HF 2611

as introduced - 86th Legislature (2009 - 2010) Posted on 02/09/2010 11:32pm

A bill for an act
relating to insurance; regulating credit default insurance; providing civil and
criminal penalties; proposing coding for new law as Minnesota Statutes, chapter
60I.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

new text begin [60I.01] DEFINITIONS.
new text end

new text begin Subdivision 1. new text end

new text begin Scope. new text end

new text begin For the purposes of this chapter, the terms defined in this
section have the meanings given them, unless the context requires otherwise.
new text end

new text begin Subd. 2. new text end

new text begin Commissioner. new text end

new text begin "Commissioner" means the commissioner of commerce.
new text end

new text begin Subd. 3. new text end

new text begin Credit default insurance. new text end

new text begin (a) "Credit default insurance" means a surety
bond, or other contract, and a guarantee that is payable upon occurrence of financial loss,
as a result of the failure of an obligor on or issuer of a debt instrument or other monetary
obligation to pay when due to be paid by the obligor or scheduled at the time insured to
be received by the holder of the obligation, principal, interest, premium, dividend or
purchase price of or on, or other amounts due or payable with respect to, the instrument
or obligation, when the failure is the result of a financial default or insolvency, or other
credit event, or, provided that the payment source is investment grade, any other failure to
make payment, regardless of whether the obligation is incurred directly or as guarantor
by or on behalf of another obligor that has also defaulted.
new text end

new text begin (b) Credit default insurance includes other events which the commissioner
determines are substantially similar to any of the events in paragraph (a).
new text end

new text begin Subd. 4. new text end

new text begin Credit default insurance corporation or corporation. new text end

new text begin "Credit default
insurance corporation" or "corporation" means an insurer licensed to transact the business
of credit default insurance in this state.
new text end

new text begin Subd. 5. new text end

new text begin Affiliate. new text end

new text begin "Affiliate" means a person which, directly or indirectly, owns at
least ten percent but less than 50 percent of the credit default insurance corporation or
which is as least ten percent but less than 50 percent, directly or indirectly, owned by a
credit default insurance corporation.
new text end

new text begin Subd. 6. new text end

new text begin Aggregate net liability. new text end

new text begin "Aggregate net liability" means the aggregate
amount of insured unpaid principal, interest, and other monetary payments, if any, of
guaranteed obligations insured or assumed, less reinsurance ceded and less collateral.
new text end

new text begin Subd. 7. new text end

new text begin Asset-backed securities. new text end

new text begin "Asset-backed securities" means securities or
other financial obligations of an issuer provided that:
new text end

new text begin (1) the issuer is a special purpose corporation, trust, or other entity, or, provided
that the securities or other financial obligations constitute an insurable risk, is a bank,
trust company, or other financial institution, deposits in which are insured by the Bank
Insurance Fund or the Savings Insurance Fund, or any successor thereto; and
new text end

new text begin (2) a pool of assets comprised of securities or other financial obligations expected to
generate either cash flow or cash proceeds by the terms of the securities or other financial
obligations, or pursuant to leases or other contractual rights, including any expected
extensions or renewals thereof, or through a sale in a public or private market for proceeds
sufficient to pay the insured obligations:
new text end

new text begin (i) has been conveyed, pledged, or otherwise transferred to or is otherwise owned
or acquired by the issuer;
new text end

new text begin (ii) the pool of assets backs the securities or other financial obligations issued; and
new text end

new text begin (iii) no asset in the pool, other than an asset directly payable by, guaranteed by, or
backed by the full faith and credit of the United States government or that otherwise
qualifies as collateral, has a value exceeding 20 percent of the pool's aggregate value.
new text end

new text begin Subd. 8. new text end

new text begin Average annual debt service. new text end

new text begin "Average annual debt service" means
the amount of insured unpaid principal and interest on an obligation, multiplied by the
number of the insured obligations, assuming each obligation represents $1,000 par value,
divided by the amount equal to the aggregate life of all the obligations, assuming each
obligation represents $1,000 par value. This definition, expressed as a formula in regard
to bonds, is as follows:
new text end

new text begin Average Annual Debt Service = new text end	new text begin Total Debt Service x No. of Bonds new text end new text begin _ new text end
	new text begin Bond Years new text end

new text begin Total Debt Service = Insured Unpaid Principal + Interest
new text end

new text begin Number of Bonds = new text end	new text begin Total Insured Principal new text end new text begin _ new text end
	new text begin $1,000 new text end

new text begin Bond Years = Number of Bonds x Term in Years
new text end

new text begin Term in Years = term to maturity based on scheduled amortization or, in the absence of a
scheduled amortization in the case of asset-backed securities or other obligations lacking a
scheduled amortization, expected amortization, in each case determined as of the date of
issuance of the insurance policy based upon the amortization assumptions employed in
pricing the insured obligations or otherwise used by the insurer to determine aggregate net
liability.
new text end

new text begin Subd. 9. new text end

new text begin Collateral. new text end

new text begin "Collateral" means:
new text end

new text begin (1) cash;
new text end

new text begin (2) the cash flow from specific obligations which are not callable and scheduled to
be received based on expected prepayment speed on or before the date of scheduled
debt service, including scheduled redemptions or prepayments, on the insured obligation
provided that:
new text end

new text begin (i) the specific obligations are directly payable by, guaranteed by, or backed by the
full faith and credit of the United States government;
new text end

new text begin (ii) in the case of insured obligations denominated or payable in foreign currency as
permitted under section 60I.04, subdivision 2, paragraph (d), the specific obligations are
directly payable by, guaranteed by, or backed by the full faith and credit of the foreign
government or the central bank thereof; or
new text end

new text begin (iii) the specific obligations are insured by the same insurer that insures the
obligations being collateralized, and the cash flows from the specific obligations are
sufficient to cover the insured scheduled payments on the obligations being collateralized;
new text end

new text begin (3) the market value of investment grade obligations, other than obligations
evidencing an interest in the project or projects financed with the proceeds of the insured
obligations; or
new text end

new text begin (4) the face amount of each letter of credit that:
new text end

new text begin (i) is irrevocable;
new text end

new text begin (ii) provides for payment under the letter of credit in lieu of or as reimbursement to
the insurer for payment required under a credit default insurance policy;
new text end

new text begin (iii) is issued, presentable, and payable either:
new text end

new text begin (A) at an office of the letter of credit issuer in the United States; or
new text end

