OR ANY SERIES OR COMBINATIONS OF AN AGREEMENT, 27 OPTION, OR INSTRUMENT TO MAKE OR TAKE DELIVERY OF, OR ASSUME OR 06968'02 28 1 RELINQUISH, A SPECIFIED AMOUNT OF 1 OR MORE UNDERLYING INTERESTS, 2 OR TO MAKE A CASH SETTLEMENT IN LIEU OF 1 OR MORE UNDERLYING 3 INTERESTS, OR THAT HAS A PRICE, PERFORMANCE, VALUE, OR CASH FLOW 4 BASED PRIMARILY UPON THE ACTUAL OR EXPECTED PRICE, YIELD, LEVEL, 5 PERFORMANCE, VALUE, OR CASH FLOW OF 1 OR MORE UNDERLYING 6 INTERESTS. DERIVATIVE INSTRUMENTS INCLUDE OPTIONS, WARRANTS, 7 CAPS, FLOORS, COLLARS, SWAPS, SWAPTIONS, FORWARDS, FUTURES, AND 8 ANY OTHER SUBSTANTIALLY SIMILAR AGREEMENTS, OPTIONS, OR INSTRU- 9 MENTS, OR ANY SERIES OR COMBINATIONS AND ANY FURTHER AGREEMENTS, 10 OPTIONS, OR INSTRUMENTS INCLUDED UNDER RULES PROMULGATED BY THE 11 COMMISSIONER. DERIVATIVE INSTRUMENTS DO NOT INCLUDE COLLATERAL- 12 IZED MORTGAGE OBLIGATIONS, OTHER ASSET-BACKED SECURITIES, 13 PRINCIPAL-PROTECTED STRUCTURED SECURITIES, OR INSTRUMENTS THAT AN 14 INSURER IS OTHERWISE PERMITTED TO INVEST IN OR RECEIVE UNDER THIS 15 CHAPTER OTHER THAN UNDER THIS SECTION. THE SALE OR PURCHASE OF A 16 DERIVATIVE INSTRUMENT BY AN INSURER IN CONNECTION WITH A WRITTEN 17 INVESTMENT POLICY THAT INSULATES THE PURCHASER FROM THE RISK OF 18 DEFAULT OF AN UNDERLYING FINANCIAL INSTRUMENT SHALL BE TREATED AS 19 A DERIVATIVE AND NOT AS INSURANCE FOR PURPOSES OF THIS ACT. 20 (F) "DERIVATIVE TRANSACTION" MEANS A TRANSACTION INVOLVING 21 THE USE OF 1 OR MORE DERIVATIVE INSTRUMENTS. FOR PURPOSES OF 22 THIS SECTION, DOLLAR ROLL TRANSACTIONS, REPURCHASE TRANSACTIONS, 23 REVERSE REPURCHASE TRANSACTIONS, AND SECURITIES LENDING TRANSAC- 24 TIONS ARE NOT DERIVATIVE TRANSACTIONS. 25 (G) "FLOOR" MEANS AN AGREEMENT OBLIGATING THE SELLER TO MAKE 26 PAYMENTS TO THE BUYER IN WHICH EACH PAYMENT IS BASED ON THE 27 AMOUNT BY WHICH A PREDETERMINED NUMBER, SOMETIMES CALLED THE 06968'02 29 1 FLOOR RATE OR PRICE, EXCEEDS A REFERENCE PRICE, LEVEL, 2 PERFORMANCE, OR VALUE OF 1 OR MORE UNDERLYING INTERESTS. 3 (H) "FORWARD" MEANS AN AGREEMENT, OTHER THAN A FUTURE, TO 4 MAKE OR TAKE DELIVERY IN THE FUTURE OF 1 OR MORE UNDERLYING 5 INTERESTS, OR EFFECT A CASH SETTLEMENT, BASED ON THE ACTUAL OR 6 EXPECTED PRICE, LEVEL, PERFORMANCE, OR VALUE OF THE UNDERLYING 7 INTERESTS. FORWARD INCLUDES SPOT TRANSACTIONS EFFECTED WITHIN 8 CUSTOMARY SETTLEMENT PERIODS, WHEN-ISSUED PURCHASES, OR OTHER 9 SIMILAR CASH MARKET TRANSACTIONS. 10 (I) "FUTURE" MEANS AN AGREEMENT TRADED ON A FUTURES 11 EXCHANGE, TO MAKE OR TAKE DELIVERY OF, OR EFFECT A CASH SETTLE- 12 MENT BASED ON THE ACTUAL OR EXPECTED PRICE, LEVEL, PERFORMANCE, 13 OR VALUE OF 1 OR MORE UNDERLYING INTERESTS. 