§ 31–1371.01. Application.
This chapter shall apply only to investments and investment practices of domestic insurers and United States branches of non-U.S. insurers that are authorized to use the District of Columbia as a state of entry to transact insurance through its United States branch under § 31-2202. This chapter shall not apply to separate accounts of an insurer pertaining to variable or modified guaranteed contracts.
§ 31–1371.02. Definitions.
For the purposes of this chapter, the term:
(1) “Acceptable collateral” means:
(A) As to securities lending transactions, and for the purpose of calculating the 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, any agency of the United States, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation;
(B) As to foreign lending securities transactions, investments set forth in subparagraph (A) of this paragraph and sovereign debt rated 1 by the SVO;
(C) As to repurchase transactions, cash, cash equivalents and direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States, an agency of the United States, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation; and
(D) As to reverse repurchase transactions, cash and cash equivalents.
(2) “Acceptable private mortgage insurance” means insurance written by a private insurer protecting a mortgage lender against loss occasioned by a mortgage loan default and issued by a licensed mortgage insurance company, with an SVO 1 designation or a rating issued by a nationally recognized statistical rating organization equivalent to an SVO 1 designation, that covers losses to an 80% loan-to-value ratio.
(3) “Accident and health insurance” means protection which provides payment of benefits for covered sickness or accidental injury, excluding credit insurance, disability insurance, accidental death and dismemberment insurance, and long-term care insurance.
(4) “Accident and health insurer” means a licensed life or health insurer or health service corporation whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively.
(5) “Admitted assets” means assets having economic value which can be used to fulfill policy obligations and permitted, as allowed in the National Association of Insurance Commissioners Accounting Practices and Procedures Manual, to be reported as admitted assets on the statutory financial statement of the insurer most recently required to be filed with the Commissioner, but excluding assets of separate accounts, the investments of which are not subject to the provisions of this chapter.
(6) “Affiliate” means, as to any person, another person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person.
(7) “Asset-backed security” means a security or other instrument, excluding a mutual fund, evidencing an interest in, providing the right to receive payments from, or payable from distributions on, an asset, a pool of assets, or specifically divisible cash flows which are legally transferred to a trust or another special purpose bankruptcy-remote business entity, under the following conditions:
(A) The trust or other business entity is established solely for the purpose of acquiring specific types of assets or right to cash flows, issuing securities and other instruments representing an interest in or right to receive cash flows from those assets or rights, and engaging in activities required to service the assets or rights and any credit enhancement or support features held by the trust or other business entity; and
(B) The assets of the trust or other business entity consist solely of interest-bearing obligations or other contractual obligations representing the right to receive payment from the cash flows from the assets or rights; provided, that the existence of credit enhancements, such as letters of credit or guarantees, or support features, such as swap agreements, shall not disqualify the security or other instrument as an asset-backed security.
(8) “Business entity” includes a sole proprietorship, corporation, limited liability company, association, partnership, joint stock company, joint venture, mutual fund, trust, joint tenancy or other similar form of business organization, whether organized for profit or not for profit.
(9) “Cap” means an agreement obligating the seller to make payments to the buyer, with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number, sometimes called the strike rate or strike price.
(10) “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.
(11) “Cash equivalents” means short-term, highly rated, and highly liquid investments or securities readily convertible to known amounts of cash without penalty. Cash equivalents shall include government money market mutual funds and class one money market mutual funds. For the purposes of this definition:
(A) “Short-term” means investments with a remaining term to maturity of 90 days or less.
(B) “Highly rated” means an investment rated P-1 by Moody’s Investors Services, Inc., A-1 by the Standard and Poor’s division of The McGraw Hill Companies, Inc., or its equivalent rating by a nationally recognized statistical rating organization recognized by the SVO.
(12) “Class one bond mutual fund” means a bond mutual fund that at all times qualifies for investment using the bond class one reserve factor under the Purposes and Procedures of the Securities Valuation Office of the Securities Valuation Office or any successor publication.
(13) “Class one money market mutual fund” means a money market mutual fund that at all times qualifies for investment using the bond class one reserve factor under the Purposes and Procedures of the Securities Valuation Office of the Securities Valuation Office or any successor publication.
(14) “Code” means the laws relating to insurance which are codified in this title of the D.C. Official Code.
(15) “Collar” means an agreement to receive payments as the buyer of an option, cap, or floor and to make payments as the seller of a different option, cap, or floor.
(16) “Commercial mortgage loan” means a loan secured by a mortgage other than a residential mortgage loan.
(17) “Construction loan” means a loan with a term of less than 3 years made for financing the cost of construction of a building or other improvement to real estate and secured by the real estate to be improved.
(18) “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or non-management services), or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if a person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of another person. This presumption may be rebutted by a showing that control does not exist in fact. The Commissioner may determine, after furnishing all interested persons notice and an opportunity to be heard and making specific findings of fact to support the determination, that control exists in fact, notwithstanding the absence of a presumption to that effect.
