The Vermont Statutes Online
Subchapter 004 : INVESTMENTS AND LOANS(Cite as: 8 V.S.A. § 3463)
§ 3463. Domestic insurers
(a) Subject to the provisions of sections 3461a, 3461b, and 3461c of this title, a domestic insurer, including a hospital service corporation established or licensed under the provisions of chapter 123 of this title and a medical service corporation established or licensed under the provisions of chapter 125 of this title, may prudently invest its assets in any of the following:
(1) Government obligations. Direct obligations of the United States for the payment of money, or obligations for the payment of money which are guaranteed or insured as to the payment of principal and interest by the United States.
(2) Government agency- Instrumentality obligations. Direct obligations for the payment of money, issued by an agency or instrumentality of the United States, or obligations for the payment of money which are guaranteed or insured as to the payment of principal or interest by an agency or instrumentality of the United States.
(3) State obligations. Bonds and other legally created direct general obligations of any state of the United States for the payment of money provided that any such state at the date of such investment shall not be in default in the payment of principal or interest on any of its direct general obligations.
(4) State political subdivision obligations. Bonds and other legally created direct general obligations of any political subdivision of any state of the United States for the payment of money provided that any such political subdivision at the date of such investment shall not be in default in the payment of principal or interest on any of its direct general obligations.
(5) Development credit corporations. Evidences of indebtedness, and shares of stock issued by a development credit corporation incorporated under the general laws of the State of Vermont and subject to supervision by the Commissioner as provided by the laws of the State.
(6) Obligations and stock of certain federal agencies. An insurer may invest in the obligations or stock, or both of the following agencies of the government of the United States of America, whether or not such obligations are guaranteed by such government:
(A) Commodity Credit Corporation.
(B) Federal Intermediate Credit Banks.
(C) Federal Land Banks.
(D) Central Bank for Cooperatives and Banks for Cooperatives.
(E) Federal Home Loan Banks.
(F) Federal National Mortgage Association.
(G) Any other similar agency of the government of the United States of America and of similar financial quality.
(7) International bank for reconstruction and development. Obligations issued or guaranteed by the international bank for reconstruction and development; provided, however, that the aggregate amount of such investments which are held at any time shall not exceed five percent of its total admitted assets.
(8) Inter-American Development Bank. Obligations issued or guaranteed by the Inter-American Development Bank; provided, however, that the aggregate amount of such investments which are held at any time by any domestic insurer shall not exceed five percent of its total admitted assets.
(9) Revenue bonds. Bonds and other obligations of the United States of America, of any state thereof, or of any political subdivision thereof, or of any public authority or instrumentality of one or more of the foregoing, which are payable as to both principal and interest from adequate special revenues pledged or otherwise appropriated or by law required to be provided for the purpose of such payment, but not including any obligations payable solely out of special assessments on properties benefited by local improvements.
(10) Equipment trust obligations. Equipment trust obligations or other instruments evidencing an interest in or ownership of personal property where there is a right to receive determined portions of rental, purchase or other fixed obligatory payments for the use or purchase of such personal property, provided the aggregate investments therein shall not exceed 10 percent of the total admitted assets of such life insurance company.
(11) Corporate obligations. Fixed interest and variable interest bearing obligations issued, assumed or guaranteed by any solvent institution, whether or not secured, which are not in default as to principal or interest and that have been or will be registered with the SVO or that meet and continue to meet the conditions for exemption as provided in section 3461d of this title.
(12) Equity interests.
(A) An insurer may acquire equity interests in business entities organized under the laws of any domestic jurisdiction or Canada.
(B) A life and health insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subdivision would exceed 20 percent of its admitted assets or the amount of equity interests then held by the insurer that are not listed on a qualified exchange would exceed five percent of its admitted assets. An accident and health insurer shall not be subject to this section but shall be subject to the same aggregate limitation on equity interests as a property and casualty insurer under subdivision (C) of this subdivision (12).
(C) A property and casualty insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section would exceed the greater of 25 percent of its admitted assets or 100 percent of its surplus as regards policyholders.
(D) An insurer shall not acquire under this section any investments that the insurer may acquire under subdivisions (a)(19) through (a)(25) of this section.
(E) An insurer shall not short sell equity investments unless the insurer covers the short sale by owning the equity investment or an unrestricted right to the equity instrument exercisable within six months of the short sale.
