Sections 44-5101 to 44-5154 shall be known and may be cited as the Insurers Investment Act.

The purpose of the Insurers Investment Act is to protect and further the interests of policyholders, claimants, creditors, and the general public by establishing standards, requirements, and limitations for the investments of insurers doing business in this state. Such standards, requirements, and limitations are intended to promote solvency, investment yield and growth, investment diversification, investment value stability, and liquidity to meet business needs.

For purposes of the Insurers Investment Act:

(1) Admitted assets means the investments authorized under the act and stated at values at which they are permitted to be reported in the insurer's financial statement filed under section 44-322, except that admitted assets does not include assets of separate accounts, the investments of which are not subject to the act;

(2) Agent means a national bank, state bank, trust company, or broker-dealer that maintains an account in its name in a clearing corporation or that is a member of the Federal Reserve System and through which a custodian participates in a clearing corporation including the Treasury/Reserve Automated Debt Entry Securities System and Treasury Direct system, except that with respect to securities issued by institutions organized or existing under the laws of a foreign country or securities used to meet deposit requirements pursuant to the laws of a foreign country as a condition of doing business therein, agent may include a corporation that is organized or existing under the laws of a foreign country and that is legally qualified under those laws to accept custody of securities;

(3) Business entity means a sole proprietorship, corporation, limited liability company, association, partnership, limited liability partnership, joint-stock company, joint venture, mutual fund, trust, joint tenancy, or other similar form of business organization, whether organized for profit or not for profit;

(4) Clearing corporation means a clearing corporation as defined in subdivision (a)(5) of section 8-102, Uniform Commercial Code, that is organized for the purpose of effecting transactions in securities by computerized book-entry, except that with respect to securities issued by institutions organized or existing under the laws of a foreign country or securities used to meet the deposit requirements pursuant to the laws of a foreign country as a condition of doing business therein, clearing corporation may include a corporation that is organized or existing under the laws of a foreign country and which is legally qualified under those laws to effect transactions in securities by computerized book-entry. Clearing corporation also includes Treasury/Reserve Automated Debt Entry Securities System and Treasury Direct system;

(5) Custodian means:

(a) A national bank, state bank, Federal Home Loan Bank, or trust company that shall at all times during which it acts as a custodian pursuant to the Insurers Investment Act be no less than adequately capitalized as determined by the standards adopted by the regulator charged with establishing such standards and assessing the solvency of such institutions and that is regulated by federal or state banking laws or the Federal Home Loan Bank Act or is a member of the Federal Reserve System and that is legally qualified to accept custody of securities in accordance with the standards set forth below, except that with respect to securities issued by institutions organized or existing under the laws of a foreign country, or securities used to meet the deposit requirements pursuant to the laws of a foreign country as a condition of doing business therein, custodian may include a bank or trust company incorporated or organized under the laws of a country other than the United States that is regulated as such by that country's government or an agency thereof that shall at all times during which it acts as a custodian pursuant to the Insurers Investment Act be no less than adequately capitalized as determined by the standards adopted by international banking authorities and that is legally qualified to accept custody of securities; or

(b) A broker-dealer that shall be registered with and subject to jurisdiction of the Securities and Exchange Commission, maintains membership in the Securities Investor Protection Corporation, and has a tangible net worth equal to or greater than two hundred fifty million dollars;

(6) Custodied securities means securities held by the custodian or its agent or in a clearing corporation, including the Treasury/Reserve Automated Debt Entry Securities System and Treasury Direct system;

(7) Direct when used in connection with the term obligation means that the designated obligor is primarily liable on the instrument representing the obligation;

(8) Director means the Director of Insurance;

(9) Insurer is defined as provided in section 44-103, and unless the context otherwise requires, insurer means domestic insurer;

(10) Mortgage means a consensual interest created by a real estate mortgage, a trust deed on real estate, or a similar instrument;

(11) Obligation means a bond, debenture, note, or other evidence of indebtedness or a participation, certificate, or other evidence of an interest in any of the foregoing;

(12) Policyholders surplus means the amount obtained by subtracting from the admitted assets (a) actual liabilities and (b) any and all reserves which by law must be maintained. In the case of a stock insurer, the policyholders surplus also includes the paid-up and issued capital stock;

(13) Primary credit source means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a claim for full payment;

(14) Securities Valuation Office means the Securities Valuation Office of the National Association of Insurance Commissioners or any successor office established by the National Association of Insurance Commissioners;

(15) Security certificate has the same meaning as defined in subdivision (a)(16) of section 8-102, Uniform Commercial Code;

(16) State means any state of the United States, the District of Columbia, or any territory organized by Congress;

(17) Tangible net worth means shareholders equity, less intangible assets, as reported in the broker-dealer's most recent Annual or Transition Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934, S.E.C. Form 10-K, filed with the Securities and Exchange Commission; and

(18) Treasury/Reserve Automated Debt Entry Securities System and Treasury Direct system mean the book-entry securities systems established pursuant to 5 U.S.C. 301, 12 U.S.C. 391, and 31 U.S.C. 3101 et seq. The operation of the systems are subject to 31 C.F.R. part 357 et seq.

(1) A domestic insurer holding a certificate of authority to do business in this state shall be subject to the Insurers Investment Act. Except as otherwise provided by law, only investments determined to be authorized investments under the act shall be considered admitted assets for purposes of a domestic insurer's financial statements filed with the director pursuant to section 44-322.

(2) A foreign or alien insurer holding a certificate of authority to do business in this state shall not be subject to the act unless the director notifies such insurer that any of its investments will not be recognized by him or her as an authorized investment for purposes of the act.

(1) An insurer shall not make any investment, sale, loan, or exchange, except loans on its own policies or contracts, unless authorized, approved, or ratified by a majority of the members of the board of directors or by a committee of its members charged by the board of directors or bylaws with the duty of making such investment, sale, loan, or exchange. The board of directors shall further determine by formal resolution at least annually whether all investments have been made in accordance with the delegations, standards, limitations, and investment objectives prescribed by the board of directors or a committee of the board of directors charged with the responsibility to direct its investments.

(2) The board of directors, after reviewing and assessing the insurer's technical investment and administrative capabilities and expertise, shall adopt a written plan for making investments and for engaging in investment practices. The plan shall specify, unless otherwise authorized by the Director of Insurance, the quality, maturity, and diversification of investments, 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 its capital and surplus. At least annually, the board of directors or a committee of the board of directors shall review and revise, as appropriate, the written plan.

(3) On no less than a quarterly basis, and more often if deemed appropriate, the board of directors or committee of the board of directors shall receive and review a summary report on the insurer's investment portfolio, investment activities, and investment practices engaged in under delegated authority, in order to determine whether the investment activity of the insurer is consistent with its written plan.

(4) The board of directors shall require that records of authorizations, approvals or other documentation as the board of directors may require, and reports of any action taken under authority delegated under the written plan shall be made available on a regular basis to the board of directors.

(5) The board of directors shall perform its duties in good faith and with that degree of care that ordinarily prudent individuals in like positions would use under similar circumstances.

(6) Each insurer shall maintain a record of its investments in a form and manner as prescribed by the Director of Insurance. Such record shall include an indication by the insurer of the provision of law under which an investment is held.

