Esta ley deroga y reemplaza el Capítulo 6 del Código de Seguros de Puerto Rico para flexibilizar las alternativas de inversión para las aseguradoras y fomentar la diversificación de sus carteras de inversión. Establece definiciones clave, criterios de elegibilidad y calificación de inversiones, requisitos de diversificación, limitaciones cuantitativas para diferentes tipos de activos (instrumentos de crédito, intereses en acciones, préstamos hipotecarios, bienes raíces, inversiones extranjeras), normas para transacciones de préstamos de valores, acuerdos de recompra y transacciones de 'dollar roll', y la autorización para inversiones adicionales bajo ciertas condiciones. También prohíbe ciertas inversiones y prácticas, y establece la responsabilidad de la Junta de Directores en la supervisión de las inversiones.
(H. B. 3064) (Reconsidered) (No. 130) (Approved May 16, 2003) AN ACT
To repeal Chapter 6 of Act No. 77 of June 19, 1957, as amended, known as the "Puerto Rico Insurance Code" (hereinafter, the "Code"); and to adopt a new Chapter 6 to make investment alternatives more flexible for insurers and develop diversification of their investment portfolios.
The proposed Chapter six (6) of the "Puerto Rico Insurance Code" intends to amend Act No. 126 of July 14, 1998 (hereinafter, "Act No. 126"), which in turn amended the Chapter 6 in effect until that date, to make investment alternatives even more flexible for insurers, and to develop the diversification of their investment portfolios.
The experience of the insurers upon the application of some of the dispositions set forth in Act No. 126 has shown that it requires modifications to clarify the insurers' empowerment to invest, and to temper same to the insurers' needs. For example, the credit classification requirements applicable to interest in equity investments that were included in Act No. 126 have turned out to be somewhat impractical, and they make the efficient management of the investment portfolios of local insurers more difficult.
After the approval of the referenced Act in 1998, insurers have found that the provisions set forth in Act No. 126 tend to hinder the diversification potential that was one of the main objectives of the amendments therein.
For such purposes, by means of the approval of this Bill, the empowerment of insurers to invest, such as investments in entities owned directly by said insurers, is hereby extended.
The proposed Chapter 6 also contains technical amendments and content corrections that clarify the provisions set forth herein.
Section 1.- Chapter 6, from Article 6.010 to Article 6.160, of Act No. 77 of June 19, 1957, as amended, is hereby repealed, and a new Chapter six (6) is hereby adopted for said Act, which shall read as follows: "Article 6.020.- Definitions (1) "AFICA" is the Spanish acronym for the Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority created by Act No. 121 of June 27, 1977, as coded in Sections 12 L.P.R.A. §§ 1241 et seq. (2) "Preferred Stock" means any preferred stock, preferent or secured of a corporation or other commercial entity authorized to issue such type of stock, with liquidation preference over common stock of the issuing Commercial Entity. (3) "Admitted Assets" means the assets described in Chapter 5 of the Code, excluding the assets of separate accounts that are not subject to the provisions set forth in this Chapter. (4) "Affiliate" means, with respect to any person, another person who, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the person. (5) "Qualified Bank" means:
(a) A bank organized under the laws of Puerto Rico, or a national state bank or trust company adequately capitalized at all times pursuant to banking regulations of the United States or Puerto Rico, and which is subject to the regulations and/or banking laws of a State or Puerto Rico, or which is a member of the Federal Reserve system; or
(b) A bank or trust company, incorporated or organized under the laws of a foreign country and which is regulated by the laws of said country or by an agency of said government and which at all times is adequately capitalized as determined by the standards adopted by international banking authorities. (6) "Multilateral development bank" means an international development organization of which the United States is a member. (7) "Real Estate" means:
(a) (i) Real property; (ii) Interest in real property, such as surface rights, mineral, oil and gas, which have not been separated from the real property, and leasing rights on the same; and
(iii) Capital improvements and fixed facilities located on or in the real property. (8) "Capital and surplus" means the sum of the capital and surplus of the insurer included in the last annual report submitted to the Commissioner pursuant to Article 3.310 of this Code. (9) "Letter of credit" means an irrevocable and unconditional letter of credit, issued by a financial institution listed under the financial institutions that comply with the norms to issue letters of credit pursuant to the Purposes and Procedures Handbook of the Securities Valuation Office (SVO), or any succeeding publication or other nationally recognized statistics rating agency. For purposes of Article 6.120 of this Chapter, a Letter of Credit shall have a maturity date subsequent to the term of the transaction to which it is subject. (10) "Registered exchange office" means:
(a) A securities exchange office registered as a national exchange office under the Securities Exchange Act of 1934 (15 U.S.C.A. Sections 78 et seq.), as amended, or as registered otherwise pursuant to said law whose price quotations shall be provided through an automated national quoting system approved by the National Association of Securities Dealers, Inc.
(b) A Board of Trade or stock exchange designated as a contracting market by the Commodity Futures Trading Commission, or its successor. (11) "Purchase Warrant Certificates" means an instrument that confers upon the holder the right to purchase underlying assets at fixed price and term or at a series of prices and terms indicated in the purchase agreement. Warrant Certificates may be issued alone or in connection with the sale of other securities, as part of a merger or recapitalization plan or agreement, or to expedite the divestiture of securities of another corporation. (12) "Acceptable collateral":
(a) For purposes of security loan transactions, it shall mean cash, cash equivalents, letters of credit, direct obligations of, or securities whose principal and interest are secured by the government of the United States or Puerto Rico, or by their respective agencies and instrumentalities, including the Federal Home Loan Mortgage Corporation; and with regard to the loaning of foreign securities, it shall mean every sovereign debt rated 1 by the Securities Valuation Office (SVO, Spanish acronym) or with an equivalent rating issued by a nationally renowned statistics rating agency, recognized by the Securities Valuation Office (SVO).
(b) For purposes of repurchasing transactions, it shall mean cash, cash equivalent, letters or credit, direct obligations of or securities the principal and interest of which are secured by the government of the Untied States or Puerto Rico, or by their respective agencies and instrumentalities, including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
(c) For purposes of reverse repurchase agreements, it shall mean cash and cash equivalent. (13) "Registered Investment company" means an investment company as defined in Section 3
(a) of the Investment Company Act of 1940, as amended, and any person described in Section 3(c) of said Act, or a registered investment company registered under the Investment Companies Act of Puerto Rico, Act No. 6 of October 19, 1954, as amended, coded in 10 L.P.R.A. sections 661 et seq. (14) "Limited Liability Company" means any trade organization, excluding regular partnerships and corporations, organized or operated pursuant to the laws of the United States or any States thereof, or of Puerto Rico, which limits the personal liability of investors to their investment in equity in the trade entity. (15) "Control", "controls" or "Controlled" means the direct or indirect holding of power to direct or influence the
direction of the administration and policies of a person, whether through the ownership of voting stock entitled to vote, through contract (other than a regular trade contract or a non-administrative service contract), or otherwise, unless the power arises from the official or corporate position held by the person. It shall be presumed that there is control if any person, directly or indirectly, holds, controls, or has a voting power totaling five percent (5%) or more, or has empowerments totaling five percent (5%) or more of any other person's voting stock. Said presumption may be defeated if it is proved that there is no such actual control. However, the Commissioner may conclude, after giving every person concerned due notice and opportunity to comment, based on the findings of fact grounding his conclusion, that there is indeed control, notwithstanding the absence of a presumption in that sense. (16) "Direct", if used in connection with an obligation, means that the designated debtor is primarily responsible for the instrument that represents the obligation. (17) "Trade entity", includes a sole owner, a corporation, partnership, limited liability company, an association, limited liability partnership, a joint-stock company, a limited partnership, special partnership, joint venture, trust, joint partnership or other similar form of trade organization whether for profit or non-profit.