(13) Asset-backed securities. An insurer's investment in the asset-backed securities secured by or representing an interest in a single asset or pool of assets held by a trust or other business entity shall not exceed five percent of the insurer's admitted assets.
(14) Stock and obligations of mortgage companies.
(A) Stock and obligations of any solvent institution created or existing under the laws of the United States or of any state thereof which is engaged primarily in the business of making, originating, purchasing, or otherwise acquiring or investing in, and servicing, or selling or otherwise disposing of, loans secured by mortgages on real property located in the United States, whether for its own account or as mortgage loan correspondent for others, or both, provided that immediately prior to such investment by a domestic insurer such institution shall be acting as, or shall be under a contract to act as, a mortgage loan correspondent for such insurer.
(B) The amount invested under this subdivision in any one such institution shall not exceed one-tenth of one percent of the admitted assets of such insurer. The cost of any investment made under this subdivision when added to the aggregate cost of all other investments made under this subdivision and then held by such insurer shall not exceed one-half of one percent of the admitted assets of such insurer.
(15) Derivative investments and transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this subdivision, on the following conditions:
(A) General conditions.
(i) An insurer may use derivative instruments under this subchapter to engage in hedging transactions and certain income generation transactions;
(ii) An insurer shall be able to demonstrate to the Commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of the transactions through cash flow testing or other appropriate analyses.
(B) Limitations on hedging transactions. An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to the transaction:
(i) The aggregate statement value of options, caps, floors, and warrants not attached to another financial instrument purchased and used in hedging transactions does not exceed seven and one-half percent of its admitted assets;
(ii) The aggregate statement value of options, caps, and floors written in hedging transactions does not exceed three percent of its admitted assets; or
(iii) The aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed six and one-half percent of its admitted assets.
(C) Limitations on income generation transactions. An insurer may enter into the following types of income generation transactions if, as a result of and after giving effect to the transactions, the aggregate statement value of the fixed income assets that are subject to call or that generate the cash flows for payments under the caps or floors, plus the face value of fixed income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the puts, does not exceed 10 percent of its admitted assets:
(i) sales of covered call options on noncallable fixed income securities, callable fixed income securities if the option expires by its terms prior to the end of the noncallable period or derivative instruments based on fixed income securities;
(ii) sales of covered call options on equity securities if the insurer holds in its portfolio or can immediately acquire through the exercise of options, warrants, or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold;
(iii) sales of covered puts on investments that the insurer is permitted to acquire under this subchapter if the insurer has escrowed or entered into a custodian agreement, segregating cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put during the complete term of the put option sold; or
(iv) sales of covered caps or floors if the insurer holds in its portfolio the investments generating the cash flow to make the required payments under the caps or floors during the complete term that the cap or floor is outstanding.
(D) Counterparty exposure. An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of sections 3461a and 3461b of this title.
(16) Policy loans. Indebtedness secured by the extent thereof by the loan value of life insurance policies or annuity contracts.
(17) Collateral loans. Obligations secured by a pledge of personal property, whether the same be tangible or intangible, upon the condition that the collateral be marketable and is fairly worth sufficiently in excess of the amount of the loan to make it a sound and prudent investment.
(18) Unsecured loans. Unsecured obligations of any person or corporation, provided that any such loan or investment in excess of $2,500.00 shall be supported by the signed financial statement of the borrower, or supported by any other assurances satisfactory to insurer, which evidence the financial stability of such obligator. No insurer shall loan or make investments under this section in an amount greater than one-fourth of one percent of its admitted assets as to any one loan transaction or investment, nor shall the aggregate amounts so loaned or invested exceed two percent of the admitted assets of such insurer.
(19) Acceptances and bills of exchange. Bank certificates of deposit and bankers' acceptances, and other bills of exchange of the kind and maturities made eligible by law for purchase in the open market by federal reserve banks.