new text begin (B) at an office of the letter of credit issuer located in the jurisdiction in which the
trustee or paying agent for the insured obligation is located;
new text end

new text begin (iv) contains a statement that either:
new text end

new text begin (A) identifies the insurer and any successor by operation of law, including a
liquidator, rehabilitator, receiver, or conservator, as the beneficiary; or
new text end

new text begin (B) identifies the trustee or the paying agent for the insured obligation as the
beneficiary;
new text end

new text begin (v) contains a statement to the effect that the obligation of the letter of credit
issuer under the letter of credit is an individual obligation of the issuer and is in no way
contingent upon reimbursement with respect thereto;
new text end

new text begin (vi) contains an issue date and a date of expiration;
new text end

new text begin (vii) either:
new text end

new text begin (A) has a term at least as long as the shorter of the term of the insured obligation or
the term of the credit default insurance policy; or
new text end

new text begin (B) provides that the letter of credit shall not expire without 30 days' prior written
notice to the beneficiary and allows for drawing under the letter of credit in the event that,
prior to expiration, the letter of credit is not renewed or extended or a substitute letter of
credit or alternate collateral meeting the requirements of this subdivision is not provided;
new text end

new text begin (viii) states that it is governed by the laws of Minnesota or by the 1983 or
1993 Revision of the Uniform Customs and Practice for Documentary Credits of the
International Chamber of Commerce, Publication 400 or 500, or any successor Revision
if approved by the commissioner, and contains a provision for an extension of time, of
not less than 30 days after resumption of business, to draw against the letter of credit
in the event that one or more of the occurrences described in Article 19 or Publication
400 or 500 occurs; and
new text end

new text begin (ix) is issued by a bank, trust company, or savings association that:
new text end

new text begin (A) is organized and existing under the laws of the United States or any state
thereof or, in the case of a nondomestic financial institution, has a branch or agency
office licensed under the laws of the United States or any state thereof and is domiciled
in a member country of the Organisation for Economic Co-operation and Development
having a sovereign rating in one of the top two generic lettered rating classifications by a
securities rating agency acceptable to the commissioner;
new text end

new text begin (B) has, or is the principal operating subsidiary of a financial institution holding
company that has, a long-term debt rating of at least investment grade; and
new text end

new text begin (C) is not a parent, subsidiary, or affiliate of the trustee or paying agent, if any, with
respect to the insured obligation if the trustee of paying agent is the named beneficiary of
the letter of credit.
new text end

new text begin Subd. 10. new text end

new text begin Commercial real estate. new text end

new text begin "Commercial real estate" means income
producing real property other than residential property consisting of less than five units.
new text end

new text begin Subd. 11. new text end

new text begin Contingency reserve. new text end

new text begin "Contingency reserve" means an additional
liability reserve established to protect policyholders against the effects of adverse
economic developments or cycles or other unforeseen circumstances.
new text end

new text begin Subd. 12. new text end

new text begin Governmental unit. new text end

new text begin "Governmental unit" means the United States,
Canada, a member country of the Organisation for Economic Co-operation and
Development having a sovereign rating in one of the top two generic lettered rating
classifications by a securities rating agency acceptable to the commissioner, a state,
territory, or possession of the United States, the District of Columbia, a province of
Canada, a municipality, or a political subdivision of any of the foregoing, or any public
agency or instrumentality thereof.
new text end

new text begin Subd. 13. new text end

new text begin Excess spread. new text end

new text begin "Excess spread" means, with respect to any insured issue
of asset-backed securities, the excess of (1) the scheduled cash flow on the underlying
assets that is reasonably projected to be available, over the term of the insured securities
after payment of the expenses associated with the insured issue, to make debt service
payments on the insured securities over (2) the scheduled debt service requirements on
the insured securities, provided that the excess is held in the same manner as collateral is
required to be held under subdivision 9.
new text end

new text begin Subd. 14. new text end

new text begin Industrial development bond. new text end

new text begin "Industrial development bond" means a
security or other instrument, other than a utility first mortgage obligation, under which a
payment obligation is created, issued by or on behalf of a governmental unit, to finance
a project serving a private industrial, commercial, or manufacturing purpose, and not
payable or guaranteed by a governmental unit.
new text end

new text begin Subd. 15. new text end

new text begin Insurable risk. new text end

new text begin "Insurable risk" means, with respect to asset-backed
securities, that the obligation on an uninsured basis has been determined to be not less
than investment grade based solely on the pool of assets backing the insured obligation or
securing the insurer, without consideration of the creditworthiness of the issuer.
new text end

new text begin Subd. 16. new text end

new text begin Investment grade. new text end

new text begin "Investment grade" means that:
new text end

new text begin (1) the obligation or parity obligation of the same issuer has been determined to be
in one of the top four generic lettered rating classifications by a securities rating agency
acceptable to the commissioner;
new text end

new text begin (2) the obligation or parity obligation of the same issuer has been identified in
writing by the rating agency to be of investment grade quality; or
new text end

new text begin (3) if the obligation or parity obligation of the same issuer has not been submitted to
the rating agency, the obligation is determined to be investment grade, as indicated by a
rating in category 1 or 2, by the Securities Valuation Office of the National Association of
Insurance Commissioners.
new text end

new text begin Subd. 17. new text end

new text begin Municipal bonds. new text end

new text begin "Municipal bonds" means municipal obligation bonds
and special revenue bonds.
new text end

new text begin Subd. 18. new text end

new text begin Municipal obligation bond. new text end

new text begin "Municipal obligation bond" means a
security or other instrument, including a lease payable or guaranteed by the United
States or another national government that qualifies as a governmental unit or an agency,
department, or instrumentality thereof, or by a state or an equivalent political subdivision
of another national government that qualifies as a governmental unit, but not a lease of any
other governmental unit, under which a payment obligation is created, issued by or on
behalf of or payable or guaranteed by a governmental unit, or issued by a special purpose
corporation, special purpose trust, or other special purpose legal entity to finance a project
serving a substantial public purpose, and which is:
new text end

new text begin (1)(i) payable from tax revenues, but not tax allocations, within the jurisdiction
of the governmental unit;
new text end

new text begin (ii) payable or guaranteed by the United States or another national government
that qualifies as a governmental unit, or any agency, department, or instrumentality
thereof, or by a housing agency of a state or an equivalent subdivision of another national
government that qualifies as a governmental unit;
new text end