(18) "Registered trade entity" means a trade entity which:
(a) Has issued obligations or preferred stock that are classified 1 or 2 by SVO or is an issues of obligations, preferred stock or instruments derived thereof that have been classified the equivalent of 1 or 2 by the SVO or by a recognized statistics rating agency recognized nationally or by the SVO; or
(b) Is a securities broker (primary dealer) of the United States Government, as recognized by the Federal Reserve Bank of New York. (19) "Government sponsored enterprise" means:
(a) a government agency; or
(b) a corporation, limited liability company, association, partnership, limited partnership, special partnership, limited liability partnership, joint stock company, joint venture, a trust or any entity or instrumentality organized by the United States, a State, a political subdivision of a State, Puerto Rico, a political subdivision of Puerto Rico, Canada, a province of Canada, or a political division of Canada in order to attain a public policy or other government purpose. (20) "State" means a state, territory or possession of the United States of America and the District of Columbia. (21) "Cash Equivalents" means short term investments or stocks of high credit classification and great liquidity,
easily convertible into known amounts of cash without incurring penalties and are so close to maturity that they represent a minimal risk of change in their value. Cash equivalents include Money Market Mutual Funds and funds of great liquidity, easily convertible into known amounts of cash without incurring penalties, which are so close to maturity that they represent a minimal risk of change in their value. Cash equivalents include Class One Money Market Mutual Funds. For purposes of this definition, "short term investments or stocks" shall mean investments or stock with a maturity term of ninety (90) days or less. (22) "Investment Strategy" means the techniques and methods used by an insurer to accomplish their investment objectives such as the active management of an investment portfolio, the passive management of an investment portfolio, use of hedging transactions and other investment practices. (23) "Hedging Transactions" means a derived transaction that has been executed and maintained to reduce:
(a) The risk of changes in the value, yield, price, cash flow or amount of assets or liabilities acquired or incurred, or about to be acquired or incurred, by the insurer; or
(b) The risk of changes in the money exchange rate or in the level of exposure regarding the assets or
liabilities received or incurred, or about to be acquired or incurred by an insurer. (24) "Mutual Fund" means an investment company registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 or any other entity subject to the provisions of the Investment Companies Act of Puerto Rico, 10 L.P.R.A. Sections 661 et seq. (25) "Class One Bond Mutual Fund" means a mutual fund that qualifies at all times for investment using the reserve factor for class one bonds of the Purposes and Procedure Manual of the SVO or any other succeeding publication, or a mutual fund registered under the Investment Companies Act of Puerto Rico that has ninety percent ( $90 %$ ) or more of its assets in the credit instruments or preferential debts described in Article 6.080 (1) of this Code and in AFICA obligations, setting forth hereby that if investments in other stock or obligations by any of such funds exceeds ten percent ( $10 %$ ) of its assets, a percentage equivalent to the investment in stock or obligations of said fund shall be deemed as an investment in equity in interest investments as described in Article 9.090 (1). (26) "Money Market Mutual Fund" means a mutual fund that meets the conditions established in paragraphs 270.2a-7 of Title 17 of the Code of Federal Regulations, as amended.
(27) "Class One Money Market Mutual Fund" means a mutual fund that qualifies at all times for investment using the reserve factor for Class One bonds of the Purposes and Procedure Manual of the SVO, NAIC or any succeeding publication. (28) "Government Money Market Mutual Fund" means a money market mutual fund that at all times:
(a) Invests in obligations that are issued, guaranteed or secured by the government of the United States, or invests in collateralized repurchase agreements composed by said obligations; and
(b) Qualifies for investment without a reserve pursuant to the Purposes and Procedure Manual of the SVO or any succeeding publication. (29) "Guaranteed" or "secured" when used jointly with an obligation acquired under this Chapter, means that the guarantor or insurer is bound to:
(a) Assume or secure the obligation of the debtor, or to buy the obligation, or
(b) Make an unconditional commitment to maintain any conditions, which allow the debtor to pay the obligation in full. (30) "Income", with respect to securities, means interest, accrued discounts, dividends or other distributions., (31)
(a) "Rated Credit Instrument") means a contractual right to receive cash or other rated credit instrument of another entity whose instrument is:
(i) rated or subject to rating by the SVO; or (ii) in case of an instrument with a maturity of three hundred and ninety-seven (397) days or less, said instrument is issued, guaranteed or underwritten by an entity rated by, or any other obligation of the entity that is rated by the SVO or by any other nationally recognized statistical rating agency, recognized by the SVO; or (iii) In case of an instrument with a maturity of ninety (90) days or less, said instrument is issued by a qualified bank; or (iv) Is a share or shares from a Class One Bond Mutual Fund; or
(v) A share or shares from a Money Market Mutual Fund.
(b) However, "rated credit instrument" does not mean:
(i) A security with a par value, which provides that the net obligation of the issuer to repay all or part of its par value shall be determined through the performance of an interest in equity, commodity, foreign interest in equity or a foreign interest in equity index, foreign commodities, foreign currency or any combination thereof; or
(ii) Instruments that, obligatorily or at the option of the issuer, are convertible into interests in equity. (32) "Derived instrument" means an agreement, option, instrument or any combination thereof:
(a) To deliver, receive or assume a specific amount from one or more underlying interest rates, or to conduct a liquidation in cash instead; or
(b) Having a price, yield, value or cash flow based in the present or expected price, level, yield, value or cash flow of one or more underlying assets. Derived instruments include options, guaranties used in hedging transactions not subject to another trade instrument, covers certificates of acquisition, maximum limits, minimum limits, exchanges, dated transactions, futures transactions and any other agreements, options or instruments substantially similar to the same, or any combination thereof. Derived instruments shall not include investments authorized by sections 6.080 to 6.130 and 6.160 of this chapter, and do not include, for purposes of this Chapter, collateralized mortgage obligations. (33) "Underlying Interest" means the assets, liabilities and other interest, or a combination of same that serve as a basis for a Derived Instrument, such as any one or more securities, currency, rates, indexes, commodities, or derived instruments.
(34) "Interest in equity" means any of the following, provided the same are not classified credit instruments:
(a) Common stock;
(b) Preferred stock;
(c) Participation certificate in investment partnership;
(d) Equity investment in an investment company that is not a Money Market Mutual Fund or a Class One Bond Mutual Fund;
(e) Investment in a common trust fund of a bank regulated by a federal or state agency
(f) Any proprietary interest in minerals, petroleum or gas, in which rights have been separated from real interest on the real estate in which the minerals, petroleum or gas are located;
(g) Instruments that obligatorily have to be converted into equity securities;
(h) Interest in limited liability partnerships;
(i) Interest in limited liability companies;
(j) Guaranties or other rights to acquire equity which are created by the entity that owns or that will issue the equity interest to be acquired;
(k) Instruments that would be Classified Credit Instruments, a described in Subsection 32
(b) of this Section. (35) "Investments" means transactions of the kind described in Articles 6.080 to 6.110 and 6.130 of this Chapter.
