and the risks inherent in any such business as well as the relative advantages to the insurer and its policyholders of conducting such business directly instead of through a subsidiary.

(f) Every insurer chartered under this Act and every person affiliated with or who effectively controls or is controlled by such insurer shall comply with such rules and regulations as the Commission may prescribe, and shall make such periodic reports in such form and in such detail as the Commission shall prescribe, and shall be subject to examination or audit by the Commission or its delegate.

COMMENCING BUSINESS

SEC. 203. (a) A federally chartered insurer may commence and continue transacting insurance only if it has a certificate under the hand and seal of the Commission certifying—

(1) that its capital and surplus or guaranty fund has been paid in; (2) that such capital and surplus or guaranty fund has been invested in such assets as are permitted under this Act or the Commission's regulations, or are held in such deposits or custodial accounts as prescribed by the Commission;

(3) that its reserve liabilities meet the standard prescribed by the Commission under section 107; and

(4) that the contracts of insurance or suretyship it proposes to use are in compliance with the provisions of this Act and, with the exception of laws relating to rates or premiums, that such contracts are in compliance with any applicable laws or regulations of the State or States where such contracts are proposed to be issued.

(b) Any such certificate issued by the Commission pursuant to subsection (a) of this section shall continue in effect unless revoked or suspended by the Commission.

APPLICABILITY OF STATE LAW

SEC. 204. (a) A federally chartered insurer shall be exempt from the provisions of the law of any State

(1) which require the establishment and maintenance of reserves in the business of insurance done in that State;

(2) which require the participation of insurers in any State insolvency guaranty plan whereby such insurers are required to assume obligations of other insurers in the event of the insolvency or other financial impairment of such other insurers;

(3) which provide for the regulation of investments; or

(4) which provide for the regulation or fixing of rates or premiums or of classes of risks established by insurers operating in that State, except regulation of (A) any assigned risk plan or other residual risk market mechanism established under State law, or (B) any line of insurance (other than reinsurance) in which the Commission determines that the insurer competes principally for the producers' business rather than the business of the ultimate consumer.

(b) Nothing in this section may be construed to deny to any State the right to levy taxes or to require license fees for federally chartered insurers transacting insurance within its jurisdiction except that a federally chartered insurer has no liability to any State for a tax measured by gross premiums or net premiums collected to the extent that the amount of such tax exceeds or would exceed the amount of tax which would be imposed on the same amount of gross or net premiums of the least taxed insurer (other than a nonprofit medical or hospitaltype corporation) doing the same type of business and organized under the laws of any State (other than the taxing State). Except as otherwise provided herein, a federally chartered insurer shall for tax purposes be taxed at no higher rate than a foreign insurer doing the same type of business in any State in which it is authorized to do business.

(c) For the purpose of any tax law enacted under authority of a State, a federally chartered insurer shall not be treated as an insurer organized or incorporated under the law of the enacting State. For the purpose of any other law enacted under authority of a State or any law enacted under authority of the United States, a federally chartered insurer shall be treated as an insurer organized or incorporated under the law of the State in which it has its principal place of business, as provided in its charter.

INVESTMENTS

SEC. 205. (a) The purpose of this section is to require that funds of any federally chartered insurer in an amount equal to the sum of its policyholder obligations and minimum capital and surplus, or guaranty fund required by law, shall be invested in assets of integrity and stability, and to provide that funds of such insurer in excess of those required to cover such policyholder obligations and capital and surplus or guaranty fund may be invested at the discretion of the insurer, except that such excess funds shall not be invested in assets prohibited by subsection (g).

(b) As used in this section, the term "policyholder obligations" means those liabilities of the insurer to its policyholders and claimants against such policyholders on account of insurance contracts issued by it and obligations to creditors, and includes the liabilities required to be included in the insurer's annual statement filed with insurance regulatory authorities of the State in which the insurer's principal place of business is located including, but not limited to, the unearned premium reserve, reserve required by applicable mortality or morbidity tables prescribed by the Commission, and claim or loss reserves including reserves for incurred but not reported losses and for loss adjustment expense; but "policyholder obligations" does not include that portion of the insurer's capital and surplus, or guaranty fund, in excess of the minimum capital and surplus, or guaranty fund, required by law for such insurer.

