Senate Study Bill 3034 - Introduced SENATE FILE _____ BY (PROPOSED COMMITTEE ON COMMERCE BILL BY CHAIRPERSON WARNSTADT) A BILL FOR An Act regulating the sale of credit default insurance, 1 and including criminal and civil penalties, transition 2 provisions, and applicability provisions. 3 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 4 TLSB 5136XC (9) 83 av/rj

S.F. _____ Section 1. NEW SECTION . 522.1 Definitions. 1 As used in this chapter, unless the context otherwise 2 requires: 3 1. “Affiliate” means a person which, directly or indirectly, 4 owns at least ten percent but less than fifty percent of a 5 credit default insurance corporation or which is at least ten 6 percent but less than fifty percent, directly or indirectly, 7 owned by a credit default insurance corporation. 8 2. “Aggregate net liability” means the aggregate amount 9 of insured unpaid principal, interest, and other monetary 10 payments, if any, of guaranteed obligations insured or assumed, 11 less reinsurance ceded and less collateral. 12 3. “Asset-backed securities” means securities or other 13 financial obligations of an issuer provided that all of the 14 following requirements are met: 15 a. The issuer is a special purpose corporation, trust, 16 or other entity, or provided that the securities or other 17 financial obligations constitute an insurable risk, is a bank, 18 trust company, or other financial institution, deposits in 19 which are insured by the full faith and credit of the United 20 States government. 21 b. The securities or other financial obligations are held 22 in a pool of assets expected to generate either cash flow or 23 cash proceeds by the terms of the securities or other financial 24 obligations, or pursuant to leases or other contractual rights, 25 including any expected extensions or renewals thereof, or 26 through a sale in a public or private market for proceeds 27 sufficient to pay the insured obligations which pool meets all 28 of the following requirements: 29 (1) Has been conveyed, pledged, or otherwise transferred to 30 or is otherwise owned or acquired by the issuer. 31 (2) Backs the securities or other financial obligations 32 issued. 33 (3) No asset in such pool, other than an asset directly 34 payable by, guaranteed by or backed by the full faith and 35 -1- LSB 5136XC (9) 83 av/rj 1/ 30

S.F. _____ credit of the United States government or that otherwise 1 qualifies as collateral under subsection 5, paragraph “a” 2 or “b” , has a value exceeding twenty percent of the pool’s 3 aggregate value. 4 4. a. “Average annual debt service” means the amount 5 of insured unpaid principal and interest on an obligation, 6 multiplied by the number of such insured obligations, assuming 7 each obligation represents one thousand dollars par value, 8 divided by the amount equal to the aggregate life of all such 9 obligations, assuming each obligation represents one thousand 10 dollars par value. 11 b. This definition, expressed as a formula in regards to 12 bonds, is as follows: average annual debt service equals 13 total debt service times the number of bonds divided by bond 14 years, assuming each bond represents one thousand dollars par 15 value, with the following terms defined as follows: 16 (1) “Bond years” means number of bonds times the term in 17 years. 18 (2) “Number of bonds” means total insured principal. 19 (3) “Term in years” means term to maturity based on 20 scheduled amortization or, in the absence of a scheduled 21 amortization in the case of asset-backed securities or 22 other obligations lacking a scheduled amortization, expected 23 amortization, in each case determined as of the date of 24 issuance of the insurance policy based upon the amortization 25 assumptions employed in pricing the insured obligations or 26 otherwise used by the insurer to determine aggregate net 27 liability. 28 (4) “Total debt service” means insured unpaid principle plus 29 interest. 30 5. “Collateral” means any of the following: 31 a. Cash. 32 b. The cash flow from specific obligations which are 33 not callable and scheduled to be received based on expected 34 prepayment speed on or prior to the date of scheduled debt 35 -2- LSB 5136XC (9) 83 av/rj 2/ 30