new text begin (iii) payable from rates or charges, but not tolls, levied or collected in respect of a
nonnuclear utility project, public transportation facility, other than an airport, or public
higher education facility; or
new text end

new text begin (iv) with respect to lease obligations, payable from future appropriations; and
new text end

new text begin (2) provided that, in the case of obligations of a special purpose corporation, special
purpose trust, or other special purpose legal entity (i) the obligations are investment grade
at the time of issuance; (ii) the obligations are payable from sources enumerated in
clause (1), subitem (i), (ii), (iii), or (iv); and (iii) the project being financed or the tolls,
tariffs, usage fees, or other similar rates or charges for its use are subject to regulation or
oversight by a governmental unit.
new text end

new text begin Subd. 19. new text end

new text begin Reinsurance. new text end

new text begin "Reinsurance" means cessions qualifying for credit under
section 60I.06.
new text end

new text begin Subd. 20. new text end

new text begin Special revenue bond. new text end

new text begin "Special revenue bond" means a security or other
instrument, under which a payment obligation is created, issued by or on behalf of, or
payable or guaranteed by a governmental unit to finance a project serving a substantial
public purpose, and not payable from any of the sources enumerated in subdivision 18; or
securities which are the functional equivalent of the foregoing issued by a not-for-profit
corporation or a special purpose corporation, special purpose trust, or other special purpose
legal entity; provided that, in the case of obligations of a special purpose corporation,
special purpose trust, or other special purpose legal entity:
new text end

new text begin (1) the obligations are investment grade at the time of issuance;
new text end

new text begin (2) the obligations are not payable from the sources enumerated in subdivision
18, clause (1); and
new text end

new text begin (3) the project being financed or the tolls, tariffs, usage fees, or other similar rates or
charges for its use are subject to regulation or oversight by a governmental unit.
new text end

new text begin Subd. 21. new text end

new text begin Utility first mortgage obligation new text end

new text begin "Utility first mortgage obligation"
means an obligation of an issuer secured by a first priority mortgage on utility property
owned by or leased to an investor-owned or cooperative-owned utility company and
located in the United States, Canada, or a member country of the Organisation for
Economic Co-operation and Development having a sovereign rating in one of the top
two generic lettered rating classifications by a securities rating agency acceptable to the
commissioner; provided that the utility or utility property or the usage fees or other similar
utility rates or charges are subject to regulation or oversight by a governmental unit.
new text end

Sec. 2.

new text begin [60I.02] ORGANIZATION; FINANCIAL REQUIREMENTS.
new text end

new text begin Subdivision 1. new text end

new text begin Organization and licensing. new text end

new text begin A credit default insurance corporation
may be organized and licensed in the manner prescribed in section 60A.07 and a foreign
insurer may be admitted to do business in the state in the manner prescribed in section
60A.19, except as modified by the following provisions:
new text end

new text begin (1) a corporation organized for the purpose of transacting credit default insurance
may, subject to the applicable provisions of this chapter, be licensed to transact only the
following additional kinds of insurance:
new text end

new text begin (i) residual value insurance;
new text end

new text begin (ii) surety insurance;
new text end

new text begin (iii) credit insurance; and
new text end

new text begin (iv) financial guaranty insurance;
new text end

new text begin (2) a credit default insurance corporation may only assume those kinds of insurance
for which it is licensed to write direct business;
new text end

new text begin (3) before the issuance of a license, unless a plan of operation has been previously
approved by the commissioner, a corporation shall submit for the approval of the
commissioner a plan of operation, detailing the types and projected diversification
of guarantees that will be issued, the underwriting procedures that will be followed,
managerial oversight methods, investment policies, and other matters as may be prescribed
by the commissioner; and
new text end

new text begin (4) a credit default insurance corporation's investments in any one entity insured
by that corporation shall not exceed four percent of its admitted assets at last year-end,
except that this limit does not apply to investments payable or guaranteed by a United
States governmental unit or Minnesota if the investments payable or guaranteed by the
United States governmental unit or Minnesota are rated in one of the top two generic
lettered rating classifications by a securities rating agency acceptable to the commissioner.
new text end

new text begin Subd. 2. new text end

new text begin Capital and surplus requirements. new text end

new text begin A credit default insurance corporation
shall not transact business unless it has paid-in capital of at least $15,000,000 and paid-in
surplus of at least $165,000,000, and shall at all times thereafter maintain a minimum
surplus to policyholders of at least $150,000,000.
new text end

new text begin Subd. 3. new text end

new text begin Compliance with general financial requests. new text end

new text begin A credit default insurance
company is deemed to be in compliance with section 60A.07 if not less than 60 percent
of the amount of the required minimum capital or minimum surplus to policyholder
investments consists of the types specified in section 60A.11 and direct government
obligations of a state of the United States or of a county, district, or municipality thereof,
provided the government obligations have been given the highest quality designation of
the Securities Valuation Office of the National Association of Insurance Commissioners.
Before investing any part of the required minimum capital or surplus in direct government
obligations of any other state of the United States or of any county, district, or municipality
thereof, the credit default insurance company shall have invested at least ten percent of the
required minimum in government obligations of Minnesota or of any county, district, or
municipality thereof. Only for purposes of meeting the required investment in government
obligations of Minnesota, the insurer may count investments in any government obligation
of Minnesota, whether direct or otherwise.
new text end

Sec. 3.

