CHAPTER 363

FORMERLY

SENATE SUBSTITUTE NO. 1 FOR SENATE BILL NO. 557

AN ACT TO AMEND CHAPTER 13 OF THE TITLE 18 OF THE DELAWARE CODE RELATING TO ELIGIBLE INVESTMENTS OF INSURANCE COMPANIES.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE:

Section 1. Amend paragraph (3) of Section 1305, Title 18, Delaware Code, by deleting such paragraph in its entirety and substituting in lieu thereof the following:

"(3) Stocks. A life insurer shall not: (i) invest in any stocks under §§1311 (common stocks), 1312(a) (insurance stocks), and 1314 (common trust funds, mutual funds) of this title if the cost thereof, when added to the aggregate cost of all such investments then held by such insurer, would exceed 125% of its policyholders' surplus (as defined in §5 11(a)(2) of this title), or hold at any one time investments under such sections having an aggregate market value exceeding 250% of such policyholders' surplus; and (ii) invest in any stocks under §1310 (preferred and guaranteed stocks) of this title if the cost thereof, when added to the aggregate cost of all such stocks then held by such insurer, would exceed 20% of its assets, or hold at any one time stoeks under such section having an aggregate market value exceeding 40% of its assets. This provision shall not apply to stock of any controlled or subsidiary corporation under §§1312(b) and 1313 of this title."

Section 2. Amend paragraph (4) of Section 1308, Title 18, Delaware Code, by deleting the parenthetica/ clause at the end of the last sentence of such paragraph and substituting in lieu thereof the following parenthetical clause:

"(other than deferred income taxes, deferred investment tax credits, capital stock and surplus)".

Section 3. Amend Section 1308, Title 18, Delaware Code, by adding a new paragraph (5) as follows:

"(5) Fixed Interest-bearing obligations, other than those described in paragraphs (1), (2) and (4) of this section, or noninterest-bearing obligations issued at a discount and repayable at a stated value on a specific maturity date, if either (a)(i) the net earnings of the issuing, assuming or guaranteeing institution available for its fixed charges during each of the 5 fiscal years next preceding the date of acquisition by such insurer shall have been not less than 125% of its fixed charges for such year, and (ii) the liquid assets of such institution as of the end of the fiscal year next preceding the date as of which determination thereof shall be made and as of the end of each of the 4 fiscal years next preceding such fiscal year shall have been not less than 95% of its liabilities (other than deferred income taxes, deferred investment tax credits, capital stock and surplus); or (b)(i) the net earnings of the issuing, assuming or guaranteeing institution available for its fixed charges for a period of 5 fiscal years next preceding the date of acquisition by such insurer shall have averaged per year not less than 115% of its average annual fixed charges applicable to such period and during each of any 4 fiscal years of such period such net earnings shall have been not less than 115% of its fixed charges for such year and during any fiscal year of such 5 year period such net earnings shall have been not less than 105% of its fixed charges for such year, and (ii) the liquid assets of such institution as of the end of the fiscal year next preceding the date as of which determination thereof shall he made and as of the end of each of the 4 fiscal years next preceding such fiscal year shall have been not less than 105% of its liabilities (other than deferred income taxes, deferred investment tax credits, capital stock and surplus)."

Section 4. Amend paragraph (3) of subsection (a) of Sectior 1309, Title 18, Delaware Code, by deleting such paragraph in its entirety and substituting in lieu thcreoi the following:

"(3) 'Net earnings available for fixed charges' means net income lifter deducting operating and maintenance expenses, taxes (other than federal, state and other income taxes), depreciation and depletion, but excluding extraordinary nonrecurring items of income or expense appearing in the regular financial statements of such institutions."

Section 5. Amend paragraph (5) of subsection (a) of Section 1309, Title 18, Delaware Code, by deleting such paragraph in its entirety and substituting in lieu thereof the following:

"(5) 'Liquid assets' and 'liabilities', as to the most recent fiscal year of an issuing, assuming or guaranteeing institution, shall be deterinined in reliance upon the latest regular financial statement of such institution prepared as of a date not more than 15 months prior to the date of acquisition of the obligations in question by an insurer kind, as to any prior fiscal year of such institution, shall be determined in reliance upon the regular financial statement of such institution as of the close of the applicable fiscal year. If net earnings are determined in reliance upon consolidated earnings statements of parent and subsidiary institutions, 'liquid assets' and 'liabilities' shall be determined in reliance upon consolidated financial statements of parent and subsidiary institutions after treating any minority stock interest in such subsidiary institutions as a liability."