S.F. _____ service, including scheduled redemptions or prepayments, on the 1 insured obligation provided that any of the following applies: 2 (1) Such specific obligations are directly payable by, 3 guaranteed by, or backed by the full faith and credit of the 4 United States government. 5 (2) In the case of insured obligations denominated or 6 payable in foreign currency as permitted under section 522.4, 7 subsection 5, such specific obligations are directly payable 8 by, guaranteed by, or backed by the full faith and credit of 9 such foreign government or the central bank thereof. 10 (3) Such specific obligations are insured by the same 11 insurer that insures the obligations being collateralized, and 12 the cash flows from such specific obligations are sufficient to 13 cover the insured scheduled payments on the obligations being 14 collateralized. 15 c. The market value of investment grade obligations, other 16 than obligations evidencing an interest in the project or 17 projects financed with the proceeds of the insured obligations. 18 d. The face amount of each letter of credit that meets all 19 of the following criteria: 20 (1) Is irrevocable. 21 (2) Provides for payment under the letter of credit in lieu 22 of or as reimbursement to the insurer for payment required 23 under a credit default insurance policy. 24 (3) Is issued, presentable, and payable at any of the 25 following: 26 (a) At an office of the letter of credit issuer in the 27 United States. 28 (b) At an office of the letter of credit issuer located in 29 the jurisdiction in which the trustee or paying agent for the 30 insured obligation is located. 31 (4) Contains a statement that identifies any of the 32 following: 33 (a) Identifies the insurer and any successor by operation 34 of law, including any liquidator, rehabilitator, receiver, or 35 -3- LSB 5136XC (9) 83 av/rj 3/ 30

S.F. _____ conservator, as the beneficiary. 1 (b) Identifies the trustee or the paying agent for the 2 insured obligation as the beneficiary. 3 (5) Contains a statement to the effect that the obligation 4 of the letter of credit issuer under the letter of credit 5 is an individual obligation of such issuer and is in no way 6 contingent upon reimbursement with respect thereto. 7 (6) Contains an issue date and a date of expiration. 8 (7) Has a term at least as long as the shorter of the term 9 of the insured obligation or the term of the credit default 10 insurance policy or provides that the letter of credit shall 11 not expire without thirty days’ prior written notice to the 12 beneficiary and allows for drawing under the letter of credit 13 in the event that, prior to expiration, the letter of credit 14 is not renewed or extended or a substitute letter of credit or 15 alternate collateral meeting the requirements of this paragraph 16 “d” is not provided. 17 (8) States that it is governed by the laws of the state of 18 Iowa or by the 1983 or 1993 revision of the uniform customs and 19 practice for documentary credits of the international chamber 20 of commerce, publication 400 or 500, or any successor revision 21 if approved by the commissioner and contains a provision for 22 an extension of time, of not less than thirty days after 23 resumption of business, to draw against the letter of credit 24 in the event that one or more of the occurrences described in 25 article 19 of publication 400 or 500 occurs. 26 (9) Is issued by a bank, trust company, or savings and loan 27 association that meets all of the following criteria: 28 (a) Is organized under the laws of the United States or 29 any state thereof or, in the case of a nondomestic financial 30 institution, has a branch or agency office licensed under 31 the laws of the United States or any state thereof and is 32 domiciled in a member country of the organisation for economic 33 co-operation and development having a sovereign rating in one 34 of the top two generic lettered rating classifications by a 35 -4- LSB 5136XC (9) 83 av/rj 4/ 30

S.F. _____ securities rating agency acceptable to the commissioner. 1 (b) Has, or is the principal operating subsidiary of, a 2 financial institution holding company that has a long-term debt 3 of at least investment grade. 4 (c) Is not a parent, subsidiary, or affiliate of the trustee 5 or paying agent, if any, with respect to the insured obligation 6 if such trustee or paying agent is the named beneficiary of the 7 letter of credit. 8 6. “Commercial real estate” means income-producing real 9 property other than residential property consisting of less 10 than five units. 11 7. “Commissioner” means the commissioner of insurance. 12 8. “Contingency reserve” means an additional liability 13 reserve established to protect policyholders against the 14 effects of adverse economic developments or cycles or other 15 unforeseen circumstances. 16 9. “Credit default insurance” means a surety bond or other 17 contract, and any guarantee which is payable upon occurrence 18 of financial loss, as a result of the failure of any obligor on 19 or issuer of any debt instrument or other monetary obligation 20 to pay when due to be paid by the obligor or scheduled at the 21 time insured to be received by the holder of the obligation, 22 principal, interest, premium, dividend, or purchase price of 23 or on, or other amounts due or payable with respect to, such 24 instrument or obligation, when such failure is the result of 25 a financial default or insolvency, or other credit event, or 26 provided that such payment source is investment grade, any 27 other failure to make payment, regardless of whether such 28 obligation is incurred directly or as guarantor by or on 29 behalf of another obligor that has also defaulted. “Credit 30 default insurance” includes other events which the commissioner 31 determines are substantially similar to any of the events 32 described in this subsection. 33 10. “Credit default insurance corporation” or “corporation” 34 means an insurer licensed to transact the business of credit 35 -5- LSB 5136XC (9) 83 av/rj 5/ 30