(19)(A) “Counterparty exposure amount” means the net amount of credit risk attributable to a derivative instrument entered into with a business entity other than through a qualified exchange, qualified foreign exchange, or cleared through a qualified clearinghouse (“over-the-counter derivative instrument”).
(B)(i) The net amount of credit risk equals:
(I) The market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or
(II) Zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer.
(ii) If over-the-counter derivative instruments are entered into under a written master agreement which provides for netting of payments owed by the respective parties, and the domiciliary jurisdiction of the counterparty is either within the United States or, if not within the United States, within a foreign jurisdiction listed in the Purposes and Procedures of the Securities Valuation Office of the Securities Valuation Office as eligible for netting, the net amount of credit risk shall be the greater of zero or the net sum of:
(I) The market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment to the insurer; and
(II) The market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment by the insurer to the business entity.
(iii) For open transactions, market value shall be determined at the end of the most recent quarter of the insurer’s fiscal year and shall be reduced by the market value of acceptable collateral held by the insurer or placed in escrow by one or both parties.
(20) “Covered” means that, in an income generation transaction, an insurer owns or can immediately acquire, through the exercise of options, warrants, or conversion rights already owned, the underlying interest to fulfill or secure its obligations under a call option, cap, or floor it has written, or has set aside under a custodial or escrow agreement cash or cash equivalents with a market value equal to the amount required to fulfill its obligations under a put option it has written.
(21) “Credit tenant loan” means a mortgage loan which is made primarily in reliance on the credit standing of a major tenant, structured with an assignment of the rental payments to the lender, and is secured by a first lien on the real estate.
(22)(A) “Derivative instrument” means an agreement, option, instrument, or a series or combination thereof:
(i) To make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests;
(ii) To make a cash settlement in lieu thereof; or
(iii) That has a price, performance, value, or cash flow based primarily upon the actual or expected price, level, performance, value, or cash flow of one or more underlying interests.
(B) Derivative instruments shall include options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, and futures; any other agreements, options, or instruments substantially similar thereto, or any series or combination thereof; and any agreements, options, or instruments permitted under regulations adopted under § 31-1375.01. Derivative instruments shall not include an investment authorized by §§ 31-1372.03 through 31-1372.09, 31-1372.11, and 31-1373.04 through 31-1373.10.
(23) “Derivative transaction” means a transaction involving the use of one or more derivative instruments.
(24) “Direct” or “directly”, when used in connection with an obligation, means that the designated obligor is primarily liable on the instrument representing the obligation.
(25) “Dollar roll transaction” means 2 simultaneous transactions with different settlement dates no more than 96 days apart, where, in the first transaction, an insurer sells to a business entity and, in the second transaction, the insurer is obligated to purchase from the same business entity, substantially similar securities of the following types:
(A) Asset-backed securities issued, assumed, or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or their respective successors; and
(B) Other asset-backed securities referred to in section 106 of the Secondary Mortgage Market Enhancement Act of 1984, approved October 3, 1984 (98 Stat. 1691; 15 U.S.C. § 77r-1).
(26) “Domestic jurisdiction” means the United States, Canada, the District of Columbia, any state, any province of Canada, or any political subdivision of any of the foregoing.
(27) “Equity interest” means any of the following that are not rated credit instruments:
(A) Common stock;
(B) Preferred stock;
(C) Trust certificate;
(D) Equity investment in an investment company other than a money market mutual fund or a class one bond mutual fund;
(E) Investment in a common trust fund of a bank regulated by a federal or state agency;
(F) An ownership interest in minerals, oil, or gas, the rights to which have been separated from the underlying fee interest in the real estate where the minerals, oil, or gas are located;
(G) Instruments which are mandatorily, or at the option of the issuer, convertible to equity;
(H) Limited partnership interests and those general partnership interests authorized under § 31-1371.05;
(I) Member interests in limited liability companies;
(J) Warrants or other rights to acquire equity interests that are created by the person that owns or would issue the equity to be acquired; or
(K) Instruments that would be rated credit instruments except as excluded by paragraph (71)(B) of this section.
(28) “Equivalent securities” means:
(A) In a securities lending transaction, securities that are identical to the loaned securities in all features, including the amount of the loaned securities, except as to certificate number if held in physical form; provided, that if any different security shall be exchanged for a loaned security by recapitalization, merger, consolidation, or other corporate action, the different security shall be deemed to be the loaned security;
(B) In a repurchase transaction, securities that are identical to the purchased securities in all features, including the amount of the purchased securities, except as to the certificate number if held in physical form; or
(C) In a reverse repurchase transaction, securities that are identical to the sold securities in all features, including the amount of the sold securities, except as to the certificate number if held in physical form.
(29) “Floor” means an agreement obligating the seller to make payments to the buyer in which each payment is based on the amount by which a predetermined number, sometimes called the floor rate or price, exceeds a reference price, level, performance, or value of one or more underlying interests.
(30) “Foreign currency” means a currency other than that of a domestic jurisdiction.
