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§ 504.2. Investment

Purdon's Pennsylvania Statutes and Consolidated StatutesTitle 40 P.S. InsuranceEffective: July 9, 2010

Purdon's Pennsylvania Statutes and Consolidated Statutes

Title 40 P.S. Insurance (Refs & Annos)

Chapter 2. Insurance Companies (Refs & Annos)

Article IV. Life Insurance

(a) General Provisions Relating to Stock and Mutual Companies (Refs & Annos)

Effective: July 9, 2010

40 P.S. § 504.2

§ 504.2. Investment

Currentness

Subject to the provisions of sections 405.2 and 406.1,¹ the assets of any life insurance company organized under the laws of this Commonwealth shall be invested in the following classes of investment, provided the value of which, as determined for annual statement purposes, but in no event in excess of cost, shall not exceed the specified percentage of such company's assets as of the thirty-first day of December next preceding the date of investment:

(1) Bonds, notes or obligations issued, assumed or guaranteed by the United States or by any state thereof, or by any county, city, town, village, municipality or district therein or by any political subdivision thereof or by a public instrumentality of one or more of the foregoing, if, by statutory or other legal requirements applicable thereto, such obligations are payable, as to both principal and interest, from taxes levied, or required to be levied, upon all taxable property or all taxable income within the jurisdiction of such governmental unit, or 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 obligation payable solely out of special assessments on properties benefited by local improvements, unless adequate security is evidenced by the ratio of assessment to the value of the property or the obligation additionally secured by an adequate guaranty fund required by law.

(2) Bonds, notes, obligations and in stock where stated, issued, assumed or guaranteed by the following agencies of the United States, or in which such government is a participant, whether or not such obligations are guaranteed by such government:

(i) Farm Loan Bank.

(ii) Commodity Credit Corporation.

(iii) Federal intermediate credit banks.

(iv) Federal land banks.

(v) Central Bank for Cooperatives.

(vi) Federal home loan banks and stock thereof.

(vii) Federal National Mortgage Association and stock thereof.

(viii) International Bank for Reconstruction and Development.

(ix) Inter-American Development Bank.

(x) Asian Development Bank.

(xi) African Development Bank.

(xii) Any other similar agency of, or participated in by, the government of the United States and of similar financial quality, which such investments the Insurance Commissioner has determined were of similar financial quality.

(3) Bonds, notes, obligations or other investments of or in any business or governmental unit in or of any foreign country which are of the same kinds, classes and investment grades as those eligible for investment under this section. Investments under this clause in the Dominion of Canada shall not exceed ten per centum (10%) of such company's admitted assets. Investments under this clause in all other foreign countries shall not exceed ten per centum (10%) of such company's admitted assets except as provided in section 406.1(a).

(4) Business obligations:

(i) Bonds, notes or obligations issued, assumed, guaranteed or accepted by any corporation, joint-stock association, business trusts, business partnerships and business joint ventures, incorporated or existing under the laws of the United States or of any state, district or territory thereof.

(ii) Preferred stock of any of the foregoing.

(iii) Interest-bearing deposits or certificates of deposits in banks, bank and trust companies, savings banks, savings associations, savings and loan associations or national banking associations, incorporated or existing under the laws of the United States or any state, district or territory thereof and branches of foreign banking institutions located in the United States or any state, district or territory thereof.

(iv) Obligations which are not issued, assumed, guaranteed or accepted by any person described under subclause (i) but are secured by an assignment of a right to receive rent, purchase or other payment or revenues for the use or purchase of real or personal property sufficient to repay the investment and payable or guaranteed by any one or more persons or entities whose bonds, notes or obligations would qualify for investment under this section or a mortgage, interest in mortgage pool or mortgage participation, or lien or security interest in real or personal property or any interest therein. Investments permitted under subclause (ii) shall not exceed twenty-five per centum (25%) of such company's admitted assets, and no investment in any single corporation or entity contemplated by this clause shall exceed five per centum (5%) of such company's admitted assets.

(5) Trustees', receivers' or equipment trust obligations:

(i) Certificates, notes or obligations issued by trustees or receivers of any corporation or business trust created or existing under the laws of the United States or of any state, district or territory thereof which, or the assets of which, are being administered under the direction of any court having jurisdiction, if such obligation is adequately secured as to principal and interest.

(ii) Equipment trust obligations or certificates, which are adequately secured, or other adequately secured instruments, evidencing an interest in transportation equipment, wholly or in part within the United States, and a right to receive determined portions of rental, purchase or other fixed obligatory payments for the use or purchase of such transportation equipment.

