215 ILCS 5/ Illinois Insurance Code.

(215 ILCS 5/Art. VIII Pt. 3 heading) 3. PROPERTY AND CASUALTY INSURERS

(215 ILCS 5/126.21)

Sec. 126.21. Applicability. This Part 3 shall apply to the investments and investment practices of property and casualty insurers authorized to transact the kinds of insurance in either or both Class 2 or Class 3 of Section 4 of this Code, subject to the provisions of Section 126.1B.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.22)

Sec. 126.22. Reserve requirements.

A. Reserve requirements.

(1) Subject to all other limitations and requirements of this Article, a property and casualty insurer shall maintain an amount at least equal to the lesser of $250,000,000 or 100% of adjusted loss reserves and loss adjustment expense reserves, 100% of adjusted unearned premium reserves and 100% of statutorily required policy and contract reserves in:

(a) Cash and cash equivalents;

(b) High and medium grade investments that qualify under Sections 126.24 or 126.25;

(c) Equity interests that qualify under Section 126.26 and that are traded on a qualified exchange;

(d) Investments of the type set forth in Section 126.30 if the investments are rated in the highest generic rating category by a nationally recognized statistical rating organization recognized by the SVO for rating foreign jurisdictions and if any foreign currency exposure is effectively hedged through the maturity date of the investments;

(e) Qualifying investments of the type set forth in subparagraphs (b), (c) or (d) of this paragraph that are acquired under Section 126.32;

(f) Interest and dividends receivable on qualifying investments of the type set forth in subparagraphs (a) through (e) of this subsection; or

(g) Reinsurance recoverable on paid losses.

(2) Reserve Requirement Amount:

(a) For purposes of determining the amount of assets to be maintained under this subsection, the calculation of adjusted loss reserves and loss adjustment expense reserves, adjusted unearned premium reserves and statutorily required policy and contract reserves shall be based on the amounts reported as of the most recent annual or quarterly statement date.

(b) Adjusted loss reserves and loss adjustment expense reserves shall be equal to the sum of the amounts derived from the following calculations:

(i) The result of each amount reported by the insurer as losses and loss adjustment expenses unpaid for each accident year for each individual line of business; multiplied by

(ii) The discount factor that is applicable to the line of business and accident year published by the Internal Revenue Service under Internal Revenue Code Section 846 (26 U.S.C. 846), as amended, for the calendar year that corresponds to the most recent annual statement of the insurer; minus

(iii) Accrued retrospective premiums discounted by an average discount factor. The discount factor shall be calculated by dividing the losses and loss adjustment expenses unpaid after discounting (the product of Items (i) and (ii) in this subparagraph) by loss and loss adjustment expense reserves before discounting Item (i) of this subparagraph.

(iv) For purposes of these calculations, the losses and loss adjustment expenses unpaid shall be determined net of anticipated salvage and subrogation, and gross of any discount for the time value of money or tabular discount.

(c) Adjusted unearned premium reserves shall be equal to the result of the following calculation:

(i) The amount reported by the insurer as unearned premium reserves; minus

(ii) The admitted asset amounts reported by the insurer as:

(I) Premiums in and agents' balances in the course of collection, accident and health premiums due and unpaid and uncollected premiums for accident and health premiums;

(II) Premiums, agents' balances and installments booked but deferred and not yet due;

(III) Bills receivable, taken for premium; and

(IV) Equities and deposits in pools and associations.

(d) Statutorily required policy and contract reserves shall also include contingency reserves required for mortgage guaranty insurers, municipal bond insurers, and other financial guaranty insurers.

B. Monitoring and reporting. A property and casualty insurer shall supplement its annual statement with a reconciliation and summary of its assets and reserve requirements as required in subsection A of this Section. A reconciliation and summary showing that an insurer's assets as required in subsection A of this Section are greater than or equal to its undiscounted reserves referred to in subsection A of this Section shall be sufficient to satisfy this requirement. Upon prior notification, the Director may require an insurer to submit such a reconciliation and summary with any quarterly statement filed during the calendar year.

C. Notification requirements and mandatory safeguards. If a property and casualty insurer's assets and reserves do not comply with subsection A of this Section, the insurer shall notify the Director immediately of the amount by which the reserve requirements exceed the annual statement value of the qualifying assets, explain why the deficiency exists and within 30 days of the date of the notice propose a plan of action to remedy the deficiency.