S.F. _____ default insurance in this state. 1 11. “Excess spread” means, with respect to any insured issue 2 of asset-backed securities, the excess of the scheduled cash 3 flow on the underlying assets that is reasonably projected to 4 be available, over the term of the insured securities after 5 payment of the expenses associated with the insured issue, to 6 make debt service payments on the insured securities over the 7 scheduled debt service requirements on the insured securities, 8 provided that such excess is held in the same manner as 9 collateral is required to be held under subsection 5. 10 12. “Governmental unit” means the United States of America, 11 Canada, a member country of the organisation for economic 12 co-operation and development having a sovereign rating in one 13 of the top two generic lettered rating classifications by 14 a securities rating agency acceptable to the commissioner, 15 a state, territory, or possession of the United States of 16 America, the District of Columbia, a province of Canada, 17 a municipality, or a political subdivision of any of the 18 foregoing, or any public agency or instrumentality thereof. 19 13. “Industrial development bond” means any security 20 or other instrument, other than a utility first mortgage 21 obligation, under which a payment obligation is created, issued 22 by or on behalf of a governmental unit, to finance a project 23 serving a private industrial, commercial, or manufacturing 24 purpose, and not payable or guaranteed by a governmental unit. 25 14. “Insurable risk” means, with respect to asset-backed 26 securities, that such obligation on an uninsured basis has been 27 determined to be not less than investment grade based solely on 28 the pool of assets backing the insured obligation or securing 29 the insurer, without consideration of the creditworthiness of 30 the issuer. 31 15. “Investment grade” means any of the following: 32 a. The obligation or parity obligation of the same issuer 33 has been determined to be in one of the top four generic 34 lettered rating classifications by a securities rating agency 35 -6- LSB 5136XC (9) 83 av/rj 6/ 30

S.F. _____ acceptable to the commissioner. 1 b. The obligation or parity obligation of the same issuer 2 has been identified in writing by such rating agency to be of 3 investment grade quality. 4 c. If the obligation or parity obligation of the same 5 issuer has not been submitted to any such rating agency, the 6 obligation is determined to be investment grade, as indicated 7 by a rating in category 1 or 2, by the securities valuation 8 office of the national association of insurance commissioners. 9 16. “Municipal bonds” means municipal bonds and special 10 revenue bonds. 11 17. “Municipal obligation bond” means any security or 12 other instrument, including a lease payable or guaranteed 13 by the United States or another national government that 14 qualifies as a governmental unit or any agency, department, 15 or instrumentality thereof, or by a state or an equivalent 16 political subdivision of another national government that 17 qualifies as a governmental unit, but not a lease of any 18 other governmental unit, under which a payment obligation is 19 created, issued by or on behalf of or payable or guaranteed by 20 a governmental unit or issued by a special purpose corporation, 21 special purpose trust, or other special purpose legal entity to 22 finance a project serving a substantial public purpose. 23 a. A municipal obligation bond may be any of the following: 24 (1) Payable from tax revenues, but not tax allocations, 25 within the jurisdiction of such governmental unit. 26 (2) Payable or guaranteed by the United States or another 27 national government that qualifies as a governmental unit, 28 or any agency, department, or instrumentality thereof, or by 29 a housing agency of a state or an equivalent subdivision of 30 another national government that qualifies as a governmental 31 unit. 32 (3) Payable from rates or charges, but not tolls, levied or 33 collected in respect of a nonnuclear utility project, public 34 transportation facility other than an airport, or public higher 35 -7- LSB 5136XC (9) 83 av/rj 7/ 30