(31)(A) “Foreign investment” means an investment in a foreign jurisdiction, or any investment in a person, real estate, or asset domiciled in a foreign jurisdiction, that is substantially of the same type as those eligible for investment under this chapter, other than under §§ 31-1372.09 and 31-1373.10. An investment shall not be a foreign investment if the issuing person, qualified primary credit source, or qualified guarantor is a domestic jurisdiction or a person domiciled in a domestic jurisdiction, unless:
(i) The issuing person is a shell business entity; and
(ii) The investment is not assumed, accepted, guaranteed, insured, or otherwise backed by a domestic jurisdiction or a person, that is not a shell business entity, domiciled in a domestic jurisdiction.
(B) For the purposes of this definition:
(i) “Shell business entity” means a business entity having no economic substance except as a vehicle for owning interests in assets issued, owned, or previously owned by a person domiciled in a foreign jurisdiction.
(ii) “Qualified guarantor” means a guarantor against which an insurer has a direct claim under contract for full and timely payment for which an enforcement action can be brought in a domestic jurisdiction.
(iii) “Qualified primary credit source” means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a direct claim under contract for full and timely payment for which an enforcement action can be brought in a domestic jurisdiction.
(32) “Foreign jurisdiction” means a jurisdiction other than a domestic jurisdiction.
(33) “Forward” means an agreement (other than a future) to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance, or value of, one or more underlying interests.
(34) “Future” means an agreement, traded on a qualified exchange or qualified foreign exchange, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests.
(35) “Government money market mutual fund” means a money market mutual fund that at all times:
(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) Qualified for investment without a reserve under the Purposes and Procedures of the Securities Valuation Office of the Securities Valuation Office or any successor publication.
(36) “Government-sponsored enterprise” means a:
(A) Governmental agency; or
(B) Corporation, limited liability company, association, partnership, joint stock company, joint venture, trust, or other entity or instrumentality organized under the laws of any domestic jurisdiction to accomplish a public policy or other governmental purpose; provided, that this subparagraph shall not apply to any entity or instrumentality which qualifies for exemption under section 501(c)(3) of the Internal Revenue Code of 1986, approved October 26, 1986 (68A Stat. 163; 26 U.S.C. § 501(c)(3)).
(37) “Guaranteed or insured”, when used in connection with an obligation acquired under this chapter, means that the guarantor or insurer has agreed to:
(A) Perform or insure the obligation of the obligor or purchase the obligation; or
(B) Be unconditionally obligated until the obligation is repaid to maintain in the obligor a minimum net worth, fixed charge coverage, minimum stockholders’ equity, or sufficient liquidity to enable the obligor to pay the obligation in full.
(38) “Hedging transaction” means a derivative transaction which is entered into and maintained to reduce:
(A) The risk of a change in the value, yield, price, cash flow, or quantity of assets or liabilities which the insurer has acquired or incurred or anticipates acquiring or incurring; or
(B) The currency exchange rate risk or the degree of exposure as to assets or liabilities which an insurer has acquired or incurred, or anticipates acquiring or incurring.
(39) “High grade investment” means a rated credit instrument rated 1 or 2 by the SVO.
(40) “Income” means, as to a security, interest, accrual of discount, dividends, or other distributions, such as rights, tax or assessment credits, warrants, and distributions in kind.
(41) “Income generation transaction” means a derivative transaction involving the writing of covered call option, covered put options, covered caps, or covered floors that is intended to generate income or enhance return.
(42) “Initial margin” means the amount of cash, securities, or other consideration initially required to be deposited to establish a futures position.
(43) “Insurance future” means a future relating to an index or pool that is based on insurance-related items.
(44) “Insurance futures option” means an option on an insurance futures contract.
(45) “Investment company” means an investment company as defined in section 3(a)(1) of the Investment Company Act of 1940, approved August 20, 1940 (56 Stat. 867; 15 U.S.C. § 80a-3(a)(1)), and a person described in section 3(c) of the Investment Company Act of 1940, approved August 20, 1940 (56 Stat. 867; 15 U.S.C.§ 80a-3(c)).
(46) “Investment company series” means an investment portfolio of an investment company that is organized as a series company and to which assets of the investment company have been specifically allocated.
(48) “Investment subsidiary” means a subsidiary of an insurer engaged or organized to engage exclusively in the ownership and management of assets authorized as investments for the insurer if each subsidiary agrees to limit its investment in any asset so that its investments will not cause the amount of the total investment of the insurer to exceed any of the investment limitations or avoid any other provisions of this chapter applicable to the insurer. For the purposes of this paragraph, the total investment of the insurer shall include:
(A) Direct investment by the insurer in an asset; and
(B) The insurer’s proportionate share of an investment in an asset by an investment subsidiary of the insurer, which share shall be calculated by multiplying the amount of the subsidiary’s investment by the percentage of the insurer’s ownership interest in the subsidiary.