D. Authority of the Director.

(1) If the Director determines that an insurer is not in compliance with subsection A of this Section, the Director shall require the insurer to eliminate the condition causing the noncompliance within a specified time from the date the notice of the Director's requirement is mailed or delivered to the insurer.

(2) If an insurer fails to comply with the Director's requirement under paragraph (1) of this subsection, the insurer is deemed to be in hazardous financial condition, and the Director shall take one or more of the actions authorized by law as to insurers in hazardous financial condition.

E. An insurer subject to this Section must comply with the requirements of this Section after December 31, 1997.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.23)

Sec. 126.23. General 5% diversification, medium and lower grade investments, and Canadian investments.

A. General 5% diversification.

(1) Except as otherwise specified in this Article, an insurer shall not acquire directly or indirectly through an investment subsidiary an investment under this Article if, as a result of and after giving effect to the investment, the insurer would hold more than 5% of its admitted assets in investments of all kinds issued, assumed, accepted, guaranteed, or insured by a single person.

(2) This 5% limitation 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.

(3) Asset-backed securities shall not be subject to the limitations of paragraph (1) of this subsection, however, except as permitted by subsection A(4) of this Section, an insurer shall not acquire an asset-backed security if, as a result of and 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 5% of its admitted assets.

(4) A company's investments in mortgage related securities, as defined by the Secondary Mortgage Market Enhancement Act of 1984 (United States Public Law 98-440, 12 U.S.C. 24, 1451, 1454 et seq.), that are backed by any single pool of mortgages and made pursuant to the authority of that Act, shall not exceed 5% of its admitted assets.

B. Medium and lower grade investments.

(1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under Sections 126.24, 126.27, and 126.30 or counterparty exposure under Section 126.31D if, as a result of and after giving effect to the investment:

(a) The aggregate amount of all medium and lower grade investments then held by the insurer would exceed 20% of its admitted assets;

(b) The aggregate amount of lower grade investments then held by the insurer would exceed 10% of its admitted assets;

(c) The aggregate amount of investments rated 5 or 6 by the SVO then held by the insurer would exceed 5% of its admitted assets;

(d) The aggregate amount of investments rated 6 by the SVO then held by the insurer would exceed 1% of its admitted assets; or

(e) The aggregate amount of lower grade investments then held by the insurer that receive as cash income less than the equivalent yield for Treasury issues with a comparative average life, would exceed 1% of its admitted assets.

(2) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under Sections 126.24, 126.27, and 126.30 or counterparty exposure under Section 126.31D if, as a result of and after giving effect to the investment:

(a) The aggregate amount of medium and lower grade investments issued, assumed, accepted, guaranteed, or insured by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed 1% of its admitted assets; or

(b) The aggregate amount of lower grade investments issued, assumed, accepted, guaranteed, or insured by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed 0.5% of its admitted assets.

(3) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection, the insurer shall not thereby be precluded from acquiring investments in other rating categories subject to the specific and multi-category limits applicable to those investments.

C. Canadian investments.

(1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, any Canadian investments authorized by this Article, if as a result of and after giving effect to the investment, the aggregate amount of these investments then held by the insurer would exceed 40% of its admitted assets, or if the aggregate amount of Canadian investments not acquired under Section 126.24B then held by the insurer would exceed 25% of its admitted assets.

(2) However, as to an insurer that is authorized to do business in Canada or that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in Canada and denominated in Canadian currency, the limitations of paragraph (1) of this subsection shall be increased by the greater of:

(a) The amount the insurer is required by Canadian law to invest in Canada or to be denominated in Canadian currency; or

(b) 125% of the amount of its reserves and other obligations under contracts on risks resident or located in Canada.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.24)

Sec. 126.24. Rated credit instruments. Subject to the limitations of subsection F of this Section, an insurer may acquire rated credit instruments:

A. Subject to the limitations of Section 126.23B, but not to the limitations of Section 126.23A except for the limitation of subsection (4) of Section 126.23A, an insurer may acquire rated credit instruments issued, assumed, guaranteed, or insured by:

(1) The United States; or

(2) A government sponsored enterprise of the United States, if the instruments of the government sponsored enterprise are assumed, guaranteed, or insured by the United States or are otherwise backed or supported by the full faith and credit of the United States.

