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91_SB1115enr SB1115 Enrolled LRB9102645JSpcA 1 AN ACT to amend the Illinois Insurance Code by changing 2 Section 107.06a and adding Article XI 1/2. 3 Be it enacted by the People of the State of Illinois, 4 represented in the General Assembly: 5 Section 5. The Illinois Insurance Code is amended by 6 changing Section 107.06a and adding Article XI 1/2 as 7 follows: 8 (215 ILCS 5/107.06a) (from Ch. 73, par. 719.06a) 9 Sec. 107.06a. Organization under Illinois Insurance 10 Code. 11 (a) After December 31, 1997, a syndicate or limited 12 syndicate, except for a limited syndicate formed as a 13 partnership, may only be organized pursuant to Sections 7, 8, 14 10, 11, 12, 14, 14.1 (other than subsection (d) thereof), 15 15 (other than subsection (d) thereof), 18, 19, 20, 21, 22, 23, 16 25, 27.1, 28, 28.1, 28.2, 29, 30, 31, 32, 32.1, 33, and 35.1 17 and Article X of this Code, to carry on the business of a 18 syndicate, or limited syndicate under Article V-1/2 of this 19 Code; provided that such syndicate or limited syndicate is 20 admitted to the Exchange. 21 (b) After December 31, 1997, syndicates and limited 22 syndicates are subject to the following: 23 (1) Articles I, IIA, VIII, VIII 1/2, X, XI, XI 1/2, 24 XII, XII 1/2, XIII, XIII 1/2, XXIV, XXV (Sections 408 25 and 412 only), and XXVIII (except for Sections 445, 26 445.1, 445.2, 445.3, 445.4, and 445.5) of this Code; 27 (2) Subsections (2) and (3) of Section 155.04 and 28 Sections 13, 132.1 through 140, 141a, 144, 155.01, 29 155.03, 378, 379.1, 393.1, 395, and 396 of this Code; 30 (3) the Reinsurance Intermediary Act; and 31 (4) the Producer Controlled Insurer Act. SB1115 Enrolled -2- LRB9102645JSpcA 1 (c) No other provision of this Insurance Code shall be 2 applicable to any such syndicate or limited syndicate except 3 as provided in this Article V-1/2. 4 (Source: P.A. 89-97, eff. 7-7-95; 90-499, eff. 8-19-97; 5 90-794, eff. 8-14-98.) 6 (215 ILCS 5/Art. XI 1/2 heading new) 7 Article XI 1/2. 8 Protected Cell Companies 9 (215 ILCS 5/179A-1 new) 10 Sec. 179A-1. Short title. This Article may be cited as 11 the Protected Cell Company Law. 12 (215 ILCS 5/179A-5 new) 13 Sec. 179A-5. Purpose. Insurance securitization has been 14 developed as a means of accessing alternative sources of 15 capital and diversifying credit risk in order to enhance an 16 insurance company's ability to both assume risk and stabilize 17 underwriting results. Under the terms of the typical debt 18 instrument underlying an insurance securitization 19 transaction, prepaid principal is repaid to the investor on a 20 specified maturity date with interest, unless a trigger event 21 occurs. The proceeds of the debt instrument both 22 collateralize the insurance company's obligations under 23 specified contracts of insurance if a trigger event occurs, 24 as well as the insurance company's obligation to repay the 25 debt instrument if a trigger event does not occur. 26 Traditionally, insurance securitization transactions have 27 been performed through alien companies in order to utilize 28 efficiencies available to alien companies that are not 29 currently available to domestic companies. This Article is 30 adopted in order to create more efficiency in conducting 31 insurance securitization, to allow domestic companies easier SB1115 Enrolled -3- LRB9102645JSpcA 1 access to alternative sources of capital, and to promote 2 the benefits of insurance securitization generally. 3 (215 ILCS 5/179A-10 new) 4 Sec. 179A-10. Definitions. 5 "Domestic company" means an insurance company domiciled 6 in the State of Illinois. 7 "General account" means the assets and liabilities of a 8 protected cell company other than protected cell assets and 9 protected cell liabilities. 10 "Indemnity trigger" means a transaction term in which 11 relief of the issuer's obligation to repay investors is 12 triggered by its suffering a specified level of losses under 13 its policies of insurance or reinsurance. 14 "Insurance securitization" means the entering into of 15 debt instruments supported in full by cash or readily 16 marketable securities with investors by a domestic company 17 where repayment of principal or interest, or both, to 18 investors pursuant to the transaction terms is contingent 19 upon the occurrence or nonoccurrence of an event with respect 20 to which the domestic company is exposed to loss under 21 policies or contracts of insurance or reinsurance it has 22 issued. 23 "Market value" has the meaning given that term in Article 24 VIII of this Code (Investments of Domestic Companies). 25 "Protected cell" means an identified pool of assets and 26 liabilities of a domestic company segregated and insulated by 27 means of this Article from the remainder of the company's 28 assets and liabilities. 