Chapter 06 Investments of Life Insurers and Property and Casualty Insurers in High Yield/High Risk Obligations

Chapter 06 Investments of Life Insurers and Property and Casualty Insurers in High Yield/High Risk Obligations | Library of Maryland Regulations

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Title 31 MARYLAND INSURANCE ADMINISTRATION

Subtitle 05 ASSETS, LIABILITIES, RESERVES, AND INVESTMENTS OF INSURERS

Chapter 06 Investments of Life Insurers and Property and Casualty Insurers in High Yield/High Risk Obligations

Code of Maryland Regulations

Chapter 06 Investments of Life Insurers and Property and Casualty Insurers in High Yield/High Risk Obligations

Administrative History Effective date: December 10, 1990 (17:24 Md. R. 2837) Regulation .01 amended effective September 26, 1994 (21:19 Md. R. 1634) Regulation .02B amended effective September 26, 1994 (21:19 Md. R. 1634) Regulation .03 amended effective September 26, 1994 (21:19 Md. R. 1634) Regulation .04 amended effective September 26, 1994 (21:19 Md. R. 1634) Regulation .07 amended effective September 26, 1994 (21:19 Md. R. 1634) —————— Chapter recodified from COMAR 09.30.85 to COMAR 31.05.06 effective September 7, 1998 (25:18 Md. R. 1439) Regulation .02B amended effective June 20, 2016 (43:12 Md. R. 668) Authority Insurance Article, §§ 2-109 , 4-103 (c), 5-502 , 5-506 , 5-507 , 5-511 , 5-605 , 5-606 , and 5-608 , Annotated Code of Maryland

.01 Purpose. The purpose of this chapter is to protect the interests of policyholders of life insurers and property and casualty insurers admitted to do business in Maryland by limiting the amount of high yield/high risk obligations in which an insurer may invest, so that the assets of the insurer will be reasonable in relation to the insurer's liabilities and adequate to its financial needs, permitting policyholders to rely with confidence on the insurer's ability to fulfill its contractual obligations.

.02 Definitions. A. In this chapter, the following terms have the meanings indicated. B. Terms Defined. (1) "Admitted assets" means those assets of the insurer which comply with the definition of the term contained in Insurance Article, §5-101, Annotated Code of Maryland , and which are listed on the last annual statement of the insurer filed with the Commissioner and valued in accordance with the then current instructions, rules, and regulations of the National Association of Insurance Commissioners and of the Commissioner. (2) "High yield/high risk obligation" means an interest-bearing obligation which is not an investment grade obligation. (3) "Interest-bearing obligation" means: (a) An obligation of the type specified in Insurance Article, §§ 5-511 (d)(ii), (iii), (iv) and 5-608(d) and (e), Annotated Code of Maryland, for a reserve investment; or (b) A collateral loan which meets the requirements of Insurance Article, §5-511(i), Annotated Code of Maryland , and is secured by an obligation described in §B(3)(a) of this regulation . (4) "Investment grade obligation" means an interest-bearing obligation which qualifies under any of the following: (a) The obligation is currently rated by Moody's Investors Service or by Standard and Poor's Corporation in one of the top four generic lettered rating classifications of either of those organizations; (b) The obligation has been designated as "Yes X" or "Yes" or classified in designation(1) or (2) by the Securities Valuation Office of the National Association of Insurance Commissioners, or is determined by that office to qualify for a designation of "Yes X", "Yes",(1), or (2); or (c) The obligation is currently given a corresponding rating by another rating agency approved by the Commissioner. (5) "Person" means a person as defined in Insurance Article, §1-101(dd), Annotated Code of Maryland . (6) "Rating agency" means the Securities Valuation Office of the National Association of Insurance Commissioners, Moody's Investors Service, Standard and Poor's Corporation, or any similar organization approved by the Commissioner at the request of an insurer.

.03 Applicability. This chapter is applicable to the acquisition of any high yield/high risk obligation by any life insurer or property and casualty insurer admitted to do business in Maryland.

.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.

.05 Collateral Loans. If a collateral loan is secured by one or more high yield/high risk obligations as well as by other types of collateral, the amount of the collateral loan to be considered for purposes of Regulation .04A of this chapter shall be that fraction of the loan which the value of the high yield/high risk obligations bears to the total value of the collateral.

.06 Private Placements. A. This regulation applies to private placements which have not been rated by rating agencies. B. If a private placement does not qualify as an investment grade obligation in accordance with Regulation .02B(4) of this chapter it shall be considered a high yield/high risk obligation unless: (1) In the case of an interest-bearing obligation which does not involve an equity feature, the interest rate charged is comparable to rates generally prevailing at the time of the loan for securities of comparable terms and duration which are classified in an investment grade classification (for example, BBB or Baa or higher) by at least one of the accepted rating agencies; (2) In the case of an interest-bearing obligation which also provides minor equity benefits to the lender, the interest rate charged is comparable to interest rates generally prevailing at the time of the loan for securities of comparable terms and duration which are classified in the third grade (for example, A) by at least one of the accepted rating agencies; or (3) In the case of an interest-bearing obligation which also provides substantial equity benefits to the lender, the interest rate charged is comparable to interest rates generally prevailing at the time of the loan for securities of comparable terms and duration which are classified in the second grade (for example, AA) by at least one of the accepted rating agencies.

.07 Separate Accounts. A. This regulation is applicable only to life insurers, and not to property and casualty insurers. B. In this regulation, the term "separate account" means a segregated asset account which is used to determine the basis of values of variable life insurance policies and variable annuity contracts and which complies with the requirements of Insurance Article, Title 16, Subtitle 6, Annotated Code of Maryland . C. A life insurer, at its option, may regard the entire assets of a fund in a separate account as being investment grade assets if not more than 20 percent of the assets of the fund are invested in high yield/high risk obligations. D. If more than 20 percent of the assets of a fund in account are invested in high yield/high risk obligations, the life insurer, at its option, may either: (1) Allocate the assets of the fund between investment grade obligations and high yield/high risk obligations as the case may be; or (2) Omit the total value of the fund from the calculation to be made under Regulation .04A of this chapter of both the life insurer's aggregate amount of high yield/high risk obligations and of its total admitted assets, if policyholders and contract holders selecting the funds have been furnished with a prospectus which indicates that the fund may invest in speculative or in high yield/high risk obligations. E. For purposes of this regulation, if a fund has several series, the term "fund" as used in this regulation is applicable to each series separately.

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