1.1                          A bill for an act 
  1.2             relating to insurance; regulating liquidations and 
  1.3             investments of insurers; amending Minnesota Statutes 
  1.4             2000, sections 60B.44, subdivision 4; 60L.01, 
  1.5             subdivision 14; 60L.10, subdivision 1; 61A.276, 
  1.6             subdivision 2; 61A.28, subdivision 6; 61A.29, 
  1.7             subdivision 2. 
  1.8   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.9      Section 1.  Minnesota Statutes 2000, section 60B.44, 
  1.10  subdivision 4, is amended to read: 
  1.11     Subd. 4.  [LOSS CLAIMS; INCLUDING CLAIMS NOT COVERED BY A 
  1.12  GUARANTY ASSOCIATION.] All claims under policies or contracts of 
  1.13  coverage for losses incurred including third party claims, and 
  1.14  all claims against the insurer for liability for bodily injury 
  1.15  or for injury to or destruction of tangible property which are 
  1.16  not under policies or contracts.  All claims under life 
  1.17  insurance and annuity policies, including funding agreements 
  1.18  issued pursuant to section 61A.276, whether for death proceeds, 
  1.19  annuity proceeds, or investment values, shall be treated as loss 
  1.20  claims.  That portion of any loss for which indemnification is 
  1.21  provided by other benefits or advantages recovered or 
  1.22  recoverable by the claimant shall not be included in this class, 
  1.23  other than benefits or advantages recovered or recoverable in 
  1.24  discharge of familial obligations of support or by way of 
  1.25  succession at death or as proceeds of life insurance, or as 
  1.26  gratuities.  No payment made by an employer to an employee shall 
  2.1   be treated as a gratuity.  Claims not covered by a guaranty 
  2.2   association are loss claims.  
  2.3      Sec. 2.  Minnesota Statutes 2000, section 60L.01, 
  2.4   subdivision 14, is amended to read: 
  2.5      Subd. 14.  [REPLICATION.] "Replication" means a derivative 
  2.6   transaction ~~involving one or more derivative instruments being~~ 
  2.7   ~~used to modify the cash flow characteristics of one or more~~ 
  2.8   ~~investments held by an insurer in a manner so that the aggregate~~ 
  2.9   ~~cash flows of the derivative instruments and investments~~ 
  2.10  ~~reproduce the cash flows of another investment having a higher~~ 
  2.11  ~~risk-based capital charge than the risk-based capital charge of~~ 
  2.12  ~~the original investments or investments~~ that is intended to 
  2.13  replicate the performance of one or more assets that an insurer 
  2.14  is authorized to acquire under sections 60L.01 to 60L.15.  A 
  2.15  derivative transaction that is entered into as a hedging 
  2.16  transaction is not considered a replication transaction. 
  2.17     Sec. 3.  Minnesota Statutes 2000, section 60L.10, 
  2.18  subdivision 1, is amended to read: 
  2.19     Subdivision 1.  [PROHIBITIONS.] An insurer may not invest 
  2.20  in investments that are prohibited for an insurer by law.  The 
  2.21  use of a derivative instrument for ~~replication, or for~~ any 
  2.22  purposes other than hedging ~~or~~, income generation, or 
  2.23  replication is prohibited. 
  2.24     Sec. 4.  Minnesota Statutes 2000, section 61A.276, 
  2.25  subdivision 2, is amended to read: 
  2.26     Subd. 2.  [ISSUANCE.] The funding agreements may be issued 
  2.27  to:  (1) individuals; or (2) persons authorized by a state or 
  2.28  foreign country to engage in an insurance business or 
  2.29  subsidiaries or affiliates of these persons; or (3) entities 
  2.30  other than individuals and other than persons authorized to 
  2.31  engage in an insurance business, and subsidiaries and affiliates 
  2.32  of these persons, for the following purposes:  (i) to fund 
  2.33  benefits under any employee benefit plan as defined in the 
  2.34  Employee Retirement Income Security Act of 1974, as now or 
  2.35  hereafter amended, maintained in the United States or in a 
  2.36  foreign country; (ii) to fund the activities of any organization 
  3.1   exempt from taxation under section 501(c) of the Internal 
  3.2   Revenue Code of 1986, as amended through December 31, 1992, or 
  3.3   of any similar organization in any foreign country; (iii) to 
  3.4   fund any program of any state, foreign country or political 
  3.5   subdivision thereof, or any agency or instrumentality thereof; 
  3.6   (iv) to fund any agreement providing for periodic payments in 
  3.7   satisfaction of a claim; or (v) to fund a program of ~~a financial~~ 
  3.8   an institution ~~limited to banks, thrifts, credit unions, and~~ 
  3.9   ~~investment companies registered under the Investment Company Act~~ 
  3.10  ~~of 1940.  No funding agreement shall be issued in an amount less~~ 
  3.11  ~~than $1,000,000~~ that has assets in excess of $25,000,000. 