(49) “Investment strategy” means the techniques and methods used by an insurer to meet its investment objectives, such as active bond portfolio management, passive bond portfolio management, interest rate anticipation, growth investment, and value investing.
(50) “Letter of credit” means a clean, irrevocable, and unconditional letter of credit issued or confirmed by, and payable and presentable at, a financial institution on the list of financial institutions meeting the standards for issuing letters of credit under the Purposes and Procedures of the Securities Valuation Office of the Securities Valuation Office of the Securities Valuation Office, or any successor publication. To constitute acceptable collateral for the purposes of § 31-1372.08 and § 31-1373.02, a letter of credit shall have an expiration date beyond the term of the subject transaction.
(51) “Limited liability company” means an entity that is an unincorporated association, having perpetual duration, having one or more members that is organized and existing under Chapter 8 of Title 29, or under the laws of the United States or any state thereof that limits the personal liability of each member to the equity investment of the member in the business entity.
(52) “Lower grade investment” means a rated credit instrument rated 4, 5, or 6 by the SVO.
(53) “Market value” means:
(A) As to cash and a letter of credit, the amount thereof; and
(B) As to a security, as of any date, the price of the security on that date obtained from a generally recognized source or the most recent quotation from such a source or, to the extent no generally recognized source exists, the price for the security as determined in good faith by the parties to a transaction, plus accrued but unpaid income thereon to the extent not included in the price as of that date.
(54) “Medium grade investment” means a rated credit instrument rated 3 by the SVO.
(55) “Modified guaranteed contracts” means a modified guaranteed annuity or modified guaranteed life insurance policy or contract.
(56) “Money market mutual fund” means a mutual fund that meets the conditions of 17 C.F.R. § 270.2a-7.
(57) “Mortgage loan” means an obligation secured by a mortgage, deed of trust, trust deed, or other consensual lien on real estate.
(58) “Multilateral development bank” means an international development organization of which the United States is a member.
(59) “Mutual fund” means an investment company or, in the case of an investment company that is organized as a series company, an investment company series, that is registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940, approved August 20, 1940 (56 Stat. 789; 15 U.S.C. § 80a-1 et seq.).
(60) “NAIC” means the National Association of Insurance Commissioners.
(61) “Obligation” means a bond, note, debenture, trust certificate, including an equipment certificate, production payment, negotiable bank certificate of deposit, bankers’ acceptance, credit tenant loan, loan secured by financing, 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 foregoing), whether constituting a general obligation of the issuer or payable only out of certain revenues or certain funds pledged or otherwise dedicated for payment.
(62)(A) “Option” means an agreement giving the buyer the right to buy or receive, sell or deliver, enter into, extend or terminate or effect a cash settlement based on the actual or expected price, level, performance, or value of one or more underlying interests.
(B) “Call option” means the right of the buyer to buy or receive the option.
(C) “Put option” means the right of the buyer to sell or deliver the option.
(63) “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.
(64) “Potential exposure” means the amount determined in accordance with the NAIC Annual Statement Instructions.
(65) “Preferred stock” means stock of a business entity, which stock has a preference in liquidation over the common stock of the business entity.
(66) “Qualified bank” means:
(A) A national bank, state bank, or trust company that at all times is no less than adequately capitalized as determined by standards adopted by United States banking regulators and that is either regulated by state banking laws or is a member of the Federal Reserve System; or
(B) A bank or trust company incorporated or organized under the laws of a country other than the United States that is regulated as a bank or trust company by that country’s government or an agency thereof and that at all times is no less than adequately capitalized as determined by the standards adopted by international banking authorities.
(67) “Qualified business entity” means a business entity that is:
(A) An issuer of obligations or preferred stock that are rated 1 or 2 by the SVO or an issuer of obligations, preferred stock, or derivative instruments that are rated the equivalent of 1 or 2 by the SVO or by a nationally recognized statistical rating organization recognized by the SVO; or
(B) A primary dealer in United States government securities, recognized by the Federal Reserve Bank of New York.
(68) “Qualified clearinghouse” means a clearinghouse for, and subject to the rules of, a qualified exchange or a qualified foreign exchange, which provides clearing services, including acting as a counterparty to each of the parties to a transaction such that the parties no longer have credit risk as to each other.
(69) “Qualified exchange” means:
(A) A securities exchange registered as a national securities exchange or a securities market regulated under the Securities Exchange Act of 1934 approved June 6, 1934 (48 Stat. 881; 15 U.S.C. § 78 et seq.);
(B) A board of trade or commodities exchange designated as a contract market by the Commodity Futures Trading Commission;
(C) Private Offerings, Resales and Trading through Automated Linkages (PORTAL);
(D) A designated offshore securities market as defined in 17 C.F.R. § 230.902(b); or
(E) A qualified foreign exchange.