(36) "Top rated investments" means, in the case of credit instruments, those rated 1 or 2 by the SVO; or in the case of short term investments, those rated "P-1" by "Moody's Investor's Service, Inc.," or "A-1" by "Standard and Poor's Rating Group"; or investments with similar ratings by a nationally recognized statistics rating agency, and by the SVO. (37) "Low rated investments means, in the case of credit instruments, those rated 4,5 or 6 by the SVO, or rated BB to R by Standard and Poor's Rating Group; or investments rated similarly by a nationally-recognized statistics agency, and by the SVO. (38) "Foreign Investments" means investments in any foreign jurisdiction, or foreign person, real property, real estate or assets domiciled in a foreign jurisdiction, which are substantially of the same nature as those qualifying for investment under this Chapter. An investment shall not be deemed foreign if the person issuing the securities, or the qualified primary credit source or the qualified guarantor is located in a domestic jurisdiction or is a person domiciled in a domestic jurisdiction, unless:
(a) the person issuing the securities is a shell business entity; and
(b) the investment is not assumed, secured, insured or otherwise supported by a person or domestic corporation which is not a shell business entity
domiciled in a domestic jurisdiction. For purposes of this definition:
(i) "Shell Business Entity" means a business entity which lacks financial substance, except as a vehicle to own interest in assets issued, owned or previously owned by a person domiciled in a foreign jurisdiction; (ii) "Qualified Primary Credit Source" means a credit source to which the guarantor may claim the payment of an investment and against which the insurer has a direct claim for the full and timely payment of the debt, based on a contractual right under which he may file a foreclosure action in the domestic jurisdiction; and (iii) "Qualified Guarantor" means a guarantor against whom an insurer has a direct claim for the full and timely payment of the debt, based on a contractual right under which he may file a foreclosure action in the domestic jurisdiction. (39) "Middle rated investments" means, in the case of credit instruments, those classified 3 by the SVO; or in the case of short term investments, investments classified P-2 and P-3 by Moody's Investor's Service, Inc., or classified A2 and A-3 by Standard and Poor's Rating Group; or in the case of long term investments, those rated BBB by
Moody's Investor's Service, Inc., or Standard and Poor's Rating Goup; or investments rated similarly by a nationally renowned statistics rating agency, acknowledged by the SVO. (40) Short term investments or securities" means investments or securities with a remaining term of one (1) year or less for maturity. (41) "Domestic jurisdiction" means the United States, any State of the United States, the District of Columbia, and Puerto Rico. (42) "Foreign jurisdiction" means a jurisdiction outside of the United States, Puerto Rico or Canada. (43) "Foreign currency" means any currency other than that of the United States. (44) "NAIC" means the National Association of Insurance Commissioners. (45) "SVO" means the Securities Valuation Office of the NAIC. (46) "Obligations" means bonds, notes, bills, trust certificates on machinery, production payments, certificates of bank deposits, term deposits, bankers acceptances, credit loans for leaseholds, loans secured by the financing of net lease and other evidence of indebtedness for the payment of money (or shares, certificates or other evidence of an interest in any of the above) which constitute general obligations of the issuer or which must be paid solely
from certain income or certain funds pledged or committed for said payment. (47) "Collateralized mortgage obligations" or CMOs are obligations and other evidences of debt whose payments are collateralized by several mortgages that pay or accrue interest on their principal. For purposes of this Chapter, residuals are not included. The word "residuals" means obligations known as ("Interest Only" or "IOs") or ("Principal Only" or "Pos"). (48) "Liabilities" means all liabilities that must be included in the last annual statement presented to the Commissioner pursuant to Article 3.310 of this Code. (49) "Person means a person, business entity, multilateral development bank, or a governmental or quasigovernmental body such as a political subdivision or government-sponsored enterprise. (50) "Investment practices" means transactions of the kind described in Articles 6.120 and 6.140 of this Chapter. (51) "Mortgage loan" means an obligation secured by a mortgage, trust deed, trust contract on real property. (52) "Home mortgage loan" means a loan primarily secured by a mortgage loan on real property improved with a residence for one to four families. (53) "Puerto Rico" means the Commonwealth of Puerto Rico, its agencies, instrumentalities, municipalities and political subdivisions.
(54) "Mortgage Loan Insurance" means an insurance subscribed by a private insurer to protect the mortgage lender against losses caused by default, and which is issued by an insurance company authorized and rated by a nationally recognized statistics rating agency, recognized by the SVO, whose coverage protects in a loan-to-value ratio for losses of eighty percent (80%) or more. (55) "Derivative Transaction" means a transaction involving the use of one or more derivative instruments, but for purposes of this Chapter, it does not include mortgagecollateralized obligations. (56) "Securities Lending Transaction" means a transaction in which the securities are loaned by an insurer to a business entity which is bound to reimburse the loaned securities or equivalent or similar securities to the insurer, whether on demand by the insurer or within a specific period of time. (57) "Repurchase Transaction" means a transaction in which an insurer purchases securities from a business entity that is bound to repurchase the securities purchased by the insurer (or equivalent securities) at a fixed price, whether on demand by the insurer or on a fixed date. (58) "Reverse Repurchase Transaction" means a transaction in which an insurer sells securities to a business entity and is bound to repurchase the securities sold or
equivalent securities from the business entity at a fixed price, whether on demand by the entity or on a fixed date. (59) "Dollar Roll Transaction" means two (2) simultaneous transactions with different liquidation dates not more than ninety-six (96) days apart, so that in the transaction with the most recent liquidation date, the insurer may sell to a business entity and in the other transaction, the insurer is bound to purchase from the same business entity substantially the same securities if they are within the following categories:
(a) securities guaranteed by other securities, assumed or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or their respective successor agencies; and
(b) other securities guaranteed by assets described in Section 106, Title 1 of the Secondary Mortgage Market Enhancement Act of 1984, as amended, coded in 15 U.S.C.A. Section 77r-1. (60) "Market Value" means:
(a) Regarding cash and cash equivalent, the amounts of these items;
(b) Regarding securities, the current price obtained from a generally recognized source, or the most recent price quotation from a generally recognized source, or if there is no generally recognized
source, the price of the security as determined by the Commissioner under Article 6.060 of this Chapter, including the income accrued but not paid, if not previously included in the price. (61) "Equivalent securities" means:
(a) In security loan transactions, securities that are identical to the securities loaned including the amount of the securities loaned, except that the same have a different certificate number (if in physical possession); but if different securities are exchanged for a security loaned as a result of a reorganization, merger, consolidation or other corporate action, the security exchanged shall be deemed as the loaned security;
(b) In a repurchase transaction, securities that are identical to purchased securities including the amount of the securities purchased except for the certificate number, if the same are in physical possession; or
(c) In a reverse repurchase transaction, securities that are identical to the securities sold including the amount of securities sold, except for the certificate number, if in physical possession. (62) "Asset-Backed Securities" are those securities or other instruments (excluding mutual funds) which evidence an interest in, or the right to receive payments from, or are primarily payable from, the distributions of an asset or
group of financial assets, or a specifically segregated cash flow, which are deposited in a trust or are segregated in a special purpose solvent business entity, under the following conditions:
(a) The trust or business entity has been established solely for the purpose of acquiring specific types of financial assets or cash-flow rights, and issues securities and other instruments which represent an interest in or a right to receive cash flow from those assets; and it is engaged in the activities that are necessary to maintain assets or rights and the credit characteristics and support of the assets owned by the trust or other business entity; and
(b) The assets of the trust or other business entity consist solely of interest-yielding obligations or other contractual obligations which represent the right to receive payments from the cash flow of the assets or rights. However, the credit enhancement or other credit support characteristics such as letters of credit, guaranties and exchange agreements shall not cause a security or other instrument to be an ineligible investment. (63) "Substantially similar securities" means securities that meet all the requirements of substantial similarity described in the Accounting and Practices Procedures Manual published by the NAIC, as amended, and in an amount which constitutes an acceptable form of delivery,
as determined from time to time by the Public Securities Administration. (64) "Short sale" means a transaction involving the sale of securities that are not yet part of the investment portfolio of the insurer with the intention of subsequently repurchasing the same at a lower price.