(6) Obligations secured by real property or any interests therein, obligations or participations therein, secured by liens on real property or interests therein, located within the United States, district or territory thereof. The value of such real property or interest, together with such other security as shall secure any such obligation, shall be adequate to secure the investment as well as any lien senior to the lien created by the investment in such real estate. No investment in a single transaction shall exceed an amount equal to five per centum (5%) of such company's admitted assets.

(7) Loans upon the security of its own policies not exceeding the net value of the policy at the time of making the loan.

(8) Such real estate or interests therein located in any state, district or territory of the United States as such company is authorized to hold under this act.

(9) Subsidiaries as permitted under this act.

(10) Equity interests:

(i) Investments (other than investments provided for in section 406,² clauses (11) and (13) of this section 404.2 and investments in subsidiaries as provided for in section 405.2(c)) in common stocks, limited partnership interests, trust certificates (except equipment trust certificates described in clause (5)) or other equity interests (other than preferred stocks) of corporations, joint-stock associations, business trusts, business partnerships and business joint ventures incorporated, organized or existing under the laws of the United States, or of any state, district or territory thereof.

(ii) Stocks or shares of any regulated investment company which is registered as an investment company under the Federal Investment Company Act of 1940 (54 Stat. 789, 15 U.S.C. §§ 80a-1 to 80a-52, 107), as, from time to time, amended, and which has no preferred stock, bonds, loans or any other outstanding securities having preference or priority as to the assets or earnings over its common stock at the date of purchase.

(iii) Investments under this clause shall not exceed twenty-five per centum (25%) of such company's admitted assets, and no investment in any single corporation or entity contemplated by this clause shall exceed five per centum (5%) of such company's admitted assets. The limitations set forth in this clause shall not apply to investments in any corporation or entity which is an insurance company or a health maintenance organization holding a certificate of authority under the act of December 29, 1972 (P.L. 1701, No. 364), known as the “Health Maintenance Organization Act.”³

(iv) Limited partnership interests under this clause shall not exceed ten per centum (10%) of the company's admitted assets in the aggregate. A company may not invest more than ten per centum (10%) of its capital and surplus in any one such limited partnership.

(11) Investments in or investments in interests in machinery, equipment, facilities, furnishings, fixtures or other tangible personal property used for, in or as part of or connected with any commercial, industrial, manufacturing, processing or financial, business activity or operation and which may be subject to contractual or other similar arrangements for the purchase, sale or use thereof. Investments in this clause shall not exceed fifteen per centum (15%) of such company's admitted assets.

(12) Derivative transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section under the conditions set forth in this section.

(i) General conditions:

(A) An insurer may use derivative instruments under this section to engage in hedging transactions and certain income generation transactions, as these terms may be further defined in regulations promulgated by the Insurance Commissioner.

(B) An insurer shall be able to demonstrate to the Insurance 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.

(ii) 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:

(A) 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 per centum (7.5%) of its admitted assets;

(B) the aggregate statement value of options, caps and floors written in hedging transactions does not exceed three per centum (3%) of its admitted assets; and

(C) the aggregate potential exposure of collars, swaps, forwards and futures used in hedging transactions does not exceed six and one-half per centum (6.5%) of its admitted assets.

(iii) Limitations on income generation transactions. An insurer may enter into the following types of income generation transactions only 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 ten per centum (10%) of its admitted assets:

(A) 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;

(B) 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;

(C) sales of covered puts on investments that the insurer is permitted to acquire under this section, 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 options sold; or

(D) 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.

(iv) Counterparty exposure. An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of clause (13).

(v) Additional transactions. Additional transactions may be approved involving the use of derivative instruments in excess of the limits of subclause (ii) or for other risk management purposes under regulations promulgated by the Insurance Commissioner, but replication transactions shall not be permitted for other than risk management purposes.

(vi) Definitions:

(A) “Call option” means an agreement giving a right to buy or receive an interest based on the actual or expected price, level, performance or value of one or more underlying interests.

(B) “Cap” means an agreement obligating a seller to make payments to a buyer, with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number, sometimes called the “strike rate” or “strike price.”

(C) “Collar” means an agreement to receive payments as the buyer of an option, cap or floor and to make payments as the seller of a different option, cap or floor.

(D) “Counterparty exposure amount” means:

(I) The net amount of credit risk attributable to a derivative instrument entered into with a business entity other than an over-the-counter derivative instrument. The amount of credit risk equals:

(a) the market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or

(b) zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer.