(c) For the purpose of covering its policy holder obligations and minimum capital and surplus or guaranty fund, every federally chartered insurer shall have and maintain investments of the classes described in this subsection to the extent of such policyholder obligations and minimum capital and surplus or guaranty fund less an amount equal to 30 per centum of its surplus as regards policyholders, but in no event shall such insurer have and maintain investments of the character described less than in an amount equal to the sum of 70 per centum of such policyholder obligations, other than its minimum capital and surplus or guaranty fund, and 100 per centum of the minimum required capital and surplus or guaranty fund, except that the investments referred to in this subsection shall be subject to the limitations provided by subsection (d), and the Commission shall disallow any specific investment upon its finding that such investment does not meet the standard of unquestioned integrity and stability for the purposes of this subsection:

(1) cash, cash funds and interest accrued thereon on deposit, or in savings accounts, or under certificates of deposit, or in any other form, in solvent banks or trust companies that have qualified for the insurance protection afforded by the Federal Deposit Insurance Corporation, but such cash or cash funds shall not be limited to, or by, the amount of any such insurance protection;

(2) cash, cash funds, and interest accrued thereon on deposit or in savings accounts, or under certificates of deposit, or in any other form, in solvent building and loan or savings and loan associations that have qualified for the insurance protection afforded by the Federal Deposit Insurance Corporation or Federal Savings and Loan Insurance Corporation, but such cash or cash funds shall not be limited to, or by, the amount of any such insurance protection;

(3) premiums in the course of collecting, including due and deferred premiums in the course of collection from agencies or general agencies effectively owned or controlled by, or owning or controlling the insurer, not more than ninety days past due, less commissions payable thereon, and installment premiums to the extent of the unearned premium reserve carried on the policies to which such premiums apply, less commissions payable thereon: Provided, That premium balances not more than ninety days past due that are due from agencies effectively owned or controlled by, or effectively owning or controlling the insurer, may be deemed assets of the insurer only to the extent that such balances due from the agency or general agency are represented by assets of the kind described in the subsection subject to the limitations mentioned in subsection (d);

(4) reinsurance recoverables not more than ninety days past due from solvent reinsurers, including deposits made with assuming reinsurers or held by ceding insurers under reinsurance agreements but only to the extent that such deposits are available as offsets against liabilities under such reinsurance agreements;

(5) bonds, notes, warrants, and other securities which are the direct obligations of the United States or for which the full faith and credit of the United States is pledged for the payment of principal and interest;

(6) obligations or stock, where stated, of the following agencies or instrumentalities of the United States, whether or not such obligations are guaranteed by the Government:

(A) Commodity Credit Corporation;

(B) Federal intermediate credit banks;
(C) Federal land banks;

(D) Central Bank for Cooperatives;

(E) Federal home loan banks and stock thereof;

(F) Federal National Mortgage Association, and stock thereof when acquired in connection with sale of mortgage loans to the Association; (G) Government National Mortgage Association; and

(H) other agencies or instrumentalities of the United States as approved by the Commission from time to time;

(7) bonds, notes, warrants, and other securities which are the direct obligations of any State or territory of the United States or of the District of Columbia, or for which the full faith and credit of such State, territory, or District has been pledged for the payment of principal and interest;

(8) bonds, notes, warrants, and other securities that are valid and legally authorized obligations issued, assumed, or guaranteed by any county, city, town, municipality, or district of any State or territory of the United States, or by any political subdivision thereof, or by any civil division or public instrumentality of the United States, any State or territory of the United States, or any county, city, town, or district of any such State or territory, if by statutory or other legal requirements applicable thereto, such obligations are payable, both as to principal and interest, from taxes levied, or required by law to be levied, upon all taxable property or taxable income within jurisdiction of such governmental unit, or from special revenues pledged or otherwise appropriated or by law required to be appropriated for the purpose of such payment, but not including any obligations payable solely out of special assessments on properties benefited by local improvements: Provided, That obligations payable out of special revenues pledged or otherwise appropriated or required by law to be appropriated for the purpose of such payment, shall be eligible for purposes of this section only if such obligations are eligible for amortization in accordance with standards promulgated in rules or regulations issued by the Commission;