Article 6.030 Qualification and Eligibility of Investments. (1) Insurers may acquire, own or invest in those investments, or engage in those investment practices described in this Chapter. Investments that do not adjust to this Chapter shall not be eligible investments and shall not be a part of the assets allowed to the insurer. (2) An insurer shall not acquire an asset unless:
(a) its acquisition price is equal to or less than its market value;
(b) it is eligible for the payment or accrual of interest or discount, or is eligible to receive dividends or other distributions;
(c) if the interest is accrued in other assets, such assets should be eligible pursuant to this Chapter;
(d) it is not in arrears regarding the payment of interest, dividends or other distributions;
(e) in the case of stock and other equity in interest that the investment shall otherwise generate income or have the potential to increase in value; or
(f) it is acquired under Article 6.110 (3), or constitutes an investment practice allowed under Articles 6.120 and 6.140 of this Chapter. (3) An insurer may acquire and maintain as an allowed investment, any investments that do not otherwise comply with the provisions of this Chapter,
(a) if the insurer did not acquire the same for the purpose of evading any of the limitations contained in this Chapter,
(b) if the investment is not an investment prohibited under Article 6.050,
(c) if the investment meets the requirements in Article 6.060 , and
(d) if the insurer acquired it under any of the following circumstances:
(i) As a payment on account of obligations or existing debts or related to the refinancing or restructuring of the same, if it is to protect the interest of the insurer in said security or investment; (ii) As execution of collateral for default of a payment obligation to the insurer; (iii) In connection with any other eligible investment or any investment practice, if the security is obtained as interest, dividend or other distribution related to the investment or investment practice, or in connection
with the refinancing of the investment, provided the same does not proceed from an investment in an affiliated company; however, in each case, such acquisition must occur at no additional cost to the insurer or only at a minimum or nominal cost; (iv) Pursuant to a legal and bona fide recapitalization or voluntary or involuntary reorganization agreement regarding an investment held by the insurer, provided the same does not proceed from a reorganization or voluntary reorganization of an affiliated company; or
(v) Pursuant to a mass reinsurance agreement, merger or consolidation if the assets constitute legal and admissible investments for the ceding, merging or consolidated companies. (4) An investment acquired by an insurer under the conditions established in Article 6.030 (3) shall become an inadmissible asset within three (3) years from the date of acquisition, unless during said period the investment has become an eligible investment under any Article other than Article 6.030 (3). Notwithstanding the above:
(a) Upon request of the insurer, and based on evidence by the insurer that determining an asset held by
him/her to be inadmissible under Article 6.030 (3) would materially affect the interests of the insurer, the Commissioner may extend the term for the disposition of the investment for two (2) additional years.
(b) The term for disposing of mortgage and real estate loans shall be of five (5) years. In this case, the dispositions established in subsection
(a) shall not apply.
(c) Any investment acquired under any mass reinsurance agreement, merger and consolidation may be withheld for a longer term if so provided in the reinsurance, merger or consolidation plan, as approved by the Commissioner. (5) Except as provided in Articles 6.030 (6) and 6.030 (8), an investment shall qualify as an eligible investment under this Chapter if as of the date of its acquisition, or Trade Date, it qualified as an eligible investment under this Chapter. For the purpose of determining the limitations contained in this Chapter, insurers must recognize their investments by using the Trade Date. (6) Investments owned by an insurer as of the effective date of this Chapter, which were eligible investments under Chapter six (6) before said date, shall be deemed as eligible investments under this Chapter. Likewise, each specific transaction that constitutes an investment practice of the type described in this Chapter, legally
executed by an insurer and in effect as of the effective date of this Chapter, shall continue to be allowed under this Chapter until its expiration or termination pursuant to its terms. (7) Except as otherwise indicated in this Chapter, the limitations established that are applicable to the investments effected based on the allowed assets or the capital and surplus of an insurer shall be determined according to the information found in the last annual statement filed with the Commissioner pursuant to Article 3.310 of this Code. For purposes of determining any limitation based on the allowed assets, the insurer shall subtract from the assets, the sum of the liabilities registered in the annual statement on account of:
(a) the return of collateral to the insurer as a result of a reverse repurchase agreement or securities loan;
(b) cash received in dollar roll transactions; and
(c) loans if not included in clauses
(a) and
(b) of this subsection. (8) A qualified investment, for acquisition or possession in whole or in part, as an allowed asset, must be qualified or re-qualified in whole or in part at the time of its acquisition or on a subsequent date, under any other Article of this Chapter, if all relevant conditions contained in said Article are met at the time of its qualification or re-qualification. In the case of an investment that becomes ineligible after its acquisition
because of its conversion to a low rating, the insurer shall have one (1) year from the occurrence of said ineligibility to dispose of said investment. (9) An insurer must hold documents to show that each investment was acquired pursuant to the provisions of this Chapter, and such documents shall specify the Article of this Chapter under which the investment was acquired. (10) An insurer shall not execute any securities purchase agreement until the same are issued to the public for resale as part of the distribution of said securities by its issuer, nor may otherwise guarantee the distribution of said securities. (11) The Commissioner may, for just cause, order the insurer to limit, dispose of, withdraw, or discontinue an investment or investment practice, or declare same as inadmissible asset. The authority of the Commissioner under this subsection is in addition to any other authority that the Commissioner may have. (12) At the request of the insurer, the Commissioner may approve additional investments to those set forth in this Chapter, if he deems that the investment or prevention strategies and the financial condition of the insurer do so warrant. (13) Insurance Futures and Insurance Future Options shall not be deemed as investments for the purposes of this Chapter.