(II) If over-the-counter derivative instruments are entered into under a written master agreement that provides for netting of payments owed by the respective parties, and the domiciliary jurisdiction of the counterparty is either within the United States or, if not within the United States, within a foreign jurisdiction listed in the Purposes and Procedures of the Securities Valuation Office of the National Association of Insurance Commissioners as eligible for netting, the amount of credit risk shall be the greater of zero or the net sum of:

(a) the market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment to the insurer; and

(b) the market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment by the insurer to the business entity.

(III) For open transactions, market value shall be determined at the end of the most recent quarter of the insurer's fiscal year and shall be reduced by the market value of acceptable collateral held by the insurer or placed in escrow by one or both parties.

(E) “Covered” means that an insurer owns or can immediately acquire, through the exercise of options, warrants or conversion rights already owned, the underlying interest in order to fulfill or secure its obligations under a call option, cap or floor it has written, or has set aside under a custodial or escrow agreement cash or cash equivalents with a market value equal to the amount required to fulfill its obligations under a put option it has written, in an income generation transaction.

(F) “Derivative instrument” means an agreement, option, instrument or a series or combination of agreements, options or instruments:

(I) to make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or to make a cash settlement in lieu thereof; or

(II) that has a price, performance, value or cash flow based primarily upon the actual or expected price, level, performance, value or cash flow of one or more underlying interests.

(G) “Derivative transaction” means a transaction involving the use of one or more derivative instruments.

(H) “Floor” means an agreement obligating a seller to make payments to a buyer in which each payment is based on the amount that a predetermined number, sometimes called the “floor rate” or “floor price,” exceeds a reference price, level, performance or value of one or more underlying interests.

(I) “Forward” means an agreement, other than a future, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests.

(J) “Future” means an agreement, traded on a qualified exchange or qualified foreign exchange, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests.

(K) “Hedging transaction” means a derivative transaction that is entered into and maintained to reduce:

(I) the risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities that the insurer has acquired or incurred or anticipates acquiring or incurring; or

(II) the currency exchange rate risk or the degree of exposure as to assets or liabilities that an insurer has acquired or incurred or anticipates acquiring or incurring.

(L) “Income generation transaction” means a derivative transaction involving the writing of covered call options, covered put options, covered caps or covered floors that is intended to generate income or enhance return.

(M) “Investment subsidiary” means a subsidiary of an insurer engaged or organized to engage exclusively in the ownership and management of assets authorized as investments for the insurer if the subsidiary agrees to limit its investment in any asset so that its investment will not cause the amount of the total investment of the insurer to exceed any of the investment limitations or violate any other provision applicable to the insurer. As used in this definition, the total investment of the insurer shall include:

(I) direct investment by the insurer in an asset; and

(II) the insurer's proportionate share of an investment in an asset by an investment subsidiary of the insurer, which shall be calculated by multiplying the amount of the subsidiary's investment by the percentage of the insurer's ownership interest in the subsidiary.

(N) “Option” means an agreement giving a right to buy or receive, sell or deliver, enter into, extend or terminate or effect a cash settlement based on the actual or expected price, level, performance or value of one or more underlying interests.

(O) “Over-the-counter derivative instrument” means a derivative instrument entered into through a qualified exchange or qualified foreign exchange or cleared through a qualified clearinghouse.

(P) “Put option” means an agreement giving a right to sell or deliver an interest based on the actual or expected price, level, performance or value of one or more underlying interests.

(Q) “Replication transaction” means a derivative transaction that is intended to replicate the performance of one or more assets that an insurer is authorized to acquire under this article. A derivative transaction that is entered into as a hedging transaction shall not be considered a replication transaction.

(R) “Swap” means an agreement to exchange or to net payments at one or more times based on the actual or expected price, level, performance or value of one or more underlying interests.

(S) “Warrant” means an instrument that gives the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement. Warrants may be issued alone or in connection with the sale of other securities, for example, as part of a merger or recapitalization agreement, or to facilitate divestiture of the securities of another business entity.

(13) General three per centum (3%) diversification.

(i) Except as otherwise specified in this section, an insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under this section if, as a result of and after giving effect to the investment, the insurer would hold more than three per centum (3%) of its admitted assets in investments of all kinds issued, assumed, accepted, insured or guaranteed by a single person, or five per centum (5%) of its admitted assets in investment in the voting securities of a depository institution or any company that controls the institution.