29 "Protected cell account" means a specifically identified 30 bank or custodial account established by a protected cell 31 company for the purpose of legally segregating the protected 32 cell assets of one protected cell from the protected cell 33 assets of other protected cells and from the assets of the SB1115 Enrolled -4- LRB9102645JSpcA 1 protected cell company's general account. 2 "Protected cell assets" means all assets identified with 3 and attributable to a specific protected cell of a protected 4 cell company, including assets physically segregated in a 5 protected cell account. 6 "Protected cell liabilities" means all liabilities 7 identified with and attributable to a specific protected cell 8 of a protected cell company. Protected cell liabilities 9 include liabilities representing the insurance obligations of 10 the protected cell as well as obligations of the protected 11 cell arising out of any insurance securitization transactions 12 of the protected cell. 13 "Protected cell company" means a domestic company which 14 has one or more protected cells. 15 (215 ILCS 5/179A-15 new) 16 Sec. 179A-15. Establishment of protected cells. 17 (a) A domestic company may, with the prior written 18 approval by the Director of a plan of operation submitted by 19 the domestic company with respect to each protected cell, 20 establish one or more protected cells. Upon the written 21 approval by the Director of the plan of operation, which 22 shall include, but not be limited to, the specific business 23 and investment objectives of the protected cell, the company 24 may, in accordance with the approved plan of operation, 25 attribute to the protected cell amounts both reflective of 26 insurance obligations with respect to its insurance business 27 and assets to fund those obligations. A protected cell shall 28 have its own distinct name or designation, which shall 29 include the words "protected cell". The company shall 30 transfer all assets attributable to a protected cell to one 31 or more separately established and identified protected cell 32 accounts bearing the name or designation of that protected 33 cell. Protected cell assets shall be held in the protected SB1115 Enrolled -5- LRB9102645JSpcA 1 cell accounts for the purpose of satisfying the obligations 2 of that protected cell. 3 (b) All sales, exchanges, transfers, or other 4 attributions of assets and liabilities between a protected 5 cell and the general account shall be in accordance with the 6 plan of operation approved by the Director or shall be 7 otherwise approved by the Director. Unless otherwise 8 approved by the Director, no sale, exchange, transfer, or 9 other attribution of assets or liabilities may be made by a 10 company between the company's general account and one or more 11 of its protected cells unless, in the case of an attribution 12 to a protected cell, the attribution is made solely to 13 establish the protected cell or, in the case of an 14 attribution from a protected cell to the company's general 15 account, the attribution is made solely to support the 16 company's insurance obligations that are the subject of the 17 business of the protected cell. Any sale, exchange, 18 transfer, or other attribution of assets and liabilities 19 between the general account and a protected cell or from 20 investors in the form of principal on a debt instrument 21 issued by a protected cell shall be in cash or in readily 22 marketable securities with established market values unless 23 otherwise approved in advance in writing by the Director. 24 (c) The creation of a protected cell does not create, in 25 respect of that protected cell, a legal person separate from 26 the company. Amounts attributed to a protected cell under 27 this Article, including assets transferred to a protected 28 cell account, are owned by the company and the company may 29 not be, nor hold itself out to be, a trustee with respect to 30 those protected cell assets of that protected cell account. 31 Notwithstanding the foregoing, the company may allow for a 32 security interest to attach to protected cell assets or a 33 protected cell account when in favor of a creditor of the 34 protected cell and otherwise allowed under applicable law. SB1115 Enrolled -6- LRB9102645JSpcA 1 (d) This Article shall not be construed to prohibit the 2 company from contracting with or arranging for an investment 3 advisor, commodity trading advisor, or other third party to 4 manage the protected cell assets of a protected cell, 5 provided that all remuneration, expenses, and other 6 compensation of the third party advisor or manager are 7 payable from the protected cell assets of that protected cell 8 and not from the protected cell assets of other protected 9 cells or the assets of the company's general account. 