new text begin [60I.03] RESERVES; COLLATERAL.
new text end

new text begin Subdivision 1. new text end

new text begin Contingency reserves. new text end

new text begin (a) A corporation shall establish and
maintain contingency reserves for the protection of insureds and claimants against the
effects of excessive losses occurring during adverse economic cycles.
new text end

new text begin (b) With respect to credit default insurance of municipal obligation bonds, special
revenue bonds, industrial development bonds, and utility first mortgage obligations written
on or after the first day of the next calendar quarter beginning after the date that the act
enacting this chapter becomes law:
new text end

new text begin (1) the insurer shall establish and maintain a contingency reserve for all the insured
issues in each calendar year for each category listed in clause (2);
new text end

new text begin (2) the total contingency reserve required must be the greater of 50 percent of
premiums written for each such category or the following amount prescribed for each
such category:
new text end

new text begin (i) municipal obligation bonds, 0.55 percent of principal guaranteed;
new text end

new text begin (ii) special revenue bonds, and obligations demonstrated to the satisfaction of the
commissioner to be the functional equivalent thereof, 0.85 percent of principal guaranteed;
new text end

new text begin (iii) investment grade industrial development bonds, secured by collateral or
having a term of seven years or less, and utility first mortgage obligations, 1.0 percent
of principal guaranteed;
new text end

new text begin (iv) other investment grade industrial development bonds, 1.5 percent of principal
guaranteed; and
new text end

new text begin (v) all other industrial development bonds, 2.5 percent of principal guaranteed; and
new text end

new text begin (3) contributions to the contingency reserve required by this subdivision, equal to
1/80 of the total reserve required, must be made each quarter for 20 years, provided,
however, that contributions may be discontinued so long as the total reserve for all
categories listed in clause (2), items (i) to (v), exceeds the percentages contained in clause
(2), items (i) to (v), when applied against unpaid principal.
new text end

new text begin (c) With respect to all other credit default insurance written on or after the first day
of the next calendar quarter beginning after the date that the act enacting this chapter
becomes law:
new text end

new text begin (1) the insurer shall establish and maintain a contingency reserve for all the insured
issues in each calendar year for each category listed in clause (2);
new text end

new text begin (2) the total contingency reserve required must be the greater of 50 percent of
premiums written for each category or the following amount prescribed for each category:
new text end

new text begin (i) investment grade obligations, secured by collateral or having a term of seven
years or less, 1.0 percent of principal guaranteed;
new text end

new text begin (ii) other investment grade obligations, 1.5 percent of principal guaranteed;
new text end

new text begin (iii) noninvestment grade consumer debt obligations, 2.0 percent of principal
guaranteed;
new text end

new text begin (iv) noninvestment grade asset-backed securities, 2.0 percent of principal
guaranteed; and
new text end

new text begin (v) other noninvestment grade obligations, 2.5 percent of principal guaranteed; and
new text end

new text begin (3) contributions to the contingency reserve required by this subdivision, equal to
1/60 of the total reserve required, must be made each quarter for 15 years, provided,
however, that contributions may be discontinued so long as the total reserve for all
categories listed in clause (2), items (i) to (v), exceeds the percentages contained in clause
(2), items (i) to (v), when applied against unpaid principal.
new text end

new text begin (d) Contingency reserves required in paragraphs (b) and (c) may be established and
maintained net of collateral and reinsurance, provided that, in the case of reinsurance, the
reinsurance agreement requires that the reinsurer shall, on or after the effective date of
the reinsurance, establish and maintain a reserve in an amount equal to the amount by
which the insurer reduces its contingency reserve, and contingency reserves required in
paragraphs (b) and (c) may be maintained:
new text end

new text begin (1) net of refundings and refinancings to the extent the refunded or refinanced issue
is paid off or secured by obligations which are directly payable or guaranteed by the
United States government; and
new text end

new text begin (2) net of insured securities in a unit investment trust or mutual fund that have been
sold from the trust or fund without insurance.
new text end

new text begin (e) The contingency reserves may be released thereafter in the same manner in
which they were established and withdrawals therefrom, to the extent of any excess, may
be made from the earliest contributions to the reserves remaining therein:
new text end

new text begin (1) with the prior written approval of the commissioner:
new text end

new text begin (i) if the actual incurred losses for the year, in the case of the categories of guarantees
subject to paragraph (b) exceeds 35 percent of earned premiums, or in the case of the
categories of guarantees subject to paragraph (c) exceed 65 percent of earned premiums; or
new text end

new text begin (ii) if the contingency reserve applicable to the categories of credit default insurance
subject to paragraph (b) has been in existence for less than 40 quarters, or for less than 30
quarters for the categories of guarantees subject to paragraph (c), upon a demonstration
satisfactory to the commissioner that the amount carried is excessive in relation to the
insurer's outstanding obligations under its credit default insurance; and
new text end

new text begin (2) upon 30 days' prior written notice to the commissioner, provided that the
contingency reserve applicable to the categories of credit default insurance subject to
paragraph (b) has been in existence for 40 quarters, or 30 quarters for categories of credit
default insurance subject to paragraph (c), upon a demonstration satisfactory to the
commissioner that the amount carried is excessive in relation to the insurer's outstanding
obligations under its credit default insurance.
new text end

new text begin (f) An insurer providing credit default insurance may invest the contingency reserve
in tax and loss bonds or similar securities, purchased pursuant to section 832(e) of the
Internal Revenue Code or any successor provision, only to the extent of the tax savings
resulting from the deduction for federal income tax purposes of a sum equal to the annual
contributions to the contingency reserve. The contingency reserve shall otherwise be
invested only in classes of securities or types of investments specified in section 60A.11.
new text end

new text begin Subd. 2. new text end

new text begin Loss reserves. new text end

new text begin (a) The case basis method or other method as may be
prescribed by the commissioner shall be used to establish and maintain loss reserves, net
of collateral, for claims reported and unpaid, in a manner consistent with state law. A
deduction from loss reserves must be allowed for the time value of money by application
of a discount rate equal to the average rate of return on the admitted assets of the insurer
as of the date of the computation of the reserves. The discount rate must be adjusted
at the end of each calendar year.
new text end

new text begin (b) If the insured principal and interest on a defaulted issue of obligations due and
payable during any three years following the date of default exceeds ten percent of the
insurer's surplus to policyholders and contingency reserves, its reserve so established must
be supported by a report from an independent source acceptable to the commissioner.
new text end

new text begin Subd. 3. new text end

new text begin Unearned premium reserve. new text end

new text begin An unearned premium reserve must be
established and maintained, net of reinsurance and collateral, with respect to all credit
default insurance premiums. Where credit default insurance premiums are paid on an
installment basis, an unearned premium reserve must be established and maintained, net of
reinsurance and collateral, computed on a daily or monthly pro rata basis. All other credit
default insurance premiums written must be earned in proportion with the expiration of
exposure, or by another method as may be prescribed by the commissioner.
new text end

new text begin Subd. 4. new text end

new text begin Collateral. new text end

new text begin Collateral must be deposited with the insurer; held in trust by a
trustee or custodian acceptable to the commissioner for the benefit of the insurer; or held
in trust pursuant to the bond indenture or other trust arrangement, for the benefit of holders
of insured obligations in the form of funds for the payment of insured obligations, sinking
funds, or other reserves which may be used for the payment of insured obligations and
trustee and other administrative fees on a first priority basis established and continually
maintained pursuant to the bond indenture or other trust arrangement by a trustee
acceptable to the commissioner. The commissioner may adopt rules to limit the amount of
collateral provided by obligations, letters of credit, or credit default insurance contracts,
or to limit the amount of collateral provided by a single issuer, bank, or counterparty as
provided for in this subdivision.
new text end