S.F. _____ education facility. 1 (4) With respect to lease obligations, payable from future 2 appropriations. 3 b. However, in the case of municipal obligation bonds of a 4 special purpose corporation, special purpose trust, or other 5 special purpose legal entity, such obligations are all of the 6 following: 7 (1) Investment grade at the time of issuance. 8 (2) Payable from sources enumerated in paragraph “a” . 9 (3) The project being financed or the tolls, tariffs, usage 10 fees, or other similar rates or charges for its use are subject 11 to regulation or oversight by a governmental unit. 12 18. “Reinsurance” means cessions qualifying for credit under 13 section 522.6. 14 19. “Special revenue bond” means any of the following: 15 a. Any security or other instrument, under which a payment 16 obligation is created, issued by or on behalf of or payable or 17 guaranteed by a governmental unit to finance a project serving 18 a substantial public purpose, and not payable from any of the 19 sources enumerated in subsection 17, paragraph “a” . 20 b. Securities, which are the functional equivalent of 21 any security or other instrument described in paragraph “a” , 22 issued by a not-for-profit corporation or a special purpose 23 corporation, special purpose trust, or other special purpose 24 legal entity, provided that, in the case of obligations of 25 a special purpose corporation, special purpose trust, or 26 other special purpose legal entity, all of the following are 27 applicable: 28 (1) Such obligations are investment grade at the time of 29 issuance. 30 (2) Such obligations are not payable from any of the sources 31 enumerated in subsection 17, paragraph “a” . 32 (3) The project being financed or the tolls, tariffs, usage 33 fees, or other similar rates or charges for its use are subject 34 to regulation or oversight by a governmental unit. 35 -8- LSB 5136XC (9) 83 av/rj 8/ 30

S.F. _____ 20. “Utility first mortgage obligation” means any 1 obligation of an issuer secured by a first priority mortgage 2 on utility property owned by or leased to an investor-owned or 3 cooperative-owned utility company and located in the United 4 States, Canada, or a member country of the organisation for 5 economic co-operation and development having a sovereign rating 6 in one of the top two generic lettered rating classifications 7 by a securities rating agency acceptable to the commissioner, 8 provided that the utility or utility property or the usage 9 fees or other similar utility rates or charges are subject to 10 regulation or oversight by a governmental unit. 11 Sec. 2. NEW SECTION . 522.2 Organization —— financial 12 requirements. 13 1. A credit default insurance corporation shall be 14 organized and licensed in the manner prescribed by Iowa law and 15 a foreign insurer shall be licensed in the manner prescribed by 16 Iowa law, except as modified by the following provisions: 17 a. A corporation organized for the purpose of transacting 18 credit default insurance shall, subject to the applicable 19 provisions of this chapter, be licensed to transact only the 20 following additional kinds of insurance: 21 (1) Residual value insurance, as defined by law or by rules 22 adopted by the commissioner. 23 (2) Surety insurance, as defined by law or by rules adopted 24 by the commissioner. 25 (3) Credit insurance, as defined by law or by rules adopted 26 by the commissioner. 27 (4) Financial guaranty insurance, as defined by law or by 28 rules adopted by the commissioner. 29 b. A credit default insurance corporation shall only assume 30 those kinds of insurance for which it is licensed to write 31 direct business. 32 c. Prior to the issuance of a license, unless a plan of 33 operation has been previously approved by the commissioner, a 34 corporation shall submit for the approval of the commissioner 35 -9- LSB 5136XC (9) 83 av/rj 9/ 30

S.F. _____ a plan of operation, detailing the types and projected 1 diversification of guaranties that will be issued, the 2 underwriting procedures that will be followed, managerial 3 oversight methods, investment policies, and such other matters 4 as may be prescribed by the commissioner by rule. 5 d. A credit default insurance corporation’s investments in 6 any one entity insured by that corporation shall not exceed 7 four percent of its admitted assets at last year end, except 8 that this limit does not apply to investments payable or 9 guaranteed by a United States governmental unit or state if 10 such investments payable or guaranteed by the United States 11 governmental unit or state are rated in one of the top two 12 generic lettered rating classifications by a securities rating 13 agency acceptable to the commissioner. 14 2. A credit default insurance corporation shall not 15 transact business in this state unless it has paid-in capital 16 of at least fifteen million dollars and paid-in surplus of at 17 least one hundred sixty-five million dollars, and shall at all 18 times thereafter maintain a minimum surplus to policyholders of 19 at least one hundred fifty million dollars. 20 3. A credit default insurance corporation shall be deemed to 21 be in compliance with Iowa law if not less than sixty percent 22 of the amount of the required minimum capital or minimum 23 surplus to policyholder investments consists of the types 24 specified by Iowa law and by rules adopted by the commissioner, 25 and direct government obligations of any state of the United 26 States or of any county, district, or municipality thereof, 27 provided such government obligations have been given the 28 highest quality designation of the securities valuation office 29 of the national association of insurance commissioners. Before 30 investing any part of the required minimum capital or surplus 31 in direct government obligations of any other state of the 32 United States or of any county, district, or municipality 33 thereof, such credit default insurance corporation shall have 34 invested at least ten percent of such required minimum in 35 -10- LSB 5136XC (9) 83 av/rj 10/ 30