(70) “Qualified foreign exchange” means a foreign exchange, board of trade, or contract market located outside the United States, its territories, or possessions:
(A) That has received regulatory comparability relief under Rule 30.10, Appendix C, 17 C.F.R. Part 30 (“Rule 30.10”);
(B) That is, or its members are, subject to the jurisdiction of a foreign futures authority that has received regulatory comparability relief under Rule 30.10 as to futures transactions in the jurisdiction where the exchange, board of trade, or contract market is located; or
(C) Upon which foreign stock index futures contracts are listed that are the subject of no-action relief issued by the Office of General Counsel of the Commodity Futures Trading Commission; provided, that an exchange, board of trade, or contract market that is a qualified foreign exchange under this subparagraph shall only be a qualified foreign exchange as to foreign stock index futures contracts that are the subject of no-action relief.
(71)(A) “Rated credit instrument” means a contractual right to receive cash or another rated credit instrument from another entity which instrument:
(i) Is rated, or required to be rated, by the SVO;
(ii) In the case of an instrument with a maturity not exceeding 397 days, is issued, guaranteed, or insured by an entity that is rated by, or another obligation of such entity is rated by, the SVO or by a nationally recognized statistical rating organization recognized by the SVO;
(iii) In the case of an instrument with a maturity not exceeding 90 days, is issued by a qualified bank;
(iv) Is a share of a class one bond mutual fund; or
(v) Is a share of a money market mutual fund.
(B) The term “rated credit instrument” shall not mean:
(i) An instrument that is mandatorily, or at the option of the issuer, convertible to an equity interest; or
(ii) A security that has a par value and whose terms provide that the issuer’s net obligation to repay all or part of the security’s par value is determined by reference to the performance of an equity, a commodity, a foreign currency, or an index of equities, commodities, foreign currencies, or combinations thereof.
(72)(A) “Real estate” means:
(i) Real property;
(ii) Interests in real property, such as leaseholds, minerals, and oil and gas that have not been separated from the underlying fee interest;
(iii) Improvements and fixtures located on or in real property; or
(iv) The seller’s equity in a contract providing for a deed of real estate.
(B) As to a mortgage on a leasehold estate, real estate shall include the leasehold estate only if it has an unexpired term, including renewal options exercisable at the option of the lessee, extending beyond the scheduled maturity date of the obligation that is secured by a mortgage on the leasehold estate by a period equal to the greater of 20% of the original term of the obligation or 10 years.
(73) “Replication transaction” means a derivative transaction that is intended to replicate the performance of one or more assets that an insurer may acquire under this chapter. A derivative transaction that is entered into as a hedging transaction shall not be considered a replication transaction.
(74) “Repurchase transaction” means a transaction in which an insurer purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period of time or upon demand.
(75) “Required liabilities” means total liabilities required to be reported on the statutory financial statement of the insurer most recently required to be filed with the Commissioner.
(76) “Residential mortgage loan” means a loan primarily secured by a mortgage on real estate improved with a residence for up to 4 families.
(77) “Reverse repurchase transaction” means a transaction in which an insurer sells securities to a business entity and is obligated to repurchase the sold securities or equivalent securities from the business entity at a specified price, either within a specified period of time or upon demand.
(78) “Secured location” means the contiguous real estate owned by one person.
(79) “Securities lending transaction” means a transaction in which securities are loaned by an insurer to a business entity that is obligated to return the loaned securities or equivalent securities to the insurer, either within a specified period of time or upon demand.
(80) “Series company” means an investment company that is organized as a series company, as defined in SEC Rule 18f-2(a), 17 C.F.R. § 270.18f-2.
(81) “Sinking fund stock” means preferred stock that:
(A) Is subject to a mandatory sinking fund or similar arrangement that will provide for the redemption or open market purchase of the entire issue over a period not longer than 40 years from the date of acquisition; and
(B) Provides for mandatory sinking fund installments or open market purchases commencing not more than 10.5 years from the date of issue, with the sinking fund installments providing for the purchase or redemption, on a cumulative basis commencing 10 years from the date of issue, of at least 2.5% per year of the original number of shares of that issue of preferred stock.