B. (1) Subject to the limitations of Section 126.23B, but not to the limitations of Section 126.23A, an insurer may acquire rated credit instruments issued, assumed, guaranteed, or insured by:

(a) Canada; or

(b) A government sponsored enterprise of Canada, if the instruments of the government sponsored enterprise are assumed, guaranteed, or insured by Canada or are otherwise backed or supported by the full faith and credit of Canada;

(2) However, an insurer shall not acquire an instrument under this subsection if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subsection would exceed 40% of its admitted assets.

C. (1) Subject to the limitations of Section 126.23B, but not to the limitations of Section 126.23A, an insurer may acquire rated credit instruments, excluding asset-backed securities:

(a) Issued by a government money market mutual fund, a class one money market mutual fund or a class one bond mutual fund;

(b) Issued, assumed, guaranteed, or insured by a government sponsored enterprise of the United States other than those eligible under subsection A of this Section;

(c) Issued, assumed, guaranteed, or insured by a state, if the instruments are general obligations of the state; or

(d) Issued by a multilateral development bank.

(2) However, an insurer shall not acquire an instrument of any one fund, any one enterprise or entity, or any one state under this subsection if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer in any one fund, enterprise, entity, or state under this subsection would exceed 10% of its admitted assets.

D. Subject to the limitations of Section 126.23, an insurer may acquire preferred stocks that are not foreign investments and that meet the requirements of rated credit instruments if, as a result of and after giving effect to the investment:

(1) The aggregate amount of preferred stocks then held by the insurer under this subsection does not exceed 33 1/3% of its admitted assets; and

(2) The aggregate amount of preferred stocks then held by the insurer under this subsection which are not sinking fund stocks or rated P1 or P2 by the SVO does not exceed 15% of its admitted assets.

E. Subject to the limitations of Section 126.23 in addition to those investments eligible under subsections A, B, C and D of this Section, an insurer may acquire rated credit instruments that are not foreign investments.

F. An insurer shall not acquire special rated credit instruments under this Section if, as a result of and after giving effect to the investment, the aggregate amount of special rated credit instruments then held by the insurer would exceed 5% of its admitted assets. The Director may, by rule, identify certain special rated credit instruments that are exempt from the limitation imposed by this subsection.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.25)

Sec. 126.25. Insurer investment pools.

A. An insurer may acquire investments in investment pools that:

(1) Invest only in:

(a) Obligations that are rated 1 or 2 by the SVO or have an equivalent of an SVO 1 or 2 rating (or, in the absence of a 1 or 2 rating or equivalent rating, the issuer has outstanding obligations with an SVO 1 or 2 or equivalent rating) by a nationally recognized statistical rating organization recognized by the SVO and have:

(i) A remaining maturity of 397 days or less or a put that entitles the holder to receive the principal amount of the obligation which put may be exercised through maturity at specified intervals not exceeding 397 days; or

(ii) A remaining maturity of 3 years or less and a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London InterBank Offered Rate (LIBOR) or commercial paper) and is subject to no maximum limit, if the obligations do not have an interest rate that varies inversely to market interest rate changes;

(b) Government money market mutual funds or class one money market mutual funds; or

(c) Securities lending, repurchase, and reverse repurchase, transactions that meet all the requirements of Section 126.29, except the quantitative limitations of Section 126.29D; or

(2) Invest only in investments which an insurer may acquire under this Article, if the insurer's proportionate interest in the amount invested in these investments when combined with amounts of such investments made directly or indirectly through an investment subsidiary or other insurer investment pool permitted under this subsection A(2) does not exceed the applicable limits of this Article for such investments.

B. For an investment in an investment pool to be qualified under this Article, the investment pool shall not:

(1) Acquire securities issued, assumed, guaranteed, or insured by the insurer or an affiliate of the insurer;

(2) Borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions that meet the requirements of Section 126.29 except the quantitative limitations of Section 126.29D; or

(3) Acquire an investment if, as a result of such transaction, the aggregate value of securities then loaned or sold to, purchased from or invested in any one business entity under this Section would exceed 10% of the total assets of the investment pool.

C. The limitations of Section 126.23A shall not apply to an insurer's investment in an investment pool, however an insurer shall not acquire an investment in an investment pool under this Section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this Section:

(1) In all investment pools investing in investments permitted under subsection A(2) of this Section would exceed 25% of its admitted assets; or

(2) In all investment pools would exceed 40% of its admitted assets.