S.F. _____ government obligations of Iowa or of any county, district, 1 or municipality thereof. Only for purposes of meeting the 2 required investment in government obligations of Iowa, the 3 insurer may count investments in any government obligation of 4 Iowa, whether direct or otherwise. 5 Sec. 3. NEW SECTION . 522.3 Contingency, loss and unearned 6 premium reserves —— collateral. 7 1. Contingency reserves . 8 a. A credit default insurance corporation shall establish 9 and maintain contingency reserves for the protection of 10 insureds and claimants against the effects of excessive losses 11 occurring during adverse economic cycles. 12 b. With respect to credit default insurance of municipal 13 obligation bonds, special revenue bonds, industrial development 14 bonds, and utility first mortgage obligations written on or 15 after the first day of the next calendar quarter commencing 16 after the effective date of this Act all of the following 17 apply: 18 (1) The insurer shall establish and maintain a contingency 19 reserve for all such insured issues in each calendar year for 20 each category listed in subparagraph (2). 21 (2) The total contingency reserve required pursuant to 22 this paragraph “b” shall be the greater of fifty percent of 23 premiums written for each such category or the following amount 24 prescribed for each such category: 25 (a) Municipal obligation bonds, fifty-five hundredths of a 26 percent of principal guaranteed. 27 (b) Special revenue bonds, and obligations demonstrated 28 to the satisfaction of the commissioner to be the functional 29 equivalent thereof, eighty-five hundredths of a percent of 30 principal guaranteed. 31 (c) Investment grade industrial development bonds, secured 32 by collateral or having a term of seven years or less, and 33 utility first mortgage obligations, one percent of principal 34 guaranteed. 35 -11- LSB 5136XC (9) 83 av/rj 11/ 30

S.F. _____ (d) Other investment grade industrial development bonds, 1 one and one-half percent of principal guaranteed. 2 (e) All other industrial development bonds, two and 3 one-half percent of principal guaranteed. 4 (3) Contributions to the contingency reserve required 5 by this paragraph “b” , equal to one-eightieth of the total 6 reserve required, shall be made each quarter for twenty years, 7 provided, however, that contributions may be discontinued 8 so long as the total reserve for all categories listed in 9 subparagraph (2), subparagraph divisions (a) through (e), 10 exceeds the percentages contained in such subparagraph 11 divisions (a) through (e) when applied against unpaid 12 principal. 13 c. With respect to all other credit default insurance 14 written on or after the first day of the next calendar quarter 15 commencing after the effective date of this Act all of the 16 following apply: 17 (1) The insurer shall establish and maintain a contingency 18 reserve for all such insured issues in each calendar year for 19 each such category listed in subparagraph (2). 20 (2) The total contingency reserve required pursuant to 21 this paragraph “c” shall be the greater of fifty percent of 22 premiums written for each such category or the following amount 23 prescribed for each such category: 24 (a) Investment grade obligations, secured by collateral or 25 having a term of seven years or less, one percent of principal 26 guaranteed. 27 (b) Other investment grade obligations, one and one-half 28 percent of principal guaranteed. 29 (c) Noninvestment grade consumer debt obligations, two 30 percent of principal guaranteed. 31 (d) Noninvestment grade asset-backed securities, two 32 percent of principal guaranteed. 33 (e) Other noninvestment grade obligations, two and one-half 34 percent of principal guaranteed. 35 -12- LSB 5136XC (9) 83 av/rj 12/ 30

S.F. _____ (3) Contributions to the contingency reserve required 1 by this paragraph “c” , equal to one-sixtieth of the total 2 reserve required, shall be made each quarter for fifteen years, 3 provided, however, that contributions may be discontinued 4 so long as the total reserve for all categories listed in 5 subparagraph (2), subparagraph divisions (a) through (e), 6 exceeds the percentages contained in such subparagraph 7 divisions (a) through (e) when applied against unpaid 8 principal. 9 d. Contingency reserves required in paragraphs “b” and 10 “c” may be established and maintained net of collateral and 11 reinsurance, provided that, in the case of reinsurance, the 12 reinsurance agreement requires that the reinsurer shall, on 13 or after the effective date of the reinsurance, establish and 14 maintain a reserve in an amount equal to the amount by which 15 the insurer reduces its contingency reserve, and contingency 16 reserves required in paragraphs “b” and “c” may be maintained 17 as follows: 18 (1) Net of refundings and refinancings to the extent 19 the refunded or refinanced issue is paid off or secured by 20 obligations which are directly payable or guaranteed by the 21 United States government. 22 (2) Net of insured securities in a unit investment trust or 23 mutual fund that have been sold from the trust or fund without 24 insurance. 25 e. The contingency reserves may be released thereafter in 26 the same manner in which they were established and withdrawals 27 therefrom, to the extent of any excess, may be made from the 28 earliest contributions to such reserves remaining therein as 29 follows: 30 (1) With the prior written approval of the commissioner if 31 any of the following applies: 32 (a) If the actual incurred losses for the year, in the 33 case of the categories of guaranties subject to paragraph “b” 34 exceeds thirty-five percent of earned premiums, or in the case 35 -13- LSB 5136XC (9) 83 av/rj 13/ 30