Article 6.040.- Authorization of Investments by the Board of Directors. (1) The Board of Directors of an insurer shall adopt a written plan to acquire and maintain investments and to outline their investment practices. This plan shall establish guidelines with regard to the quality, maturity, diversity of investments and other requirements, including investment strategies geared to ensure that the investments and investment practices are appropriate for the business conducted by the insurer, its liquidity needs, and its capital and surplus. The Board of Directors shall review and evaluate the technical and administrative capacity, and the experience and investment record of the Company before adopting any written plan related to any investment or investment practice. The plan must contain objectives with regard to the composition of the kinds of investments, including maximum internal limits. The plan must state the professional qualifications of the persons that shall be making routine investment decisions in order to ensure their competence and ethical behavior. The plan must also outline the relation of the types of investment, to the composition of the business portfolio of the insurer and the risk rating that would be most appropriate for the insurer, taking into consideration its capitalization level and expertise in investment management. (2) All investments acquired and held under this Chapter shall be acquired and owned under the supervision and
direction of the Board of Directors of the insurer. The Board of Directors shall certify in writing, through a formal resolution to be adopted at least once a year, that all investments have been made pursuant to the delegation, standards, limitations and investment goals established by the Board, or by a committee authorized by the Board with the responsibility to administer the investments of the insurer. (3) At least every three months, or more often if necessary, the Board of Directors of the insurer or a duly authorized committee shall:
(a) Receive and review a summary report of the investment portfolio of the insurer, its investment activities and the investment practices effected pursuant to its delegated authority, for the purpose of determining if the investment activity of the insurer is consistent with its written plan; and
(b) Review and update the written plan, as appropriate. (4) The Board of Directors or a duly-authorized committee, in the discharge of their duties under this Article, shall require that the files of any authorization or approval, and any other document that the Board or committee may need, and the reports of any action taken pursuant to the authority delegated under Section (1) of this Article, shall always be at the disposal of the Board or authorized committee.
(5) The directors of the insurer shall discharge their duties under this Article with the degree of care that is proper to the trust relationship with the insurer. (6) If the insurer does not have a Board of Directors, all references to a Board of Directors in this Chapter shall be understood as references to the governing body of the insurer with authority equivalent to that of a Board of Directors. (7) Every director of the insurer who, in the discharge of his/her duties under this Article incurs fraud, or a violation of the fiduciary duties, which causes financial damage to the insurer, shall incur personal liability.
Article 6.050.- Prohibited Investments.- An insurer shall not, directly or indirectly: (1) Invest in an obligation or security of, or grant or offer a guaranty for the benefit of, or in favor of an official or director of the insurer. (2) Invest in an obligation or security, grant a guaranty in benefit of or in favor of, or make other investments in a business entity of which five percent (5%) or more of the voting stock or interest in equity that belong directly or indirectly or are for the direct or indirect benefit of one or more officials or directors of the insurer. (3) Participate, on its own, or through one or more affiliates of the insurer in one or a series of transactions geared to evade the prohibitions of this Chapter.
(4) Invest in partnerships as a partner with unlimited liability except as provided in Article 6.030 (3) of this Chapter. This subsection does not prohibit a subsidiary of the insurer or any other affiliate, which are not insurers in turn, to become a partner with unlimited liability in a partnership. (5) Invest in or loan its funds secured by its own shares, but an insurer may acquire its own shares (although they shall not be admitted assets of the insurer) with the prior authorization of the Commissioner for the following purposes:
(a) convert a stock underwriter into a mutual or reciprocal underwriter, or convert a mutual or reciprocal underwriter into a stockbroker,
(b) transfer shares to the directors, officers, employees and agents of the insurer according to a plan approved by the Commissioner to convert a public underwriter to a private underwriter or with regard to an employee benefit plan; or
(c) as allowed in a plan approved by the Commissioner. (6) An insurer may not make short sales of securities. (7) No insurer may, at any time, or in any way, own more than five percent (5%) of the outstanding stock with voting rights of a corporation, except with the prior authorization of the Commissioner.
Article 6.060.- Valuation of investments.- (1) For purposes of this Chapter, the worth of an investment acquired or maintained under this Chapter, unless otherwise indicated in this Code, shall be the informed worth of the asset for statutory accounting purposes, as determined according to the procedures indicated in the valuation and accounting standards published by NAIC, including the Purposes and Procedures Manual, the Accounting Practices and Procedures Manual, the Annual Statement Instructions Manual of the SVO, or any valuation procedure officially adopted by NAIC. (2) In those cases in which the NAIC does not provide for a valuation procedure or a valuation, the investment shall be appraised according to the price determined by the Commissioner as its fair market value.
Article 6.070.- Diversification- General Requirements.- (1) Unless otherwise indicated in this Chapter, an insurer shall not acquire any investment under this Chapter if, as a result of, and after making the investment, the insurer has more than five percent (5%) of its allowed assets or more than ten percent ( $10 %$ ) of its capital and surplus, whichever is less, in any type of investments issued, assumed or guaranteed by one single person or business entity, including shares guaranteed by assets or loans guaranteed by a single set of assets. For the purposes of this Chapter, the securities issued by AFICA shall be
deemed as issued by the business entity to which AFICA is lending the money resulting from the issue. (2) Unless otherwise indicated in this Code, an insurer may only acquire investments allowed under this Chapter (excluding investments allowed under Articles 6.080 (1), $6.110(3), 6.150,6.160$ and the investment practices allowed under Articles 6.120, and 6.140 if, as a result of and after making the investment, they do not exceed forty percent $(40 %)$ of the allowed assets of the insurer. (3) The investments of an insurer shall be limited according to their rating, as follows:
(a) Top rated investments
An insurer may not acquire, directly or indirectly, an investment under Articles 6.080 (2), 6.080 (3), 6.090 or 6.130 of this Chapter, if as a result of and after making the investment, the sum total of the top rated investments owned at that moment would exceed forty percent ( $40 %$ ) of its allowed assets.
(b) Middle-rated investments
An insurer may not acquire, directly or indirectly, an investment under Articles 6.080 (2), 6.080 (3), or 6.130 of this Chapter, if as a result of and after making the investment, the sum total of the middlerated investments owned at that moment would exceed twenty percent (20%) of its allowed assets.
(c) Low rated Investments and Unrated Investments An insurer may not acquire a low rated investment.
An insurer may acquire unrated investments as provided in Articles 6.090 and 6.160 of this Chapter. (4) Canadian Investments- General Limitations.-
(a) An insurer may not acquire, directly or indirectly, those Canadian investments authorized by this Chapter if, as a result of and after making the investment, the total sum of such investments exceeds twenty percent (20%) of its allowed assets; the investments acquired under Articles other than Article 6.080 (2), shall not exceed ten percent $(10 %)$ of its allowed assets.
(b) However, regarding an insurer authorized to do business in Canada or who has life and risk insurance, annuity or reinsurance contracts based or located in Canada that are denominated in Canadian currency, the limitations shall be whichever is greater between A and B , in which A is the limitations in the foregoing subsection (4)(a), and B shall be whichever amount is greater between:
(i) the amount required by Canadian law to be invested by an insurer in the jurisdiction of Canada or in Canadian currency; or (ii) One hundred and fifteen percent (115%) of the amount of its reserves and other
obligations under life or risk insurance contracts based or located in Canada.