D. For an investment in an investment pool to be qualified under this Article, the manager of the investment pool shall:

(1) Be organized under the laws of the United States or a state and designated as the pool manager in a pooling agreement;

(2) Be the insurer, an affiliated insurer or a business entity affiliated with the insurer, a qualified bank, a business entity registered under the Investment Advisers Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended or, in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-fact, or in the case of a United States branch of an alien insurer, its United States manager or an affiliate or subsidiary of its United States manager;

(3) Be responsible for the compilation and maintenance of detailed accounting records setting forth:

(a) The cash receipts and disbursements reflecting each participant's proportionate investment in the investment pool;

(b) A complete description of all underlying assets of the investment pool (including amount, interest rate, maturity date (if any) and other appropriate designations); and

(c) Other records which, on a daily basis, allow third parties to verify each participant's investment in the investment pool; and

(4) Maintain the assets of the investment pool in one or more accounts, in the name of or on behalf of the investment pool, under a custody agreement with a qualified bank. The custody agreement shall:

(a) State and recognize the claims and rights of each participant;

(b) Acknowledge that the underlying assets of the investment pool are held solely for the benefit of each participant in proportion to the aggregate amount of its investments in the investment pool; and

(c) Contain an agreement that the underlying assets of the investment pool shall not be commingled with the general assets of the custodian qualified bank or any other person.

E. The pooling agreement for each investment pool shall be in writing and shall provide that:

(1) An insurer and its affiliated insurers or, in the case of an investment pool investing solely in investments permitted under subsection A(1) of this Section, the insurer and its subsidiaries, affiliates or any pension or profit sharing plan of the insurer, its subsidiaries and affiliates or, in the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States manager, shall, at all times, hold 100% of the interests in the investment pool;

(2) The underlying assets of the investment pool shall not be commingled with the general assets of the pool manager or any other person;

(3) In proportion to the aggregate amount of each pool participant's interest in the investment pool:

(a) Each participant owns an undivided interest in the underlying assets of the investment pool; and

(b) The underlying assets of the investment pool are held solely for the benefit of each participant;

(4) A participant, or in the event of the participant's insolvency, bankruptcy or receivership, its trustee, receiver or other successor-in-interest, may withdraw all or any portion of its investment from the investment pool under the terms of the pooling agreement;

(5) Withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds shall occur within a reasonable and customary period thereafter not to exceed 10 business days. Distributions under this paragraph shall be calculated in each case net of all then applicable fees and expenses of the investment pool. The pooling agreement shall provide that the pool manager shall distribute to a participant, at the discretion of the pool manager:

(a) In cash, the then fair market value of the participant's pro rata share of each underlying asset of the investment pool;

(b) In kind, a pro rata share of each underlying asset; or

(c) In a combination of cash and in kind distributions, a pro rata share in each underlying asset; and

(6) The pool manager shall make the records of the investment pool available for inspection by the Director.

F. Except for the formation of the investment pool, transactions between a domestic insurer and an affiliated insurer investment pool shall not be subject to the requirements of Section 131.20a of this Code.

(Source: P.A. 100-201, eff. 8-18-17.)

(215 ILCS 5/126.26)

Sec. 126.26. Equity Interests.

A. Subject to the limitations of Section 126.23, an insurer may acquire directly, or indirectly through an investment subsidiary, equity interests in business entities organized under the laws of any domestic jurisdiction.

B. 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 aggregate amount of investments then held by the insurer under this Section would exceed the greater of 25% of its admitted assets or 100% of its surplus as regards policyholders.

C. An insurer shall not acquire under this Section any investments that the insurer may acquire under Section 126.28.

D. An insurer shall not short sell equity interests unless the insurer covers the short sale by owning the equity interest or an unrestricted right to the equity interest exercisable within 6 months of the short sale.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.27)

Sec. 126.27. Tangible personal property under lease.

A. (1) Subject to the limitations of Section 126.23, an insurer may acquire tangible personal property or equity interests therein located or used wholly or in part within a domestic jurisdiction either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 126.5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments.

(2) Investments acquired under paragraph (1) of this subsection shall be eligible only if:

(a) The property is subject to a lease or other agreement with a person whose rated credit instruments in the amount of the purchase price of the personal property the insurer could then acquire under Section 126.24; and

(b) The lease or other agreement provides the insurer the right to receive rental, purchase or other fixed payments for the use or purchase of the property, and the aggregate value of the payments, together with the estimated residual value of the property at the end of its useful life and the estimated tax benefits to the insurer resulting from ownership of the property, shall be adequate to return the cost of the insurer's investment in the property, plus a return deemed adequate by the insurer.

