Section 205.10  Authority

Part 205 is promulgated by the Director of Insurance pursuant to Sections 401 and 144 of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch. 73, pars. 1013 and 756), which empowers the Director...to make reasonable rules and regulations as may be necessary for making effective...the insurance laws of the State.

Section 205.20  Purpose

It is the purpose of this Part to regulate the writing and servicing of municipal bond insurance.

Section 205.30  Definitions

a)         Municipal Bond Insurance – insurance or reinsurance against financial loss by reason of nonpayment of principal, interest or other payment obligations pursuant to the terms of municipal bonds as defined in subsection (b) hereof.

b)         Municipal Bond – any security (or other instrument under which a payment obligation is created) issued by or on behalf of, or payable or guaranteed by a state, territory or possession of the United States of America, a municipality, or a political subdivision of any of the foregoing, or by any public agency or instrumentality thereof.

c)         Contingency Reserve – an additional premium reserve established for the protection of insureds covered by policies insuring municipal bonds against the effect of excessive losses occurring during adverse economic cycles.

d)         Cumulative Net Liability – the insured unpaid principal and insured unpaid interest due or to become due covered by in-force policies of municipal bond insurance, reduced by the appropriate allowance for acceptable reinsurance.

e)         Average Annual Debt Service – in respect to any issue or part thereof of municipal bonds covered by an in-force policy, the product of the total insured, unpaid principal and insured, unpaid interest thereon times the number of such bonds (assuming that each $1,000 of par value represents one bond), divided by an amount equal to the aggregate life (in years) of such bonds (assuming that each $1,000 of par value represents one bond); i.e.:

f)         Industrial Revenue Bonds – municipal bonds issued primarily to finance property for use in a trade or business and without a substantial public purpose, and backed by a revenue source other than a governmental unit described in the definition of municipal bonds above.

g)         Insurer – includes a company engaged in the reinsurance of municipal bonds unless the text provides otherwise.

Section 205.40  Requirements

a)         Any direct insurer issuing contracts insuring municipal bonds must:

1)         be authorized to write the kinds of business defined in Class 2(g) and 2(h) of Section 4 of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch. 73, par. 616), and

2)         have a policyholders' surplus and contingency reserve of not less than $50,000,000 as shown by its last annual statement on file with the Director.

b)         Any insurer issuing contracts insuring municipal bonds shall establish a contingency reserve which shall consist of allocations of sums representing fifty percent (50%) of the earned premiums on policies insuring municipal bonds.  Allocations to such reserve made during each calendar year shall be maintained for a period of at least 240 months, except that withdrawals may be made by the company in any year and to the extent that the actual incurred losses on policies insuring municipal bonds exceed thirty-five percent (35%) of the earned premiums thereon or, notwithstanding the foregoing, withdrawals may be made by the company in any year and to the extent that the contingency reserve equals or exceeds one half of one percent (½%) of the cumulative net liability.  No such release shall be made without written notice to the Director.

Section 205.50  Limitations and Restrictions

a)

1)         In no event, shall the insured average annual debt service (net of the appropriate allowance for acceptable reinsurance and collateral allowable under Section 205.80) in respect to securities, backed by a single revenue source, exceed an amount representing ten percent (10%) of the insurer's policyholders' surplus plus its contingency reserve.

2)         In no event, shall the insured unpaid principal (net of the appropriate allowance for acceptable reinsurance and collateral allowable under Section 205.80) in respect to securites backed by a single revenue source, when added to the admitted value of the securities of such source in which the insurer has invested, exceed amount representing seventy-five percent (75%) of the insurer's policyholders' surplus plus its contingency reserve.

3)         In no event, shall twice the outstanding cumulative net liability under policies in force insuring industrial revenue bonds described in subsection 205.30(f) plus the outstanding cumulative net liability under policies in force insuring all other municipal bonds exceed:

A)        300 times the sum of the insurer's policyholders' surplus plus its contingency reserve if the insurer transacts only municipal bond insurance, or

B)        60 times the sum of the insurer's policyholders' surplus plus its contingency reserve if the insurer transacts any insurance in addition to municipal bond insurance.

b)         In the event that the requirement of subsection (a)(2) is exceeded because of municipal bond insurance written prior to the effective date of this Part, then

1)         the insurer shall not transact any new insurance of securities backed by such a single revenue source as described in subsection (a)(2), and

2)         the insurer shall not invest in any additional securities of such single revenue source as described in subsection (a)(2), unless and until the requirement of subsection (a)(2) has been met.

c)         In the event that an insurer exceeds the limitation in subsection (a)(3), it shall not transact any new insurance of municipal bonds until the such excess no longer exists.

d)         No insurer authorized to transact the business of insuring municipal bonds shall pay any commission or make any gift of money, property or other valuable thing to any employee, agent or representative of any issuer of municipal bonds or of any underwriter of any issue of such bonds, as an inducement to the purchase of a policy insuring such bonds, and no such employee, agent or representative of such issuer or underwriter shall receive any such payment or gift.  However, violation of the provisions of this section shall not have the effect of rendering void the insurance policy issued by the insurer.

e)         Any insurer that transacts any insurance other than municipal bond insurance may not have more than twenty percent (20%) of its gross (direct plus assumed) written premiums, net of acceptable reinsurance, in any one year represented by municipal bond premiums.