Section 6. Amend paragraph (6) of subsection (a) of Section 1309, Title 18, Delaware Code, by deleting the number 10 as it appears therein and substituting in lieu thereof the number "12".

Section 7. Amend subsection (b) of Section 1309, Title 18, Delaware Code, by deleting the portion thereof that precedes the semicolon and substituting in lieu thereof the following:

"(b) If net earnings are determined in reliance upon consolidated earnings statements of parent and subsidiary institutions, such net earnings shall be determined after provision for income taxes of subsidiaries in which the parent institution owns directly or indirectly less than 80% of all classes of voting stock, and after proper allowance for minority stock interest if any;"

Section 8. Amend Section 1311, Title 18, Delaware Code, by deleting the first sentence of such section and substituting in lieu thereof the following:

"An insurer may invest In common stocks, other than insurance stocks, of any solvent institution organized and existing under the laws of the United States or Canada, or of any state or province thereof, if during a period of 7 fiscal years next preceding the date of acquisition by such insurer the institution had aggregate net earnings available for the payment of dividends upon its common stock of no less than the aggregate sum which would have been sufficient to pay dividends of 4% per annum upon the par value (or in the case of common stocks without par value, upon the stated capital) of all of its shares of common stock outstanding during such period."

Section 9. Amend subsection (a) and amend paragraph (1) of subsection (a) of Section 1323, Title 18, Delaware Code, by deleting such subsection and paragraph in their entirety and substituting in lieu thereof the following:

"(a) An insurer may invest in bonds, notes or other evidences of indebtedness secured by first or second mortgages or deeds of trust representing first or second Hens upon real estate, perpetual leases thereon or leasehold estates when the remaining term of such leasehold and enforceable renewals is not less than the term of such first or second lien, as the case may be, In the United States or Canada, subject to the following conditions:

(1) The amount loaned or the aggregate amount of bonds or other evidences of indebtedness issued upon the security of a mortgage or deed of trust (when added to the amount unpaid upon any prior first mortgage or deed of trust) shall not at the time of the investment exceed 75% of the fair market value of the real estate, as such value has been determined by a qualified appraiser for the purposes of the Investment or at the time of issuance of the bonds or other evidences of indebtedness."

Section 10. Amend subsection (a) of Section 1323, Title 18, Delaware Code, by adding thereto a new paragraph (5) as follows:

"(5) The total investments of any insurer permitted under this subsection 1323(a) in bonds, notes, or other evidences of indebtedness secured by second mortgages or deeds of trust and under subsection 1323(e) in participations evidencing participating interests in bonds, notes or other evidences of indebtedness which are so secured, shall not exceed 5% of its assets, and no such investment shall be made or acquired by an insurer if the mortgagor, without the approval of the insurer, may increase the principal amount of the indebtedness secured by the prior first mortgage except to the extent that the amount of such increase Is applied in reduction of the investment held by the insurer."

Section 11. Amend Section 1323, Title 18, Delaware Code, by adding thereto a new subsection (e) as follows:

"(e) A permissible investment under this §1323 shall include a participation (meaning an instrument evidencing a participating interest in a bond, note or other evidence or indebtedness secured by first or second mortgage or deed of trust) if the entire indebtedness would qualify for investment under the provisions of subsection 1323(a) and:

(1) The entire indebtedness secured by the same mortgage or deed of trust Is held by such insurer; or

(2) The insurer holds a senior participation giving It substantially the rights of a first or second mortgagee and a position of priority over the other holders of participations in such indebtedness; or

(3) If each participation is of equal rank, the aggregate amount of the insurer's investment under this paragraph (3) in all such participations does riot exceed 20% of its assets."

Section 12. Amend subsection (a) of Section 1303, Title 18, Delaware Code, by deleting the last sentence of such subsection in its entirety and substituting in lieu thereof the following:

"Nothing in this section shall prohibit an insurer from giving or receiving a participating interest in a bond, note or other evidence of indebtedness acquired by such insurer under 51323 of this title, or the acquisition by an insurer of warrants, options or similar rights to acquire securities if (i) the acquisition of such securities would then be permitted by the provisions of this chapter (other than §1320 of this title) or, (ii) such warrants, options or similar rights are acquired in connection with an investment otherwise permitted by this chapter."