  3.12     Sec. 5.  Minnesota Statutes 2000, section 61A.28, 
  3.13  subdivision 6, is amended to read: 
  3.14     Subd. 6.  [STOCKS, OBLIGATIONS, AND OTHER INVESTMENTS.] (a) 
  3.15  Common stocks, common stock equivalents, or securities 
  3.16  convertible into common stock or common stock equivalents of a 
  3.17  business entity organized under the laws of the United States or 
  3.18  any state thereof, or the Dominion of Canada or any province 
  3.19  thereof~~, if the net earnings of the business entity after the~~ 
  3.20  ~~elimination of extraordinary nonrecurring items of income and~~ 
  3.21  ~~expense and before income taxes and fixed charges over the five~~ 
  3.22  ~~immediately preceding completed fiscal years, or its period of~~ 
  3.23  ~~existence if less than five years, has averaged not less than~~ 
  3.24  ~~1-1/4 times its average annual fixed charges applicable to the~~ 
  3.25  ~~period~~.  
  3.26     (b) Preferred stock of, or common or preferred stock 
  3.27  guaranteed as to dividends by a business entity organized under 
  3.28  the laws of the United States or any state thereof, or the 
  3.29  Dominion of Canada or any province thereof, under the following 
  3.30  conditions:  (1) No investment may be made under this paragraph 
  3.31  in a stock upon which any dividend, current or cumulative, is in 
  3.32  arrears; (2) the company may not invest in stocks under this 
  3.33  paragraph and in common stocks under paragraph (a) if the 
  3.34  investment causes the company's aggregate investments in the 
  3.35  common or preferred stocks to exceed 25 percent of the company's 
  3.36  total admitted assets, provided that no more than 20 percent of 
  4.1   the company's admitted assets may be invested in common stocks 
  4.2   under paragraph (a); and (3) the company may not invest in any 
  4.3   preferred stock or common stock guaranteed as to dividends, 
  4.4   which is rated in the four lowest categories established by the 
  4.5   securities valuation office of the National Association of 
  4.6   Insurance Commissioners, if the investment causes the company's 
  4.7   aggregate investment in the lower rated preferred or common 
  4.8   stock guaranteed as to dividends to exceed five percent of its 
  4.9   total admitted assets.  
  4.10     (c) Warrants, options, and rights to purchase stock if the 
  4.11  stock, at the time of the acquisition of the warrant, option, or 
  4.12  right to purchase, would qualify as an investment under 
  4.13  paragraph (a) or (b), whichever is applicable.  A company shall 
  4.14  not invest in a warrant, option, or right to purchase stock if, 
  4.15  upon purchase and immediate exercise thereof, the acquisition of 
  4.16  the stock violates any of the concentration limitations 
  4.17  contained in paragraphs (a) and (b).  
  4.18     (d) In addition to amounts that may be invested under 
  4.19  subdivision 8 and without regard to the percentage limitation 
  4.20  applicable to stocks, warrants, options, and rights to purchase, 
  4.21  the securities of any face amount certificate company, unit 
  4.22  investment trust, or management type investment company, 
  4.23  registered or in the process of registration under the 
  4.24  Investment Company Act of 1940 as from time to time amended.  In 
  4.25  addition, the company may transfer assets into one or more of 
  4.26  its separate accounts for the purpose of establishing, or 
  4.27  supporting its contractual obligations under, the accounts in 
  4.28  accordance with the provisions of sections 61A.13 to 61A.21.  A 
  4.29  company may not invest in a security authorized under this 
  4.30  paragraph if the investment causes the company's aggregate 
  4.31  investments in the securities to exceed ~~five~~ ten percent of its 
  4.32  total admitted assets, except that for a health service plan 
  4.33  corporation operating under chapter 62C, and for a health 
  4.34  maintenance organization operating under chapter 62D, the 
  4.35  company's aggregate investments may not exceed 20 percent of its 
  4.36  total admitted assets.  No more than five percent of the allowed 
  5.1   investment by health service plan corporations or health 
  5.2   maintenance organizations may be invested in funds that invest 
  5.3   in assets not backed by the federal government.  When investing 
  5.4   in money market mutual funds, nonprofit health service plans 
  5.5   regulated under chapter 62C, and health maintenance 
  5.6   organizations regulated under chapter 62D, shall establish a 
  5.7   trustee custodial account for the transfer of cash into the 
  5.8   money market mutual fund. 