(ii) The three per centum (3%) limitation under subclause (i) shall not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally recognized statistical rating organization.

(iii) Asset-backed securities shall not be subject to the limitations of subclause (i), but an insurer shall not acquire an asset-backed security if, as a result of an after giving effect to the investment, the aggregate amount of asset-backed securities secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity then held by the insurer would exceed three per centum (3%) of its admitted assets.

(14) Investment in properties and facilities for the exploration, development, production and distribution of energy-producing substances. Such investments may include ownership and control of such properties and facilities or interests therein, including royalty interests and production payments from such activities or investments in limited partnerships engaged in such activities. Investments under this clause shall not exceed five per centum (5%) of such company's admitted assets. The investments in activities producing royalty interests and production payments shall not exceed an additional ten per centum (10%) of such company's admitted assets. An additional one per centum (1%) of such company's assets may be invested in properties, facilities, royalty interests or production payments under this clause, provided that such properties and facilities are located in or operated principally in this Commonwealth.

(15) Lending of securities, repurchase agreements and reverse repurchase agreements:

(i) Definitions:

(A) “Lending of securities” means an investment, other than a repurchase agreement, whereby an agreement is entered into which transfers ownership rights and possession of securities to the borrower of such securities with the agreement providing for a return of ownership rights and possession of the securities to the lender at a specified date or upon demand.

(B) “Repurchase agreement” means a bilateral agreement whereby a company purchases securities with a related agreement that the seller will purchase or repurchase at a specified price the equivalent or similar securities within a specified period of time or on demand.

(C) “Reverse repurchase agreement” means a bilateral agreement whereby a company (i) sells securities with a related agreement to purchase or repurchase at a specified price the equivalent or similar securities within a specified period of time or upon demand or (ii) borrows funds and transfers securities to the lender with a related agreement that equivalent or similar securities will be returned to the company upon repayment of the loan within a specified period of time or on demand.

(ii) Lending of securities, repurchase agreements and reverse repurchase agreements transactions are authorized on the following conditions:

(A) The agreement for each transaction or the master agreement for a series of transactions shall be reduced to writing.

(B) Securities acquired by a company and owned subject to reacquisition pursuant to an outstanding repurchase agreement may not be sold pursuant to a reverse repurchase agreement nor lent pursuant to a lending of securities agreement. Consideration, or collateral, received from a reverse repurchase agreement or lending of securities agreement may be used to acquire securities which are equivalent or similar to the securities transferred pursuant to such repurchase agreement or lending of securities agreement; however, such acquired securities may not be sold pursuant to a reverse repurchase agreement nor lent pursuant to a lending of securities agreement.

(C) A company is limited to no more than five per centum (5%) of its admitted assets being subject to lending of securities, repurchase or reverse repurchase agreements transactions outstanding with any one business entity under this clause (15).

(D) A company may engage in lending its securities or repurchase or reverse repurchase agreements up to forty per centum (40%) of its admitted assets, provided that such transactions are fully collateralized.

(E) The Insurance Commissioner may promulgate reasonable rules and regulations for investments and transactions under this clause (15), to include, but not be limited to, rules and regulations which impose financial solvency standards, valuation standards and reporting requirements.

(16) Other loans and investments:

(i) Loans or investments not authorized by any of the clauses of this section to an amount not exceeding the aggregate of twenty per centum (20%) of such company's admitted assets. The twenty per centum (20%) limitation provided above shall be increased in the same amount that investments approved by the Insurance Commissioner are made in the following categories of investments provided that their principal operations or locations are located in this Commonwealth:

(A) Investments in venture capital limited partnerships or in new and young small businesses which are making an initial public offering of securities or utilizing a limited private placement.

(B) Investments in minority-owned and operated businesses domiciled in Pennsylvania as provided in the act of July 22, 1974 (P.L. 598, No. 206), known as the “Pennsylvania Minority Business Development Authority Act.”⁴

(D) Investments in housing for families and persons of low income or in housing in enterprise zones designated by the Department of Community Affairs.

(E) Investments in seed capital funds established pursuant to the provisions of the act of July 2, 1984 (P.L. 555, No. 111), known as the “Small Business Incubators Act.”⁶

(F) Investments in business development credit corporations established pursuant to the act of December 1, 1959 (P.L. 1647, No. 606), known as the “Business Development Credit Corporation Law.”⁷

(G) Investments in small business investment corporations and minority enterprise small business investment companies certified pursuant to applicable Federal laws. In no event may the percentage limitation under this subclause (i) exceed the aggregate of twenty-five per centum (25%).