14 (J) "HEDGING TRANSACTION" MEANS A DERIVATIVE TRANSACTION 15 THAT IS ENTERED INTO AND MAINTAINED TO MANAGE THE RISK OF A 16 CHANGE IN THE VALUE, YIELD, PRICE, CASH FLOW, OR QUANTITY OF 17 ASSETS OR LIABILITIES THAT THE INSURER HAS ACQUIRED OR INCURRED 18 OR ANTICIPATES ACQUIRING OR INCURRING OR THE CURRENCY EXCHANGE 19 RATE RISK RELATED TO ASSETS OR LIABILITIES THAT AN INSURER HAS 20 ACQUIRED OR INCURRED OR ANTICIPATES ACQUIRING OR INCURRING. 21 (K) "OPTION" MEANS AN AGREEMENT GIVING THE BUYER THE RIGHT 22 TO BUY OR RECEIVE, KNOWN AS A CALL OPTION, SELL OR DELIVER, KNOWN 23 AS A PUT OPTION, ENTER INTO, EXTEND, OR TERMINATE OR EFFECT A 24 CASH SETTLEMENT BASED ON THE ACTUAL OR EXPECTED PRICE, SPREAD, 25 LEVEL, PERFORMANCE, OR VALUE OF 1 OR MORE UNDERLYING INTERESTS. 26 (l) "REPLICATION TRANSACTION" MEANS A DERIVATIVE TRANSACTION 27 OR COMBINATION OF DERIVATIVE TRANSACTIONS EFFECTED EITHER 06968'02 30 1 SEPARATELY OR IN CONJUNCTION WITH CASH MARKET INVESTMENTS 2 INCLUDED IN THE INSURER'S INVESTMENT PORTFOLIO IN ORDER TO REPLI- 3 CATE THE RISKS AND RETURNS OF ANOTHER AUTHORIZED TRANSACTION, 4 INVESTMENT, OR INSTRUMENT OR TO OPERATE AS A SUBSTITUTE FOR CASH 5 MARKET TRANSACTIONS. A DERIVATIVE TRANSACTION ENTERED INTO BY 6 THE INSURER AS A HEDGING TRANSACTION IS NOT A REPLICATION 7 TRANSACTION. 8 (M) "STRUCTURED SECURITY" MEANS AN OBLIGATION WHOSE PRINCI- 9 PAL OR INTEREST PAYMENTS ARE DETERMINED PARTIALLY OR ENTIRELY BY 10 REFERENCE TO AN INDEX, MARKET, EVENT, OR ASSET UNRELATED TO THE 11 ISSUER'S ABILITY TO PAY. 12 (N) "SWAP" MEANS AN AGREEMENT TO EXCHANGE OR TO NET PAYMENTS 13 AT 1 OR MORE TIMES BASED ON THE ACTUAL OR EXPECTED PRICE, YIELD, 14 LEVEL, PERFORMANCE, OR VALUE OF 1 OR MORE UNDERLYING INTERESTS. 15 (O) "SWAPTION" MEANS AN OPTION TO PURCHASE OR SELL A SWAP AT 16 A GIVEN PRICE AND TIME OR AT A SERIES OF PRICES AND TIMES. A 17 SWAPTION DOES NOT MEAN A SWAP WITH AN EMBEDDED OPTION. 18 (P) "UNDERLYING INTEREST" MEANS THE ASSETS, LIABILITIES, 19 OTHER INTERESTS, OR A COMBINATION OF ASSETS, LIABILITIES, OR 20 OTHER INTERESTS UNDERLYING A DERIVATIVE INSTRUMENT SUCH AS ANY 1 21 OR MORE SECURITIES, CURRENCIES, RATES, INDICES, COMMODITIES, OR 22 DERIVATIVE INSTRUMENTS. 23 (Q) "WARRANT" MEANS AN INSTRUMENT THAT GIVES THE HOLDER THE 24 RIGHT TO PURCHASE OR SELL THE UNDERLYING INTEREST AT A GIVEN 25 PRICE AND TIME OR AT A SERIES OF PRICES AND TIMES OUTLINED IN THE 26 WARRANT AGREEMENT. 06968'02 31 1 (9) THE AMENDATORY ACT THAT ADDED THIS SUBSECTION DOES NOT 2 AFFECT THE VALIDITY OF ANY DERIVATIVE TRANSACTION ENTERED INTO OR 3 DERIVATIVE INSTRUMENT ACQUIRED BY AN INSURER BEFORE THE EFFECTIVE 4 DATE OF THE AMENDATORY ACT THAT ADDED THIS SUBSECTION. 06968'02 Final page. DKH