S.F. _____ of the categories of guaranties subject to paragraph “c” exceeds 1 sixty-five percent of earned premiums. 2 (b) If the contingency reserve applicable to the categories 3 of credit default insurance subject to paragraph “b” has been in 4 existence for less than forty quarters, or for less than thirty 5 quarters for the categories of guaranties subject to paragraph 6 “c” , upon a demonstration satisfactory to the commissioner that 7 the amount carried is excessive in relation to the insurer’s 8 outstanding obligations under its credit default insurance. 9 (2) Upon thirty days’ prior written notice to the 10 commissioner, provided that the contingency reserve applicable 11 to the categories of credit default insurance subject to 12 paragraph “b” has been in existence for forty quarters, or 13 thirty quarters for categories of credit default insurance 14 subject to paragraph “c” , upon a demonstration satisfactory 15 to the commissioner that the amount carried is excessive in 16 relation to the insurer’s outstanding obligations under its 17 credit default insurance. 18 f. An insurer providing credit default insurance may 19 invest the contingency reserve in tax and loss bonds, or 20 similar securities, purchased pursuant to section 832(e) of 21 the Internal Revenue Code, or any successor provision, only 22 to the extent of the tax savings resulting from the deduction 23 for federal income tax purposes of a sum equal to the annual 24 contributions to the contingency reserve. The contingency 25 reserve shall otherwise be invested only in classes of 26 securities or types of investments specified by Iowa law or by 27 rules adopted by the commissioner. 28 2. Loss reserves. 29 a. The case basis method or such other method as may be 30 prescribed by the commissioner shall be used to establish and 31 maintain loss reserves, net of collateral, for claims reported 32 and unpaid, in a manner consistent with Iowa law. A deduction 33 from loss reserves shall be allowed for the time value of money 34 by application of a discount rate equal to the average rate of 35 -14- LSB 5136XC (9) 83 av/rj 14/ 30

S.F. _____ return on the admitted assets of the insurer as of the date of 1 the computation of any such reserves. The discount rate shall 2 be adjusted at the end of each calendar year. 3 b. If the insured principal and interest on a defaulted 4 issue of obligations due and payable during any three years 5 following the date of default exceeds ten percent of the 6 insurer’s surplus to policyholders and contingency reserves, 7 its reserve so established shall be supported by a report from 8 an independent source acceptable to the commissioner. 9 3. Unearned premium reserve. An unearned premium reserve 10 shall be established and maintained net of reinsurance and 11 collateral with respect to all credit default insurance 12 premiums. Where credit default insurance premiums are paid 13 on an installment basis, an unearned premium reserve shall be 14 established and maintained, net of reinsurance and collateral, 15 computed on a daily or monthly pro rata basis. All other 16 credit default insurance premiums written shall be earned in 17 proportion with the expiration of exposure, or by such other 18 method as may be prescribed by the commissioner. 19 4. Collateral. Collateral shall be deposited with the 20 insurer, held in trust by a trustee or custodian acceptable 21 to the commissioner for the benefit of the insurer, or 22 held in trust pursuant to the bond indenture or other trust 23 arrangement, for the benefit of holders of insured obligations 24 in the form of funds for the payment of insured obligations, 25 sinking funds, or other reserves which may be used for 26 the payment of insured obligations and trustee and other 27 administrative fees on a first priority basis established 28 and continually maintained pursuant to the bond indenture 29 or other trust arrangement by a trustee acceptable to the 30 commissioner. The commissioner may adopt rules to limit the 31 amount of collateral provided by obligations, letters of credit 32 or credit default insurance contracts or to limit the amount of 33 collateral provided by any single issuer, bank, or counterparty 34 as provided for in this subsection. 35 -15- LSB 5136XC (9) 83 av/rj 15/ 30