(7) For purposes of this section, board of directors includes the governing body of an insurer having authority equivalent to that of a board of directors.

An insurer may make loans on any of its policies in an amount not exceeding the reserve thereon.

A life insurer may allocate amounts to separate accounts established pursuant to sections 44-402.01 to 44-402.05.

An insurer may invest in securities which are convertible into other securities if:

(1) The convertible securities are authorized under the Insurers Investment Act at the time of acquisition; and

(2) The securities into which such securities are convertible are authorized under the act at the time of conversion.

An insurer's investments shall be held in its own name or the name of its nominee, except that:

(1) Investments may be held in the name of a clearing corporation, a custodian, or the nominee of either on the following conditions:

(a) The clearing corporation, custodian, or nominee shall be legally authorized to hold the particular investment for the account of others;

(b) Security certificates held by the custodian shall be held separate from the security certificates of the custodian and of all its other customers; and

(c) Securities held indirectly by the custodian and securities in a clearing corporation shall be separately identified on the custodian's official records as being owned by the insurer. The records shall identify which securities are held by the custodian or by its agent and which securities are in a clearing corporation. If the securities are in a clearing corporation, the records shall also identify where the securities are and if in a clearing corporation, the name of the clearing corporation, and if through an agent, the name of the agent; and

(2) An insurer may participate through a member bank in the Federal Reserve book-entry system. The records of the member bank shall at all times show that the investments are held for the insurer or for specific accounts of the insurer.

(1) An insurer may invest in an individual interest of a pool of obligations or a fractional interest of a single obligation if:

(a) The certificate of participation or interest or the confirmation of participation or interest in the investment is issued in the name of the insurer, a custodian bank, or the nominee of either; and

(b) The certificate or confirmation, if held by a custodian bank, is kept separate and apart from the investment of others so that at all times the participation or interest may be identified as belonging solely to the insurer making the investment.

(2) If an investment is not evidenced by a certificate, adequate evidence of the insurer's investment shall be obtained from the issuer or its transfer or recording agent and retained by the insurer, custodian bank, or clearing corporation except as provided in subdivision (2) of section 44-5109. For purposes of this subsection, adequate evidence shall mean a written receipt or other verification issued by the depository, issuer, or custodian bank which shows that the investment is held for the insurer. Transfers of ownership or investments held as described in subdivisions (1)(c) and (2) of section 44-5109 and this section may be evidenced by a bookkeeping entry on the books of the issuer of the investment, its transfer or recording agent, or the clearing corporation without physical delivery of certificates, if any, evidencing the insurer's investment.

(3) Any investment made pursuant to this section shall also conform with the following:

(a) The investment in which the interest is purchased shall be authorized under the Insurers Investment Act; and

(b) The insurer's pro rata interest in the investment shall be in the same percentage as the par amount of its interest bears to the outstanding par amount of the investment at the time of purchase.

(4) An investment may be authorized under this section although its interest does not include the right to exercise the investor's rights or enforce the investor's remedies according to the provisions of the issue.

(5) Any investment made pursuant to this section shall be purchased pursuant to a written participation agreement.

Any investment limitation in the Insurers Investment Act based upon the amount of the insurer's admitted assets or policyholders surplus shall relate to admitted assets or policyholders surplus as shown by the most recent financial statement filed by the insurer pursuant to section 44-322 unless the insurer's admitted assets or policyholders surplus is revised as a result of an examination conducted pursuant to the Insurers Examination Act, in which case the results of the examination shall control. Except as otherwise provided by law, an investment shall be measured by the lesser of actual cost or admitted value at the time of acquisition. If there is no actual cost at the time of acquisition, the investment shall be measured at the lesser of fair value or admitted value.

For purposes of this section, actual cost means the total amount invested, expended, or which should be reasonably anticipated to be invested or expended in the acquisition or organization of any investment, insurer, or subsidiary, including all organizational expenses or contributions to capital and surplus whether or not represented by the purchase of capital stock or issuance of other securities.

Any investment required to meet minimum quality ratings by the Insurers Investment Act shall be subject to the following categories:

(1) Category 1. Any investment subject to this subdivision shall have a 1 designation from the Securities Valuation Office. If the Securities Valuation Office does not rate the investment in question but does rate an obligation of the obligor having a priority equal to or lower than the investment in question, the insurer may apply such rating to the investment. If the Securities Valuation Office does not rate the investment in question or an outstanding obligation of the obligor having a priority equal to or lower than the investment in question, the investment shall have a minimum quality rating of A3 by Moody's Investors Services, Inc., A- by Standard and Poor's Corporation, or the corresponding investment grade rating from any nationally recognized statistical rating organization recognized by the Securities Valuation Office; and

(2) Category 2. Any investment subject to this subdivision shall have a 1 or 2 designation from the Securities Valuation Office. If the Securities Valuation Office does not rate the investment in question but does rate an obligation of the obligor having a priority equal to or lower than the investment in question, the insurer may apply such rating to the investment. If the Securities Valuation Office does not rate the investment in question or an outstanding obligation of the obligor having a priority equal to or lower than the investment in question, the investment shall have a minimum quality rating of Baa3 by Moody's Investors Services, Inc., BBB- by Standard and Poor's Corporation, or the corresponding investment grade rating from any nationally recognized statistical rating organization recognized by the Securities Valuation Office. If the obligor of an investment is authorized by, established by, or incorporated under the laws of Canada or any province thereof and the Securities Valuation Office does not rate the investment in question, the minimum quality rating shall be BBB (low) by the Dominion Bond Rating Service, B++ by the Canadian Bond Rating Service, or the corresponding rating of any successor organization approved by the director.

For purposes of the Insurers Investment Act, investments shall be valued in accordance with the valuation procedures established by the National Association of Insurance Commissioners unless the director requires a different valuation method or finds another valuation method reasonable under the circumstances.

An insurer shall not invest in:

(1) Issued shares of its own capital stock except with the written permission of the director. Such permission may be granted if the purpose of the acquisition is:

(a) In connection with the lawful plan for mutualization of the insurer;

(b) In furtherance of a retirement, pension, or incentive program for officers or employees of the insurer which has been approved by the shareholders; or

(c) Shown to be for the benefit of all shareholders.

Any share acquired pursuant to this subdivision shall not be considered an admitted asset; and

(2) Any investment which is found by the director to be designed to evade any provision of the Insurers Investment Act.

(1) Except as provided in subsections (2) through (4) of this section, an insurer's investments authorized under the Insurers Investment Act in any one person shall not exceed five percent of the insurer's admitted assets.

(2) Subsection (1) of this section shall not apply to:

(a) Investments authorized under sections 44-5123, 44-5125, 44-5142, and 44-5153;

(b) Investments authorized under sections 44-5124, 44-5126 to 44-5129, and 44-5132 if collateralized by obligations or mortgages for which the full faith and credit of the United States or Canada is pledged for the payment of all principal and interest;

(c) Loans made pursuant to section 44-5106; and

(d) Real estate held pursuant to subsection (2) or (3) of section 44-5144.