(20) Mortgage loans- Real estate. Obligations for the payment of money secured by first mortgages on real estate situated within any state or territory of the United States or the District of Columbia upon the following conditions:
(A) The security for the loan shall be a first lien upon timberland or improved real estate, including mines, and quarries, except that a first mortgage on lands impressed with a public use, sometimes known as society or glebe lands, but held under a durable lease, or lands subject to lease under which rents are reserved to the owner and with all of the owner's rights and options under the lease are collaterally assigned to the insurer as security, shall nonetheless be deemed to be a first lien as in this subdivision (A) required; provided, however, there is no condition or right of reentry or forfeiture, not insured against by a responsible title insurance company qualified to do business in the state wherein the mortgaged property is located, under which, in the case of real estate other than leaseholds, such lien can be cut off or subordinated or otherwise disturbed or under which, in the case of leaseholds, the insurer is unable to continue the lease in force for the duration of the loan.
(i) Nothing herein shall prohibit any loan or investment by reason of the existence of any prior lien for grounds rents, taxes, assessments, or other similar charges not delinquent.
(ii) Real estate shall not be deemed to be encumbered, within the meaning of this subdivision, by reason of the existence of instruments reserving or granting rights-of-way, mineral rights, oil or timber rights or easements, provided such interests do not unreasonably interfere with the use of the real estate contemplated at the time of investment.
(iii) A leasehold estate shall constitute real estate under this subdivision only if it has an unexpired term of not less than 21 years, inclusive of the term or terms which may be provided by enforceable options of renewal, provided the underlying fee simple estate is not subject to any prior lien or encumbrance; and no mortgage loan upon a leasehold shall be made or acquired unless the terms thereof shall provide for the complete amortization of principal by the end of four-fifths of the period of the leasehold, inclusive of the period or periods which may be provided by enforceable options of renewal, which is unexpired at the time the loan is made, and shall further provide that the amount of required principal and interest payable in any prior full year.
(B) No such mortgage loan or loans made or acquired on any one property shall exceed 75 percent of the appraised value of the real estate, and the terms thereof shall provide for: (i) payments of principal, whatever the period of the loan so that at no time during the period of the loan shall the aggregate payments of principal theretofore required to be made under the terms of the loan be less than would have been necessary for a loan payable completely by the end of 30 years through payments of interest only for five years; and (ii) substantially equal payments of principal and interest at the end of each year thereafter, except that loans secured by dwellings for use by not more than two families may exceed 75 percent of the appraised value of the real estate but shall not be greater than 80 percent unless the secured real estate be located in the state of Vermont, in which event said loans shall not be greater than 90 percent; and, anything in this subdivision to the contrary notwithstanding, loans secured chiefly by timberland, mines or quarries shall not exceed 50 percent of the appraised value of the real estate nor have a maturity greater than five years. If there is no provision for substantially complete amortization of principal as hereinabove provided, then in that event no such mortgage loan or loans made or acquired on any one property shall exceed 662/3 percent of the appraised value and the same shall be made payable upon demand or within not to exceed two years.
(C) The appraised value of real estate securing any mortgage loan shall be established and evidenced by the written appraisal of a qualified real estate appraiser who may be an employee of the insurer, except that in the case of property to be qualified hereunder as timberland, mines or quarries, the appraisal must be made by an engineer or geologist or other person qualified in the relevant field.
(D) If the obligation is purchased, no payment thereon shall be more than 30 days overdue at the time of the investment.
(E) No mortgage loan made or acquired which is a participation or a part of a series or issue secured by the same mortgage shall be a lawful investment under this subdivision unless (i) the entire series or issue is held by such insurer, or (ii) the insurer holds a participation in such mortgage giving it, by written agreement with all other participants, substantially, rights of a first mortgagee, or (iii) the loan is evidenced by bonds, notes or evidences of indebtedness forming part of an issue of bonds, notes or evidences of indebtedness secured by a mortgage which, if there are more than five holders of such issue at the time such mortgage loan is made or acquired by such insurer, or if there are more than three holders of such issue at that time and such issue aggregates less than $5,000,000.00 in original principal amount, shall be to a bank, trust company, or national bank duly authorized and licensed to act as a corporate trustee in its state of domicile (with or without a co-trustee), provided that such issue is all of equal rank.
(F) Each mortgage loan must be supported by evidence satisfactory to insurer that such mortgage is a first lien on the secured real estate as in this subdivision provided.
(G) Insurer shall not invest more than 60 percent of its admitted assets pursuant to this subdivision.
(H) Insurer shall not invest under this subdivision more than two percent of its admitted assets in obligations of any one obligor.