(H) Investments in and direct management of or participation in private placement accounts, including investments by private and public employe pension funds, and investments in and direct management of or participation in long and intermediate loans to small and large corporations within Pennsylvania for purposes such as plant construction, equipment purchases and working capital.

(I) Investments in, and financial assistance to, Pennsylvania-based employe-owned enterprises, as defined and described by the Internal Revenue Code of 1954, including worker cooperatives, employe stock ownership plans and businesses in which a majority of the voting rights are held or controlled by employes or held in trust for and passed through to employes.

(J) Investments in, and financial assistance to, Pennsylvania-based employe-ownership groups, including corporations, labor unions or other entities formed by, or on behalf of, the current or former employes of an industrial or commercial firm or facility for the purpose of assuming ownership or control of the firm or facility and operating it as an employe-owned enterprise.

(K) Investments in construction loans to builders and developers of low-income to moderate-income housing in Pennsylvania involved in the new construction or rehabilitation of single-family or multi-family housing in census tracts or neighborhoods, in both urban and rural communities, designated by State or Federal law as economically deprived or financially underserved, and mortgage loans and other credit to individuals seeking to purchase this type of housing.

(ii) For each one-half per centum (.5%) of such company's admitted assets invested in categories (A) through (G) of subclause (i) of this clause whose principal operations or locations are located in this Commonwealth, investments under other clauses of this section may exceed the volume limitations set forth in such other clauses by an aggregate of two and one-half per centum (2.5%) of the company's admitted assets, but in no event may such excess investments exceed a maximum of five per centum (5%) of admitted assets; however, such excess investments shall be charged against the limitation established in subclause (i) of this clause.

(17) (i) Investments shall be valued in accordance with the published valuation standards of the National Association of Insurance Commissioners. Securities investments as to which the National Association of Insurance Commissioners has not published valuation standards in its valuation of securities manual or its successor publication shall be valued as follows:

(A) Any investment by any insurer that is not valued by Standards published by the National Association of Insurance Commissioners shall, at the time of acquisition, be submitted to the National Association of Insurance Commissioners for evaluation.

(B) Other securities investments shall be valued in accordance with regulations promulgated by the Insurance Commissioner pursuant to subclause (iv) of this clause.

(ii) Other investments, including real property, shall be valued in accordance with regulations promulgated by the Insurance Commissioner pursuant to subclause (iv) of this clause, but in no event shall such other investments be valued at more than their purchase price. Purchase price for real property includes capitalized permanent improvements, less depreciation spread evenly over the life of the property or, at the option of the company, less depreciation computed on any basis permitted under the Internal Revenue Code of 1954 (68A Stat. 3, 26 U.S.C. § 1 et seq.) and regulations thereunder. Such investments that have been affected by an impairment, other than a temporary decline, in value shall be valued at not more than their market value.

(iii) Any investment, including real property, not purchased by a company but acquired in satisfaction of a debt or otherwise, shall be valued in accordance with the accounting procedures and practices developed by the National Association of Insurance Commissioners as required by the law relating to the filing of annual financial statement blanks.

(iv) The Insurance Commissioner may promulgate rules and regulations for determining and calculating values to be used in financial statements submitted to the Insurance Department for investments not subject to published National Association of Insurance Commissioners' valuation standards.

Credits

1921, May 17, P.L. 682, No. 284, § 404.2, added 1986, June 11, P.L. 226, No. 64, § 4, imd. effective. Amended 1992, Dec. 18, P.L. 1519, No. 178, § 10, effective in 120 days; 1995, Dec. 21, P.L. 714, No. 79, § 1, effective in 60 days; 1996, Dec. 18, P.L. 1003, No. 154, § 1, effective in 60 days; 2004, Nov. 30, P.L. 1690, No. 216, § 3, imd. effective; 2010, July 9, P.L. 362, No. 51, § 2, imd. effective.

Footnotes

40 P.S. §§ 505.2, 506.1.

40 P.S. § 506.

40 P.S. § 1551 et seq.

73 P.S. § 390.1 et seq.

Now Department of Community and Economic Development; see 71 P.S. § 1709.301.

73 P.S. § 395.1 et seq.

15 P.S. § 2701 et seq. (repealed).

40 P.S. § 504.2, PA ST 40 P.S. § 504.2

Current through Act 11 of the 2024 Regular Session. Some statute sections may be more current, see credits for details.

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