  5.9      (e) Investment grade obligations that are:  
  5.10     (1) bonds, obligations, notes, debentures, repurchase 
  5.11  agreements, or other evidences of indebtedness of a business 
  5.12  entity, organized under the laws of the United States or any 
  5.13  state thereof, or the Dominion of Canada or any province 
  5.14  thereof; and 
  5.15     (2) rated in one of the four highest rating categories by 
  5.16  at least one nationally recognized statistical rating 
  5.17  organization, or are rated in one of the two highest categories 
  5.18  established by the securities valuation office of the National 
  5.19  Association of Insurance Commissioners. 
  5.20     (f) Noninvestment grade obligations:  A company may acquire 
  5.21  noninvestment grade obligations as defined in subclause (i) 
  5.22  (hereinafter noninvestment grade obligations) which meet the 
  5.23  earnings test set forth in subclause (ii).  A company may not 
  5.24  acquire a noninvestment grade obligation if the acquisition will 
  5.25  cause the company to exceed the limitations set forth in 
  5.26  subclause (iii). 
  5.27     (i) A noninvestment grade obligation is an obligation of a 
  5.28  business entity, organized under the laws of the United States 
  5.29  or any state thereof, or the Dominion of Canada or any province 
  5.30  thereof, that is not rated in one of the four highest rating 
  5.31  categories by at least one nationally recognized statistical 
  5.32  rating organization, or is not rated in one of the two highest 
  5.33  categories established by the securities valuation office of the 
  5.34  National Association of Insurance Commissioners. 
  5.35     (ii) Noninvestment grade obligations authorized by this 
  5.36  subdivision may be acquired by a company if the business entity 
  6.1   issuing or assuming the obligation, or the business entity 
  6.2   securing or guaranteeing the obligation, has had net earnings 
  6.3   after the elimination of extraordinary nonrecurring items of 
  6.4   income and expense and before income taxes and fixed charges 
  6.5   over the five immediately preceding completed fiscal years, or 
  6.6   its period of existence of less than five years, has averaged 
  6.7   not less than 1-1/4 times its average annual fixed charges 
  6.8   applicable to the period; provided, however, that if a business 
  6.9   entity issuing or assuming the obligation, or the business 
  6.10  entity securing or guaranteeing the obligation, has undergone an 
  6.11  acquisition, recapitalization, or reorganization within the 
  6.12  immediately preceding 12 months, or will use the proceeds of the 
  6.13  obligation for an acquisition, recapitalization, or 
  6.14  reorganization, then such business entity shall also have, on a 
  6.15  pro forma basis, for the next succeeding 12 months, net earnings 
  6.16  averaging 1-1/4 times its average annual fixed charges 
  6.17  applicable to such period after elimination of extraordinary 
  6.18  nonrecurring items of income and expense and before taxes and 
  6.19  fixed charges; no investment may be made under this section upon 
  6.20  which any interest obligation is in default. 
  6.21     (iii) Limitation on aggregate interest in noninvestment 
  6.22  grade obligations.  A company may not invest in a noninvestment 
  6.23  grade obligation if the investment will cause the company's 
  6.24  aggregate investments in noninvestment grade obligations to 
  6.25  exceed the applicable percentage of admitted assets set forth in 
  6.26  the following table:  
  6.27                                          Percentage of
  6.28              Effective Date              Admitted Assets
  6.29              January 1, 1992                  20
  6.30              January 1, 1993                  17.5
  6.31              January 1, 1994                  15
  6.32     Nothing in this paragraph limits the ability of a company 
  6.33  to invest in noninvestment grade obligations as provided under 
  6.34  subdivision 12. 
  6.35     (g) Obligations for the payment of money under the 
  6.36  following conditions:  (1) The obligation must be secured, 
  7.1   either solely or in conjunction with other security, by an 
  7.2   assignment of a lease or leases on property, real or personal; 
  7.3   (2) the lease or leases must be nonterminable by the lessee or 
  7.4   lessees upon foreclosure of any lien upon the leased property; 
  7.5   (3) the rents payable under the lease or leases must be 
  7.6   sufficient to amortize at least 90 percent of the obligation 
  7.7   during the primary term of the lease; and (4) the lessee or 
  7.8   lessees under the lease or leases, or a governmental entity or 
  7.9   business entity, organized under the laws of the United States 
  7.10  or any state thereof, or the Dominion of Canada, or any province 
  7.11  thereof, that has assumed or guaranteed any lessee's performance 
  7.12  thereunder, must be a governmental entity or business entity 
  7.13  whose obligations would qualify as an investment under 
  7.14  subdivision 2 or paragraph (e) or (f).  A company may acquire 
  7.15  leases assumed or guaranteed by a noninvestment grade lessee 
  7.16  unless the value of the lease, when added to the other 
  7.17  noninvestment grade obligations owned by the company, exceeds 15 
  7.18  percent of the company's admitted assets.  