(82) “Special rated credit instrument” means a rated credit instrument that is:
(A) An instrument that is structured so that, if it is held until retired by or on behalf of the issuer, its rate of return, based on its purchase cost and any possible cash flow, may become negative due to reasons other than the credit risk associated with the issuer of the instrument; provided, that a rated credit instrument shall not be a special rated credit instrument under this subsection if it is:
(i) A share in a class one bond mutual fund;
(ii) An instrument, other than an asset-backed security, which:
(I) Has payments of par value fixed as to amount and timing or is callable;
(II) Is payable only at par or greater; and
(III) Has interest or dividend cash flows that are based on either a fixed or variable rate determined by reference to a specified rate or index;
(iii) An instrument, other than an asset-backed security, that has a par value and is purchased at a price no greater than 110% of par value;
(iv) An instrument, including an asset-backed security, whose rate of return would become negative only as a result of a prepayment due to casualty, condemnation or economic obsolescence of collateral, or change of law;
(v) An asset-backed security that relies on collateral that meets the requirements of sub-subparagraph (ii) of this subparagraph, the par value of which collateral:
(I) Is not permitted to be paid sooner than 1/2 of the remaining term to maturity from the date of acquisition;
(II) Is permitted to be paid prior to maturity only at a premium sufficient to provide a yield to maturity for the investment, considering the amount prepaid and reinvestment rates at the time of early repayment, at least equal to the yield to maturity of the initial investment; or
(III) Is permitted to be paid prior to maturity at a premium at least equal to the yield of a treasury issue of comparable remaining life; or
(vi) An asset-backed security that relies on cash flows from assets that are not prepayable at any time at par value, but is not otherwise governed by sub-subparagraph (v) of this subparagraph, if the asset-backed security has par value reflecting principal payments to be received if held until retired by or on behalf of the issuer and is purchased at a price not greater than 105% of such par amount; or
(B)(i) An asset-backed security that:
(I) Relies on cash flows from assets that are prepayable at par value at any time;
(II) Does not make payments of par value that are fixed as to amount and timing; and
(III) Has a negative rate of return at the time of acquisition if a prepayment threshold assumption is used, with the prepayment threshold assumption defined as:
(aa) Twice the prepayment expectation reported by a recognized, publicly available source as being the median of expectations contributed by broker-dealers or other entities, except insurers, engaged in the business of selling or evaluating such securities or assets. The prepayment expectation used in this calculation shall be, at the insurer’s election, the prepayment expectation for pass-through securities of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or for other assets of the same type as the assets that underlie the asset-backed security, in either case which has a gross weighted average coupon comparable to the gross weighted average coupon of the assets that underlie the asset-backed security; or
(bb) Another prepayment threshold assumption specified by the Commissioner by regulation promulgated under § 31-1375.01.
(ii) For the purposes of this subparagraph, if the asset-backed security is purchased in combination with one or more other asset-backed securities that are supported by identical underlying collateral, the insurer may calculate the rate of return for these specific combined asset-backed securities in combination; provided, that the insurer shall maintain documentation demonstrating that the securities were acquired and are continuing to be held in combination.
(83) “State” means any of the several states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of Northern Mariana Islands.
(84) “Substantially similar securities” means securities that meet all criteria for substantially similar specified in the NAIC Accounting Practices and Procedures Manual, and in an amount that constitutes good delivery form as determined from time to time by the Public Securities Administration.
(85) “SVO” means the Securities Valuation Office of the NAIC, or any successor office established by the NAIC.
(86) “Swap” means an agreement to exchange or to net payments at one or more times based on the actual or expected price, level, performance, or value of one or more underlying interests.
(87) “Variable contracts” means a variable annuity or a variable life insurance policy.
(88) “Underlying interest” means the assets, liabilities, other interests or a combination thereof underlying a derivative instrument, such as any one or more securities, currencies, rates, indices, commodities, or derivative instruments.
(89) “Unrestricted surplus” means the amount by which total admitted assets exceed 125% of the insurer’s required liabilities.
(90) “Warrant” means an instrument that gives the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement. Warrants may be issued alone or in connection with the sale of other securities or to facilitate divestiture of the securities of another business entity.
Effect of Amendments
§ 31–1371.03. General investment qualifications.
(a) Domestic insurers may acquire, hold, or invest in investments or engage in investment practices as set forth in this chapter. In addition to investments conforming to this act, domestic insurers may also invest in securities of one or more subsidiaries of the insurer to the extent permitted by § 31-702.
(b) Subject to subsection (c) of this section, an insurer shall not acquire or hold an investment as an admitted asset unless, at the time of acquisition, it is:
(1) Eligible for the payment or accrual of interest or discount, whether in cash or other securities; eligible to receive dividends or other distributions; or is otherwise income-producing; or
(2) Acquired under §§ 31-1372.07(c), 31-1372.08, 31-1372.10, 31-1372.12, 31-1373.08(c), 31-1373.09, 31-1373.11, or 31-1373.12, or under other provisions of District of Columbia law other than this chapter.
(c) An insurer may acquire or hold as admitted assets investments that do not otherwise qualify as provided in this chapter if the insurer has not acquired them for the purpose of circumventing any limitations contained in this chapter, the insurer complies with the provisions of §§ 31-1371.04 and 31-1371.06 as to the investments, and the insurer acquires the investments in the following circumstances:
(1) As payment on account of existing indebtedness or in connection with the refinancing, restructuring, or workout of existing indebtedness, if taken to protect the insurer’s interest in that investment;
(2) As realization on collateral for an obligation;
(3) In connection with an otherwise qualified investment or investment practice, (A) as interest on or a dividend or other distribution related to the investment or investment practice or in connection with the refinancing of the investment, and (B) for no additional or only nominal consideration;
(4) Under a lawful and bona fide agreement of recapitalization or voluntary or involuntary reorganization in connection with an investment held by the insurer; or
(5) Under a bulk reinsurance, merger, or consolidation transaction approved by the Commissioner if the assets constitute admissible investments for the ceding, merged, or consolidated companies.
