Section 6.20. Investments of insurance companies.

 

(1)   Purpose. The purpose of this rule is to implement and interpret ch. 620 , Stats. , for the purpose of establishing procedures and requirements for investments of insurance companies.

(2)   Scope. This rule shall apply to all insurers subject to ch. 620 , Stats.

(3)   Definitions. As used in this rule:

(a) "Call option" means an option contract under which the holder of the option contract has the right, in accordance with the terms of the contract, to purchase, or to make a cash settlement in lieu thereof, the amount of the underlying financial instrument covered by the option contract.

(b) "Financial futures contract" means an exchange-traded agreement to make or take delivery, or to make cash settlement in lieu thereof, of a specified amount of financial instruments on or before a specified date or period of time, under terms and conditions regulated by the commodity futures trading commission.

(c) "Financial instrument" means a security, currency, or index of a group of securities or currencies.

(d) "Financial options contract" means options on a financial futures contract and any other option contract for a financial instrument which is traded on an exchange, board of trade, or an over-the-counter market regulated under the laws of the United States.

(e) "Fixed charges" includes interest on all debt, and amortization of debt discount.

(f) "Money market mutual fund" means a fund that meets the conditions of 17 Code of Federal Regulations Par. 270.2a-7, under the Investment Company Act of 1940 ( 15 USC 80a-1 et seq.), as amended or renumbered.

(g) "Net earnings available for fixed charges" means income after allowance for operating and maintenance expenses, depreciation and depletion, and taxes other than federal and state income taxes, but without allowance for extraordinary nonrecurring items of income or expense appearing in the regular financial statements of the issuing company. If the issuing company has acquired, prior to the date of investment, substantially all the assets of another company by purchase, merger, consolidation or otherwise, the net earnings available for fixed charges of the other company for the portion of the test period that preceded acquisition may be included in accordance with a consolidated earnings statement covering the period.

(h) "Net earnings available for fixed charges and dividends" shall be determined in the same manner as "net earnings available for fixed charges" but after allowance for federal and state income taxes.

(i) "Preferred dividend requirements" include dividends at the maximum prescribed rate on all stock ranking as to dividends on parity with or prior to that being acquired, whether or not the dividends are cumulative.

(j) "Put option" means an option contract under which the holder of the contract has the right, in accordance with the terms of the contract, to sell, or to make a cash settlement in lieu thereof, the amount of the underlying financial instrument covered by the put option contract.

(k) "Real estate" or "real property" includes leaseholds.

(L) "Repurchase transaction" means a transaction in which an insurer purchases securities from a business entity which is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period or upon demand.

(4)   General limitations on restricted insurers. No insurer restricted under s. 620.03 , Stats., may invest thereafter in any of the following classes of assets except by permission of the commissioner:

(a) Any securities of an issuer who has defaulted on any payment on any debt security within the previous 5 years;

(b) Any asset under s. 620.22 (9) , Stats., or

(c) Any financial futures contract or financial options contract.

(5)   Special limitations on restricted insurers other than town mutuals. An insurer which is restricted under s. 620.03 , Stats., and which is not a town mutual, shall not invest:

(a) Evidences of indebtedness. In evidences of indebtedness under s. 620.22 (1) , Stats., unless they are lawfully authorized and:

1. They are rated AAA, AA or A by Fitch Investors Service, Inc. or by Standard & Poor's Corporation, or Aaa, Aa or A by Moody's Investors Service, Inc.; or

2. They are evidences of indebtedness of a municipally owned public utility of this state created pursuant to section 3 of article XI of the constitution, and the net book value of the property pledged as security for the bonds has been established or approved by the public service commission and the total issue of the bonds does not exceed 50% of the net book value of such property; or

3. They are payable from revenues of a public utility or railroad owned by or held for the benefit of any governmental unit in the United States or Canada, if they are adequately secured by mortgage or lien on property or by specific pledge or revenues, and lawful authorizing resolutions or ordinance of the governing body of the unit require that during the life of the evidence of indebtedness the rates, fees, tolls or charges together with any other revenues pledged shall at all times produce revenues sufficient to pay all expenses of operation and maintenance, interest as promised and the principal sum when due; or

4. They are evidences of indebtedness of public utilities in the United States or Canada and are either adequately secured by mortgage, pledge or other collateral, or have had net earnings available for fixed charges that for the previous 3 fiscal years have averaged per year not less than 1 1/2 times the average annual fixed charges; or

5. They are evidences of indebtedness of a United States or Canadian private corporation, and they are either adequately secured by mortgage, pledge or other collateral, or are issued by a corporation which has had net earnings available for fixed charges that have averaged for the previous 5 years and equalled for each of the previous 2 years an annual amount which exceeded average annual fixed charges by at least 50%, or 25% in the case of corporations engaged primarily in wholesale or retail merchandising, installment, commercial and consumer financing, factoring or small loan business.