(3)(a) An insurer's investments authorized under section 44-5124 or 44-5126 in any one agency or instrumentality of the United States or Canada shall not exceed twenty-five percent of the insurer's admitted assets, and (b) an insurer's investments authorized under section 44-5132 in any one person if collateralized by mortgages for which the full faith and credit of an agency or instrumentality of the United States or Canada is pledged for the payment of all principal and interest shall not exceed twenty-five percent of the insurer's admitted assets. An insurer's investments authorized under section 44-5124 or 44-5126 in any one agency or instrumentality of the United States or Canada and the insurer's investments authorized under section 44-5132 collateralized by mortgages for which the full faith and credit of such agency or instrumentality of the United States or Canada is pledged for the payment of all principal and interest, in the aggregate, shall not exceed twenty-five percent of the insurer's admitted assets.

(4)(a) An insurer's investments in any one person whose senior obligations have a 3 designation from the Securities Valuation Office, in the aggregate, shall not exceed three percent of the insurer's admitted assets.

(b) An insurer's investments in any one person whose senior obligations have a 4 designation from the Securities Valuation Office, in the aggregate, shall not exceed two percent of the insurer's admitted assets.

(c) An insurer's investments in any one person whose senior obligations have a 5 designation from the Securities Valuation Office, in the aggregate, shall not exceed one percent of the insurer's admitted assets.

(d) An insurer's investments in any one person whose senior obligations have a 6 designation from the Securities Valuation Office, in the aggregate, shall not exceed one-half percent of the insurer's admitted assets.

(5) For purposes of this section, person shall mean an individual or entity or group of individuals or entities so related as in fact to constitute a single venture, institution, corporation, association, company, partnership, limited liability company, syndicate, trust, society, or other legal entity.

The amount of any obligation issued, assumed, or guaranteed by more than one obligor and authorized under more than one provision of the Insurers Investment Act shall be allocated to those provisions on a basis proportional to the obligations of each obligor.

An insurer may hold an investment authorized under more than one provision of the Insurers Investment Act under the provision of its choice except as otherwise expressly provided by law. Nothing in the act shall prevent an insurer from holding an investment under a provision different from the one under which it previously held the investment except as otherwise expressly provided by law.

All cash payments of principal, interest, premiums, dividends, and other cash consideration received on any investment authorized under the Insurers Investment Act shall be payable in lawful money of the United States except as provided in section 44-5137.

(1) The director may impose reasonable and temporary restrictions upon the investments of an insurer, including prohibition or divestment of a particular investment, if the director finds that the interests of insureds, creditors, or the general public are or may be endangered.

(2) If any insurer desires to exceed any investment limitation contained in the Insurers Investment Act, the insurer shall file an application with the director requesting written approval to exceed the investment limitation. The application shall set out all pertinent information regarding the proposed investment, including a full description of the investment, its actual cost, its market value, any appraisals, any encumbrances, the interest rate, the maturity dates, as appropriate, and any other relevant information requested by the director. The application shall be a public record open to public inspection from the date of filing. If the application is not approved or disapproved by the director within thirty days from the date of filing, the application shall be deemed disapproved. The disapproval in whole or in part shall be in the sole discretion of the director and shall not be subject to judicial review.

In determining whether to approve or disapprove the application, the director shall consider the following factors:

(a) The credit risk quality of the proposed investment;

(b) The liquidity of the proposed investment and of the insurer's entire investment portfolio;

(c) The extent of the diversification of the insurer's investment portfolio;

(d) The yield of the proposed investment;

(e) The reasonableness of the insurer's policyholders surplus in relation to the insurer's outstanding liabilities and financial needs as evaluated in accordance with the factors set forth in section 44-2136; and

(f) Any other relevant considerations.

If the director approves the application in whole or in part, the proposed investment shall be deemed to be an authorized investment to the extent of the director's approval. Whenever an insurer makes application pursuant to this subsection, the director may retain, at the insurer's expense, such attorneys, actuaries, accountants, and other experts not otherwise a part of the director's staff as are reasonably necessary to assist the director in determining whether such application should be approved. Any individual or organization so retained shall be under the direction and control of the director and shall serve in a purely advisory capacity.

(1) An insurer may lend its securities if:

(a) The securities are created or existing under the laws of the United States and, simultaneously with the delivery of the loaned securities, the insurer receives collateral from the borrower consisting of cash or securities backed by the full faith and credit of the United States or an agency or instrumentality of the United States, except that any securities provided as collateral shall not be of lesser quality than the quality of the loaned securities. Any investment made by an insurer with cash received as collateral for loaned securities shall be made in the same kinds, classes, and investment grades as those authorized under the Insurers Investment Act and in a manner that recognizes the liquidity needs of the transaction or is used by the insurer for its general corporate purposes. The securities provided as collateral shall have a market value when the loan is made of at least one hundred two percent of the market value of the loaned securities;

(b) The securities are created or existing under the laws of Canada or are securities described in section 44-5137 and, simultaneously with the delivery of the loaned securities, the insurer receives collateral from the borrower consisting of cash or securities backed by the full faith and credit of the foreign country, except that any securities provided as collateral shall not be of lesser quality than the quality of the loaned securities. Any investment made by an insurer with cash received as collateral for loaned securities shall be made in the same kinds, classes, and investment grades as those authorized under the Insurers Investment Act and in a manner that recognizes the liquidity needs of the transaction or is used by the insurer for its general corporate purposes. The securities provided as collateral shall have a market value when the loan is made of at least one hundred two percent of the market value of the loaned securities;

(c) Prior to the loan, the borrower or any indemnifying party furnishes the insurer with or the insurer otherwise obtains the most recent financial statement of the borrower or any indemnifying party;

(d) The insurer receives a reasonable fee related to the market value of the loaned securities and to the term of the loan;

(e) The loan is made pursuant to a written loan agreement; and

(f) The borrower is required to furnish by the close of each business day during the term of the loan a report of the market value of all collateral and the market value of all loaned securities as of the close of trading on the previous business day. If at the close of any business day the market value of the collateral for any loan outstanding to a borrower is less than one hundred percent of the market value of the loaned securities, the borrower shall deliver by the close of the next business day an additional amount of cash or securities. The market value of the additional securities, together with the market value of all previously delivered collateral, shall equal at least one hundred two percent of the market value of the loaned securities for that loan.

(2) An insurer shall effect securities lending only through the services of a custodian bank or similar entity as approved by the director.

(3) An insurer's investments authorized under this section shall not exceed twenty percent of its admitted assets.

(1) For purposes of this section:

(a) Acceptable collateral means:

(i) As to reverse repurchase transactions, cash, cash equivalents, highly rated business entity obligations created or existing under the laws of the United States or Canada, public equity securities that are traded on a United States exchange, and direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States or an agency of the government of the United States or the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation; and

(ii) As to repurchase transactions, cash and cash equivalents;

(b) Cash equivalents means short-term, highly rated investments or securities readily convertible to known amounts of cash without penalty and so near maturity that they present insignificant risk of change in value. Cash equivalents includes government money market mutual funds and class one money market mutual funds;

(c) Highly rated means an investment with a minimum quality rating as described in subdivision (2) of section 44-5112;

(d) Repurchase transaction means a transaction in which an insurer sells securities to a business entity and is obligated to repurchase the sold securities or equivalent securities from the business entity at a specified price, either within a specified period of time or upon demand;

(e) Reverse repurchase transaction means a transaction in which an insurer purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period of time or upon demand; and

(f) Short-term means investments with a remaining term to maturity of ninety days or less.