(d) Unless within the period the investment has become a qualified investment under a section of this chapter other than subsection (c) of this section, an investment, or portion of an investment, acquired by an insurer under subsection (c) of this section shall become a nonadmitted asset 3 years (or 5 years in the case of mortgage loans and real estate) from the date of its acquisition; provided, that an investment acquired under an agreement of bulk reinsurance, merger, or consolidation may be qualified for a long period if so provided in the plan for reinsurance, merger, or consolidation as approved by the Commissioner. Upon application by the insurer and a showing that the nonadmission of an asset held under subsection (c) of this section would materially injure the interests of the insurer, the Commissioner may extend the period for admissibility for an additional reasonable period of time.
(e) Except as provided in subsections (f) and (h) of this section, an investment shall qualify under this chapter if, on the date that the insurer committed to acquire the investment or on the date of its acquisition, it would have qualified under this chapter. For the purposes of determining limitations contained in this chapter, an insurer shall give appropriate recognition to any commitments to acquire investments.
(f)(1) An investment held as an admitted asset by an insurer on April 11, 2003, which qualified under § 31-4435 [repealed], and § 31-2502.18 [repealed], shall remain qualified as an admitted asset under this chapter.
(2) Each specific transaction constituting an investment practice of the type described in this chapter that was lawfully entered into by an insurer and was in effect on April 11, 2003, shall continue to be permitted under this chapter until its expiration or termination under its terms.
(g) Unless otherwise specified, an investment limitation computed on the basis of an insurer’s admitted assets or capital and surplus shall relate to the amount required to be shown on the statutory balance sheet of the insurer most recently required to be filed with the Commissioner. For purposes of computing any limitation based upon admitted assets, the insurer shall deduct from the amount of its admitted assets the amount of the liability recorded on its statutory balance sheet for:
(1) The return of acceptable collateral received in a reverse repurchase transaction or a securities lending transaction;
(2) Cash received in a dollar roll transaction; and
(3) The amount reported as borrowed money in the most recently filed financial statement to the extent not included in paragraphs (1) and (2) of this subsection.
(h) An investment qualified, in whole or in part, for acquisition or holding as an admitted asset may be qualified or requalified at the time of acquisition or a later date, in whole or in part, under any other section, if the relevant conditions contained in the other section are satisfied at the time of qualification or requalification.
(i) An insurer shall maintain documentation demonstrating that investments were acquired in accordance with this chapter and specifying the section of this chapter under which they were acquired.
(j) An insurer shall not enter into an agreement to purchase securities in advance of their issuance for resale to the public as part of a distribution of the securities by the issuer or otherwise guarantee the distribution, except that an insurer may acquire privately placed securities with registration rights.
(k) Notwithstanding any provision of this chapter, the Commissioner may, by rule or order, permit an insurer to nonadmit, limit, dispose of, withdraw from, or discontinue an investment or investment practice to the extent the Commissioner finds that the investment or investment practice endangers the solvency of the insurer or is otherwise hazardous to policyholders, creditors, or the public in the District of Columbia. The authority of the Commissioner under this subsection shall be in addition to any other authority of the Commissioner.
(l) Insurance future and insurance futures options shall not be considered investments or investment practices for purposes of this chapter.
§ 31–1371.04. Authorization of investments by the board of directors.
(a) An insurer’s board of directors shall adopt a written plan for acquiring and holding investments and for engaging in investment practices that specifies guidelines as to the quality, maturity, and diversification of investments and other specifications, including investment strategies intended to assure that the investments and investment practices are appropriate for the business conducted by the insurer, its liquidity needs, and its capital and surplus. The board of directors shall review and assess the insurer’s technical investment and administrative capabilities and expertise before adopting a written plan concerning an investment strategy or investment practice.
(b) Investments acquired and held under this chapter shall be acquired and held under the supervision and direction of the board of directors of the insurer. The board of directors shall evidence by formal resolution, at least annually, that it has determined whether all investments have been made in accordance with delegations, standards, limitations, and investment objectives prescribed by the board of directors or a committee of the board of directors charged with the responsibility to direct its investments.
(c) On no less than a quarterly basis, and more often if considered appropriate, an insurer’s board of directors, or committee of the board of directors, shall:
(1) Receive and review a summary report on the insurer’s investment portfolio, its investment activities, and investment practices engaged in under delegated authority, to determine whether the investment activity of the insurer is consistent with its written plan; and
(2) Review and revise, as appropriate, the written plan.
(d) In discharging its duties under this section, the board of directors shall require that records of an authorization or approval, other documentation as the board of directors may require, and the report of an action taken under authority delegated under the plan referred to in subsection (a) of this section shall be made available on a regular basis to the board of directors.
(e) In discharging their duties under this section, the directors of an insurer shall perform their duties in good faith and with that degree of care that ordinarily prudent individuals in like positions would use under similar circumstances.