(b) Equipment securities. In equipment securities or in certificates of an equipment trust under sub. (8) (b) unless the obligor's net earnings have averaged at least 2 times its average annual fixed charges for the previous 3 years.

(c) Real estate loans. In real estate loans:

1. On the security of encumbered property, but property shall not be deemed encumbered because of unpaid but not delinquent assessments and taxes, mineral, oil or timber rights, easements for public highways, private roads, railroads, telegraph, telephone, electric light and power lines, drains, sewers or other similar easements, liens for service and maintenance of water rights when not delinquent, party wall agreements, building restrictions, or other restrictive covenants or conditions, with or without a reversionary clause, or leases under which rents or profits are reserved to the owner;

2. In excess of 2/3 of the fair market value, including buildings covered by the mortgage. If the value of buildings constitute part of the security, the buildings must be insured adequately to protect the insurer's security interest. The 2/3 limitation shall not apply to any loan fully insured by a federal insurance corporation; nor

3. On the security of a leasehold interest in real property unless it is unencumbered except by rentals owed to the owner of the fee, has at least 25 years yet to run, and then for no more than 50% of the fair market value of the leasehold less the present value of all rentals due upon it to the owner of the fee.

(d) Preferred shares. In preferred shares unless the issuing company has had, disregarding fixed charges on indebtedness and dividend requirements on preferred stock for the retirement of which provision has been made at the date of the investment, net earnings:

1. Available for fixed charges and dividends that during the previous 5 fiscal years have averaged not less than twice the sum of the fixed charges, maximum contingent interest and preferred dividend requirements of the issuing company; or

2. Available for fixed charges and dividends that for each of the previous 3 fiscal years have been not less than 1 1/2 times the sum of the fixed charges, maximum contingent interest and preferred dividend requirements of the issuing company; or

3. Available to meet preferred dividend requirements of the previous 5 years, after allowance for fixed charges and federal and state income taxes, that have averaged not less than 3 times the preferred dividend requirements.

(e) Common stock. In common stock except:

1. In accordance with a plan of acquisition proposed by the insurer and approved by the commissioner; and

2. In common stocks which are authorized securities for NASDAQ, the automated quotation system of the National Association of Securities Dealers.

(f) Real property. In any investment under s. 620.22 (4) or (5) , Stats., except with prior written approval of the commissioner.

(g) Limitations on amount of investment.

1. Except as permitted under subd. 2. , more than 3% of assets in securities of any single issuer unless it obtains the prior written permission of the commissioner or unless the investment is in securities of the government of the United States or its instrumentalities or in securities guaranteed by the full faith and credit of the United States; or

2. More than 10% of assets in the securities of one state, of one instrumentality of a state, or of one governmental unit of a state.

(6)   Town mutual insurance companies.

(a) Town mutual insurance companies authorized to operate under the provisions of ch. 612 , Stats. , are restricted insurers and are subject to the restrictions of ss. 612.36 and 620.03 (1) , Stats., sub. (4) and other applicable provisions of this section. The commissioner may grant exemptions under s. 620.03 (2) , Stats.

(b) Permitted investments. Except as permitted by pars. (c) , (d) and (e) a town mutual insurer may only invest in one or more of the following:

1. Treasury bonds, treasury notes, treasury bills or any other direct obligations of the United States Government or agencies or instrumentalities of the United States Government with a final maturity 15 years or less, except that no part of the amount determined under this paragraph shall be invested in zero coupon bonds or collateralized mortgage obligations;

2. Demand deposit, interest bearing accounts and certificates of deposit in financial institutions, including banks, savings and loan associations and credit unions, except that the amount of an insurer's investment with each such financial institution shall be limited to the total amount eligible for insurance under the financial institution's depositor insurance program;

3. Bonds of any United State or Canadian corporation that at the time of purchase have a "BBB" or better rating from Standard and Poor's Corporation or Moody's Investment Service or bonds rated "1" by the National Association of Insurance Commissioners Securities Valuation Office, except that no part of the amount determined under this paragraph shall be invested in zero coupon bonds, collateralized mortgage obligations, payment in kind bonds or bonds with a final maturity of more than 15 years;

