Organization; financial requirements.

(1) A financial guaranty insurance corporation must be organized and licensed in the manner prescribed in this code for stock or mutual property and casualty insurers except that:

(a) A corporation organized to transact financial guaranty insurance may, subject to this code, be licensed to transact:

1. Residual value insurance, as defined by s. 624.6081;

2. Surety insurance, as defined by s. 624.606;

3. Credit insurance, as defined by s. 624.605(1)(i); and

4. Mortgage guaranty insurance as defined in s. 635.011 if the provisions of chapter 635 are met.

(b)1. Prior to the issuance of a license, a corporation must submit to the office for approval a plan of operation detailing:

a. The types and projected diversification of guaranties to be issued;

b. The underwriting procedures to be followed;

c. The managerial oversight methods;

d. The investment policies; and

e. Any other matters prescribed by the office.

2. An insurer that is writing only the types of insurance allowed under this part on July 1, 1988, and otherwise meets the requirements of this part, is exempt from this paragraph.

(c) An insurer transacting financial guaranty insurance is subject to all provisions of this code which are applicable to property and casualty insurers to the extent that those provisions are not inconsistent with this part.

(d) The investments of an insurer transacting financial guaranty insurance in any entity insured by the corporation may not exceed 2 percent of its admitted assets as of the end of the prior calendar year.

(e) An insurer transacting financial guaranty insurance may only assume those lines of insurance for which it is licensed to write direct business.

(2) An insurer may not transact financial guaranty business unless it has surplus to policyholders of at least $50 million at the date of initial licensing for financial guaranty insurance and maintains a minimum surplus to policyholders of at least $35 million.

(3) An insurer may not transact financial guaranty insurance unless it establishes a contingency reserve, net of reinsurance, as follows:

(a) A contingency reserve, net of reinsurance, must be established in a minimum amount calculated by applying the following percentages to the net principal outstanding each calendar year of guaranties of:

1. Municipal obligation bonds, 0.8 percent;

2. Investment grade obligations with a term of less than 3 years, 1.0 percent;

3. All other investment grade obligations, including investment grade industrial development bonds and investment grade consumer debt obligations, 1.6 percent;

4. Noninvestment grade consumer debt obligations, 2.5 percent; and

5. All other obligations guaranteed, 3.0 percent.

(b)1. Quarterly additions to the reserve for subparagraph (a)1. must be equal to the greater of 1/80th of the amounts derived by applying the appropriate contribution specified in that subparagraph or 50 percent of the quarterly earned premiums on these guaranties, and must be maintained for a period of 20 years; and

2. Quarterly additions to the reserve for subparagraphs (a)2., 3., and 4. must be equal to the greater of 1/40th of the amounts derived by applying the appropriate contribution specified in that subparagraph or 50 percent of the quarterly earned premiums on these guaranties and must be maintained for a period of 10 years, except that, for obligations with a term of less than 3 years, the reserve must be maintained for a period of at least 5 years.

(c) The reserve may be released thereafter in the same manner, except that a part of the reserve may be released proportional to the reduction in net total liabilities resulting from reinsurance and the reinsurer must, on the effective date of the reinsurance, establish a reserve in an amount equal to the amount released.

(d) Withdrawals from the contingency reserve, to the extent of any excess, may be made with the approval of the office from the earliest contributions to the reserve remaining therein:

1. In any year in which the actual incurred losses exceed 35 percent of earned premiums, or

2. If the contingency reserve has been in existence for 40 quarters for reserves subject to subparagraph (b)1., and 20 quarters for reserves subject to subparagraph (b)2., upon demonstration that the amount carried is excessive in relation to the insurer’s outstanding obligations.

(4) In addition to the contingency reserve, the case basis method or other method prescribed by the office is used to determine loss reserves, in a manner consistent with the requirements of part I of chapter 625, which must include a reserve for claims reported and unpaid net of collateral. A deduction from loss reserves 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 must be adjusted at the end of each calendar year.

(5) The insurer maintains an unearned premium reserve, net of reinsurance, computed on the monthly pro rata basis, where the premiums are paid on an installment basis. All other such premiums paid must be earned proportionately with the expiration of exposure or by such other method the office prescribes or approves.