10 (e) A domestic company that is a protected cell company 11 shall establish such administrative and accounting procedures 12 as are necessary to properly identify the one or more 13 protected cells of the company and the protected cell assets 14 and protected cell liabilities attributable thereto. It 15 shall be the duty of the directors of a protected cell 16 company to (i) keep protected cell assets and protected cell 17 liabilities separate and separately identifiable from the 18 assets and liabilities of the company's general account and 19 (ii) keep protected cell assets and protected cell 20 liabilities attributable to one protected cell separate and 21 separately identifiable from protected cell assets and 22 protected cell liabilities attributable to other protected 23 cells. Notwithstanding the foregoing, the remedy of tracing 24 shall be applicable to protected cell assets when commingled 25 with protected cell assets of other protected cells or the 26 assets of the company's general account. 27 (f) Unless otherwise approved by the Director, the 28 company shall, when establishing a protected cell, attribute 29 to the protected cell assets with a value at least equal to 30 the reserves and other insurance liabilities attributed to 31 that protected cell. 32 (215 ILCS 5/179A-20 new) 33 Sec. 179A-20. Use and operation of protected cells. SB1115 Enrolled -7- LRB9102645JSpcA 1 (a) The protected cell assets of any protected cell may 2 not be charged with liabilities arising out of any other 3 business the company may conduct. All contracts or other 4 documentation reflecting the obligations of a protected cell 5 to the general account shall clearly indicate that only the 6 assets of the protected cell are available for the 7 obligations of the protected cell. 8 (b) The income, gains, and losses, realized or 9 unrealized, from protected cell assets and protected cell 10 liabilities must be credited to or charged against the 11 protected cell without regard to other income, gains, or 12 losses of the company, including income, gains, or losses of 13 other protected cells. Amounts attributed to a protected 14 cell and accumulations thereon may be invested and reinvested 15 without regard to any requirements or limitations of Article 16 VIII of this Code (Investments of Domestic Companies), and 17 the investments in a protected cell or cells may not be taken 18 into account in applying the investment limitations otherwise 19 applicable to the investments of the company. 20 (c) Unless otherwise approved by the Director, assets 21 attributed to a protected cell must be valued at their 22 market value on the date of valuation, or if there is no 23 readily available market, then as provided in the contract or 24 the rules or other written documentation applicable to the 25 protected cell. 26 (d) A protected cell company shall, in respect of any of 27 its protected cells, engage in fully funded 28 indemnity-triggered insurance securitization to support in 29 full the protected cell liabilities attributable to that 30 protected cell. An insurance securitization that is not 31 indemnity-triggered and does not support in full the 32 protected cell obligations of a protected cell shall be 33 prohibited absent specific permission by the Director in 34 accordance with the authority granted under Section 179A-40 SB1115 Enrolled -8- LRB9102645JSpcA 1 and the guidance of the National Association of Insurance 2 Commissioners, as such guidance is developed. An insurance 3 securitization transaction that is not fully funded, whether 4 indemnity-triggered or not indemnity-triggered, is 5 prohibited. A protected cell may pay interest or other 6 consideration on any outstanding debt or other obligation 7 attributable to that protected cell, and nothing in this 8 subsection shall be construed or interpreted to prevent a 9 protected cell from entering into a swap agreement or other 10 transaction that has the effect of guaranteeing such interest 11 or other consideration. 12 (e) In all cases in which a protected cell engages in an 13 insurance securitization, the financial instrument effecting 14 such transaction shall contain provisions identifying the 15 protected cell to which the transaction will be attributed. 16 In addition, the financial instrument shall clearly disclose 17 that the assets of that protected cell, and only those 18 assets, are available to pay the obligations of that 19 protected cell. Notwithstanding the foregoing, and subject to 20 the provisions of this Article and any other applicable law 21 or rule, the failure to include such language in the 22 financial instrument shall not be used as the sole basis by 23 creditors, reinsurers, or other claimants to circumvent the 24 provisions of this Article. 25 (f) At the cessation of business of a protected cell, 26 the protected cell company shall voluntarily wind up the 27 protected cell in accordance with a plan approved by the 28 Director. 