(2) An insurer may engage in repurchase and reverse repurchase transactions as set forth in this section. The insurer shall enter into a written agreement for transactions entered under this section. Such agreements shall require that each transaction terminate no more than one year from its inception.

(3) Cash received in a transaction under this section shall be invested in accordance with the Insurers Investment Act and in a manner that recognizes the liquidity needs of the transaction or is used by the insurer for its general corporate purposes.

(4) So long as the transaction remains outstanding, the insurer, or its agent or custodian, shall maintain as 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:

(a) Possession of the acceptable collateral;

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

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

(5) The limitations of sections 44-5115 and 44-5137 shall not apply to the business entity counterparty exposure created by transactions under this section. An insurer shall not enter into a transaction under this section if, as a result of and after giving effect to the transaction:

(a) The aggregate amount of securities then sold to or purchased from any one business entity counterparty under this section would exceed five percent of its admitted assets; and 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

(b) The aggregate amount of all securities then sold to or purchased from all business entities under this section would exceed twenty percent of its admitted assets, and in no event shall the collateral market value of all public equity securities that are traded on a United States exchange received in a reverse repurchase transaction exceed more than twenty percent of the total market value of collateral received in reverse repurchase transactions.

(6)(a) In a repurchase transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to ninety-five percent of the market value of the securities transferred by the insurer in the transaction as of that date. If at the close of any business day the market value of the acceptable collateral is less than ninety-five percent of the market value of the securities so transferred, the business entity counterparty shall be obligated to deliver, by the close of the next business day, additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals ninety-five percent of the market value of the transferred securities.

(b) In a reverse repurchase transaction, the insurer shall receive acceptable collateral having a market value at least equal to (i) one hundred two percent of the purchase price paid by the insurer for collateral excluding public equity securities that are traded on a United States exchange or (ii) one hundred ten percent of the purchase price paid by the insurer for public equity securities that are traded on a United States exchange. If at the close of any business day the market value of the acceptable collateral is less than one hundred percent of the purchase price paid by the insurer, the business entity counterparty shall be obligated to provide, by the close of the next business day, additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals the applicable percentage of such collateral as provided in this subdivision. Securities acquired by an insurer in a reverse repurchase transaction shall not be sold in a repurchase transaction, loaned in a securities lending transaction, or otherwise pledged.

An insurer's investments shall be subject to the Insurers Investment Act notwithstanding anything in 15 U.S.C. 77r-1 to the contrary.

Any investment held by an insurer on September 13, 1997, which was an authorized investment immediately prior to such date shall be deemed an authorized investment under the Insurers Investment Act.

An insurer may invest in direct obligations of the United States or obligations for which the full faith and credit of the United States is pledged for the payment of all principal and interest.

An insurer may invest in direct obligations of any agency or instrumentality of the United States or obligations for which the full faith and credit of any agency or instrumentality of the United States is pledged for the payment of all principal and interest.

An insurer may invest in direct obligations of the government of Canada or obligations for which the full faith and credit of the government of Canada is pledged for the payment of all principal and interest.

An insurer may invest in direct obligations of any agency or instrumentality of the government of Canada or obligations for which the full faith and credit of any agency or instrumentality of the government of Canada is pledged for the payment of all principal and interest.

An insurer may invest in direct obligations of any province or municipality of Canada or obligations for which the full faith and credit of any province or municipality of Canada is pledged for the payment of all principal and interest. Any investment authorized under this section shall have a minimum quality rating as described in subdivision (2) of section 44-5112.

An insurer may invest in obligations issued, assumed, or guaranteed by the United States, an agency or instrumentality of the United States, a state, a municipality, a political subdivision, the government of Canada, an agency or instrumentality of the government of Canada, any province or municipality of Canada, or any municipal utility, corporate authority, nonprofit corporation, or institution authorized or established by an act of Congress or by the laws of any state, Canada, or any province of Canada if, by statutory or other legal requirements applicable to those obligations, they are payable as to both principal and interest:

(1) From taxes levied or required to be levied upon all taxable property or all taxable income within the jurisdiction of the borrowing entity;

(2) From adequate special revenue pledged or otherwise appropriated or required by law to be provided for the purpose of the payment, excluding any obligation payable solely out of special assessments on properties benefited by local improvements;

(3) From and secured by a pledge of rentals from leases or subleases on property owned or leased by the obligor if:

(a) Such underlying lease has an unexpired term of not less than the term of the lease or sublease whose rentals are pledged by the issuer; and

(b) The fixed rentals reserved under such lease or sublease will be sufficient to pay all of the expenses of the lessor in connection with the lease or sublease and the operation of the property and to pay principal and interest so as to retire the bonds during the fixed term of such lease or sublease or, if such fixed rentals are not sufficient, a governmental subdivision agrees to pay such required amounts;

(4) From revenue specifically pledged therefor of a public service operated by the borrowing entity if the entity is legally authorized and does obligate itself that rates of service will be fixed, maintained, and collected so as to produce revenue or earnings sufficient to pay all operating and maintenance charges and all principal and interest of such obligations in accordance with their terms; or

(5) From revenue specifically pledged therefor from excise taxes levied.

Any investment authorized under this section shall have a minimum quality rating as described in subdivision (2) of section 44-5112.

An insurer may invest in obligations of a business entity created or existing under the laws of the United States or Canada or any state or province thereof. Any investment authorized under this section shall have a minimum quality rating as described in subdivision (2) of section 44-5112.

An insurer may invest in obligations of an international development bank of which the United States is a member. Any investment authorized under this section shall have a minimum quality rating as described in subdivision (1) of section 44-5112. An insurer's investments authorized under this section shall not exceed twenty percent of its admitted assets.

(1) An insurer may invest in a security or other instrument, excluding a mutual fund, evidencing an interest in or the right to receive payments from, or payable from distributions on, an asset, a pool of assets, or specifically divisible cash flows which are legally transferred to a special purpose bankruptcy-remote business entity on the following conditions:

(a) The business entity is established solely for the purpose of acquiring specific types of assets or rights to cash flows, issuing securities and other instruments representing an interest in or right to receive cash flows from those assets or rights, and engaging in activities required to service the assets or rights and any credit enhancement or support features held by the business entity; and

(b) The assets of the business entity consist solely of interest-bearing obligations or other contractual obligations representing the right to receive payment from the cash flows from the assets or rights. However, the existence of credit enhancements, such as letters of credit or guarantees, or other support features, shall not cause a security or other instrument to be an unauthorized investment under this section.

(2) Investments in interest-only securities, other than those with a 1 designation from the Securities Valuation Office, or other instruments shall not be authorized under this section.

(3) Any investment authorized under this section shall have a minimum quality rating as described in subdivision (2) of section 44-5112.

(1) An insurer may, in addition to any investment authorized under section 44-5132, invest in obligations secured by pledged securities if:

(a) The market value of such pledged securities or the fair value if the securities have no recognized market value will at all times of holding the investment be equal to at least one hundred ten percent of the investment in the notes or other evidence of indebtedness; and

(b) The pledged securities are of the kind authorized for investment under the Insurers Investment Act.