(9) bonds, notes, warrants, or other securities of the Dominion of Canada, or of any Province thereof;

(10) bonds, notes, or debentures of solvent corporations existing under the laws of the United States or any State or territory thereof, the District of Columbia, Canada, or any Province thereof, if such obligations meet such standards of integrity and stability as the Commission may from time to time prescribe;

(11) preferred or guaranteed stocks or shares, other than common stocks, of solvent institutions existing under the laws of the United States or of any State, or territory thereof, or of the District of Columbia, if such obligations meet such standards of unquestioned integrity and stability as the Commission may from time to time prescribe:

(12) if a life insurer, as loans to policyholders upon pledge of the policy as collateral security, amounts not exceeding the cash surrender values of such policies;

(13) if a life insurer, bonds or evidences of debt secured by first mortgages or deeds of trust on improved unencumbered real property or the equity of the seller of any such property in the contract for a deed covering the entire balance due on a bona fide sale of such property located in the United States or any State or territory thereof or the District of Columbia; but no such mortgage loan or investment in the equity of the seller in the contract for deed shall exceed in amount at the time of acquisition 75 per centum of the fair market value of the property. Real estate shall not be deemed to be encumbered within the meaning of this paragraph (13) by reason of the existence of taxes or assessments which are not delinquent, instruments creating or reserving mineral, oil, or timber rights, rights-of-ways, joint driveways, sewer rights, rights in walls, nor by reason of building restrictions or other restrictive covenants, nor when such real estate is subject

to lease in whole or in part whereby rents or profits are reserved to the owner if in any event the security for the loan or investment is a first lien upon the real estate: Provided, however, That the value of any mineral, oil, timber, or similar right so reserved shall not be included in the fair market value of the property;

(14) if a life insurer, bonds or notes secured by mortgage or trust deed guaranteed or insured as to principal in whole or in part under chapter 37 of title 38, United States Code, or bonds or notes secured by mortgage or trust deed guaranteed or insured under the National Housing Act; and

(15) common stocks of any solvent corporation incorporated under the laws of the United States or any State or territory thereof or the District of Columbia or the Dominion of Canada or any Province thereof, if the stocks of such corporation are listed or admitted to trading on a national securities exchange located in the United States and registered pursuant to section 6 and 19 of the Securities Exchange Act of 1934.

(d) Investments made by federally chartered insurers for the purpose of covering their policyholder obligations and their minimum capital and surplus or guaranty fund provided by law, as provided in subsection (e), are, with respect to such purpose only, subject to the following limitations;

(1) None of the securities mentioned in subdivision (c) shall be eligible for the purposes of that subsection if, within the five years immediately preceding, the obligor shall have defaulted in the payment of principal or interest on any of its bonds, warrants, or other securities.

(2) In respect to investments of the kind described in paragraph (8) of subsection (c) not more than an amount equal to 10 per centum of the insurer's policyholders' obligations shall be invested in the securities of any one such county, city, town, village, municipality, or district of such State or territory of the United States or of any political subdivision thereof, or of any such civil division or public instrumentality.

(3) Investments of the kind described in paragraph (9) of subsection (c) shall not exceed an amount equal to 5 per centum of the insurer's policyholder obligations.

(4) Investments of the kind described in paragraph (10) of subsection (c) shall not exceed an amount equal to 40 per centum of the insurer's policyholder obligations, nor shall more than an amount equal to 5 percentum of the insurer's policyholder obligations be invested in any one such investment.

(5) Investments of the kind described in paragraph (11) of subsection (c) shall not exceed an amount equal to 10 percentum of the insurer's policyholder obligations.

(6) Investments of the kinds described in paragraphs (13) and (14) of subsection (c) shall not exceed in the aggregate an amount equal to 40 percentum of the insurer's policyholder obligations, nor, with respect to investments under any of such paragraphs shall more than an amount equal to 5 per centum of the insurer's policyholder obligations be invested in any one such investment or in any one project, subdivision, or series of related transactions thereunder as determined by the Commission.

(7) Investments of the kind described in paragraph (15) of subsection (c) shall not exceed an amount equal to 10 per centum of the insurer's policyholder obligations.