Sec. 4.

new text begin [60I.04] LIMITATIONS.
new text end

new text begin Subdivision 1. new text end

new text begin License required. new text end

new text begin Credit default insurance may be transacted in this
state only by a corporation licensed for that purpose pursuant to section 60I.02.
new text end

new text begin Subd. 2. new text end

new text begin Permissible credit default insurance. new text end

new text begin (a) The commissioner shall not
permit the writing of credit default insurance except where the insured or beneficiary
under the policy, bond, or contract has, or is expected to have at the time of the default
or other failure of the obligor under the debt instrument or other monetary obligation, a
material interest in the default or other failure; and a corporation may insure the timely
payment of United States dollar debt instruments, or other monetary obligations, only in
the following categories:
new text end

new text begin (1) municipal obligation bonds;
new text end

new text begin (2) special revenue bonds;
new text end

new text begin (3) industrial development bonds;
new text end

new text begin (4) investment grade obligations of the government of a country, municipality, or
political subdivision of any of the foregoing, or any public agency or instrumentality
thereof if that entity does not meet the definition of a governmental unit;
new text end

new text begin (5) obligations of corporations, trusts, or other similar entities established under
applicable law;
new text end

new text begin (6) partnership obligations; and
new text end

new text begin (7) asset-backed securities, trust certificates, and trust obligations, provided that:
new text end

new text begin (i) with respect to mortgage-backed securities secured by first mortgages on real
property that are insurable by an authorized mortgage guaranty insurer;
new text end

new text begin (A) the mortgages with loan-to-value ratios in excess of 80 percent are:
new text end

new text begin (I) in the case of mortgages on property located in Minnesota, insured by authorized
mortgage guaranty insurers;
new text end

new text begin (II) in the case of mortgages on property located in a state other than Minnesota,
insured by mortgage guaranty insurers authorized to do business in another state; or
new text end

new text begin (III) in an aggregate principal amount less than the single-risk limits prescribed
in subdivision 4, clause (5); or
new text end

new text begin (B) additional mortgages with principal balances, other collateral with a market
value, or, provided the insured risk is investment grade, excess spread in an amount, in
each instance at least equal to the coverage that would otherwise be provided by the
mortgage guaranty insurers in accordance with subitem (A) are pledged as additional
security for the asset-backed securities; or
new text end

new text begin (ii) with respect to any asset-backed securities backed by another pool of
asset-backed securities:
new text end

new text begin (A) the pool of asset-backed securities must be comprised of asset-backed securities
having a right to payment and rights in insolvency that are not subordinated to any other
security of the issuer, in the event of a payment default by, or rehabilitation or insolvency
of, the issuer;
new text end

new text begin (B) the credit default insurer shall possess control and remediation rights
substantially similar to those held by the most senior class of securities of the issuer of
the insured obligations backed by the same pool of assets;
new text end

new text begin (C) the pool consists of asset-backed securities that are issued or guaranteed by a
governmental unit, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, the Federal Home Loan Bank, the Federal Agricultural Mortgage
Corporation, or the Federal Farm Credit System Banks as a consolidated debt obligation
or a systemwide debt obligation to the extent that the obligations are covered by the
Farm Credit Insurance Fund;
new text end

new text begin (D) the pool consists entirely of asset-backed securities insured by the credit default
insurer; or
new text end

new text begin (E) the commissioner has determined that insuring the asset-backed securities does
not present undue risk to the credit default insurer;
new text end

new text begin (8) installment purchase agreements executed as a condition of sale;
new text end

new text begin (9) consumer debt obligations;
new text end

new text begin (10) utility first mortgage obligations; and
new text end

new text begin (11) any other debt instrument or financial obligation that the commissioner
determines to be substantially similar to any of the foregoing or shall otherwise be
approved by the commissioner.
new text end

new text begin (b) An insurer may insure obligations enumerated in paragraph (a), clauses (1),
(2), and (3), that are not investment grade so long as at least 95 percent of the insurer's
aggregate net liability on the kinds of obligations enumerated in paragraph (a), clauses
(1), (2), and (3), must be investment grade.
new text end

new text begin (c) A corporation may insure the timely payment of monetary obligations in any
category designated in this subdivision notwithstanding that the obligation may be insured
by an insurance policy issued by another insurer. In the event that any obligation is
insured by more than one credit default insurance policy, then each insurance policy may
by its terms specify its priority of payment in the event of a default under the obligation
insured or any other insurance policy; provided that an insurer is entitled to take into
account payment under another policy insuring the obligation for purposes of establishing
and maintaining loss reserves only to the extent that the policy issued by the insurer
provides for payment only in the event of payment default under both the obligation
and the other policy.
new text end

new text begin (d) A corporation may also write credit default insurance as defined in section
60I.01, subdivision 2, paragraph (a), to insure the timely payment of non-United States
dollar debt instruments or other monetary obligations denominated or payable in foreign
currency, only for the categories listed in paragraph (a), clauses (1) to (11), provided that:
new text end

new text begin (1) the currency is that of an Organisation for Economic Co-operation and
Development country or other country (i) whose sovereign rating is investment grade or
(ii) as shall not otherwise be disapproved by the commissioner within 30 days following
receipt of written notification. The commissioner shall not disapprove the notification
upon demonstration that there is no undue risk associated with insuring the timely payment
of the instruments or obligations. In making such a determination, the commissioner shall
take into consideration the corporation's outstanding liabilities on noninvestment grade
instruments and obligations in relation to its outstanding liabilities on all instruments and
obligations and in relation to the amount of its surplus to policyholders;
new text end

new text begin (2) reserves required pursuant to section 60I.03 in regard to such obligations must be
established and adjusted quarterly based upon the then-current foreign exchange rates;
new text end

new text begin (3) the obligations shall not exceed 25 percent of an insurer's aggregate net liability;
and
new text end

new text begin (4) the aggregate and single risk limitations prescribed by subdivisions 3 and 4 shall
be determined by applying the then-current foreign exchange rates.
new text end