(2) For purposes of this section, pledged securities shall mean notes, mortgages, bonds, debentures, and preferred or common stock. Pledged securities shall not be valued at an amount greater than the value at which they could be shown on the insurer's financial statements filed with the director pursuant to section 44-322 if owned directly by the insurer.

(3) An insurer's investments authorized under this section shall not exceed twenty percent of its admitted assets.

An insurer may invest in obligations secured by an assignment of a lease to or for the benefit of the insurer and the rents payable under the lease if:

(1) The lessee or ultimate guarantor of any lease securing the obligation is an entity the obligations of which are authorized for investment under sections 44-5123 to 44-5131;

(2) The rentals assigned are sufficient to repay not less than ninety percent of the obligation within the unexpired term of the lease excluding any term that may be provided by an enforceable option of renewal; and

(3) A first lien on the lessor's interest in the unencumbered leased property is obtained as additional security for the obligation for which the rentals described in subdivision (2) of this section are not sufficient to repay the obligation.

(1) An insurer may invest in foreign securities or other investments (a) issued in, (b) located in, (c) denominated in the currency of, (d) whose ultimate payment amounts of principal or interest are subject to fluctuations in the currency of, or (e) whose obligors are domiciled in countries other than the United States or Canada, which are substantially of the same kinds and classes as those authorized for investment under the Insurers Investment Act. A security or investment shall not be deemed to be foreign if the issuer or a guarantor against which an insurer has a claim for payment has its principal place of business or is domiciled in the United States or Canada or the primary credit source is located in the United States or Canada and, in each case, the insurer has a contractual right to bring an enforcement action in the United States or Canada.

(2) Subject to the limitations in subsection (3) of this section:

(a) An insurer's investments authorized under subsection (1) of this section in any one foreign jurisdiction whose sovereign debt has a 1 designation from the Securities Valuation Office shall not exceed ten percent of the insurer's admitted assets;

(b) An insurer's investments authorized under subsection (1) of this section in any one foreign jurisdiction whose sovereign debt has a 2 or 3 designation from the Securities Valuation Office shall not exceed five percent of the insurer's admitted assets;

(c) An insurer's investments authorized under subsection (1) of this section in any one foreign jurisdiction whose sovereign debt has a 4, 5, or 6 designation from the Securities Valuation Office shall not exceed three percent of the insurer's admitted assets;

(d) An insurer's investments authorized under subsection (1) of this section denominated in any one foreign currency shall not exceed two percent of the insurer's admitted assets;

(e) An insurer's investments authorized under subsection (1) of this section denominated in foreign currencies, in the aggregate, shall not exceed five percent of the insurer's admitted assets; and

(f) An insurer's investments authorized under subsection (1) of this section shall not be considered denominated in a foreign currency if the acquiring insurer enters into one or more contracts in transactions permitted under section 44-5149 to exchange all payments made on the foreign currency denominated investments for United States currency at a rate which effectively insulates the investment cash flows against future changes in currency exchange rates during the period the contract or contracts are in effect.

(3) An insurer's investments authorized under subsection (1) of this section shall not exceed, in the aggregate, twenty-five percent of its admitted assets.

(4) An insurer which is authorized to do business in a foreign country or which has outstanding insurance, annuity, or reinsurance contracts on lives or risks resident or located in a foreign country may, in addition to the investments authorized by subsection (1) of this section, invest in securities and investments (a) issued in, (b) located in, (c) denominated in the currency of, (d) whose ultimate payment amounts of principal and interest are subject to fluctuations in the currency of, or (e) whose obligors are domiciled in such foreign countries, which are substantially of the same kinds and classes as those authorized for investment under the act.

(5) An insurer's investments authorized under subsection (4) of this section and cash in the currency of such country which is at any time held by such insurer, in the aggregate, shall not exceed the greater of (a) one and one-half times the amount of its reserves and other obligations under such contracts or (b) the amount which such insurer is required by law to invest in such country.

(6) Any investment in debt obligations authorized under this section shall have a minimum quality rating as described in subdivision (2) of section 44-5112, except that an insurer's investment in bonds or notes secured by a mortgage on real estate located outside of the United States or Canada that otherwise complies with section 44-5143 shall not be subject to such minimum quality rating requirements.

(7) An insurer's investments made under this section shall be aggregated with investments of the same kinds and classes made under the Insurers Investment Act except section 44-5153 for purposes of determining compliance with the limitations contained in other sections.

(1) An insurer may invest in:

(a) Bank certificates of deposit, banker's acceptances, or corporate promissory notes with a remaining term of no more than one year; and

(b) Shares, interests, or participation certificates in any management type of investment trust, corporate or otherwise, registered under the Investment Company Act of 1940, as amended, as a diversified open-end investment company, that invests solely in such investments as described in subdivision (1)(a) of this section.

(2) Any investment in corporate promissory notes authorized under subdivision (1)(a) of this section shall have a 1 or 2 designation from the Securities Valuation Office. If the Securities Valuation Office does not rate the investment in question but does rate an obligation of the obligor having a priority equal to or lower than the investment in question, the insurer may apply such rating to the investment. If the Securities Valuation Office does not rate the investment in question or an outstanding obligation of the obligor having a priority equal to or lower than the investment in question, the investment shall have a minimum short-term quality rating of P-2 by Moody's Investors Service, Inc., A-2 by Standard and Poor's Corporation, or the corresponding investment grade rating from any nationally recognized statistical rating organization recognized by the Securities Valuation Office. If the obligor of an investment is authorized by, established by, or incorporated under the laws of Canada or any province thereof and the Securities Valuation Office does not rate the investment in question, the minimum quality rating shall be R-2 by the Dominion Bond Rating Service, A-1 by the Canadian Bond Rating Service, or the corresponding rating of any successor organization approved by the director.

(1) An insurer may invest in shares of a fund registered under the Investment Company Act of 1940, as amended, as a diversified open-end investment company and in shares, interests, or participation certificates in any management type of investment trust, corporate or otherwise, subject to the following restrictions:

(a) The investment restrictions and policies relating to the investment of the assets of the trust and its activities shall be limited to the same kinds, classes, and investment grades as those authorized for investment under the Insurers Investment Act; and

(b) The assets of such investment trust shall not be less than twenty million dollars at the date of purchase.

An insurer's investments authorized under this subsection shall not exceed ten percent of its admitted assets.

(2) An insurer may invest in the shares of a fund registered under the Investment Company Act of 1940, as amended, as a diversified open-end investment company when the investment restrictions and policies relating to the investment of the assets of the fund and its activities are limited solely to (a) obligations, (b) commitments to purchase obligations, or (c) assignments of interest in obligations issued or guaranteed by the United States or its agencies or instrumentalities. An insurer's investments authorized under this subsection shall not exceed twenty-five percent of its admitted assets.

(1) An insurer may invest in the preferred stock of any corporation which:

(a) Has earned and paid regular dividends at the regular prescribed rate each year upon its preferred stock, if any is or has been outstanding, for not less than five years immediately preceding the purchase of such preferred stock or during such part of such five-year period as it has had preferred stock outstanding; and

(b) Has had no material defaults in principal payments of or interest on any obligations of such corporation and its subsidiaries having a priority equal to or higher than those purchased during the period of five years immediately preceding the date of acquisition or, if outstanding for less than five years, at any time since such obligations were issued.