B. The insurer shall compute the amount of each investment under this Section on the basis of the out of pocket purchase price and applicable related expenses paid by the insurer for the investment, net of each borrowing made to finance the purchase price and expenses, to the extent the borrowing is without recourse to the insurer.

C. 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 aggregate amount of all investments then held by the insurer under this Section would exceed:

(1) 2% of its admitted assets; or

(2) 0.5% of its admitted assets as to any single item of tangible personal property.

D. For purposes of determining compliance with the limitations of Section 126.23, investments acquired by an insurer under this Section shall be aggregated with those acquired under Section 126.24, and each lessee of the property under a lease referred to in this Section shall be deemed the issuer of an obligation in the amount of the investment of the insurer in the property determined as provided in subsection B of this Section.

E. Nothing in this Section is applicable to tangible personal property lease arrangements between an insurer and its subsidiaries and affiliates under a cost sharing arrangement or agreement permitted under Section 131.20a(1)(a)(iv) of this Code.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.28)

Sec. 126.28. Mortgage loans and real estate.

A. Mortgage loans.

(1) Subject to the limitations of Section 126.23, an insurer may acquire, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 126.5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments, obligations secured by mortgages on real estate situated within a domestic jurisdiction, but a mortgage loan which is secured by other than a first lien shall not be acquired under this subsection (1) unless the insurer is the holder of the first lien. The obligations held by the insurer and any obligations with an equal lien priority, shall not, at the time of acquisition of the obligation, exceed:

(a) 90% of the fair market value of the real estate, if the mortgage loan is secured by a purchase money mortgage or like security received by the insurer upon disposition of the real estate;

(b) 80% of the fair market value of the real estate, if the mortgage loan requires immediate scheduled payment in periodic installments of principal and interest, has an amortization period of 30 years or less and periodic payments made no less frequently than annually. Each periodic payment shall be sufficient to assure that at all times the outstanding principal balance of the mortgage loan shall be not greater than the outstanding principal balance which would be outstanding under a mortgage loan with the same original principal balance, with the same interest rate and requiring equal payments of principal and interest with the same frequency over the same amortization period. Mortgage loans permitted under this subsection are permitted notwithstanding the fact that they provide for a payment of the principal balance prior to the end of the period of amortization of the loan. For residential mortgage loans, the 80% limitation may be increased to 97% if acceptable private mortgage insurance has been obtained; or

(c) 75% of the fair market value of the real estate for mortgage loans that do not meet the requirements of subparagraph (a) or (b) of this paragraph.

(2) For purposes of paragraph (1) of this subsection, the amount of an obligation required to be included in the calculation of the loan-to-value ratio may be reduced to the extent the obligation is insured by the Federal Housing Administration or guaranteed by the Administrator of Veterans Affairs, or their successors.

(3) Subject to the limitations of Section 126.23, an insurer may acquire, either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 126.5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments, obligations secured by a second mortgage on real estate situated within a domestic jurisdiction, other than as authorized in subsection (1) of this Section 126.28. The obligation held by the insurer shall be the sole second lien priority obligation and shall not, at the time of acquisition of the obligation, exceed 70% of the amount by which the fair market value of the real estate exceeds the amount outstanding under the first mortgage.

(4) A mortgage loan that is held by an insurer under Section 126.3F or acquired under this Section and is restructured in a manner that meets the requirements of a restructured mortgage loan in accordance with the NAIC Accounting Practices and Procedures Manual or successor publication shall continue to qualify as a mortgage loan under this Article.

(5) Subject to the limitations of Section 126.23, credit lease transactions that do not qualify for investment under Section 126.24 with the following characteristics shall be exempt from the provisions of paragraph (1) of this subsection:

(a) The loan amortizes over the initial fixed lease term at least in an amount sufficient so that the loan balance at the end of the lease term does not exceed the original appraised value of the real estate;

(b) The lease payments cover or exceed the total debt service over the life of the loan;

(c) A tenant or its affiliated entity, whose rated credit instruments have a SVO 1 or 2 designation or a comparable rating from a nationally recognized statistical rating organization recognized by the SVO, has a full faith and credit obligation to make the lease payments;

(d) The insurer holds or is the beneficial holder of a first lien mortgage on the real estate;

(e) The expenses of the real estate are passed through to the tenant, excluding exterior, structural, parking and heating, ventilation and air conditioning replacement expenses, unless annual escrow contributions, from cash flows derived from the lease payments, cover the expense shortfall; and

(f) There is a perfected assignment of the rents due pursuant to the lease to, or for the benefit of, the insurer.