(8) For the purposes of the limitations contained in this subsection (d), the property and securities enumerated in subsection (c) shall be valued at market value or at cost, less depreciation except that the Commission may, by regulation, authorize valuation of securities in accordance with stated values established for such securities in writing or as published by the Committee on Valuation of Securities of the National Association of Insurance Commissioners.

(e) A federally chartered insurer owning not less than 80 per centum of all classes of the outstanding stock of one or more federally chartered insurers may, for the purpose of complying with subsection (c) of this section, as limited by subsection (d), so comply on the basis of a consolidated statement.

(f) Any federally chartered insurer not in compliance with the requirements imposed by this section shall within a reasonable time, not to exceed thirty days, notify the Commission of that fact. Upon being so notified, or upon otherwise determining such fact, the Commission shall forthwith order the federally chartered insurer to make good the deficiency within thirty days, and it shall upon a

failure of such insurer to make good the deficiency within that period, revoke or suspend the Federal charter of such insurer until the deficiency has been made good: Provided, however, That if such noncompliance involuntarily results from the acquisition of the property or security through foreclosure or otherwise results from a default in a loan or other obligation and such acquisition was rendered necessary in order to protect the investment or avoid greater loss, the Commission may further extend such period if the federally chartered insurer establishes that such extension is necessary, that it will not unduly prejudice the policyholders, and that the insurer has, in good faith, entered upon a course of action calculated to terminate such noncompliance on or before the expiration of such extended period.

(g) Notwithstanding any other provision of this section, no federally chartered insurer shall invest any of its funds in or lend any of its funds upon the security of

(1) issued shares of its own capital stock except with the written permission of the Commission which may be granted at its discretion where the purpose of such acquisition is in connection with a lawful plan for mutualization of the insurer or in furtherance of a retirement, pension, or incentive program for officers or employees of the insurer, which plan has been approved by the stockholders, or if such acquisition is shown otherwise to be for the benefit of all stockholders; but in no event shall such shares so acquired be admissible as an asset covering policyholder obligations;

(2) securities issued by a corporation which is insolvent at the time of the proposed investment except with the written consent of the Commission pursuant to its determination that such proposed acquisition is pursuant to a reorganization or rearrangement in bankruptcy or some smilar proceeding or that such acquisition will not be prejudicial to stockholders, policyholders, or creditors, but no such securities shall be used to cover policyholder obligations;

(3) securities which will subject the insurer to any assessment other than for taxes or wages; or

(4) any investment or security which is found by the Commission to be designed to evade any prohibition of this subsection.

(h) The assets enumerated in subsection (c) and other assets not prohibited under subsection (g) nor required to be scheduled as nonadmitted assets in any annual statement form as prescribed from time to time by the Commission, shall be deemed admitted assets for purposes of determining the solvency or solidity of the federally chartered insurer or any applicant for a Federal charter, and all such assets shall be valued in accordance with the standards prescribed in paragraph (8) of subsection (d).

REMARKS OF SENATOR BROOKE ON INTRODUCTION OF S. 1710

[Reprinted from the Congressional Record, June 16, 1977]

By Mr. BROOKE:

S. 1710. A bill to authorize the issuance of charters or carrying on the business of insurance, to provide for the guarantee of the insurance obligations, and for other purposes; to the Committee on Banking. Housing and Urban Affairs.

Mr. BROOKE. Mr. President, on October 1, 1976, the day of sine die adjournment of the 94th Congress, I introduced S. 3884, titled the Federal Insurance Act of 1976. At that time, I stated that I was introducing the bill so that it would be in the public domain, available for discussion and comment by those who are interested in the future of our insurance industry.

The bill was not offered as a definitive piece, but as a working document to be studied and criticized. And I continue to view the concepts which are included in the bill I am introducing today in the same way.

Since I introduced S. 3884, I have had an opportunity to meet with a number of insurance executives, insurance agents, and some State regulators. And the discussions which I have had with them have led me to modify the provisions of S. 3884. No doubt this legislation will be further modified as comments are received on the version of the bill which I introduce today.

The bill grew out of my concern about the financial condition of the property casualty insurance business. In 1974 and 1975, property casualty companies experienced the 2 worst years in their history, with combined underwriting