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H.B. 33

             1     

INSURANCE RELATED INVESTMENT

             2     
AMENDMENTS

             3     
2006 GENERAL SESSION

             4     
STATE OF UTAH

             5     
Chief Sponsor: James A. Dunnigan

             6     
Senate Sponsor: Curtis S. Bramble

             7     
             8      LONG TITLE
             9      General Description:
             10          This bill modifies the Insurance Code related to investments.
             11      Highlighted Provisions:
             12          This bill:
             13          .    modifies the power to hold property in other than an insurer's own name including:
             14              .    enforcement of these provisions; and
             15              .    treatment of securities kept in violation of the provisions;
             16          .    expands the permitted classes of investment;
             17          .    modifies investment limitations; and
             18          .    makes technical changes.
             19      Monies Appropriated in this Bill:
             20          None
             21      Other Special Clauses:
             22          None
             23      Utah Code Sections Affected:
             24      AMENDS:
             25          31A-4-108, as last amended by Chapters 60 and 344, Laws of Utah 1995
             26          31A-18-105, as last amended by Chapter 116, Laws of Utah 2001
             27          31A-18-106, as last amended by Chapter 90, Laws of Utah 2004


             28     
             29      Be it enacted by the Legislature of the state of Utah:
             30          Section 1. Section 31A-4-108 is amended to read:
             31           31A-4-108. Power to hold property in other than own name.
             32          (1) An insurer shall hold all investments and deposits of its funds in its own name
             33      except:
             34          (a) securities:
             35          (i) kept under a custodial agreement or trust arrangement with one of the following
             36      approved by the commissioner:
             37          (A) a bank[,];
             38          (B) a securities firm's trust company[, or];
             39          (C) a trust company [approved by the commissioner, which]; or
             40          (D) a brokerage firm; and
             41          (ii) that may be issued in the name of a nominee of the:
             42          (A) bank[,];
             43          (B) securities firm's trust company[, or];
             44          (C) trust company; [and] or
             45          (D) brokerage firm; and
             46          (b) securities that may be acquired and held in bearer form.
             47          (2) [The] An insurer shall take steps which the commissioner reasonably prescribes by
             48      rule or order to:
             49          (a) safeguard the securities described in Subsection (1); and [to]
             50          (b) ensure that [they] the securities are not loaned to other insurers, affiliated or not, to
             51      mislead the commissioner about the true financial condition of either the lending or the
             52      borrowing insurer.
             53          (3) (a) If the department finds that an insurer is in violation of this section, the insurer
             54      is subject to:
             55          (i) a fine;
             56          (ii) suspension of a license;
             57          (iii) revocation of a license;
             58          (iv) another penalty permitted by Section 31A-2-308 ; or


             59          (v) any combination of Subsections (3)(a)(i) through (iv).
             60          (b) An insurer may not provide for the custody of the insurer's securities except as
             61      granted by this section.
             62          (c) Securities of an insurer kept under a custodial agreement or trust arrangement in
             63      violation of this section shall be disregarded in:
             64          (i) determining the financial condition of the insurer; or
             65          (ii) reporting the financial condition of the insurer.
             66          Section 2. Section 31A-18-105 is amended to read:
             67           31A-18-105. Permitted classes of investments.
             68          The following classes of investment may be counted for the purposes specified under
             69      Chapter 17, Part 6, Risk-Based Capital:
             70          (1) bonds or other evidences of indebtedness of:
             71          (a) (i) governmental units in the United States or Canada;
             72          (ii) instrumentalities of the governmental units described in Subsection (1)(a)(i); or
             73          (iii) private corporations domiciled in the United States; and
             74          (b) including demand deposits and certificates of deposits in solvent banks and savings
             75      and loan institutions;
             76          (2) equipment trust obligations or certificates that are adequately secured instruments
             77      evidencing an interest in transportation equipment that is located wholly or in part within the
             78      United States, with a right to receive determined portions of the rental, or to purchase other
             79      fixed obligatory payments for the use or purchase of the transportation equipment;
             80          (3) loans secured by:
             81          (a) mortgages;
             82          (b) trust deeds; or
             83          (c) other statutorily authorized types of security interests in real estate located in the
             84      United States;
             85          (4) loans secured by pledged securities or evidences of debt eligible for investment
             86      under this section;
             87          (5) preferred stocks of United States corporations;
             88          (6) (a) common stocks of United States corporations; or
             89          (b) American depository receipts if traded on one of the following exchanges:


             90          (i) New York;
             91          (ii) American; or
             92          (iii) NASDAQ;
             93          (7) real estate which is used as the home office or branch office of the insurer;
             94          (8) real estate in the United States which produces substantial income;
             95          (9) loans upon the security of the insurer's own policies in amounts that are adequately
             96      secured by the policies and that do not exceed the surrender value of the policies;
             97          (10) financial futures contracts used for hedging and not for speculation, as approved
             98      under rules adopted by the commissioner;
             99          (11) investments in foreign securities of the classes permitted under this section as
             100      required for compliance with Section 31A-18-103 ;
             101          (12) investments permitted under Subsection 31A-18-102 (2); [and]
             102          (13) American depository receipts not traded on one of the following exchanges:
             103          (a) New York;
             104          (b) American; or
             105          (c) NASDAQ;
             106          (14) investments other than those listed in Subsections (1) through (13) that are
             107      determined to be admitted in the Accounting Practices and Procedures Manual, published by
             108      the National Association of Insurance Commissioners; and
             109          [(13)] (15) other investments as the commissioner authorizes by rule.
             110          Section 3. Section 31A-18-106 is amended to read:
             111           31A-18-106. Investment limitations generally applicable.
             112          (1) The investment limitations listed in Subsections (1)(a) through [(l)] (m) apply to
             113      each insurer.
             114          (a) (i) Except as provided in Subsection (1)(a)(ii), for investments authorized under
             115      Subsection 31A-18-105 (1) that are not amortizable under applicable valuation rules, the
             116      limitation is 5% of assets.
             117          (ii) The limitation of Subsection (1)(a)(i) and the limitation of Subsection (2) do not
             118      apply to demand deposits and certificates of deposit in solvent banks and savings and loan
             119      institutions to the extent they are insured by a federal deposit insurance agency.
             120          (b) For investments authorized under Subsection 31A-18-105 (2), the limitation is 10%


             121      of assets.
             122          (c) For investments authorized under Subsection 31A-18-105 (3), the limitation is 50%
             123      of assets.
             124          (d) For investments authorized under Subsection 31A-18-105 (4), that are considered to
             125      be investments in kinds of securities or evidences of debt pledged, those investments are
             126      subject to the class limitations applicable to the pledged securities or evidences of debt.
             127          (e) For investments authorized under Subsection 31A-18-105 (5), the limitation is 35%
             128      of assets.
             129          (f) For investments authorized under Subsection 31A-18-105 (6), the limitation is:
             130          (i) 20% of assets for life insurers; and
             131          (ii) 50% of assets for nonlife insurers.
             132          (g) For investments authorized under Subsection 31A-18-105 (7), the limitation is:
             133          (i) 5% of assets[, except as to]; or
             134          (ii) for insurers organized and operating under Chapter 7, Nonprofit Health Service
             135      Insurance Corporations, [in which case the limitation is] 25% of assets.
             136          (h) For investments authorized under Subsection 31A-18-105 (8), the limitation is:
             137          (i) 20% of assets, inclusive of home office and branch office properties[, except as to];
             138      or
             139          (ii) for insurers organized and operating under Chapter 7, Nonprofit Health Service
             140      Insurance Corporations, [in which case the limitation is] 35% of assets, inclusive of home
             141      office and branch office properties.
             142          (i) For investments authorized under Subsection 31A-18-105 (10), the limitation is 1%
             143      of assets.
             144          (j) For investments authorized under Subsection 31A-18-105 (11), the limitation is the
             145      greater of that permitted or required for compliance with Section 31A-18-103 .
             146          (k) Except as provided in Subsection (1)(l), an insurer's investments in subsidiaries is
             147      limited to 50% of the insurer's total adjusted capital. Investments by an insurer in its
             148      subsidiaries includes:
             149          (i) the insurer's loans, advances, and contributions to its subsidiaries; and
             150          (ii) the insurer's holding of bonds, notes, and stocks of its subsidiaries are included.
             151          (l) Under a plan of merger approved by the commissioner, the commissioner may