The earnings of and the regular dividends paid by all predecessor, merged, consolidated, or purchased corporations may be included through the use of consolidated or pro forma statements.

(2) Except as authorized under the Insurance Holding Company System Act, an insurer shall not own more than five percent of the total issued shares of stock of any corporation other than an insurer.

(3) A life insurer's investments authorized under this section shall not exceed the greater of twenty-five percent of its admitted assets or one hundred percent of its policyholders surplus, nor shall a life insurer's investments authorized under this section that are not rated P-1 or P-2 by the Securities Valuation Office exceed ten percent of its admitted assets.

(1) An insurer may invest in the common stock or rights to purchase or sell common stock of any corporation.

(2)(a) An insurer may invest in equity interests or rights to purchase or sell equity interests in business entities other than general partnerships unless the general partnership is wholly owned by the insurer.

(b) A life insurer shall not invest under this subsection in any investment which the life insurer may invest in under section 44-5140 or 44-5144 or subsection (1) of this section.

(3) A life insurer's investments authorized under this section shall not exceed the greater of one hundred percent of its policyholders surplus or twenty percent of its admitted assets.

(1) Stock insurers which maintain capital stock required by section 44-214 and nonstock insurers which maintain surplus required by section 44-219 may invest in the common and preferred stock of other insurers.

(2) An insurer's investments authorized under this section shall not exceed the lesser of (a) the amount by which such insurer's admitted assets exceed its required capital and liabilities if a stock insurer or its required surplus and liabilities if a nonstock insurer or (b) fifty percent of its policyholders surplus.

(3) In calculating the admitted assets of the insurer acquiring the stock of another insurer pursuant to this section, the value of any investment in such common or preferred stock shall be the cost of such stock to the acquiring insurer.

(1) An insurer may invest in bonds or notes secured by a first mortgage on real estate in the United States or Canada if the amount loaned by the insurer, together with any amount secured by an equal security interest, does not exceed eighty percent of the appraised value of the real estate and improvements at the time of making the investment, or if the funds are used for a construction loan, the amount does not exceed eighty percent of the market value of the real estate together with the actual costs of improvements constructed thereon at the time of final funding by the insurer. The limitation in this subsection shall not:

(a) Apply to investments authorized under section 44-5132;

(b) Prohibit an insurer from renewing or extending a loan for the original amount when the value of such real estate has depreciated;

(c) Prohibit an insurer from accepting, as part payment for real estate sold by it, a mortgage thereon for more than eighty percent of the purchase price of such real estate; or

(d) Prohibit an insurer from advancing additional loan funds to protect its real estate security.

(2) An insurer may invest in bonds or notes secured by a first mortgage on leasehold estates in real estate located in the United States or Canada if:

(a) Such underlying real estate is unencumbered except by (i) rentals to accrue therefrom to the owner of the real estate or (ii) a fee mortgage, if there is an agreement from the lender secured by the fee mortgage to not terminate or extinguish the leasehold interest as long as the lessee is not in default;

(b) There is no condition or right of reentry or forfeiture under which such lien can be cut off, subordinated, or otherwise disturbed so long as the lessee is not in default;

(c) The amount loaned by the insurer, together with any amount secured by an equal security interest, does not exceed eighty percent of the appraised value of such leasehold with improvements at the time of making the loan, or, if the funds are used for a construction loan, the amount loaned does not exceed eighty percent of the market value of the leasehold estate together with the actual costs of improvements constructed thereon at the time of final funding by the insurer; and

(d) Such mortgage loan will be completely amortized during the unexpired portion of the lease or leasehold estate, or, if a loan has a balloon payment, the mortgage loan amortization period plus the remaining unexpired term of the lease after the maturity date of the loan is at least thirty years, except that any lease or leasehold estate that is convertible by the borrower, as lessee, or the insurer, as lender, into a fee interest for no or minimal consideration at any time during the lease term shall be treated as a fee interest for all purposes under section 44-5143 so long as the insurer's mortgage is secured by such fee interest following such conversion.

(3) Nothing in this section shall prevent any amount invested under this section that exceeds eighty percent of the appraised value of the real estate or leasehold and improvements, as the case may be, from being authorized under section 44-5153.

(4) All buildings and other real estate improvements which constitute a material part of the value of the mortgaged premises, whether estates in fee or leasehold estates or combination thereof, shall be (a)(i) substantially completed before the investment is made or (ii) of a value that is at all times substantial in value in relation to the amount of construction loan funds advanced by the insurer on account of the loan and (b) kept insured against loss or damage by fire or windstorm in a reasonable amount for the benefit of the mortgagee.

(5) Other than investments subject to section 44-5132, if there are more than four holders of the issue of such bonds or notes described in subsection (1) or (2) of this section, (a) the security of such bonds or notes, as well as all collateral papers including insurance policies executed in connection therewith, shall be made to and held by a trustee, which trustee shall be a solvent bank or trust company having a paid-in capital of not less than two hundred fifty thousand dollars, except in case of a bank or trust company incorporated under the laws of this state, in which case a paid-in capital of not less than one hundred thousand dollars shall be required, and (b) it shall be agreed that, in case of proper notification of default, such trustee, upon request of at least twenty-five percent of the holders of the par amount of the bonds outstanding and proper indemnification, shall proceed to protect the rights of such bondholders under the provisions of the trust indenture. Nothing in this subsection shall be deemed to inhibit the ability of an insurer to rely on the provisions of section 44-5110 with regard to loan participations for loans that meet the requirements of this section.

(6)(a) An insurer may invest in notes or bonds secured by second mortgages or other second liens, including all inclusive or wraparound mortgages or liens, upon real property encumbered only by a first mortgage or lien which meets the requirements set forth in this section, subject to either of the following conditions:

(i) The insurer also owns the note or bond secured by the prior first mortgage or lien and the aggregate value of both loans does not exceed the loan to market value ratio requirements of this section; or

(ii) The note or bond is secured by an all-inclusive or wraparound lien or mortgage which conforms to the requirements set forth in subdivision (b) of this subsection, if the aggregate value of the resulting loan does not exceed the loan to market value ratio requirements of this section.

(b) For purposes of this subsection, the terms wraparound and all-inclusive lien or mortgage refer to a loan made by an insurer to a borrower on the security of a mortgage or lien on real property other than property containing a residence of one to four units or on which a residence of one to four units is to be constructed, where such real property is encumbered by a first mortgage or lien and which loan is subject to all of the following requirements:

(i) The total amount of the obligation of the borrower to the insurer under the loan is not less than the sum of the amount disbursed by the insurer on account of the loan and the outstanding balance of the obligation secured by the preexisting lien or mortgage;

(ii) The instrument evidencing the lien or mortgage by which the obligation of the borrower to the insurer under the loan is secured, is recorded, and the lien is insured under a policy of title insurance in an amount not less than the total amount of the obligation of the borrower to the insurer under the loan; and

(iii) The insurer either (A) files for record in the office of the recorder of the county in which the real property is located a duly acknowledged request for a copy of any notice of default or of sale under the preexisting lien or (B) is entitled under applicable law to receive notice of default, sale, or foreclosure of the preexisting lien.