Article 6.080.- Credit Instruments or Obligations.- (1) Credit Instruments or Preferential Debt
An insurer may invest up to one hundred percent (100%) of its allowed assets in credit instruments issued, assumed, secured or insured by the United States or Puerto Rico; or a public agency, dependency, instrumentality or corporation of Puerto Rico or the United States; or a political subdivision or municipality of Puerto Rico; a State or enterprise sponsored by the governments of the United States, or any State, or Puerto Rico, if such instruments are assumed, secured or insured by the full faith and credit of said governments; or an enterprise that has been sponsored by the government of the United States, if such instruments maintain a triple AAA rating by a nationally recognized statistics rating entity; in obligations that are one hundred percent (100%) collateralized by the previously described credit instruments; or in stock and obligations issued by a Class One Bond Mutual Fund. (2) Canadian Credit Instruments
Subject to the limitations indicated in Article 6.070 (4), an insurer may invest up to twenty percent (20%) of its allowed assets in rated credit or debt instruments that have been issued, assumed, secured or insured by:
(a) Canada; or
(b) An enterprise sponsored by the government of Canada, if such instruments are assumed, guaranteed or secured by Canada or backed or secured by the full faith and credit of Canada. (3) Other Rated Credit Instruments and Obligations
Subject to the limitations indicated in Article 6.070, an insurer may invest in the following rated credit instruments:
(a) Issued by a money market mutual fund of the government of the United States, or a Class One Money Market Mutual Fund;
(b) Issued, assumed, guaranteed or secured by an enterprise sponsored by the government of the United States or Puerto Rico, other than those that qualify under Subsection (1) of this Article;
(c) Issued, assumed, guaranteed or secured by a State of the United States, if the instruments are general obligations of the State;
(d) Issued by a Multilateral Development Bank; or
(e) Issued, assumed, guaranteed or secured by an existing corporation under the laws of Puerto Rico or the United States, including, without being limited to obligations collateralized by mortgage loans and other obligations.
Article 6.090.- Interests in equity.- (1) Subject to the limitations indicated in subsections (1) and (2) of Article 6.070 of this Chapter, an insurer may invest in securities of a registered investment company. (2) Subject to the limitations indicated subsections (1) and (2) of Article 6.070 of this Chapter, an insurer may acquire interests in equity of any business entities organized under the laws of Puerto Rico or any state of the United States or province of Canada. (3) An insurer may acquire interests in equity that are not registered with a registered exchange brokerage firm and that are not investments prohibited under Article 6.050, if the aggregate amount of the interests in equity acquired under subsection (3) do not exceed five percent (5%) of the allowed assets of the insurer. (4) Unless otherwise indicated in this Chapter, an insurer may not acquire common stock as described in subsections (1), (2), and (3) of this Article, if, as a result of and after making the investment, the aggregate in common stock investments would exceed thirty percent $(30 %)$ of the allowed assets of the insurer. (5) Tangible Chattels Subject to Leasing
(a) An insurer may acquire interests in equity in chattels, located or used in whole or in part within the United States, or Puerto Rico through:
(i) Interests in partnerships, or interests in limited liability partnerships not prohibited under Article 6.050 (4); (ii) Joint Ventures; (iii) Interests in equity from limited liability corporations or companies; (iv) Trust Certificates; or
(v) Other similar instruments.
(b) Investments according to Subsection (1)
(a) of this Article shall be eligible only if chattels are subject to a lease contract or other agreement with a business entity whose obligations (totaling the purchase price of the chattel) may be acquired by the insurer independently, pursuant to Article 6.080 of this Chapter, and
(c) An insurer may not acquire investments under this Article if, as a result of and after making the investment, the worth of all the investments held by the insurer at that time under this Article exceeds two percent ( $2 %$ ) of its allowed assets.
(d) For purposes of determining compliance with the limitations indicated in Article 6.070 (1), the investments acquired by an insurer under this Article shall be added to all the investments assumed, issued
or secured by the same leaseholder under other Articles of this Chapter.
(e) This Article shall not apply to chattel lease contracts between the insurer and its subsidiaries or affiliates.
Article 6.100.- Investment in Subsidiaries The limitations and restrictions to investment set forth in this Chapter shall not apply to investments made by an insurer in a subsidiary that was acquired or established by the insurer with prior authorization from the Commissioner. All entities that are directly or indirectly under the control of the insurer shall be deemed to be subsidiaries. However, the investment in all subsidiaries of the insurer shall not exceed twenty percent (20%) of its admitted assets or thirty percent (30%) of its capital and surplus, whichever is less.
Article 6.110.- Mortgage Loans and Real State.- (1) Mortgage loans
(a) Subject to the limitations indicated in Article 6.070 of this Chapter, an insurer may acquire, whether directly, or indirectly through interests in limited liability partnerships, interests in partnerships not prohibited under Article 6.050 (4), limited liability companies, joint ventures, or shares in investment trusts evidenced by a participation certificate or other instrument, obligations secured by mortgage loans on real estate located within Puerto Rico, or the United States. Mortgage loans that are not first
liens, may only be acquired when the insurer is the holder of the first lien. Said obligations, together with all the obligations secured by mortgages or other real estate liens of equal priority, may not exceed the following at the time of acquisition exceed:
(i) ninety percent ( $90 %$ ) of the fair market value of the real property at the time of acquisition, if the obligation is secured by a deferred payment mortgage loan or similar guaranty; (ii) eighty percent ( $80 %$ ) of the fair market value of the real estate property, if the mortgage loan requires immediate periodic and pre-established payments of principal and interest, if it has an amortization period that does not exceed thirty (30) years and requires periodic payments at least once a year. Each periodic payment shall be sufficient to ensure that the balance of the principal owed in the mortgage loan at all times shall not exceed the outstanding balance in a mortgage loan for the same amount, the same rate of interest and requires equal payments of principal and interest, with the same frequency and amortization terms. Mortgage loans subject to this subsection
(a) (ii) shall be allowed notwithstanding that said loans provide for the
payment of the principal balance before the amortization term. In the case of home mortgage loans, the eighty percent ( $80 %$ ) limit may be increased to ninety-seven percent ( $97 %$ ) if a mortgage loan insurance policy has been obtained; or (iii) seventy-five percent ( $75 %$ ) of the fair market value if the real property in all other cases in which the requirements of Sections (1)(a)(i) and (1)(a)(ii) of this Article are not met.
(b) For purposes of subsection (1)
(a) of this Article, the amount of an obligation required to be included in computing the debt-value ratio may be reduced if said obligation is secured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, or their respective successors.
(c) An insurer shall not acquire under this Subsection any security guaranteed with assets that said insurer could otherwise acquire under Article 6.080.
(d) A mortgage loan rated under Article 6.030(6) or under this Article (1)
(d) , and which is restructured in such way that it complies with the requirements of a restructured mortgage loan pursuant to the "NAIC Accounting Practices Procedures Manual or a successor publication, shall continue being a rated mortgage under this Chapter.