(f) If an insurer does not have a board of directors, all references to the board of directors in this chapter shall refer to the governing body of the insurer having authority equivalent to that of a board of directors.
§ 31–1371.05. Prohibited investments.
(a) An insurer shall not, directly or indirectly:
(1) Invest in an obligation or security or make a guarantee for the benefit of or in favor of an officer or director of the insurer, except as provided in § 31-1371.06;
(2) Invest in an obligation or security, make a guarantee for the benefit of or in favor of, or make other investments in a business entity of which 10% or more of the voting securities or equity interests are owned, directly or indirectly, by or for the benefit of one or more officers or directors of the insurer, except as authorized in § 31-701, or provided in § 31-1371.06;
(3) Engage on its own behalf or through one or more affiliates in a transaction or series of transactions designed to evade the prohibitions of this chapter;
(4) Invest in a partnership as a general partner; provided, that an insurer may make an investment as a general partner:
(A) If all other partners in the partnership are subsidiaries of the insurer;
(B) For the purpose of:
(i) Meeting cash calls committed to prior to April 11, 2003;
(ii) Completing those specific projects or activities of the partnership in which the insurer was a general partner as of April 11, 2003, that had been undertaken as of that date; or
(iii) Making capital improvements to property owned by the partnership on April 11, 2003, if the insurer was a general partner as of that date; or
(C) In accordance with § 31-1371.03(c); or
(5) Invest in or lend its funds upon the security of shares of its own stock, except that an insurer may acquire shares of its own stock, which shall not be admitted assets of the insurer for the following purposes:
(A) Conversion of a stock insurer into a mutual or reciprocal insurer or a mutual or reciprocal insurer into a stock insurer;
(B) Issuance to the insurer’s officers, employees, or agents in connection with a plan approved by the Commissioner for converting a publicly-held insurer into a privately-held insurer under § 31-903, or in connection with other stock option and employee benefit plans; or
(C) In accordance with any other plan approved by the Commissioner.
(b) Subsection (a)(3) of this section shall not prohibit a subsidiary or other affiliate of the insurer from becoming a general partner.
§ 31–1371.06. Loans to officers and directors.
(a) Except as provided in subsection (b) of this section, an insurer shall not, without the prior written approval of the Commissioner, directly or indirectly:
(1) Make a loan to or other investment in an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest;
(2) Make a guarantee for the benefit of or in favor of an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest; or
(3) Enter into an agreement for the purchase or sale of property from or to an officer to director of the insurer or a person in which the officer or director has any direct or indirect financial interest.
(b)(1) For purposes of this section, an officer or director shall not be deemed to have a financial interest by reason of:
(A) An interest that is held directly or indirectly through the ownership of equity interests representing less than 2% of all outstanding equity interests issued by a person that is a party to the transaction; or
(B) The individual’s position as a director or officer of a person that is a party to the transaction.
(2) Paragraph (1) of this subsection shall not:
(A) Permit an investment that is prohibited by § 31-1371.05; or
(B) Apply to a transaction between an insurer and any of its subsidiaries or affiliates that is entered into in connection with § 31-701, other than a transaction between an insurer and its officer or director.
(c) An insurer may make, without the prior written approval of the Commissioner:
(1) Policy loans in accordance with the terms of the policy or contract and § 31-1372.11;
(2) Advances to officers or directors for expenses reasonably expected to be incurred in the ordinary course of the insurer’s business or guarantees associated with credit or charge cards issued or credit extended for the purpose of financing these expenses;
(3) Loans secured by the principal residence of an existing or new officer of the insurer made in connection with the officer’s relocation at the insurer’s request, if the loans comply with the requirements of § 31-1372.07 or § 31-1372.08 and the terms and conditions otherwise are the same as those generally available from unaffiliated third parties;
(4) Secured loans to an existing or new officer of the insurer made in connection with the officer’s relocation at the insurer’s request, if the loans:
(A) Do not have a term exceeding 2 years;
(B) Are required to finance mortgage loans outstanding at the same time on the prior and new residences of the officer;
(C) Do not exceed an amount equal to the equity of the officer in the prior residence; and
(D) Are required to be fully repaid upon the earlier of the end of the 2-year period or the sale of the prior residence; or
(5) Loans and advances to officers or directors made in compliance with state or federal law specifically related to the loans and advances by a regulated non-insurance subsidiary or affiliate of the insurer in the ordinary course of business and on terms no more favorable than available to other customers of the entity.
§ 31–1371.07. Valuation of investments.
For the purposes of this chapter, the value or amount of an investment acquired or held, or any investment practice engaged in, under this chapter, unless otherwise specified in this code, shall be the value at which assets of an insurer are required to be reported for statutory accounting purposes as determined in accordance with procedures prescribed in published accounting and valuation standards of the NAIC, including thePurposes and Procedures of the Securities Valuation OfficeValuation of SecuritiesAccounting Practices and ProceduresAnnual Statement Instructions , or any successor valuation procedures officially adopted by the NAIC. , the , the , the