(7)(a) An insurer may invest in mezzanine real estate loans subject to the following conditions:

(i) The terms of the mezzanine loan agreement:

(A) Require that each pledgor abstain from granting additional security interests in the equity interest pledged;

(B) Employ techniques to minimize the likelihood or impact of a bankruptcy filing on the part of the real estate owner or the mezzanine real estate loan borrower; and

(C) Require the real estate owner, or mezzanine real estate loan borrower, to: (I) Hold no assets other than, in the case of the real estate owner, the real property, and in the case of the mezzanine borrower, the equity interest in the real estate owner; (II) not engage in any business other than, in the case of the real estate owner, the ownership and operation of the real estate, and in the case of the mezzanine real estate borrower, holding an ownership interest in the real estate owner; and (III) not incur additional debt, other than limited trade payables, a first mortgage loan, and the mezzanine real estate loan; and

(ii) At the time of the initial investment, the mezzanine real estate loan lender shall corroborate that the sum of the first mortgage and the mezzanine real estate loan does not exceed one hundred percent of the value of the real estate as evidenced by a current appraisal.

(b) The value of an insurer's investments authorized under this subsection shall not exceed three percent of its admitted assets.

(c) For purposes of this subsection, mezzanine real estate loan refers to a loan made by an insurer to a borrower on the security of debt obligation which is secured by a pledge of a direct or indirect equity interest in an entity that owns real estate.

(8) An insurer's investments authorized under this section shall not exceed forty percent of its admitted assets, and an insurer's investments authorized under this section and section 44-5144, in the aggregate, shall not exceed fifty percent of its admitted assets.

(1) An insurer may acquire and hold unencumbered real estate or certificates evidencing participation with other investors, either directly or through partnership or limited liability company interests, or other equity interests, including common and preferred equity investments, in unencumbered real estate if:

(a) The real estate is leased under a lease contract;

(b) The net amount of the annual lease payments to the owner of the real estate is sufficient to amortize the cost of the real estate within the duration of the lease, but in no event for a period of longer than forty years, and pay at least three percent per annum on the unamortized balance of the cost of the real estate; and

(c) The amount invested in any such real estate does not exceed its appraised value.

When the lessee under a lease described in this subsection is the United States or any agency or instrumentality thereof, any state or any county, municipality, district, or other governmental subdivision thereof, or any agency, board, authority, or institution established or maintained under the laws of the United States or any state thereof, such lease contract may provide that upon the termination of the term thereof, title to such real estate shall vest in the lessee.

When a lease described in this subsection is under a trust agreement which provides, among other things, that upon proper notification of default under such lease and request to such trustee by an investor or investors representing at least twenty-five percent of the equitable ownership of the real estate and proper indemnification, the trustee shall proceed to protect the rights and interest of the investors owning the equitable title to the real estate. In a governmental lease or leasehold estate under which the insurer owns an interest in a lessee that is convertible by the lessee into a fee interest for no or de minimis consideration at any time during the lease term, it shall be treated as a fee interest for all purposes under this section.

For purposes of this subsection, unencumbered real estate means real estate in which other interests may exist which if enforced would not result in the forfeiture of the insurer's interest.

(2) An insurer may also acquire and hold real estate:

(a) Mortgaged to it in good faith by way of security for a loan previously contracted or for money due;

(b) Conveyed to it in satisfaction of debts previously contracted in the course of its dealings; and

(c) Purchased at sale upon judgments, decrees, or mortgages obtained or made for such debts.

(3) An insurer may invest in real estate required for its home offices or to be otherwise occupied by the insurer or its employees in the transaction of its business and may rent the balance of the space therein. The value of an insurer's investments authorized under this subsection shall not exceed ten percent of its admitted assets.

(4)(a) An insurer with policyholders surplus of at least one million dollars may individually or in conjunction with other investors acquire, own, hold, develop, and improve real estate that is essentially residential or commercial in character, even though subject to an existing mortgage or thereafter mortgaged by the insurer, if such real estate is located in the United States or Canada.

(b) For purposes of this subsection, real estate shall include a leasehold having an unexpired term of at least twenty years, including the term provided by any enforceable option of renewal. The income from such leasehold shall be applied so as to amortize the cost of leasehold and improvements within the lesser of eighty percent of such unexpired term or forty years from acquisition.

(c) An insurer may hold real estate or certification evidencing participation authorized under this subsection with other investors either directly or through a partnership, limited liability company, or other equity interest, including without limitation, common and preferred equity investments.

(d) The value of an insurer's investments authorized under this subsection shall not exceed ten percent of its admitted assets.

(5) An insurer may also acquire such other real estate as may be acquired ancillary to a corporate merger, acquisition, or reorganization of the insurer.

(6) The value of an insurer's investments authorized under subsections (3), (4), and (5) of this section, in the aggregate, shall not exceed fifteen percent of its admitted assets.

(7) For purposes of this section, value shall mean original cost plus any development and improvement costs whenever expended less the unpaid balance of any mortgage and annual depreciation on improvements of not less than two percent.

(8) An insurer's investments authorized under this section and section 44-5143, in the aggregate, shall not exceed fifty percent of its admitted assets.

An insurer may invest in equipment or interests in equipment wholly situated or maintained in the United States and Canada which are mortgaged or otherwise encumbered by the insurer as security for a nonrecourse debt and which are leased under a lease contract if:

(1) The annual lease payments to the lessor are sufficient to repay the full cost of the financing thereof within the unexpired term of the lease; and

(2) The lessee or ultimate guarantor of any lease securing the obligation is an entity the obligations of which are authorized investments under sections 44-5123 to 44-5131.

An insurer's investments authorized under this section shall not exceed five percent of its admitted assets.

(1) An insurer may use derivative instruments in hedging transactions if:

(a) The aggregate statement value of options, caps, floors, and warrants not attached to any financial instrument and used in hedging transactions does not exceed the lesser of seven and one-half percent of the insurer's admitted assets or seventy-five percent of the insurer's policyholders surplus;

(b) The aggregate statement value of options, caps, and floors written in hedging transactions does not exceed the lesser of three percent of the insurer's admitted assets or thirty percent of the insurer's policyholders surplus; and

(c) The aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed the lesser of six and one-half percent of the insurer's admitted assets or sixty-five percent of the insurer's policyholders surplus.

(2)(a) An insurer may use derivative instruments in income-generation transactions by selling:

(i) Covered call options on non-callable fixed income securities or callable fixed income securities if the option expires by its terms prior to the end of the non-callable period;

(ii) 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;

(iii) Covered puts on investments that the insurer is permitted to acquire under the Insurers Investment Act 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 that put during the complete term of the put option sold; and

(iv) Covered caps or floors if the insurer holds in its portfolio the investments generating the cash flow to make the required payments under such caps or floors during the complete term that the cap or floor is outstanding.

(b) An insurer may enter into income-generation transactions under this subsection if the aggregate statement value of the fixed income assets that are subject to call or that generate the cash flows for payments under the caps or floors, plus the face value of fixed income securities underlying any derivative instrument subject to call, does not exceed the lesser of ten percent of the insurer's admitted assets or one hundred percent of the insurer's policyholders surplus.