4. Bonds of any United States municipality that at the time of purchase have a "BBB" or better rating from Standard and Poors Corporation or Moody's Investment Service or bonds rated "1" by the National Association of Insurance Commissioners Securities Valuation Office with a final maturity of 15 years or less, except that no amount shall be invested in zero coupon bonds;

5. No more than an aggregate of 10% of assets in preferred stock of any United States or Canadian corporation that at the time of purchase has a "BBB" or better rating from Standard and Poor's Corporation or Moody's Investment Service or preferred stock rated "1" by the National Association of Insurance Commissioners Securities Valuation Office; or

6. No more than an aggregate of 10% of assets in money market mutual funds.

(c) A town mutual insurer may invest in assets permitted under par. (d) only if on December 31 of the preceding year its assets invested in accordance with par. (b) are an amount at least equal to the sum of its liabilities plus the greater of:

1. 50% of the net written premiums and assessments for the 12-month period ending December 31;

2. 33% of the gross written premiums and assessments for the 12-month period ending December 31; or

3. $300,000.

(d) A town mutual insurer may invest assets in excess of the amount determined under par. (c) in one or more of the following:

1. Unrated bonds of a Wisconsin municipality or political subdivision not included in par. (b) . Any bonds purchased under this subdivision must be direct obligations of the municipality or political subdivision, and no investment shall be made in unrated industrial revenue or industrial development bonds. Such investments shall not exceed 3% of assets in any single issue or 10% of assets in a single issuer or its affiliates;

2. Bonds with a final maturity of more than 15 years that would otherwise be classified within par. (b) 1. , 3. or 4.

3. An aggregate of no more than 25% of the insurer's assets in one or more of the following:

a. Stock which is either common stock or preferred stock of a licensed insurance company domiciled in this state which reinsured town mutual insurers in this state at the time it converted from a mutual insurance corporation to a stock insurance corporation.

b. Common or preferred stock or convertible securities of any United States, Canadian or foreign corporation not included in par. (b) that are traded on a federally regulated securities exchange.

c. Any mutual fund that invests in common or preferred stock or convertible securities of any United States, Canadian or foreign corporation not included in par. (b) that has a minimum four-star rating from Morningstar Mutual Funds Inc. A town mutual insurer shall not exceed 10% of assets in any single family of mutual funds.

4. Any subsidiaries formed to provide services ancillary to the town mutual insurer's insurance operations. Subsidiaries are considered ancillary subsidiaries if they are engaged principally in insurance-related activities such as acting as an insurance agent or providing claims adjusting services. A town mutual insurer may invest in a subsidiary only with the prior written approval of the commissioner and the investment may not exceed the amount approved by the commissioner or 10% of assets, whichever is less.

5. Any mutual fund not included in par. (b) or this paragraph that has a minimum four-star rating from Morningstar Mutual Funds Inc. Total investment under this paragraph shall not exceed 10% of assets in any single family of mutual funds and 25% of assets in aggregate.

6. Real property needed for the convenient transaction of the insurer's business, provided that the insurer obtains the prior written approval of the commissioner.

7. Real estate loans on property meeting the requirements of sub. (5) (c) and investment in real estate partnerships. Any investment in real estate partnerships shall be with the prior approval of the commissioner.

8. Collateralized mortgage obligations or tranche bonds whose principal repayment is divided into multiple categories of preferential repayment classes, with final maturities of not more than 20 years for the entire mortgage obligation. Such investments shall not exceed 3% of assets in any single issue or 10% of assets in the aggregate.

9. Investments not otherwise permitted by this paragraph, and not specifically prohibited by statute or rule, to the extent of not more than 5% of the insurer's assets.

(e) Town mutual insurer reinsurer stock; grandfather provision. A town mutual insurer is not required to divest stock described in par. (d) 3. a. which is held by the town mutual insurer on December 31, 1995. Any such stock:

1. Is an authorized investment;

2. Is not an asset invested in accordance with par. (b) for the purpose of determining under par. (c) whether an investment is authorized under par. (d) ; and

3. Shall be included for the purpose of determining compliance with the aggregate limit under par. (d) 3. The town mutual insurer is required under par. (f) to divest itself of any other investments which otherwise qualify under par. (d) 3. until it is in compliance or until the only investment qualifying under par. (d) 3. is the stock held on December 31, 1995.