Section 205.60  Financial Statements

a)         A municipal bond insurer shall maintain an unearned premium reserve computed to show gross premiums, without any deductions, received and receivable upon all unexpired risks, net of reinsurance, on a monthly pro rata basis, except that in the case of premiums paid more than one (1) year in advance, the premiums shall be earned proportionally with the expiration of exposure, or by such other method which will correlate the expiration of exposure with the premium earned as the Director may prescribe or approve when the company's exposure to loss does not correlate with the passage of time.

b)         In addition to the contingency reserve, a municipal bond insurer shall compute and maintain reserves for losses and loss adjustment expenses for claims reported and unpaid determined by use of the case basis method or, when the requirements of Section 378 of the Insurance Code will not be met by the case basis method, such other methods as the Director may prescribe or approve which produces the reserves required by Section 378 of the Insurance Code.  (Ill. Rev. Stat. 1985, ch. 73, par. 990).

1)         Except as otherwise permitted by the Director, no deduction shall be made for anticipated salvage in computing case basis loss reserves unless such salvage is held by or under the control of the insurer and would qualify as an admitted asset under Section 3.1 of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch. 73, par. 615.1) or unless such salvage constitutes or is secured by a clean, irrevocable letter of credit.

2)         A deduction from reserves for losses shall be allowed for the time value of money by application of a discount rate equal to the average rate of return on the admitted assets of the insurer as of the date of the computation of any such reserve.  The discount rate shall be adjusted annually on the last day of each year.  No deduction from reserves for losses shall be otherwise allowed for the time value of money unless the insurer can satisfy the Director that bonds, notes and other fixed income investment, as authorized under Sections 124 through 125.24a of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch. 73, pars. 736 through 737.24a inclusive) sufficient to meet obligations for insured unpaid principal and insured unpaid interest calculated to the redemption of the defaulted issue have been deposited in trust for the purpose of meeting such obligations.

3)         If the insured principal and interest on a defaulted issue of bonds due and payable over the period of the next three years exceeds ten percent (10%) of the insurer's policyholders' surplus plus its contingency reserve, and such default is a default in payment of sums due, the insurer's reserve shall be supported by a report from a qualified independent source if the reserve is set up for less than the entire unpaid insured principal and unpaid insured interest to redemption.

c)         Treatment of Contingency Reserve on Financial Statements

1)         The contingency reserve required by subsection 205.40(b) shall be reported as a separate liability in all statutory financial statements. Any increase or decrease in the contingency reserve for the period shall be reported as a direct adjustment to surplus and shown separately in the Capital and Surplus Account of the Underwriting and Investment Exhibit.

2)         For purposes of determining whether a dividend or distribution is extraordinary pursuant to Section 131.20 of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch. 73, par. 743.20(3)), the change in the contingency reserve shall be included as net income (loss) for the period.

Section 205.70  Reinsurance

a)         An insurer qualified to write municipal bond insurance may, by contract, reinsure any such insurance it transacts, provided that credit in accounting and financial statements for reinsurance ceded shall be allowed only if the reinsurer is either:

1)         An insurer, authorized in Illinois to write the kinds of business defined in Class 2(g) and 2(h) of Section 4 of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch. 73, par. 616), which has policyholders' surplus of not less than twenty-five million dollars ($25,000,000), or

2)         An insurer that meets the surplus requirements of subsection 205.70(a)(1) hereof, but is not licensed in Illinois; however, such credit shall be allowed only to the extent and under the conditions specified in Section 173.1(2) of the Illinois Insurance Code (Ill Rev. Stat. 1985, ch. 73, par. 785.1(2)).  The security requirements of such sections shall also cover any contingency reserve established by such reinsurer.

b)         The contingency reserve required by subsection 205.40(b) shall not be reduced by reason of any risk ceded unless the risk is ceded to a reinsurer described in subsection (a)(1) or (2) hereof and provided such reinsurer establishes the reserves required in subsections 205.40(b) and 205.60 with respect to the ceded portion of the risk.

c)

1)         A municipal bond insurer may not reinsure such insurance with affiliated companies unless the limitations of Section 205.50 are measured against the consolidated policyholders' surplus of such affiliated insurers.

2)         Subsection 205.70(a) hereof does not diminish the applicability of Section 173.1 of the Illinois Insurance Code (Ill Rev. Stat. 1985, ch. 73, par. 785.1).

Section 205.80  Collateral Security

An insurer transacting municipal bond insurance as defined in Section 205.30 insurer may, for the purposes of Section 205.50, treat the amount of a clean, irrevocable letter of credit or other assets which would qualify under Section 173.1(2) of the Illinois Insurance Code (Ill. Rev. Stat. 1985, ch.73, par. 171.1(2)) deposited with it or held in trust to secure payment of the insured principal and interest, as a reduction in the amount of exposure insured.

Section 205.90  Applicability of Other Laws

a)         All the applicable provisions of the Illinois Insurance Code and the Illinois Insurance Regulations of the Department of Insurance and of other statutes and regulations of this State, except as the same may be in conflict herewith, shall apply to the operation and conduct of business described herein as municipal bond insurance.

b)         This Part does not prohibit any surety or municipal bond insurer from directly obtaining or receiving any form of collateral as security for its protection.