S.F. _____ Sec. 4. NEW SECTION . 522.4 Limitations. 1 1. Credit default insurance may be transacted in this state 2 only by a corporation licensed for such purpose pursuant to 3 section 522.2. 4 2. The commissioner shall not permit the writing of credit 5 default insurance except where the insured or beneficiary under 6 the policy, bond, or contract has, or is expected to have at 7 the time of the default or other failure of the obligor under 8 the debt instrument or other monetary obligation, a material 9 interest in such default or other failure and a corporation 10 may insure the timely payment of United States dollar debt 11 instruments, or other monetary obligations, only in the 12 following categories: 13 a. Municipal obligation bonds. 14 b. Special revenue bonds. 15 c. Industrial development bonds. 16 d. Investment grade obligations of the government of a 17 country, a municipality, or a political subdivision of any of 18 the foregoing, or any public agency or instrumentality thereof 19 if that entity does not meet the definition of a governmental 20 unit. 21 e. Obligations of corporations, trusts, or other similar 22 entities established under applicable law. 23 f. Partnership obligations. 24 g. Asset-backed securities, trust certificates, and trust 25 obligations, provided that any of the following apply: 26 (1) With respect to mortgage-backed securities secured 27 by first mortgages on real property which are insurable by 28 a mortgage guaranty insurer authorized under Iowa law, such 29 mortgages are one of the following: 30 (a) Such mortgages with loan-to-value ratios in excess of 31 eighty percent are any of the following: 32 (i) In the case of mortgages on property located in the 33 state of Iowa, insured by mortgage guaranty insurers authorized 34 under Iowa law. 35 -16- LSB 5136XC (9) 83 av/rj 16/ 30

S.F. _____ (ii) In the case of mortgages on property located in a state 1 other than the state of Iowa, insured by mortgage guaranty 2 insurers authorized to do business in such other state. 3 (iii) In an aggregate principal amount less than the single 4 risk limits prescribed in subsection 7, paragraph “e” . 5 (b) With respect to additional mortgages with principal 6 balances, other collateral with a market value or, provided the 7 insured risk is investment grade, excess spread in an amount 8 in each instance at least equal to the coverage that would 9 otherwise be provided by such mortgage guaranty insurers in 10 accordance with paragraph “g” , subparagraph (1), subparagraph 11 division (a), is pledged as additional security for the 12 asset-backed securities. 13 (2) With respect to any asset-backed securities backed 14 by another pool of asset-backed securities, the pool of 15 asset-backed securities shall meet all of the following 16 requirements: 17 (a) The pool of asset-backed securities shall be comprised 18 of asset-backed securities having a right to payment and 19 rights to insolvency that are not subordinated to any other 20 security of the issuer, in the event of a payment default by, 21 or rehabilitation or insolvency of the issuer. 22 (b) The credit default insurer shall possess control and 23 remediation rights substantially similar to those held by the 24 most senior class of securities of the issuer of the insured 25 obligations backed by the same pool of assets. 26 (c) The pool of asset-backed securities meets any of the 27 following requirements: 28 (i) The pool consists of asset-backed securities that are 29 issued or guaranteed by a governmental unit, federal national 30 mortgage association, federal home loan mortgage corporation, 31 federal home loan bank, the federal agricultural mortgage 32 corporation, or the federal farm credit system banks as a 33 consolidated debt obligation or a systemwide debt obligation to 34 the extent that the obligations are covered by the farm credit 35 -17- LSB 5136XC (9) 83 av/rj 17/ 30