(21) Mortgage loans- Insured or guaranteed. Obligations for the payment of money secured by mortgages guaranteed or insured, as the case may be, as follows:
(A) by the Federal Housing Administration under the terms of an act of Congress of the United States of June 27, 1934, entitled the "National Housing Act," as heretofore or hereafter amended;
(B) by the Administrator of Veterans' Affairs, pursuant to the provisions of Title III of an act of Congress of the United States of June 22, 1944, entitled the "Servicemen's Readjustment Act of 1944," as heretofore or hereafter amended, provided that any excess investment over 80 percent of the appraised value is guaranteed;
(C) by the United States, any state, territory, or district thereof, or of any instrumentality, agency or political subdivision of one or more of the foregoing, provided that any excess investment over 75 percent of the appraised value is so insured or guaranteed;
(D) any mortgage loan so guaranteed or insured as in this subdivision (21) provided, shall not be subject to the provisions of any law of this state prescribing the nature, amount or form of security, or requiring security upon which loans or advances of credit may be made, or prescribing or limiting the period or principal amount for which loans or advances of credit may be made, or prescribing or limiting the interest which may be charged or taken upon any loan or advance of credit.
(22) Mortgage loans- Additionally secured by assignment of certain leases. Obligations for the payment of money under the following conditions:
(A) the obligation shall be secured by a first mortgage or lien on real or personal property and additionally secured by assignment of the mortgagor's interest, as lessor, on a lease or leases on said property located within any state of the United States, any territory thereof, or the District of Columbia;
(B) such lease or leases shall be collaterally assigned for the benefit of the insurer, and shall be nonterminable upon foreclosure of any lien upon the leased property;
(C) the rents payable under such lease or leases shall be sufficient to provide for amortization during the term of the lease of not less than 60 percent of the investment with interest thereon as to real property and 80 percent as to personal property;
(D) such lease or leases shall be noncancelable by lessee during the term of the lease or period of the obligation, whichever is less, other than in the event of lessor's default therein, condemnation, or destruction of the leased property to the extent that it is no longer tenantable for the purposes to which it was devoted at the time of destruction, by any hazard excluding, however, from the provisions of this subdivision (D) leases to the United States government or its agencies;
(E) the lessee or lessees under the lease or leases, or any corporation or corporations which have assumed or guaranteed any lessee's performance thereunder shall be the United States government, its agencies, any state of the United States, or political subdivision thereof, or a corporation or corporations whose obligations would be eligible for investment by an insurer in accordance with the provisions of this subdivision (11) of this section;
(F) insurer shall not invest more than 10 percent of its admitted assets pursuant to this section; and
(G) insurer shall not invest under this subdivision more than two percent of its admitted assets in the obligations of any one obligor or in obligations secured by leases to any one corporation.
(23) Mortgage loans- Personal property. Obligations for the payment of money secured by first mortgages or liens, including conditional sale contracts, on tangible personal property situated within any state, territory or district of the United States, provided no such investment made or acquired shall at the time of acquisition exceed 75 percent of the fair market value of the property secured.
(24) Real estate- Company business. Real estate (including leasehold interests) for the convenient accommodation of the insurer's business operations, including home office, branch office and field operations, on the following conditions:
(A) any parcel of real estate acquired under this provision may include excess space for rent to others if it is reasonably anticipated that such excess will be required by the insurer for expansion or if the excess is reasonably required in order to have a building that will be an economic unit;
(B) such real estate may be subject to a mortgage; and
(C) an insurer's aggregate investment under this provision will not exceed 10 percent of its admitted assets, except with the permission of the commissioner if he or she finds that such percentage of its admitted assets are insufficient to provide convenient accommodation for the insurer's business.
(25) Real estate and personal property under lease. Real estate in the United States or its territories under lease or commitment for lease and personal property for intended use in the United States under lease, or commitment for lease, on the following conditions:
(A) the lessee or the guarantor of lessee's obligations under the lease is a corporation with tangible net worth of $500,000.00 or more;
(B) the lease provides for a net rental sufficient to amortize the investment with interest over the primary term of the lease or 40 years, whichever is less;
(C) insurer shall not invest in real estate under lease more than 10 percent of its admitted assets pursuant to this subdivision; and
(D) insurer shall not invest in personal property under lease more than five percent of its admitted assets pursuant to this subdivision.