             152      allow an insurer any portion of its assets invested in an insurance subsidiary. The approved
             153      plan of merger shall require the acquiring insurer to conform its accounting for investments in
             154      subsidiaries to Subsection (1)(k) within a specified period that may not exceed five years.
             155          (m) For investments authorized under Subsections 31A-18-105 (13) and (14), the
             156      aggregate limitation is 10% of assets.
             157          (2) The limits on investments listed in Subsections (2)(a) through (e) apply to each
             158      insurer.
             159          (a) For all investments in a single entity, its affiliates, and subsidiaries, the limitation is
             160      10% of assets, except that the limit imposed by this Subsection (2)(a) does not apply to:
             161          (i) investments in the government of the United States or its agencies;
             162          (ii) investments guaranteed by the government of the United States; or
             163          (iii) investments in the insurer's insurance subsidiaries.
             164          (b) Investments authorized by Subsection 31A-18-105 (3) shall comply with the
             165      requirements listed in this Subsection (2)(b).
             166          (i) (A) Except as provided in this Subsection (2)(b)(i), the amount of any loan secured
             167      by a mortgage or deed of trust may not exceed 80% of the value of the real estate interest
             168      mortgaged, unless the excess over 80%:
             169          (I) is insured or guaranteed by the United States, any state of the United States, any
             170      instrumentality, agency, or political subdivision of the United States, any of its states, or a
             171      combination of any of these; or
             172          (II) insured by an insurer approved by the commissioner and qualified to insure that
             173      type of risk in this state.
             174          (B) Mortgage loans representing purchase money mortgages acquired from the sale of
             175      real estate are not subject to the limitation of Subsection (2)(b)(i)(A).
             176          (ii) Subject to Subsection (2)(b)(v), loans or evidences of debt secured by real estate
             177      may only be secured by:
             178          (A) unencumbered real property[,] that is located in the United States; or
             179          (B) an unencumbered interest in real property that is located in the United States.
             180          (iii) Evidence of debt secured by first mortgages or deeds of trust upon leasehold
             181      estates shall require that:
             182          (A) the leasehold estate exceed the maturity of the loan by not less than 10% of the


             183      lease term;
             184          (B) the real estate not be otherwise encumbered; and
             185          (C) the mortgagee is entitled to be subrogated to all rights under the leasehold.
             186          (iv) Subject to Subsection (2)(b)(v):
             187          (A) participation in any mortgage loan must:
             188          (I) be senior to other participants; and
             189          (II) give the holder substantially the rights of a first mortgagee; or
             190          (B) the interest of the insurer in the evidence of indebtedness must be of equal priority,
             191      to the extent of the interest, with other interests in the real property.
             192          (v) A fee simple or leasehold real estate or any interest in either of them is not
             193      considered to be encumbered within the meaning of this chapter by reason of any prior
             194      mortgage or trust deed held or assumed by the insurer as a lien on the property, if:
             195          (A) the total of the mortgages or trust deeds held does not exceed 70% of the value of
             196      the property; and
             197          (B) the security created by the prior mortgage or trust deed is a first lien.
             198          (c) Loans permitted under Subsection 31A-18-105 (4) may not exceed 75% of the
             199      market value of the collateral pledged, except that loans upon the pledge of United States
             200      government bonds may be equal to the market values of the pledge.
             201          (d) For an equity interest in a single real estate property authorized under Subsection
             202      31A-18-105 (8), the limitation is 5% of assets.
             203          (e) Investments authorized under Subsection 31A-18-105 (10) shall be in connection
             204      with potential changes in the value of specifically identified:
             205          (i) assets which the insurer owns; or
             206          (ii) liabilities which the insurer has incurred.
             207          (3) The restrictions on investments listed in Subsections (3)(a) and (b) apply to each
             208      insurer.
             209          (a) Except for financial futures contracts and real property acquired and occupied by
             210      the insurer for home and branch office purposes, a security or other investment is not eligible
             211      for purchase or acquisition under this chapter unless it is:
             212          (i) interest bearing or income paying; and
             213          (ii) not then in default.


             214          (b) A security is not eligible for purchase at a price above its market value.
             215          (4) Computation of percentage limitations under this section:
             216          (a) is based only upon the insurer's total qualified invested assets described in Section
             217      31A-18-105 and this section, as these assets are valued under Section 31A-17-401 ; and
             218          (b) excludes investments permitted under Section 31A-18-108 and Subsections
             219      31A-17-203 (2) and (3).
             220          (5) An insurer may not make an investment that, because the investment does not
             221      conform to Section 31A-18-105 and this section, has the result of rendering the insurer, under
             222      Chapter 17, Part 6, Risk-Based Capital, subject to proceedings under Chapter 27, Insurers
             223      Rehabilitation and Liquidation.
             224          (6) A pattern of persistent deviation from the investment diversification standards set
             225      forth in Section 31A-18-105 and this section may be grounds for a finding that the person or
             226      persons with authority to make the insurer's investment decisions are "incompetent" as used in
             227      Subsection 31A-5-410 (3).
             228          (7) Section 77r-1 of the Secondary Mortgage Market Enhancement Act of 1984 does
             229      not apply to the purchase, holding, investment, or valuation limitations of assets of insurance
             230      companies subject to this chapter.




Legislative Review Note
    as of 11-9-05 2:48 PM


Based on a limited legal review, this legislation has not been determined to have a high
probability of being held unconstitutional.

Office of Legislative Research and General Counsel


Interim Committee Note
    as of 12-21-05 12:58 PM


The Business and Labor Interim Committee recommended this bill.


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