Sec. 31.05.08.10. Credit for Reinsurance — Reinsurers Maintaining Trust Funds for Multiple Cedents — Assets Deposited in the Trust

A. Assets deposited in the trust shall be valued according to their current fair market value and shall consist only of cash in U.S. dollars, certificates of deposit issued by a qualified U.S. financial institution, clean, irrevocable, unconditional and "evergreen" letters of credit issued or confirmed by a qualified U.S. financial institution, and investments of the type specified in this regulation, but investments in or issued by an entity controlling, controlled by, or under common control with either the grantor or beneficiary of the trust may not exceed 5 percent of total investments.

B. No more than 20 percent of the total of the investments in the trust may be foreign investments authorized under §D(1)(d), D(3), E(2), or F of this regulation, and no more than 10 percent of the total of the investments in the trust may be securities denominated in foreign currencies.

C. For purposes of applying §B of this regulation, a depository receipt denominated in U.S. dollars and representing rights conferred by a foreign security shall be classified as a foreign investment denominated in a foreign currency.

D. The assets of a trust established to satisfy the requirements of Regulations .08-.11 of this chapter shall be invested only as follows:

(1) Government obligations that are not in default as to principal or interest, that are valid and legally authorized and that are issued, assumed, or guaranteed by:

(a) The United States or by any agency or instrumentality of the United States;

(b) A state of the United States;

(c) A territory, possession, or other governmental unit of the United States;

(d) An agency or instrumentality of a governmental unit referred to in §D(1)(b) and (c) of this regulation if the obligations shall be by law (statutory or otherwise) payable, as to both principal and interest, from taxes levied, or by law required to be levied, or from adequate special revenues pledged or otherwise appropriated, or by law required to be provided for making these payments, but may not be obligations eligible for investment under this section if payable solely out of special assessments on properties benefited by local improvements; or

(e) The government of any other country that is a member of the Organization for Economic Cooperation and Development and whose government obligations are rated A or higher, or the equivalent, by a nationally recognized statistical rating organization approved by the Securities Valuation Office;

(2) Obligations that are issued in the United States, or that are dollar denominated and issued in a non-U.S. market, by a solvent U.S. institution (other than an insurance company), or that are assumed or guaranteed by a solvent U.S. institution (other than an insurance company) and that are not in default as to principal or interest if the obligations:

(a) Are rated A or higher (or the equivalent) by a nationally recognized statistical rating organization approved by the Securities Valuation Office, or, if not so rated, are similar in structure and other material respects to other obligations of the same institution that are so rated;

(b) Are insured by at least one authorized insurer (other than the investing insurer or a parent, subsidiary, or affiliate of the investing insurer) licensed to insure obligations in this State and, after considering the insurance, are rated AAA (or the equivalent) by a nationally recognized statistical rating organization approved by the Securities Valuation Office; or

(c) Have been designated as Class One or Class Two by the Securities Valuation Office;

(3) Obligations issued, assumed, or guaranteed by a solvent non-U.S. institution chartered in a country that is a member of the Organization for Economic Cooperation and Development, or obligations of U.S. corporations issued in a non-U.S. currency, provided that in either case the obligations are rated A or higher, or the equivalent, by a nationally recognized statistical rating organization approved by the Securities Valuation Office;

(4) An investment made pursuant to the provisions of §D(1), (2), or (3) of this regulation shall be subject to the following additional limitations:

(a) An investment in or loan upon the obligations of an institution other than an institution that issues mortgage-related securities may not exceed 5 percent of the assets of the trust;

(b) An investment in any one mortgage-related security may not exceed 5 percent of the assets of the trust;

(c) The aggregate total investment in mortgage-related securities may not exceed 25 percent of the assets of the trust; and

(d) Preferred or guaranteed shares issued or guaranteed by a solvent U.S. institution are permissible investments if all of the institution's obligations are eligible as investments under §D(2)(a) and (c) of this regulation, but may not exceed 2 percent of the assets of the trust.

E. Equity Interests.

(1) Investments in common shares or partnership interests of a solvent U.S. institution are permissible if:

(a) Its obligations and preferred shares, if any, are eligible as investments under §D of this regulation;

(b) The equity interests of the institution (except an insurance company) are registered on a national securities exchange as provided in the Securities Exchange Act of 1934, 15 U.S.C. §78a to 78kk or otherwise registered pursuant to that Act, and if otherwise registered, price quotations for them are furnished through a nationwide automated quotations system approved by the Financial Industry Regulatory Authority or successor organization; and

(c) The amount invested in equity interests under this subsection does not exceed 1 percent of the assets of the trust even though the equity interests are not so registered and are not issued by an insurance company.

(2) Investments in common shares of a solvent institution organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development are permissible if:

(a) All its obligations are rated A or higher, or the equivalent, by a nationally recognized statistical rating organization approved by the Securities Valuation Office; and

(b) The equity interests of the institution are registered on a securities exchange regulated by the government of a country that is a member of the Organization for Economic Cooperation and Development.

(3) An investment in or loan upon any one institution's outstanding equity interests may not exceed 1 percent of the assets of the trust. The cost of an investment in equity interests made pursuant to this section, when added to the aggregate cost of other investments in equity interests then held pursuant to this section, may not exceed 10 percent of the assets in the trust.

F. Obligations issued, assumed, or guaranteed by a multinational development bank are permissible investments, provided the obligations are rated A or higher, or the equivalent, by a nationally recognized statistical rating organization approved by the Securities Valuation Office.

G. Investment Companies.

(1) Securities of an investment company registered pursuant to the Investment Company Act of 1940, 15 U.S.C. §80a, are permissible investments if the investment company:

(a) Invests at least 90 percent of its assets in the types of securities that qualify as an investment under §D(1), (2), or (3) of this regulation or invests in securities that are determined by the Commissioner to be substantively similar to the types of securities set forth in §D(1), (2), or (3) of this regulation; or

(b) Invests at least 90 percent of its assets in the types of equity interests that qualify as an investment under §E(1) of this regulation.

(2) Investments made by a trust in investment companies under this section may not exceed the following limitations:

(a) An investment in an investment company qualifying under §G(1)(a) of this regulation may not exceed 10 percent of the assets in the trust, and the aggregate amount of investment in qualifying investment companies may not exceed 25 percent of the assets in the trust; and

(b) Investments in an investment company qualifying under §G(1)(b) of this regulation may not exceed 5 percent of the assets in the trust and the aggregate amount of investment in qualifying investment companies shall be included when calculating the permissible aggregate value of equity interests pursuant to §E(1) of this regulation.

H. Letters of Credit.

(1) In order for a letter of credit to qualify as an asset of the trust, the trustee shall have the right and the obligation pursuant to the deed of trust or some other binding agreement, duly approved by the Commissioner, to immediately draw down the full amount of the letter of credit and hold the proceeds in trust for the beneficiaries of the trust if the letter of credit will otherwise expire without being renewed or replaced.

(2) The trust agreement shall provide that the trustee shall be liable for its negligence, willful misconduct, or lack of good faith. The failure of the trustee to draw against the letter of credit in circumstances where the draw would be required shall be considered to be negligence, willful misconduct, or both.