(3) An insurer may use derivative instruments in replication transactions if:

(a) The aggregate statement value of options, caps, floors, and warrants not attached to any financial instrument and used in replication transactions does not exceed the lesser of seven and one-half percent of the insurer's admitted assets or seventy-five percent of the insurer's policyholders surplus;

(b) The aggregate statement value of options, caps, and floors written in replication transactions does not exceed the lesser of three percent of the insurer's admitted assets or thirty percent of the insurer's policyholders surplus;

(c) The aggregate potential exposure of collars, swaps, forwards, and futures used in replication transactions does not exceed the lesser of six and one-half percent of the insurer's admitted assets or sixty-five percent of the insurer's policyholders surplus;

(d) The replication transactions are limited to the replication of investments or instruments otherwise permitted under the Insurers Investment Act; and

(e) The insurer engages in hedging transactions or income generation transactions pursuant to this section and has sufficient experience with derivatives generally such that its performance and procedures reflect that the insurer has been successful in adequately identifying, measuring, monitoring, and limiting exposures associated with such transactions and that the insurer has superior corporate controls over such activities as well as a sufficient number of dedicated staff who are knowledgeable and skilled with these sophisticated financial instruments.

(4) An insurer may purchase or sell one or more derivative instruments to offset, in whole or in part, any derivative instrument previously purchased or sold, as the case may be, without regard to the quantitative limitations of this section, provided that the derivative instrument is an exact offset to the original derivative instrument being offset.

(5) An insurer shall demonstrate to the director upon request the intended hedging, income-generation, or replication characteristics and the ongoing effectiveness of the derivative transaction or combination of the transactions through cash flow testing or other appropriate analysis.

(6) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations in section 44-5115.

(7) The director may approve additional transactions involving the use of derivative instruments pursuant to rules and regulations adopted and promulgated by the director.

(8) For the investment limitations covered in subsections (1), (2), and (3) of this section, aggregate statement value and aggregate potential exposure shall be calculated net of collateral posted or received.

(9) For purposes of this section:

(a) Derivative instrument means an agreement, option, instrument, or a series or combination thereof:

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

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

Derivative instrument includes all investment instruments or contracts that derive all or almost all of their value from the performance of an underlying market, index, or financial instrument, including, but not limited to, options, warrants, caps, floors, collars, swaps, credit default swaps, swaptions, forwards, and futures. Derivative instrument does not include investments authorized under any other section of the Insurers Investment Act;

(b) Hedging transaction means a derivative transaction which is entered into and maintained to reduce:

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

(ii) The currency exchange rate risk or the degree of exposure as to assets or liabilities which an insurer has acquired or incurred or anticipates acquiring or incurring;

(c) Income-generation transaction means a derivative transaction involving the writing of covered call options, covered put options, covered caps, or covered floors that is intended to generate income or enhance return; and

(d) Replication transaction means a derivative transaction or combination of derivative transactions effected either separately or in conjunction with cash market investments included in the insurer's portfolio in order to replicate the investment characteristic of another authorized transaction, investment, or instrument or that may operate as a substitute for cash market investments. A derivative transaction entered into by the insurer as a hedging or income-generation transaction authorized pursuant to this section shall not be considered a replication transaction.

(1) An insurer may hold investments not otherwise authorized under the Insurers Investment Act if such investments:

(a) Have minimum quality ratings as described in subdivision (2) of section 44-5112; and

(b) In the aggregate do not exceed one hundred percent of the insurer's policyholders surplus.

(2) Investments authorized under any other section of the Insurers Investment Act, except section 44-5153, shall not be authorized investments under this section.

(1) In addition to investments otherwise authorized under the Insurers Investment Act and subject to the limitations in subsections (2) and (3) of this section, an insurer may invest in obligations having 3, 4, 5, and 6 designations from the Securities Valuation Office.

(2) Subject to the limitation in subsection (3) of this section, an insurer shall not acquire, directly or indirectly through an investment subsidiary, investments in obligations:

(a) Having a 4 designation from the Securities Valuation Office if, as a result of and giving effect to the investment, the aggregate amount of such investments would exceed four percent of the insurer's admitted assets;

(b) Having a 5 designation from the Securities Valuation Office if, as a result of and giving effect to the investment, the aggregate amount of such investments would exceed two percent of the insurer's admitted assets; and

(c) Having a 6 designation from the Securities Valuation Office if, as a result of and giving effect to the investment, the aggregate amount of such investments would exceed one percent of the insurer's admitted assets.

(3) An insurer shall not acquire, directly or indirectly through an investment subsidiary, investments under this section if, as a result of and giving effect to the investment, the aggregate amount would exceed fifteen percent of the insurer's admitted assets.

(1)(a)(i) A life insurer may make investments not otherwise authorized under the Insurers Investment Act in an amount, in the aggregate, not exceeding the lesser of five percent of the first five hundred million dollars of its admitted assets plus ten percent of its admitted assets exceeding five hundred million dollars or one hundred percent of its policyholders surplus.

(ii) An insurer other than a life insurer may make investments not otherwise authorized under the act in an amount, in the aggregate, not exceeding the lesser of twenty-five percent of the amount by which its admitted assets exceed its total liabilities, excluding capital, or five percent of the first five hundred million dollars of its admitted assets plus ten percent of its admitted assets exceeding five hundred million dollars.

(b) Investments authorized under this subsection shall not include obligations having 3, 4, 5, and 6 designations from the Securities Valuation Office.

(2)(a) In addition to the provisions of subdivision (1)(a)(i) of this section, a life insurer may make investments not otherwise authorized under the act in an amount not exceeding that portion of its policyholders surplus which is in excess of ten percent of its admitted assets.

(b) In addition to the provisions of subdivisions (1)(a)(ii) and (b) of this section, an insurer other than a life insurer may make investments not otherwise authorized under the act in an amount not exceeding that portion of its policyholders surplus which is in excess of fifty percent of its annual net written premiums as shown by the most recent annual financial statement filed by the insurer pursuant to section 44-322.

(3) Investments authorized under subsection (1) or (2) of this section shall not include assets held by a ceding insurer as security supporting reinsurance arrangements through which credit for reinsurance has been allowed.

(4) Investments authorized under subsection (1) or (2) of this section shall not include insurance agents' balances or amounts advanced to or owing by insurance agents.

(5) The limitations set forth in this section shall be applied at the time the investment in question is made and at the end of each calendar quarter. An insurer's investment, which at the time of its acquisition was authorized only under the provisions of this section but which has subsequently and while held by such insurer become of such character as to be authorized elsewhere under the act, shall not be included in determining the amount of such insurer's investments, in the aggregate, authorized under this section, and investments otherwise authorized under the act at the time of their acquisition shall not be included in making such determination.

(6) Derivative instruments described in subsections (1), (2), and (3) of section 44-5149 shall not be authorized investments under this section.

The director may adopt and promulgate rules and regulations to carry out the Insurers Investment Act, including, but not limited to, establishing standards for qualification as custodians for insurer investments and establishing requirements for custody agreements.