new text begin Subd. 3. new text end

new text begin Aggregate risk limits. new text end

new text begin The corporation must at all times maintain surplus
to policyholders and contingency reserves in the aggregate no less than the sum of:
new text end

new text begin (1)(i) 0.3333 percent or 1/300 of the aggregate net liability under credit default
insurance in which the underlying obligations are municipal bonds including obligations
demonstrated to the satisfaction of the commissioner to be the functional equivalent
thereof and investment grade utility first mortgage obligations; plus
new text end

new text begin (ii) 0.6666 percent or 1/150 of the aggregate net liability under credit default
insurance in which the underlying obligations are investment grade asset-backed
securities; plus
new text end

new text begin (iii) 1.0 percent or 1/100 of the aggregate net liability under credit default insurance
in which the underlying obligations are secured by collateral or having a term of seven
years or less, of:
new text end

new text begin (A) investment grade industrial development bonds; and
new text end

new text begin (B) other investment grade obligations; plus
new text end

new text begin (iv) 1.5 percent or 1/66.67 of the aggregate net liability under credit default insurance
in which the underlying obligations are investment grade obligations; plus
new text end

new text begin (v) 2.0 percent or 1/50 of the aggregate net liability under credit default insurance
in which the underlying obligations are:
new text end

new text begin (A) noninvestment grade consumer debt obligations; and
new text end

new text begin (B) noninvestment grade asset-backed securities; plus
new text end

new text begin (vi) 2.5 percent or 1/40 of the aggregate net liability under credit default insurance
in which the underlying obligations are noninvestment grade obligations secured by first
mortgages on commercial real estate and having loan-to-value ratios of 80 percent or
less; plus
new text end

new text begin (vii) 4.0 percent or 1/25 of the aggregate net liability under credit default insurance
in which the underlying obligations are other noninvestment grade obligations; and
new text end

new text begin (viii) if the amount of collateral required by item (iii) is no longer maintained, that
proportion of the obligation insured which is not so collateralized shall be subject to the
aggregate limits specified in item (iv); and
new text end

new text begin (2) surplus to policyholders determined by the commissioner to be adequate to
support the writing of residual value insurance, surety insurance, and credit insurance, if
the corporation has elected to transact such kinds of insurance pursuant to section 60I.02,
subdivision 1.
new text end

new text begin Subd. 4. new text end

new text begin Single-risk limits. new text end

new text begin A credit default insurance corporation shall limit its
exposure to loss on any one risk insured by policies providing credit default insurance, net
of collateral and reinsurance, as follows:
new text end

new text begin (1) for municipal obligation bonds, special revenue bonds, and obligations
demonstrated to the satisfaction of the commissioner to be the functional equivalent
thereof:
new text end

new text begin (i) the insured average annual debt service with respect to a single entity and backed
by a single revenue source shall not exceed ten percent of the aggregate of the insurer's
surplus to policyholders and contingency reserve; and
new text end

new text begin (ii) the insured unpaid principal issued by a single entity and backed by a single
revenue source shall not exceed 75 percent of the aggregate of the insurer's surplus to
policyholders and contingency reserve;
new text end

new text begin (2) for each issue of asset-backed securities issued by a single entity and for each
pool of consumer debt obligations, the lesser of:
new text end

new text begin (i) insured average annual debt service; or
new text end

new text begin (ii) insured unpaid principal, reduced by the extent to which the unpaid principal of
the supporting assets and, provided the insured risk is investment grade, excess spread
exceeds the insured unpaid principal, divided by nine; shall not exceed ten percent of the
aggregate of the insurer's surplus to policyholders and contingency reserve, provided that
no asset in the pool supporting the asset-backed securities exceeds the single-risk limits
prescribed in clause (5), if insured; and provided further that, if the issuer of the insured
asset-backed securities is a special purpose corporation, trust, or other entity and the issuer
shall have indebtedness outstanding with respect to any other pool of assets, either such
other indebtedness is entitled to the benefits of a credit default insurance policy of the
same insurer, or such other indebtedness shall: (A) be fully subordinated to the insured
obligation, with respect to, or be nonrecourse with respect to, the pool of assets that
supports the insured obligation; (B) be nonrecourse to the issuer other than with respect to
the asset pool securing such other indebtedness and proceeds in excess of the proceeds
necessary to pay the insured obligation ("excess proceeds"); and (C) not constitute a
claim against the issuer to the extent that the asset pool securing the other indebtedness or
excess proceeds are insufficient to pay the other indebtedness and provided further that, in
the case of asset-backed securities that are subordinate, in right of payment in the event
of an issuer insolvency, to any other securities of the issuer backed by the same pool
of assets, for purposes of this clause only, the insured average annual debt service and
insured unpaid principal must be deemed to be the lesser of: (I) 300 percent of the insured
average annual debt service and insured unpaid principal respectively, or (II) the insured
average annual debt service and insured unpaid principal respectively if the scheduled
principal of and interest on all senior securities of the issuer were included in the amount
insured by the insurer for purposes of calculating insured average annual debt service and
insured unpaid principal;
new text end

new text begin (3) for obligations issued by a single entity and secured by commercial real estate,
and not meeting the definition of asset-backed securities, the insured unpaid principal less
50 percent of the appraised value of the underlying real estate must not exceed ten percent
of the aggregate of the insurer's surplus to policyholders and contingency reserve;
new text end

new text begin (4) for utility first mortgage obligations, the insured average annual debt service
must not exceed ten percent of the aggregate of the insurer's surplus to policyholders and
contingency reserve; and
new text end

new text begin (5) for all other policies providing credit default insurance with respect to
obligations issued by a single entity and backed by a single revenue source, the insured
unpaid principal must not exceed ten percent of the aggregate of the insurer's surplus
to policyholders and contingency reserve.
new text end

new text begin Subd. 5. new text end

new text begin Plans to reduce loss exposure. new text end

new text begin If an insurer at any time exceeds any
limitation prescribed by subdivision 3 or 4 or the last sentence of subdivision 2, paragraph
(a), the insurer shall within 30 days after the limitations are breached submit a written
plan to the commissioner detailing the steps that it will take or has taken to reduce its
exposure to loss to no more than the permitted amounts, and if after notice and hearing the
commissioner determines that an insurer has exceeded any limitation prescribed by this
subdivision, the commissioner may order the insurer to cease transacting any new credit
default insurance business until its exposure to loss no longer exceeds these limitations or
with respect to the limitations prescribed in the last sentence of subdivision 2, paragraph
(a), may order the insurer to limit its writing of the types of credit default insurance
permitted under subdivision 2, paragraph (a), clauses (1), (2), and (3), to investment grade
obligations until it is in compliance with the limitations.
new text end

new text begin Subd. 6. new text end

new text begin Payments restricted. new text end

new text begin An insurer authorized to transact the business of
credit default insurance shall not pay a commission or make a gift of money, property,
or other valuable thing to an employee, agent, or representative of a potential purchaser
of a credit default insurance policy, as an inducement to the purchase of the policy, and
no employee, agent, or representative of the potential purchaser shall receive any such
payment or gift. Violation of this section does not, however, have the effect of rendering
void the insurance policy issued by the insurer.
new text end