29 (215 ILCS 5/179A-25 new) 30 Sec. 179A-25. Reach of creditors and other claimants. 31 (a) Protected cell assets shall only be available to the 32 creditors of the company who are creditors in respect of that 33 protected cell and shall thereby be entitled, in conformity SB1115 Enrolled -9- LRB9102645JSpcA 1 with the provisions of this Article, to have recourse to the 2 protected cell assets attributable to that protected cell, 3 and shall be absolutely protected from the creditors of the 4 company who are not creditors in respect of that protected 5 cell and who, accordingly, shall not be entitled to have 6 recourse to the protected cell assets attributable to that 7 protected cell. Creditors of a protected cell shall not be 8 entitled to have recourse against the protected cell assets 9 of other protected cells or the assets of the company's 10 general account. 11 (b) When an obligation of a protected cell company to a 12 person arises from a transaction, or is otherwise imposed, in 13 respect of a protected cell: 14 (1) that obligation of the company shall extend 15 only to the protected cell assets attributable to that 16 protected cell, and the person shall, in respect of that 17 obligation, be entitled to have recourse only to the 18 protected cell assets attributable to that protected 19 cell; and 20 (2) that obligation of the company shall not extend 21 to the protected cell assets of any other protected cell 22 or the assets of the company's general account, and that 23 person shall not, in respect of that obligation, be 24 entitled to have recourse to the protected cell assets of 25 any other protected cell or the assets of the company's 26 general account. 27 (c) When an obligation of a protected cell company 28 relates solely to the general account, the obligation of the 29 company shall extend only to, and that creditor shall, in 30 respect of that obligation, be entitled to have recourse only 31 to, the company's general account. 32 (d) A protected cell shall only be authorized to assume 33 an insurance obligation directly from the company's general 34 account, and under no circumstances shall a protected cell be SB1115 Enrolled -10- LRB9102645JSpcA 1 authorized to issue insurance or reinsurance policies or 2 contracts directly to policyholders or reinsureds or have any 3 obligation to the policyholders of the company's general 4 account. The activities and obligations of a protected cell 5 are not subject to the provisions of Article XXXIII1/2 6 (Illinois Life and Health Guaranty Association Law) or 7 Article XXXIV (Illinois Insurance Guaranty Fund), and 8 protected cells shall not be assessed by or otherwise be 9 required to contribute to any guaranty fund or guaranty 10 association in this State. Nothing in this subsection shall 11 affect the activities or obligations of a company's general 12 account. 13 (e) In no event shall the establishment of one or more 14 protected cells alone constitute or be deemed to be a 15 fraudulent conveyance, an intent by the company to defraud 16 creditors, or the carrying out of business by the company for 17 any other fraudulent purpose. 18 (215 ILCS 5/179A-30 new) 19 Sec. 179A-30. Rehabilitation and liquidation of 20 protected cell companies. 21 (a) Notwithstanding any contrary provision in this Code, 22 the rules promulgated under this Code, or any other 23 applicable law or rule, upon any order of rehabilitation, 24 conservation, or liquidation of a domestic company that is a 25 protected cell company, the receiver shall be bound to deal 26 with the company's assets and liabilities, including 27 protected cell assets and protected cell liabilities, in 28 accordance with the requirements set forth in this Article. 29 (b) With respect to amounts recoverable under any 30 insurance securitization entered into or outstanding in any 31 protected cell of a protected cell company, the amount 32 recoverable by the receiver shall not be reduced or 33 diminished as a result of the entry of an order of SB1115 Enrolled -11- LRB9102645JSpcA 1 rehabilitation, conservation, or liquidation with respect to 2 the protected cell company notwithstanding any provisions to 3 the contrary in the financial instrument governing such 4 insurance securitization. 5 (215 ILCS 5/179A-35 new) 6 Sec. 179A-35. No transaction of an insurance business. 7 No insurance securitization effected under the provisions of 8 this Article shall be deemed to be an insurance policy or 9 contract of insurance and no investor in a securitization 10 transaction shall, by sole means of such investment, be 11 required to be licensed as an insurance company in the State 12 of Illinois. 13 (215 ILCS 5/179A-40 new) 14 Sec. 179A-40. Rules. The Director may promulgate 15 reasonable rules as may be necessary to effectuate the 16 purposes of this Article. 17 Section 99. Effective date. This Act takes effect upon 18 becoming law.