Section 13. Amend paragraph 4 of Section 1305 Title 18, Delaware Code, by deleting such paragraph in its entirety and substituting in lieu thereof the following:

"(4) Mortgages. An insurer shall not at any one time have more than 50% of its assets invested in obligations under §1323 of this title, exclusive of that portion of such obligations guaranteed or insured by an agency of the United States government."

Section 14. Amend paragraph (7) of subsection (a) of Section 1324, Title 18, Delaware Code, by deleting the last sentence of such paragraph and substituting in lieu thereof the following:

"Real estate to be used primarily for agricultural, ranch, mining, development of oil and mineral resources, recreational, amusement, hotel, motel or club purposes shall in total not exceed 10% of an insurer's assets."

Section 15. Amend Section 1331, Title 18, Delaware Code, by deleting such section in its entirety and substituting in lieu thereof the following:

§1331. Secured obligations

An insurer may invest in obligations which are secured by (a) an assignment of a right to receive rental, charter hire, purchase or other payments for the use or purchase of real or personal property adequate to return the investment and payable or guaranteed by one or more governmental units or instrumentalities whose obligations would qualify for investment under 51306 (public obligations) or one or more institutions whose obligations would qualify for investment under subsections (2), (4) or (5) or S1308 (corporate obligations), and (b) a mortgage on or secured interest in such real or personal property. No insurer shall make an investment pursuant to this section in obligations, other than those of institutions, if the aggregate amount so invested will exceed 10% of its assets or if the aggregate amount so invested as to which such rental, charter hire, purchase or other payments are payable or guaranteed by any one governmental unit or instrumentality or any one institution will exceed 5% of such assets. No insurer shall make any investment pursuant to this 51331 in obligations of or in any affiliate (as defined in §5002(3))."

Section l6. Amend Chapter 13, Title 18, Delaware Code, by adding a new Section 1332 as follows:

"§1332. Production payments

Production payments, or interests therein evidenced by trust certificates or other instruments, payable from oil, gas or other hydrocarbons in producing properties located in the United States or Canada or the adjacent continental shelf If an obligation secured by and payable from such production payment or interest therein would qualify for investment under §1308(1) of this title as an obligation which is adequately secured and has investment qualities and characteristics wherein the speculative elements arc not predominant. The term 'production payments' shall be deemed to mean rights to oil, gas or other hydrocarbons in place or as produced which entitle the owner thereof to a specified fraction or percentage of production until a specified sum of money has been received. No insurer shall make an Investment pursuant to this section if the aggregate amount so invested will exceed 15% of its assets."

Section 17. Amend Section 1306 Title 18, Delaware Code, by adding the following language immediately preceding the words "If, by statutory or other legal requirements applicable thereto,';

"and in any such obligations issued, assumed or guaranteed by the federal government of Mexico,"

Section 18. Amend subsection (a) of Section 1321, Title 18, Delaware Code by deleting the portion thereof following the semicolon, Inserting a period in place of said semicolon, and adding the following sentence:

"Except as provided in the foregoing sentence and in subsection 1321(b), an insurer may not invest more than 5% of its assets in securities and Investments of or in foreign countries other than Canada; provided that In addition to investments otherwise authorized in the foregoing sentence and in subsection 1321(b), an insurer may invest in public obligations issued, assumed or guaranteed by the federal government of Mexico (as provided in 51306 of this title) in an aggregate amount not in excess of 10% of such insurer's assets..

Section 19. Amend Section 1302 of Title 18, Delaware Code, by adding a new subsection (e) thereto as follows:

"(e) An insurer shall not invest in (i) corporate obligations under §1308(5) of this title, (ii) bond:, notes or other evidences of indebtedness secured by second mortgages or deeds of trust under §1323(a) of this title, (iii) participations under §1323(e) of this title, (iv) secured oblig,ations of institutions under §1331 of this title, or (v) production payments under §1332 of this title, unless such insurer possesses unimpaired capital and surplus (contributed and unassigned) of not less than $7,500,000 (as shown by the insurer's annual statement as of the December 31 next preceding the date of acquisition), which amount shall be invested in investments permitted under this chapter other than those specified in this subsection or §1320 (miscellaneous investments).

Approved July 8, 1982.