Sec. 5.

new text begin [60I.05] POLICY FORMS AND RATES.
new text end

new text begin Subdivision 1. new text end

new text begin Filing. new text end

new text begin Policy forms and amendments must be filed with the
commissioner within 30 days of their use by the insurer if not otherwise filed before
the effective date of this chapter.
new text end

new text begin Subd. 2. new text end

new text begin Acceleration of payments. new text end

new text begin (a) A credit default insurance policy shall
provide that, in the event of a payment default by or insolvency of the obligor, there is no
acceleration of the payment required to be made under the policy unless the acceleration
is permitted by the credit default insurer at its sole option, exercised at the time of the
payment.
new text end

new text begin (b) A credit default insurance policy shall not provide that commencement of
rehabilitation, liquidation or conservatorship proceedings under chapter 60B, bankruptcy,
or any other similar proceedings, whether under the laws of this state or another state, with
respect to a credit default insurer or the insured, accelerates any payment required to be
made under the policy, absent a payment default by the obligor or the insurer.
new text end

new text begin Subd. 3. new text end

new text begin Termination rights. new text end

new text begin A credit default insurance policy may provide that
either the credit default insurer or the insured may terminate the policy as a consequence
of the commencement of rehabilitation, liquidation or conservatorship proceedings under
chapter 60B, bankruptcy, or any other similar proceedings, whether under the laws of this
state or another state, with respect to a credit default insurer or the insured, provided
that the termination:
new text end

new text begin (1) does not accelerate or otherwise increase the obligation of the credit default
insurer to make scheduled payments when due under the policy; and
new text end

new text begin (2) does not require the insurer to make an additional payment to the insured by
reason of the termination.
new text end

new text begin Subd. 4. new text end

new text begin Rulemaking. new text end

new text begin The commissioner by rule may prescribe minimum policy
provisions determined by the commissioner to be necessary or appropriate to protect
credit default insurers, policyholders, claimants, obligees or indemnitees, or the people of
this state.
new text end

new text begin Subd. 5. new text end

new text begin Rate standards. new text end

new text begin Rates shall not be excessive, inadequate, unfairly
discriminatory, destructive of competition, detrimental to the solvency of the insurer, or
otherwise unreasonable. In determining whether rates comply with these standards, the
commissioner shall include all income earned by the insurer. Criteria and guidelines used
by insurers in establishing rating categories and ranges of rates to be used shall be filed
with the commissioner for information before their use by the insurer if not otherwise filed
before the effective date of this chapter.
new text end

new text begin Subd. 6. new text end

new text begin Public inspection. new text end

new text begin All filings must be available for public inspection
at the Department of Commerce.
new text end

Sec. 6.

new text begin [60I.06] REINSURANCE.
new text end

new text begin Subdivision 1. new text end

new text begin Insurer credit. new text end

new text begin For credit default insurance that takes effect on or
after the effective date of this chapter, an insurer authorized to transact credit default
insurance shall receive credit for reinsurance according to this chapter applicable to
property and casualty insurers, as an asset or as a reduction from liabilities provided
that the reinsurance is subject to an agreement that, for its stated term and with respect
to any reinsured credit default insurance in force, the reinsurance agreement, facultative
or treaty, may only be terminated or amended (i) at the option of the reinsurer or the
ceding insurer, if the reinsurance agreement provides that the liability of the reinsurer with
respect to policies in effect at the date of termination shall continue until the expiration or
cancellation of the policy; (ii) with the consent of the ceding company, if the reinsurance
agreement provides for a cutoff of the reinsurance in force at the date of termination; or
(iii) at the discretion of the commissioner acting as rehabilitator, liquidator, or receiver of
the ceding or assuming insurer; and provided that the reinsurance is:
new text end

new text begin (1) placed with a credit default insurance corporation licensed under this chapter
or an insurer writing only credit default insurance as is or would be permitted by this
chapter; or
new text end

new text begin (2) placed with a property and casualty insurer or an accredited reinsurer licensed or
accredited to reinsure risks of every kind or description, including municipal obligation
bonds, if the reinsurance agreement with the insurer requires that the insurer:
new text end

new text begin (i) have and maintain surplus to policyholders of at least $35,000,000;
new text end

new text begin (ii) establish and maintain the reserves required in section 60I.03, except that if the
reinsurance agreement is not pro rata the contribution to the contingency reserve must be
equal to 50 percent of the quarterly earned reinsurance premium. However, the assuming
insurer need not establish and maintain the reserve to the extent that the ceding insurer has
established and continues to maintain the reserve;
new text end

new text begin (iii) comply with section 60I.04, subdivision 3, except that the maximum total
exposures reinsured, net of retrocessions and collateral, is one-half of that permitted
for a credit default insurance corporation;
new text end

new text begin (iv) if a parent of the insurer, another subsidiary of the parent of the insurer, or a
subsidiary of the insurer, then the aggregate of all risks assumed by the reinsurers shall
not exceed ten percent of the insurer's exposures, net of retrocessions and collateral.
Direct or indirect ownership interests of 50 percent or more shall be deemed a parent and
subsidiary relationship;
new text end

new text begin (v) if an affiliate of the insurer, the affiliate shall not assume a percentage of the
insurer's total exposures insured, net of retrocessions and collateral, in excess of its
percentage of equity interest in the insurer; and
new text end