(f) Limitations on amount of investment. A town mutual insurer may not invest:

1. Except as permitted under subd. 2. , more than 3% of assets in securities of any single issuer unless it obtains the prior written permission of the commissioner or unless the investment is in securities of the government of the United States or its instrumentalities or in securities guaranteed by the full faith and credit of the United States; or

2. More than 10% of assets in the securities of one state, of one instrumentality of a state, or of one governmental unit of a state.

(g) Transition and divestment. Except as provided under par. (e) , a town mutual insurer shall divest any investment which does not meet the requirements of pars. (b) to (f) due to decline in the rating of a bond or mutual fund, the insurer's size, limitations on investments or any other reason, within three years of its noncompliance, unless otherwise permitted or required by the commissioner. In addition, the commissioner may permit a longer period for divestment by approving a plan for transition to compliance with this rule as adopted on the effective date of this rule (1996).

(h) Authorization of investments by the board of directors.

1. The board of directors of a town mutual shall adopt a written plan for acquiring and holding investments and for engaging in investment practices which specifies guidelines as to the quality, maturity, diversification of investments and other specifications including investment strategies intended to assure that the investments and investment practices are appropriate for the business conducted by the insurer, its liquidity needs and the amount of its surplus. The board shall review and assess the company's technical and administrative capabilities and expertise with regard to investments before adopting a written plan concerning any investment strategy or investment practice. The board shall give due consideration to all commissions and expenses associated with each investment, and the effect of such costs on anticipated returns and on liquidity.

2. All investments acquired and held under this section shall be acquired and held under the supervision and direction of the board of directors of the town mutual insurer. The town mutual insurer board of directors shall require that all investments be authorized or approved by the board or a committee of the board charged with the responsibility to supervise and direct its investments in accordance with delegations, standards, limitations, and investment objectives prescribed by the board.

3. For all mutual funds held by a town mutual insurer, the insurer shall maintain in its records the fund's prospectus and latest issued annual financial statement.

(7)   Bonds permissible. Bonds permissible under s. 620.22 (1) , Stats., include:

(a) Direct obligations of the United States or Canada, or of other governmental units therein;

(b) Obligations payable from and adequately secured by specifically pledged revenues of such governmental units or their instrumentalities, including corporations owned by or operated for such units; and

(c) Evidences of indebtedness of any solvent corporation of the United States or Canada.

(8)   Additional authorized investments. An insurer may, in addition to investments authorized by s. 620.22 (1) to (7) , Stats., invest its assets in the following classes of investments, up to the limits stated, and in the case of insurers that are subject to special restrictions under s. 620.03 , Stats., in accordance with any other rules made applicable to them:

(a) Mortgage bonds of farm loan banks authorized under the federal farm loan act, and debentures issued by the banks for cooperatives established pursuant to the farm credit act of 1933, as amended;

(b) Equipment securities or certificates of any equipment trust evidencing rights to receive partial payments agreed to be made upon any contract of leasing or conditional sale;

(c) The purchase and ownership of machinery or equipment, which is or will become subject to contracts for sale or use under which contractual payments may reasonably be expected to return the principal of and provide earnings on the investment within the anticipated useful life of the property which shall be not less than 5 years but the aggregate of such investments shall not exceed 3% of the insurer's assets;

(d) Loans upon the collateral security of any securities that the insurer could lawfully purchase, but not exceeding 90% of the market value of the securities up to an amount which, together with like securities owned, does not exceed the limits on the purchase of such securities;

(e) Evidences of indebtedness not otherwise authorized of the kind which if held by a bank would be eligible for discount, rediscount, purchase or sale by federal reserve banks or other government agencies having similar powers and functions but the aggregate of such investments shall not exceed 1% of the insurer's assets;

(f) Shares of savings and loan associations to the extent that they are insured or guaranteed by the United States government or any agency thereof;

(g) The cash surrender values of life insurance policies of companies authorized to do business in Wisconsin;

(h) For a company authorized to transact a credit insurance business, the claims and demands that it has guaranteed;

(i) For a company authorized to transact a title insurance business, materials and plant necessary for the convenient transaction of business — not exceeding 50% of minimum capital or 5% of assets, whichever is greater;

(j) Direct obligations of foreign governments but the aggregate of such investments shall not exceed 1% of the insurer's assets;

(k) Loans, securities or investments in countries other than the United States and Canada which are of substantially the same kinds, classes and investment grades as those eligible for investment under ch. 620 , Stats. , and supplementary rules, but the aggregate of such investments shall not exceed 2% of the insurer's assets;