(2) Income-generating Real Property
An insurer may invest in real property located within the United States or Puerto Rico through interests in special partnerships, limited liability partnerships, joint ventures, corporate stock, certified shares in an investment trust, or other similar instruments. Real property acquired under this subsection shall be acquired or managed for income-generating purposes or to be improved or developed for investment purposes according to an existing program (in which case the property shall be deemed as income-generating). (3) Real Property for business location
An insurer may acquire, manage and dispose of real property for the convenient location of its business operations, including its main office, branches and field operations (and of those of its affiliated companies) subject to the following:
(a) Real property may be subject to mortgages, liens or other encumbrances, the amount of which shall be deductible from the invested amount to the extent that the obligations secured by said mortgages, liens or other encumbrances are of no recourse against the insurer, shall be reduced from the amount invested by the insurer in the real property for the purpose of determining compliance with Subsection (4)(d) of this Article;
(b) For purposes of this subsection, the business operations of an insurer shall not include the portion of the real property used directly to provide medical health services to the insured of a health and accident insurer. Real property used for such purposes may be acquired under Subsection (2) of this Article. (4) Quantitative limitation
(a) An insurer may not acquire an investment under Subsection (1) of this Article if as a result of and after making the investment, the amount of all the investments owned by the insurer under Subsection (1) of this Article would exceed one percent (1%) of its allowed assets in mortgage loans securing a real property in particular.
(b) An insurer may not acquire an investment under Subsection (2) of this Article if, as a result of and after making the investment, the amount of the investment in a single property or contiguous properties including the guaranties granted at that moment by the insurer under Subsection (2) of this Article would exceed one percent (1%) of its allowed assets.
(c) An insurer may not acquire an investment under Subsection (1) or (2) of this Article if as a result of, and after making said investment, and considering any guaranty granted by the insurer regarding said investment, the amount of all the investments owned by
the insurer under Subsections (1) and (2) of this Article and the guaranties that have been granted and are in effect, would exceed ten percent ( $10 %$ ) of its allowed assets.
(d) The acquisition of real property by an insurer under Subsection (3) of this Article shall not be included in the calculations to determine compliance with the limitations established by Article 6.070 of this Chapter. An insurer may not acquire real properties under Subsection (3) of this Article if, as result of and after making the acquisition, the amount of the real property owned at that moment by the insurer under Subsection (3) would exceed ten percent ( $10 %$ ) of its allowed assets. Additional real property may be acquired under Subsection (3) of this Article with the authorization of the Commissioner.
Article 6.120.- Securities Loans, Repurchase Transactions, Inverse Repurchase Transaction, and Dollar Roll Transactions.
An insurer may effect securities loans, repurchase transactions, reverse repurchase transactions, and dollar roll transactions with registered business entities, if: (1) The Board of Directors of the insurer adopts a written plan consistent with the requirements of the plan described in Article 6.040(1) specifying the guidelines and goals to be followed, including:
(a) A description of how the cash received shall be invested or used for the general corporate purposes of the insurer;
(b) Operating procedures to manage the risks associated to interest fluctuations in the market and default by the other party, the conditions under which the product of the inverse repurchase transaction may be used in the regular course of business, and the use of acceptable collateral which reflects the liquidity need of the transaction; and
(c) Quantitative limits associated to the percentage of allowed assets of the insurer that may be invested in these transactions. (2) The insurer shall grant a written agreement for each authorized transaction in this Article or a master agreement for a series of transactions, excluding dollar roll type transactions. The written agreement shall require that each transaction is concluded no later than one year from the starting date or before, at the request of the insurer. The agreement must be made with the counterpart business entity in the transaction, but in the case of security loans, the agreement must be made with an agent authorized by the insurer, if the agent is a registered business entity and if the agreement:
(a) requires the agent to enter into separate agreements with each counterpart consistent with the requirements of this Article; and
(b) prohibits securities loans subject to the agreement with the agent or its affiliates. (3) Any cash received in a transaction under this Article shall be invested according to this Chapter, and in a manner in which the liquidity need of the transaction is recognized, or shall be used by the insurer for general corporate purposes. During the period that the transaction remains pending, the insurer, its agent or custodian must maintain the following as acceptable collateral received in a transaction under this Article, whether physically or through a book entry in the books of the Federal Reserve, the Depository Trust Company, the Participants Trust Company or other securities depository approved by the Commissioner:
(a) The possession of the acceptable collateral; or
(b) A full lien on the acceptable collateral; or
(c) In the case of jurisdictions outside the United States and Puerto Rico, the title of the acceptable collateral, or the rights as creditor secured by the acceptable collateral. (4) The limitations of Article 6.070 and Article 6.130 shall not apply to the risk created by transactions under this Article to a counterpart business entity. For purposes of the calculations made to determine compliance with this Subsection, no effect shall be given to the obligation of the insurer of reselling futures in the case of a repurchase transaction or repurchasing
securities in the case of an inverse repurchase transaction. An insurer may not effect a transaction under this Article if, as a result of, and after effecting the transaction:
(a) the sum total of the securities lent, sold or purchased under this Article, to the same registered business entity exceeds five percent (5%) of its allowed assets or ten percent ( $10 %$ ) of the capital and surplus, whichever is less. When calculating the amount sold or purchased from the same business entity under a repurchase or inverse repurchase transaction, the net effect may be deemed as provided in the master agreement; or
(b) the total aggregate sum of all the securities loaned, sold, or purchased under this Article would exceed forty percent ( $40 %$ ) of its allowed assets, setting forth hereby that for purposes of this calculation, the amount the insurer has invested in mutual funds registered under the Investment Companies Act of Puerto Rico shall be subtracted from the total of said admitted assets, in the measure in which said amount is deemed as an investment in Class One Bond Mutual Funds, pursuant to Article 6.020(25). (5) When an insurer effects a securities loan transaction, the insurer shall receive acceptable collateral with a market value as of the date of the transaction, at least equivalent to one hundred and two percent ( $102 %$ ) of the market value of the securities lent by
the insurer on that date. If at any moment the market value of the acceptable collateral owned by the insurer is less than the market value of the securities lent, the business entity to which the securities were lent shall provide the insurer additional acceptable collateral, the market value of which, together with the market value of every other collateral of the same nature held by the insurer with respect to the transaction is at least equal to one hundred and two percent ( $102 %$ ) of the market value of the securities lent. (6) When an insurer effects an inverse repurchase transaction (other than a dollar roll type transaction), the insurer shall receive in cash not less than ninety-five percent ( $95 %$ ) of the market value of the securities transferred as acceptable collateral. If at any moment the market value of the collateral transferred by the insurer exceeds ninety-five percent ( $95 %$ ), the counterpart business entity which received the collateral shall be bound to reimburse to the insurer the excess of the collateral originally transferred, in order to maintain the collateral market value-tocash received margin ratio of ninety-five percent ( $95 %$ ). (7) In dollar roll type transactions, the insurer shall receive cash in an amount at least equal to the market value of the securities transferred by the insurer as of the date of the transaction. (8) In repurchase transactions, an insurer shall receive securities as collateral with a market value as of the date of the transaction at least equal to one hundred two percent ( $102 %$ ) of the price paid
by the insurer for the securities. If at any moment the market value of the acceptable collateral received by the insurer is less than the value paid by the insurer, the business entity to which the securities were lent must provide the insurer additional acceptable collateral, the market value of which, together with the market value of every other collateral of the same nature received by the insurer with respect to the transaction, is at least equal to one hundred and two percent ( $102 %$ ) of the value paid by the insurer. No securities acquired by an insurer in a reverse repurchase transaction may be sold in a reverse repurchase transaction, or lent in securities loans transactions, or otherwise encumbered.
