Sec. 31.05.06.04. Acquisition of Certain Obligations

A. A life insurer or property and casualty insurer admitted to do business in Maryland may not acquire directly or indirectly, except with the prior approval of the Commissioner, or except under a plan of replacement approved by the Commissioner in accordance with §C of this regulation, any high yield/high risk obligation of any person if, after giving effect to the acquisition, the aggregate cost of the acquisition plus the admitted value of all other high yield/high risk obligations then held by the insurer would exceed 20 percent of the insurer's admitted assets.

B. In considering approval of an acquisition in excess of the limit stated in §A of this regulation, the Commissioner shall consider the following factors:

(1) Requirements of law relating to the acquisition;

(2) The amount of capital and surplus of the life insurer or property and casualty insurer relative to its size and the activities in which it is currently engaged;

(3) The size of the life insurer or property and casualty insurer as measured by its assets, reserves, premium writings, and insurance in force;

(4) The quality, diversification, and liquidity of the life insurer's or property and casualty insurer's investment portfolio;

(5) The past and projected future trends in the amount of the life insurer's or property and casualty insurer's surplus as regards policyholders;

(6) The financial position of the life insurer or property and casualty insurer when investments in, and other transactions with, affiliated persons are excluded from assets.

C. Plan of Replacement.

(1) A life insurer or property and casualty insurer which, on the effective date of this regulation, holds high yield/high risk obligations in excess of 20 percent of its admitted assets may request approval from the Commissioner for a 12-month plan of replacement, and may request renewal of approval of the plan from year to year after that for the purpose of replacing high yield/high risk obligations owned by the insurer with other high yield/high risk obligations.

(2) In reviewing requests for approval, the Commissioner shall consider the factors enumerated in §B of this regulation and any other factors reasonably related to the plan of replacement and to the financial condition of the life insurer or property and casualty insurer.

(3) A plan of replacement is subject to the following conditions and any other conditions which the Commissioner determines to be necessary:

(a) High yield/high risk obligations that are acquired are to be limited to those issued by:

(i) Governmental units that are current in all their obligations, and

(ii) Corporations with not less than $100 million in assets which are current in all their obligations;

(b) A replacement or exchange of a high yield/high risk obligation is not to increase the:

(i) Amount invested by the life insurer or property and casualty insurer in high yield/high risk obligations, nor the weighted average maturity date of those obligations, or

(ii) Percentage of admitted assets of the life insurer or property and casualty insurer invested in high yield/high risk obligations;

(c) The plan is to provide that at the end of each 12-month period the high yield/high risk obligations held by the life insurer or property and casualty insurer when measured as a percentage of its admitted assets will be at least 5 percent less or, if required by the Commissioner, as much as 10 percent less than the percentage of its high yield/high risk obligations at the beginning of the 12-month period until the 20 percent limitation established by §A of this regulation is reached;

(d) The life insurer or property and casualty insurer is to maintain a separate file of all transactions involving high risk/high yield obligations with such information as the Commissioner may require.