B. Income producing real estate.

(1) An insurer may acquire, manage and dispose of real estate situated in a domestic jurisdiction either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 126.5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments. The real estate shall be income producing or intended for improvement or development for investment purposes under an existing program (in which case the real estate shall be deemed to be income producing).

(2) The real estate may be subject to mortgages, liens or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with subsections D(2) and D(3) of this Section.

C. Real estate for the accommodation of business.

An insurer may acquire, manage, and dispose of real estate for the convenient accommodation of the insurer's (which may include its affiliates) business operations, including home office, branch office and field office operations.

(1) Real estate acquired under this subsection may include excess space for rent to others, if the excess space, valued at its fair market value, would otherwise be a permitted investment under subsection B of this Section and is so qualified by the insurer;

(2) The real estate acquired under this subsection may be subject to one or more mortgages, liens or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with subsection D(4) of this Section; and

(3) For purposes of this subsection, business operations shall not include that portion of real estate used for the direct provision of health care services by an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively. An insurer may acquire real estate used for these purposes under subsection B of this Section.

D. Quantitative limitations.

(1) An insurer shall not acquire an investment under subsection A of this Section if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under subsection A of this Section would exceed:

(a) 1% of its admitted assets in mortgage loans covering any one secured location;

(b) 0.25% of its admitted assets in construction loans covering any one secured location; or

(c) 1% of its admitted assets in construction loans in the aggregate.

(2) An insurer shall not acquire an investment under subsection B of this Section if, as a result of and after giving effect to the investment and any outstanding guarantees made by the insurer in connection with the investment, the aggregate amount of investments then held by the insurer under subsection B of this Section plus the guarantees then outstanding would exceed:

(a) 1% of its admitted assets in any one parcel or group of contiguous parcels of real estate, except that this limitation shall not apply to that portion of real estate used for the direct provision of health care services by an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively, such as hospitals, medical clinics, medical professional buildings or other health facilities used for the purpose of providing health services; or

(b) The lesser of 10% of its admitted assets or 40% of its surplus as regards policyholders in the aggregate, except for an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least 95% of total premium considerations or total statutory required reserves, respectively, this limitation shall be increased to 15% of its admitted assets in the aggregate.

(3) An insurer shall not acquire an investment under subsection A or B of this Section if, as a result of and after giving effect to the investment and any guarantees it has made in connection with the investment, the aggregate amount of all investments then held by the insurer under subsections A and B of this Section plus the guarantees then outstanding would exceed 25% of its admitted assets.

(4) The limitations of Section 126.23 shall not apply to an insurer's acquisition of real estate under subsection C of this Section. An insurer shall not acquire real estate under subsection C of this Section if, as a result of and after giving effect to the acquisition, the aggregate amount of all real estate then held by the insurer under subsection C of this Section would exceed 10% of its admitted assets. With the permission of the Director, additional amounts of real estate may be acquired under subsection C of this Section.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.29)

Sec. 126.29. Securities lending and repurchase, reverse repurchase, and dollar roll transactions. An insurer may enter into securities lending, repurchase, reverse repurchase, and dollar roll transactions with business entities, subject to the following requirements:

A. The insurer's board of directors shall adopt a written plan that is consistent with the requirements of the written plan in Section 126.4A that specifies guidelines and objectives to be followed, such as:

(1) A description of how cash received will be invested or used for general corporate purposes of the insurer;

(2) Operational procedures to manage interest rate risk, counterparty default risk, the conditions under which proceeds from reverse repurchase transactions may be used in the ordinary course of business and the use of acceptable collateral in a manner that reflects the liquidity needs of the transaction; and

(3) The extent to which the insurer may engage in these transactions.

B. The insurer shall enter into a written agreement for all transactions authorized in this Section other than dollar roll transactions. The written agreement shall require that each transaction terminate no more than one year from its inception or upon the earlier demand of the insurer. The agreement shall be with the business entity counterparty, but for securities lending transactions, the agreement may be with an agent acting on behalf of the insurer, if the agent is a qualified business entity, and if the agreement:

(1) Requires the agent to enter into separate agreements with each counterparty that are consistent with the requirements of this Section; and

(2) Prohibits securities lending transactions pursuant to the agreement with the agent or its affiliates.