(26) Real estate- Income producing. Real estate and equipment incident and related to the operation of said real estate for the production of income, or as may be acquired to be improved or developed for such investment purpose pursuant to an existing program therefor, situated in any state of the United States of America, any territory thereof, or the District of Columbia, and the construction thereon of improvements, on the following conditions:
(A) The term "real estate" as used in this subdivision shall include any real property and interest therein including, without limitation any interest on, above or below the surface of the land any leasehold estate therein and any interest held or to be held by the insurer in cotenancy with one or more other institutions.
(B) The insurer's investment shall not exceed the reasonable value of the property or of the interest therein acquired.
(C) The insurer may let contracts for construction and pay costs of construction and leasing, hold, maintain, lease, and manage the property, collect rents and other income therefrom, and sell the property in whole or in part.
(D) The property may be encumbered by leases to tenants and by rights-of-way, easements, mineral reservations, building restrictions, and restrictive covenants, provided none of them can interfere substantially with the use of the property or result in a forfeiture of the property, unless a policy of title insurance, issued by a responsible title insurer qualified to do business in the state wherein the property is located, insures the company against loss or damage arising from such encumbrances or reversionary rights.
(E) Insurer shall not invest more than 10 percent of its admitted assets under this subdivision.
(27) Real estate- Participation. Any of the investments which are authorized by subdivisions (24), (25), and (26) of this subsection may be made by an insurer through ownership of:
(A) voting capital stock of a corporation;
(B) an interest in a partnership, joint venture, or other form of business entity.
(28) Foreign investments. Investments in foreign jurisdictions subject to the following:
(A) Any domestic insurer which is authorized to do business in a foreign jurisdiction or possession of the United States or which has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in a foreign jurisdiction or possession of the United States may invest in, or otherwise acquire or loan upon securities and investments in such foreign jurisdiction or possession which are substantially of the same kind, classes, and investment grades as those eligible for investment under the provisions of this chapter; but the aggregate amount of such investments in a foreign jurisdiction or a possession of the United States and of cash in the currency of such jurisdiction or possession which is at any time held by such insurer shall not exceed one and one-half times the amount of its reserves and other obligations under such contracts or the amounts which such insurer is required by law to invest in such jurisdiction or possession;
(B) In addition to the foreign investments permitted under subdivision (A) of this subdivision (28), any domestic insurer may invest or otherwise acquire or loan upon securities and investments in foreign countries which are substantially of the same kinds, classes and investment grades as those eligible for investment under this chapter; but:
(i) The aggregate amount of such investments made pursuant to this subdivision (B) shall not exceed 20 percent of its admitted assets; and
(ii) The aggregate amount of foreign investments then held by the insurer under this subdivision in a single foreign jurisdiction shall not exceed 10 percent of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or five percent of its admitted assets as to any other foreign jurisdiction (three percent in the case of life and health insurers). Of the investments permitted under this subdivision, the aggregate amount of investments denominated in foreign currencies may not exceed 15 percent of the insurer's admitted assets (10 percent in the case of life and health insurers). Such investments denominated in the foreign currency of a single foreign jurisdiction which has a sovereign debt rating of SVO 1 may not exceed 10 percent of the insurer's admitted assets. Such investments denominated in the foreign currency of a single foreign jurisdiction which does not have a sovereign debt rating of SVO 1 may not exceed five percent of the insurer's admitted assets (three percent in the case of life and health insurers).
(29) "Other loans or investments." Loans or investments not qualifying or permitted under this chapter in an amount not exceeding 10 percent of a domestic insurer's admitted assets regardless of whether the same or similar type investment has been included in or omitted from any provision of this chapter.
(b) Investments in subsidiaries are subject to section 3682 of this title and are not subject to any other investment limitations contained in this subchapter. (Added 1967, No. 344 (Adj. Sess.), § 1 (ch. 1, subch. 5, art. 1, §§ 1-28); amended 1969, No. 12, eff. Feb. 26, 1969; 1981, No. 15, § 1; 1999, No. 84 (Adj. Sess.), § 6, eff. April 19, 2000; 2001, No. 71, § 5, eff. June 16, 2001; 2003, No. 163 (Adj. Sess.), § 43, eff. June 10, 2004.)