S.F. _____ insurance fund. 1 (ii) The pool consists entirely of asset-backed securities 2 insured by the credit default insurer. 3 (iii) The commissioner has determined that insuring the 4 asset-backed securities does not present undue risk to the 5 credit default insurer. 6 h. Installment purchase agreements executed as a condition 7 of sale. 8 i. Consumer debt obligations. 9 j. Utility first mortgage obligations. 10 k. Any other debt instrument or financial obligation that 11 the commissioner determines to be substantially similar to any 12 of the debt instruments or financial obligations described 13 in this subsection or that is otherwise approved by the 14 commissioner. 15 3. An insurer may insure obligations enumerated in 16 subsection 2, paragraphs “a” , “b” , and “c” , that are not 17 investment grade so long as at least ninety-five percent of the 18 insurer’s aggregate net liability on the kinds of obligations 19 enumerated in those paragraphs is investment grade. 20 4. A corporation may insure the timely payment of monetary 21 obligations in any category designated in this section 22 notwithstanding that such obligation may be insured by an 23 insurance policy issued by another insurer. In the event that 24 any obligation is insured by more than one credit default 25 insurance policy, then each such insurance policy may by its 26 terms specify its priority of payment in the event of a default 27 under the obligation insured or any other insurance policy, 28 provided that an insurer shall be entitled to take into account 29 payment under another policy insuring such obligation for 30 purposes of establishing and maintaining loss reserves only to 31 the extent that the policy issued by such insurer provides for 32 payment only in the event of payment default under both such 33 obligation and the other policy. 34 5. A corporation may also write credit default insurance 35 -18- LSB 5136XC (9) 83 av/rj 18/ 30

S.F. _____ to insure the timely payment of non-United States dollar debt 1 instruments or other monetary obligations denominated or 2 payable in foreign currency, only for the categories listed in 3 subsection 2, paragraphs “a” through “k” , provided that all of 4 the following are applicable: 5 a. Such currency is that of an organisation for economic 6 co-operation and development country or such other country 7 whose sovereign rating is investment grade or that is not 8 otherwise disapproved by the commissioner within thirty days 9 following receipt of written notification. The commissioner 10 shall not disapprove such notification upon demonstration 11 that there is no undue risk associated with insuring the 12 timely payment of such instruments or obligations. In making 13 such a determination, the commissioner shall take into 14 consideration the corporation’s outstanding liabilities on 15 noninvestment grade instruments and obligations in relation to 16 its outstanding liabilities on all instruments and obligations 17 and in relation to the amount of its surplus to policyholders. 18 b. Reserves required pursuant to section 522.3 in regard to 19 such obligations are established and adjusted quarterly based 20 upon the then current foreign exchange rates. 21 c. Such obligations do not exceed twenty-five percent of an 22 insurer’s aggregate net liability. 23 d. The aggregate and single risk limitations prescribed by 24 subsections 6 and 7 are determined by applying the then current 25 foreign exchange rates. 26 6. The corporation shall at all times maintain surplus to 27 policyholders and contingency reserves in the aggregate no less 28 than the sum of all of the following: 29 a. The sum of all of the following: 30 (1) Three thousand three hundred thirty-three ten 31 thousandths of one percent or one three hundredths of the 32 aggregate net liability under credit default insurance 33 in which the underlying obligations are municipal bonds 34 including obligations demonstrated to the satisfaction of 35 -19- LSB 5136XC (9) 83 av/rj 19/ 30

S.F. _____ the commissioner to be the functional equivalent thereof and 1 investment grade utility first mortgage obligations. 2 (2) Six thousand six hundred sixty-six ten thousandths 3 of one percent or one one hundred fiftieths of the aggregate 4 net liability under credit default insurance in which the 5 underlying obligations are investment grade asset-backed 6 securities. 7 (3) One percent or one one hundredth of the aggregate 8 net liability under credit default insurance in which the 9 underlying obligations are secured by collateral or having a 10 term of seven years or less, of all of the following: 11 (a) Investment grade industrial development bonds. 12 (b) Other investment grade obligations. 13 (4) One and one-half percent or one sixty-six and 14 sixty-seven one hundredths of the aggregate net liability under 15 credit default insurance in which the underlying obligations 16 are investment grade obligations. 17 (5) Two percent or one fiftieth of the aggregate net 18 liability under credit default insurance in which the 19 underlying obligations are the sum of all of the following: 20 (a) Noninvestment grade consumer debt obligations. 21 (b) Noninvestment grade asset-backed securities. 22 (6) Two and one-half percent or one fortieth of the 23 aggregate net liability under credit default insurance in which 24 the underlying obligations are noninvestment grade obligations 25 secured by first mortgages on commercial real estate and having 26 loan-to-value ratios of eighty percent or less. 27 (7) Four percent or one twenty-fifth of the aggregate 28 net liability under credit default insurance in which 29 the underlying obligations are other noninvestment grade 30 obligations. 31 (8) If the amount of collateral required by subparagraph 32 (3) is no longer maintained, that proportion of the obligation 33 insured which is not so collateralized shall be subject to the 34 aggregate limits specified in subparagraph (4). 35 -20- LSB 5136XC (9) 83 av/rj 20/ 30