C. Cash received in a transaction under this Section shall be invested in accordance with this Article and in a manner that recognizes the liquidity needs of the transaction or used by the insurer for its general corporate purposes. For so long as the transaction remains outstanding, the insurer, its agent or custodian shall maintain, as to acceptable collateral received in a transaction under this Section, either physically or through the book entry systems of the Federal Reserve, Depository Trust Company, Participants Trust Company or other securities depositories approved by the Director:

(1) Possession of the acceptable collateral;

(2) A perfected security interest in the acceptable collateral; or

(3) In the case of a jurisdiction outside of the United States, title to, or rights of a secured creditor to, the acceptable collateral.

D. The limitations of Sections 126.23 and 126.30 shall not apply to the business entity counterparty exposure created by transactions under this Section. For purposes of calculations made to determine compliance with this subsection, no effect will be given to the insurer's future obligation to resell securities, in the case of a repurchase transaction, or to repurchase securities, in the case of a reverse repurchase transaction. An insurer shall not enter into a transaction under this Section if, as a result of and after giving effect to the transaction:

(1) The aggregate amount of securities then loaned or sold to, or purchased from, any one business entity counterparty under this Section would exceed 5% of its admitted assets. In calculating the amount sold to or purchased from a business entity counterparty under repurchase or reverse repurchase transactions, effect may be given to netting provisions under a master written agreement; or

(2) The aggregate amount of all securities then loaned, sold to or purchased from all business entities under this Section would exceed 40% of its admitted assets but the limitation of this subsection shall not apply to reverse repurchase transactions for so long as the borrowing is used to meet operational liquidity requirements resulting from an officially declared catastrophe and subject to a plan approved by the Director.

E. In a dollar roll transaction, the insurer shall receive cash in an amount at least equal to the market value of the securities transferred by the insurer in the transaction as of the transaction date.

F. The Director may promulgate reasonable rules for investments and transactions under this Section including, but not limited to, rules which impose financial solvency standards, valuation standards, and reporting requirements.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.30)

Sec. 126.30. Foreign investments and foreign currency exposure.

A. Subject to the limitations of Section 126.23, an insurer may acquire directly or indirectly through an investment subsidiary, foreign investments, or engage in investment practices with persons of or in foreign jurisdictions, of substantially the same types as those that an insurer is permitted to acquire under this Article, other than of the type permitted under Section 126.25, if, as a result and after giving effect to the investment:

(1) the aggregate amount of foreign investments then held by the insurer under this subsection does not exceed 20% of its admitted assets; and

(2) the aggregate amount of foreign investments then held by the insurer under this subsection in a single foreign jurisdiction does not exceed 10% of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or 5% of its admitted assets as to any other foreign jurisdiction.

B. Subject to the limitations of Section 126.23, an insurer may acquire investments, or engage in investment practices denominated in foreign currencies, whether or not they are foreign investments acquired under subsection A of this Section, or additional foreign currency exposure as a result of the termination or expiration of a hedging transaction with respect to investments denominated in a foreign currency, if, as a result of and after giving effect to the transaction:

(1) the aggregate amount of investments then held by the insurer under this subsection denominated in foreign currencies does not exceed 15% of its admitted assets; and

(2) the aggregate amount of investments then held by the insurer under this subsection denominated in the foreign currency of a single foreign jurisdiction does not exceed 10% of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or 5% of its admitted assets as to any other foreign jurisdiction.

However, an investment shall not be considered denominated in a foreign currency if the acquiring insurer enters into one or more contracts in transactions permitted under Section 126.31 in which the business entity counterparty agrees to exchange, or grants to the insurer the option to exchange, all payments made on the foreign currency denominated investment (or amounts equivalent to the payments that are or will be due to the insurer in accordance with the terms of such investment) for United States currency during the period the contract or contracts are in effect to insulate the insurer against loss caused by diminution of the value of payments owed to the insurer due to future changes in currency exchange rates.

C. In addition to investments permitted under subsections A and B of this Section, an insurer that is authorized to do business in a foreign jurisdiction, and that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction, may acquire foreign investments respecting that foreign jurisdiction, and may acquire investments denominated in the currency of that jurisdiction, subject to the limitations of Section 126.23. However, investments made under this subsection in obligations of foreign governments, their political subdivisions and government sponsored enterprises shall not be subject to the limitations of Section 126.23 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection shall not exceed the greater of:

(1) the amount the insurer is required by law to invest in the foreign jurisdiction; or

(2) 125% of the amount of its reserves, net of reinsurance, and other obligations under the contracts.

