(1) A contingency reserve shall be established and consist of allocations of sums representing 50 percent of the earned premiums on policies insuring financial guaranties.

(2) Allocations to such reserve made during each calendar year shall be maintained for a period of at least 240 months, except that withdrawals may be made by the insurer in any year in which the actual paid losses on the said type of policy exceed 35 percent of the earned premiums thereon, but no such releases shall be made without the prior written approval of the superintendent. A part of the reserve may be released proportional to the reduction in aggregate net lability resulting from reinsurance, provided that the assuming insurer shall, on the effective date of the reinsurance, establish a reserve in an amount equal to the amount released. The insurer may apply to the superintendent for a release of a reasonable percentage of the reserve upon demonstration that the amount carried is excessive in relation to the insurer's obligations on such policies.

(3) An insurer 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 sections 1402(b)(1) through (3) and 1404(a)(1) through (3) of the Insurance Law.

(1) Reserves for unpaid losses and loss adjustment expenses shall be computed in a manner consistent with the provisions of sections 4117 and 1303 of the Insurance Law, and shall be based upon the case basis method. No deduction shall be made for anticipated salvage in computing claim reserves.

(2) If the insured principal and interest on a defaulted obligation due and payable over the period of the next three years exceeds 10 percent of the insurer's capital, surplus and contingency reserve, its reserve so established shall be supported by a report from an independent source acceptable to the Superintendent.

(3) In meeting the requirements of section 4117(b)(2) of the Insurance Law, the contingency reserve set forth in subdivision (a) of this section shall be added to the incurred but not reported loss reserve in order to determine compliance.

(4) If the contingency reserve is not an amount equal to that required by section 4117(b)(2) of the Insurance Law, then the insurer shall establish an incurred but not reported loss reserve in an amount sufficient to make the total of the combined contingency reserve and incurred but not reported loss reserve equal to five percent of net premiums in force. For the purpose of this paragraph, net premiums in force include annual premiums on noncancellable installment type policies.