(L) Direct obligations of the international bank for reconstruction and development, the inter-American development bank, the African development bank and the Asian development bank but the aggregate of such investments shall not exceed 2% of the insurer's assets;

(m) For an insurer doing business in a foreign country, the assets needed to meet its obligations in the foreign country in the kinds of securities within the foreign country that would be permissible investments if made in this state; and

(n) Shares of investment companies or investment trusts registered under the Federal Investment Company Act of 1940, 15 USC 80a-1 et seq., as amended — regarded as part of the common stock portfolio of the insurer; and

(o) Financial futures contracts and financial options contracts, provided that:

1. Such contracts shall be entered into to protect the investment portfolio of an insurer against the risk of changing asset values or interest rates, to enhance its liquidity, to aid in cash flow management, as a substitute for cash market transactions, and for any other purpose consistent with the investment objectives for the assets of insurers stated in s. 620.01 , Stats.;

2. The aggregate market value of all financial futures contracts outstanding may not exceed 10% of the insurer's admitted assets;

3. An insurer may purchase put options or sell call options only with regard to financial futures contracts or financial instruments owned by, or which may be obtained through exercise of warrants or conversion rights held by the insurer;

4. An insurer may purchase call options or sell put options on financial futures contracts or financial instruments only if the amount of the instrument which may be acquired upon exercise of the option, when aggregated with current holdings, would be an authorized investment under s. 620.22 (1) to (7) , Stats., or this subsection, and would not exceed the limitations specified in s. 620.23 , Stats., or this section;

5. The board of directors or its authorized committee shall first approve the insurer's plan relating to such investments, which plan must contain specific policy objectives and strategies, establish aggregate maximum limits in such investments and internal control procedures, and identify the duties, expertise and limits of authority of personnel authorized by the board of directors to engage in such transactions on behalf of the insurer; and

6. A copy of the insurer's plan shall be filed with the commissioner 30 days prior to its effective date. The commissioner may disapprove the plan within the 30-day period.

(9)   Changes in qualification of investments. Any investment originally made under s. 620.22 (9) , Stats., may thereafter be considered as falling within any other class of investment for which it subsequently qualifies.

(10)   Valuation.

(a) General. Security valuations contained in "Valuations of Securities", issued by the Committee on Valuation of Securities of the National Association of Insurance Commissioners, will be followed in implementing this chapter.

(b) Insurance policies. Insurance policies purchased under sub. (8) (g) will be valued at their cash surrender value.

(c) Claims and demands guaranteed by insurer. When an insurer authorized to sell credit insurance purchases, under sub. (8) (h) , claims and demands it has guaranteed, it shall value them at face value or at cost, whichever is less, and shall set up a separate and adequate "loss reserve for guaranteed claims purchased" in an amount satisfactory to the commissioner.

History: Cr. emerg. eff. 5-2-72; cr. Register, July, 1972, No. 199 , eff. 8-1-72; am. (5) (a) 1., Register, October, 1974, No. 226 , eff. 11-1-74; r. and recr. (5) (g), cr. (6) (c), Register, December, 1974, No. 228 , eff. 1-1-75; emerg. am. (6) (a), eff. 6-22-76, am. (6) (a), Register, September, 1976, No. 249 , eff. 10-1-76; am. (8) (intro.), (b), (c), (e), (j), (k) and (l), Register, August, 1981, No. 308 , eff. 9-1-81; reprinted to correct printing error in (8) (f), Register, March, 1983, No. 327 ; correction in (9) made under s. 13.93 (2m) (b) 7., Stats., Register, December, 1984, No. 348 ; renum. (3) (a) to (e) to be (3) (e) to (h) and (j), cr. (3) (a) to (d), (i), (4) (c) and (8) (o), am. (4) (a) and (b) and (8) (n), Register, April, 1987, No. 376 , eff. 5-1-87; am. (8) (l), Register, October, 1990, No. 418 , eff. 11-1-90; corrections in (4) (b) and (6) (b) 3. made under s. 13.93 (2m) (b) 5. and 7., Stats., Register, April, 1992, No. 436 ; renum. (3) (f) to (j) to be (3) (g) to (k), cr. (3) (f), (L), (6) (d) to (h), am. (5) (intro.), (6) (a), r. and recr. (5) (g), (6) (b), (c), Register, December, 1996, No. 492 , eff. 1-1-97.