new text begin (vi) assumes from the credit default insurance corporation and any affiliate, parent of
the insurer, another subsidiary of the parent of the insurer, or subsidiary of the insurer that
is a credit default insurance corporation or an insurer writing only credit default insurance
as is or would be permitted by this chapter, together with all other reinsurers subject to this
section, less than 50 percent of the total exposures insured by the credit default insurance
corporation and the affiliates, parents, or subsidiaries of the insurer, net of collateral,
remaining after deducting any reinsurance placed with another credit default insurance
corporation that is not an affiliate, a parent of the credit default insurance corporation,
another subsidiary of the parent of the insurer, or a subsidiary of the insurer or a credit
default insurance corporation writing only credit default insurance as is or would be
permitted by this chapter that is not an affiliate, a parent of the credit default insurance
corporation, another subsidiary of the parent of the insurer, or a subsidiary of the insurer; or
new text end

new text begin (3) if placed with an unauthorized or unaccredited reinsurer which otherwise meets
the requirements of either the opening paragraph of this subdivision and clause (1), or the
opening paragraph of this subdivision and clause (2), items (i), (iv), (v), and (vi), in an
amount not exceeding the liabilities carried by the ceding insurer for amounts withheld
under a reinsurance treaty with the reinsurer or amounts deposited by the reinsurer as
security for the payment of obligations under the treaty if the funds or deposit are held
subject to withdrawal by, and under the control of, the ceding insurer.
new text end

new text begin Subd. 2. new text end

new text begin Aggregate excess insurance. new text end

new text begin In determining whether the insurer meets the
aggregate risk limitations, in addition to credit for other types of qualifying reinsurance,
the insurer's aggregate risk may be reduced to the extent of the limit for aggregate excess
reinsurance, but in no event in an amount greater than the amount of the aggregate risks
which will become due during the unexpired term of the reinsurance agreement in excess
of the insurer's retention pursuant to the reinsurance agreement.
new text end

Sec. 7.

new text begin [60I.07] APPLICABILITY OF OTHER LAWS.
new text end

new text begin An insurer issuing policies of credit default insurance is subject to the provisions of
this chapter applicable to property and casualty insurers to the extent that the provisions
are not inconsistent with this chapter.
new text end

Sec. 8.

new text begin [60I.08] RELATIONSHIP TO SECURITY FUND.
new text end

new text begin No insurer or agent of an insurer may deliver a policy of credit default insurance
unless the policy and any prospectus delivered on or after the effective date of this chapter
with respect to the insured obligations clearly discloses that the policy is not covered by
the Minnesota Insurance Guaranty Association Act, chapter 60C.
new text end

Sec. 9.

new text begin [60I.09] CIVIL AND CRIMINAL PENALTIES.
new text end

new text begin (a) It is a violation of this chapter for a credit default insurance corporation, affiliate,
or other party related to the business of credit default insurance to sell credit default
insurance not permissible under section 60I.04.
new text end

new text begin (b) For criminal liability purposes, a violation of a provision of this chapter shall,
unless the same constitutes a felony, be a misdemeanor.
new text end

new text begin (c) The commissioner may levy a civil penalty not exceeding $....... and the amount
of the claim for each violation upon any person who is found to have violated any
provision of this chapter.
new text end

new text begin (d) The license of a person licensed under this chapter that sells credit default
insurance not permissible under section 60I.04 shall be revoked for a period of at least
one year.
new text end

Sec. 10.

new text begin TRANSITION PROVISION.
new text end

new text begin (a)(1) A company organized for the purpose of transacting financial guaranty
insurance in its state of domicile or any other state on the effective date of this act and
licensed and operating in this state as a provider of surety insurance on the effective
date of this act, upon application by the company within one year of the effective date
of this act, shall be issued a license pursuant to section 60I.02 and, before and after the
license is issued, may engage in the business of credit default insurance, provided that the
company meets all requirements of this act, except the requirements described in clause
(2), before the effective date of this act to transact business as a credit default insurance
corporation in this state.
new text end

new text begin (2) A company described in clause (1) must meet the requirements of this act, with
the following exceptions:
new text end

new text begin (i) the company shall not be deemed to be in violation of any provision of this act
with respect to credit default insurance policies outstanding prior to the effective date of
this act, if the insurer was in compliance with the applicable provisions relating to financial
guaranty insurance in its state of domicile at the time that the credit default insurance
policy was issued, provided that this act shall apply to the policies that are amended or
replaced on or after the effective date of this act if the amendment of the original policy
extends the term or the replacement policy provides a new term that extends beyond the
term of the original policy in effect on the effective date of this act, unless the amendment
or replacement complies with item (ii);
new text end

new text begin (ii) the company shall not be deemed to be in violation of any provision of this act
with respect to any amendment or replacement of a credit default insurance policy issued
prior to the effective date of this act, provided that:
new text end

new text begin (A) the amendment or replacement of the original policy is executed in good faith to
mitigate losses or reduce exposure to future losses under the original policy; and
new text end

new text begin (B) the company provides notice to the commissioner of the amendment or
replacement within ten business days of the amendment or replacement;
new text end

new text begin (iii) before ten years after the effective date of this act, the following requirements of
this act shall not apply to the company:
new text end

new text begin (A) section 60I.02, subdivision 2, regarding paid-in capital and surplus requirements
and minimum surplus to policyholders;
new text end

new text begin (B) section 60I.04, subdivisions 3, 4, and 5, regarding aggregate and single-risk
limits.
new text end

new text begin (3) The commissioner may:
new text end

new text begin (i) extend the transition time permitted in clause (2), item (iii), an additional six
months if the commissioner determines that it would not pose a hazard to the insurer, its
policyholders, or the public, and there are unusual or unique circumstances that justify
the extension;
new text end

new text begin (ii) decrease the transition time permitted in clause (2), item (iii), if the commissioner
determines, after notice and an opportunity to be heard, that permitting a company
to continue transacting credit default insurance poses a hazard to the insurer, its
policyholders, or the public.
new text end

new text begin (4) A company that does not comply with clauses (1) and (2) shall cease writing
any new credit default insurance.
new text end

new text begin (b) A company not licensed as an insurance company in this state pursuant to section
60A.07 on the effective date of this act may not engage in the business of credit default
insurance until the date the company has received a license from this state pursuant to
section 60I.02.
new text end

Sec. 11. new text begin EFFECTIVE DATE.
new text end

new text begin This act is effective for all credit default insurance entered into or materially changed
on or after August 1, 2010.
new text end