D. In addition to investments permitted under subsections A and B of this Section, an insurer that is not authorized to do business in a foreign jurisdiction but which has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in a foreign jurisdiction and denominated in foreign currency of that jurisdiction, may acquire foreign investments respecting that foreign jurisdiction, and may acquire investments denominated in the currency of that jurisdiction subject to the limitations set forth of Section 126.24. However, investments made under this subsection in obligations of foreign governments, their political subdivisions and government sponsored enterprises shall not be subject to the limitations of Section 126.23 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection shall not exceed 105% of the amount of its reserves, net of reinsurance, and other obligations under the contracts on risks resident or located in the foreign jurisdiction.

E. Investments acquired under this Section shall be aggregated with investments of the same types made under all other Sections of this Article, and in a similar manner, for purposes of determining compliance with the limitations, if any, contained in the other Sections. Investments in obligations of foreign governments, their political subdivisions and government sponsored enterprises of these persons, except for those exempted under subsections C and D of this Section, shall be subject to the limitations of Section 126.23.

(Source: P.A. 90-418, eff. 8-15-97; 91-357, eff. 7-29-99.)

(215 ILCS 5/126.31)

Sec. 126.31. Derivative transactions. An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this Section under the following conditions:

A. General conditions.

(1) An insurer may use derivative instruments under this Section to engage in hedging transactions and income generation transactions.

(2) An insurer may use derivative instruments for replication transactions only after the Director promulgates reasonable rules that set forth methods of disclosure, reserving for risk-based capital, and determining the asset valuation reserve for these investments. Any asset being replicated is subject to all the provisions and limitations on the making thereof specified in this Article with respect to investments by the insurer as if the transaction constituted a direct investment by the insurer in the replicated asset.

(3) With respect to all hedging transactions, an insurer shall be able to demonstrate to the Director the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of transactions through cash flow testing or other appropriate analyses.

(4) The Director may promulgate reasonable rules for investments and transactions under this Section including, but not limited to, rules which impose financial solvency standards, valuation standards, and reporting requirements.

B. 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:

(1) The aggregate statement value of options, caps, floors and warrants not attached to another financial instrument purchased and used in hedging transactions then engaged in by the insurer does not exceed 7.5% of its admitted assets;

(2) The aggregate statement value of options, caps and floors written in hedging transactions then engaged in by the insurer does not exceed 3% of its admitted assets; and

(3) The aggregate potential exposure of collars, swaps, forwards and futures used in hedging transactions then engaged in by the insurer does not exceed 6.5% of its admitted assets.

C. Limitations on income generation transactions. An insurer may enter into the following types of income generation transactions subject to the quantitative limits of subsection C(4):

(1) 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;

(2) 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; or

(3) Sales of covered puts on investments that the insurer is permitted to acquire under this Article, 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 option sold.

(4) 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 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 10% of its admitted assets.

D. Counterparty exposure. An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of Section 126.23.

E. Additional transactions. Pursuant to rules promulgated under Section 126.8, the Director may approve additional transactions involving the use of derivative instruments in excess of the limits of subsection B of this Section or for other risk management purposes.

(Source: P.A. 90-418, eff. 8-15-97.)

(215 ILCS 5/126.32)

Sec. 126.32. Additional investment authority.

A. Under this Section, an insurer may acquire investments or engage in investment practices of any kind that are not specifically prohibited by Section 126.5 and are not derivative instruments without regard to any limitation in Sections 126.23 through 126.30, but an insurer shall not acquire an investment or engage in an investment practice under this Section if, as a result of and after giving effect to the transaction, the aggregate amount of the investments then held by the insurer under this Section would exceed the greater of:

(1) Its unrestricted surplus; or

(2) The lesser of:

(a) 10% of its admitted assets; or

(b) 50% of its surplus as regards policyholders.

B. An insurer shall not acquire any investment or engage in any investment practice under subsection A(2) of this Section if, as a result of and after giving effect to the transaction the aggregate amount of all investments in any one person then held by the insurer under that subsection would exceed 5% of its admitted assets.

(Source: P.A. 90-418, eff. 8-15-97.)