Article 6.130.- Foreign Investments and Foreign Currency Exposure.- (1) Subject to the limitations stated in Article 6.070 of this Chapter, an insurer may acquire foreign investments of substantially the same nature as those allowed to be acquired by an insurer under this Chapter, if as a result of such acquisition:
(a) The sum total of the foreign investments held at a given moment by the insurer does not exceed twenty percent $(20 %)$ of its allowed assets; and
(b) The sum total of the foreign investments held at a given moment by the insurer in one single foreign jurisdiction does not exceed five percent (5%) of its allowed assets or ten percent ( $10 %$ ) of its capital and surplus, whichever is less, in jurisdictions with a debt rating of one (1) by the
SVO, or does not exceed three percent (3%) of its allowed assets or five percent (5%) of its capital and surplus, whichever is less, in any other foreign jurisdiction. (2) Subject to the limitation indicated in Article 6.070 of this Chapter, an insurer may acquire investments or be involved in investment practices denominated in foreign currency, whether or not they are foreign investments acquired under Subsection (1) of this Article, or have additional exposure to foreign currency as a result of the conclusion or expiration of a hedge transaction with regard to investments in foreign currency denomination, if:
(a) The sum total of the investments held at a given moment by the insurer denominated in foreign currency under this Subsection (2) does not exceed five percent (5%) of its allowed assets or ten percent (10%) of its capital and surplus, whichever is less; and
(b) The sum total of the investments held by the insurer at a given moment in foreign currency denominations of a single foreign jurisdiction does not exceed five percent (5%) of its allowed assets or ten percent (10%) of its capital and surplus, whichever is less, in jurisdictions with a debt rating of one (1) by the SVO, or does not exceed three percent (3%) of its allowed assets or five
percent (5%) of its capital and surplus, whichever is less, in all other jurisdictions. c) However, an investment shall not be deemed to be in foreign currency if the insurer acquiring the same enters into one or more contracts which include transactions allowed under Article 6.140 and the counterpart business entity agrees under such contracts or contracts to change all payments made in foreign currency investments into United States currency at a rate that effectively protects the cash flow of the insurer from fluctuations in the currency exchange rates during the life of the contract. (3) In addition to the investments allowed under subsections (1) and (2) of this Article, an insurer who is not authorized to do business in a foreign jurisdiction, but has pending life or risk insurance policies, annuities or reinsurance contracts located in a foreign jurisdiction and denominated in foreign currency, may acquire investments denominated in the foreign currency of the jurisdiction, subject to the limitations described in Article 6.070 of this Chapter. However, no investments made under this Subsection in obligations of foreign governments, their political subdivisions and enterprises sponsored by said governments shall be subject to the limitations described in Article 6.070 of this Chapter if said investments are rated 1 or 2 by the SVO. The sum total of foreign investments acquired by the insurer under this Subsection shall not exceed whichever is greater of:
(a) The amount that the law of such foreign jurisdiction requires the insurer invests in said jurisdiction; or
(b) One hundred fifteen percent (115%) of the amount of its reserves, reinsurance net and other obligations, under life or risk contracts located in the foreign jurisdiction. (4) In addition to the investments allowed under Subsections (1) and (2) of this Article, an insurer not authorized to do business in a foreign jurisdiction, but who has pending life or risk insurance, annuities or reinsurance contracts located or placed in a foreign jurisdiction and denominated in foreign currency may acquire investments denominated in the foreign currency of such jurisdiction, subject to the limitations described in Article 6.070 of this Chapter. However, investments made under this Subsection in obligations of foreign governments, their political subdivisions and enterprises sponsored by said government shall not be subject to the limitations described in Article 6.070 of this Chapter if said investments are rated 1 or 2 by the SVO. The sum total of the investments acquired by the insurer under this subsection shall not exceed one hundred five percent (105%) of the amount of its reserves, net reinsurance and other obligations, under life and risk contracts located in the foreign jurisdiction. (5) The investments acquired under this Article shall be added to investments of the same nature effected under all the other Articles of this Chapter for purposes of determining compliance
with the limits contained in other Articles of this Chapter. All investments in obligations of foreign governments, their political subdivisions and enterprises sponsored by said governments, except those exempted under Subsections (3) and (4) of this Article, shall be subject to the limitations indicated in Article 6.070 of this Chapter.
Article 6.140.- Hedge Transactions.- (1) An insurer may use hedging instruments such as options, futures and other transactions, to protect interest rates solely for the following purposes:
(a) to reduce the risk of its other investments and,
(b) to improve the income of its other investments. The use of options, futures and other hedging instruments for said purposes shall be known as hedging strategies. (2) The use of hedges options, futures or instruments for the purpose of speculating in financial markets is hereby prohibited. At the request of the Commissioner, an insurer must be able to explain, at any time, the nature of the hedging being used and the continued effectiveness of said hedge strategies using cash flow analysis or other appropriate analysis. (3) The sum of the declared book value and the potential aggregate exposure of the financial instruments used by the insurer in its hedging strategies shall not exceed three percent (3%) of the allowed assets of the insurer.
(4) For purposes of this Article, the term "option" means an agreement that grants to the buyer a call option (the right to purchase or receive) or a put option (the right to sell, execute, conclude or carry out a cash transaction) based on real or expected price, level, behavior or value of one or more underlying interests.
Article 6.150.- Loans on Policies A life insurer may make loans to policy holders with the collateral of their respective policies in amounts that shall not exceed the redeemable cash value according to the terms of the policy.
Article 6.160.- Authority for Additional Investment.- (1) An insurer may acquire investments of any type that are not expressly prohibited by Article 6.050 of this Chapter without considering the categories, conditions, requirements or other limitations established by Articles 6.070 to 6.130 , including exceeding the quantitative limits established in this Chapter, if as a result of, and after effecting the transaction, the total sum of the investments acquired under this Article does not exceed whichever is less of the following:
(a) $5 %$ of its allowed assets, or
(b) $25 %$ of its capital and surplus. (2) An insurer may not acquire an investment or engage in an investment practice under this Article if, as a result of and after effecting the transaction, the total of all the investments in only
one person or business entity held by the insurer under this Article would exceed three percent (3%) of its allowed assets."
Section 2.- Qualification of Eligible Investments under the previous Act.
Any investment held by an insurer at the date of effectiveness of this Act, that were eligible investments under Chapter 6 of the Insurance Code prior to said date shall continue to be qualified as eligible investments under said Chapter.
Section 3.- This Act shall take effect immediately after its approval.
I hereby certify to the Secretary of State that the following Act No. 130 (H.B. 3064) (Reconsidered) of the $5^{ ext {th }}$ Session of the $14^{ ext {th }}$ Legislature of Puerto Rico:
AN ACT to repeal Chapter 6 of Act No. 77 of June 19, 1957, as amended, known as the "Puerto Rico Insurance Code" (hereinafter, the "Code"); and to adopt a new Chapter 6 to make investment alternatives more flexible for insurers and develop diversification of their investment portfolios, has been translated from Spanish to English and that the English version is correct.
In San Juan, Puerto Rico, today $1^{ ext {st }}$ of April of 2004.
Elba Rosa Rodríguez-Fuentes Director
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