  7.19     (h) A company may sell call options against stocks or other 
  7.20  securities owned by the company and may purchase call options in 
  7.21  a closing transaction against a call option previously written 
  7.22  by the company.  In addition to the authority granted by 
  7.23  paragraph (c), to the extent and on the terms and conditions the 
  7.24  commissioner determines to be consistent with the purposes of 
  7.25  this chapter, a company may purchase or sell other 
  7.26  exchange-traded call options, and may sell or purchase 
  7.27  exchange-traded put options.  
  7.28     (i) A company may not invest in a security or other 
  7.29  obligation authorized under this subdivision if the investment, 
  7.30  valued at cost at the date of purchase, causes the company's 
  7.31  aggregate investment in any one business entity to exceed two 
  7.32  percent of the company's admitted assets.  
  7.33     (j) For nonprofit health service plan corporations 
  7.34  regulated under chapter 62C, and for health maintenance 
  7.35  organizations regulated under chapter 62D, a company may invest 
  7.36  in commercial paper rated in one of the two highest rating 
  8.1   categories by at least one nationally recognized statistical 
  8.2   rating organization, or rated in one of the two highest 
  8.3   categories established by the securities valuation office of the 
  8.4   National Association of Insurance Commissioners, if the 
  8.5   investment, valued at cost at the date of purchase, does not 
  8.6   cause the company's aggregate investment in any one business 
  8.7   entity to exceed six percent of the company's admitted assets. 
  8.8      Sec. 6.  Minnesota Statutes 2000, section 61A.29, 
  8.9   subdivision 2, is amended to read: 
  8.10     Subd. 2.  [AUTHORIZED INVESTMENTS.] A company may invest in 
  8.11  (i) foreign assets denominated in United States dollars; (ii) 
  8.12  foreign assets denominated in foreign currency; and (iii) United 
  8.13  States assets denominated in foreign currency.  The investments 
  8.14  may be made in any combination of the following: 
  8.15     (a) Obligations of sovereign governments and political 
  8.16  subdivisions thereof and obligations issued or fully guaranteed 
  8.17  by a supranational bank or organization, other than those 
  8.18  described in section 61A.28, subdivision 2, paragraph (e), 
  8.19  provided that the obligations are rated in one of the two 
  8.20  highest rating categories by at least one nationally recognized 
  8.21  statistical rating organization in the United States.  For 
  8.22  purposes of this section, "supranational bank" means a bank 
  8.23  owned by a number of sovereign nations and engaging in 
  8.24  international borrowing and lending.  
  8.25     (b) Obligations of a foreign business entity, provided that 
  8.26  the obligation (i) is rated in one of the four highest rating 
  8.27  categories by at least one nationally recognized statistical 
  8.28  rating organization in the United States or by a similarly 
  8.29  recognized statistical rating organization, as approved by the 
  8.30  commissioner, in the country where the investment is made; or 
  8.31  (ii) is rated in one of the two highest categories established 
  8.32  by the securities valuation office of the National Association 
  8.33  of Insurance Commissioners.  
  8.34     (c) Stock or stock equivalents issued by a foreign entity 
  8.35  if the stock or stock equivalents are regularly traded ~~on the~~ 
  8.36  ~~Frankfurt, London, Paris, or Tokyo stock exchange or any similar~~ 
  9.1   ~~securities exchange as may be approved from time to time by the~~ 
  9.2   ~~commissioner~~ and subject to oversight by the government of the 
  9.3   country in which the ~~exchange is located~~ regular trading occurs. 
  9.4      (d) Financial transactions for the sole purpose of managing 
  9.5   the foreign currency risk of investments made under this 
  9.6   subdivision, provided that the financial transactions are 
  9.7   entered into under a detailed plan maintained by the company.  
  9.8   For purposes of this paragraph, "financial transactions"  
  9.9   include, but are not limited to, the purchase or sale of 
  9.10  currency swaps, forward agreements, and currency futures.