SENATE BILL No. 1061

January 24, 2008, Introduced by Senators SANBORN and WHITMER and referred to the Committee on Banking and Financial Institutions.

A bill to amend 1956 PA 218, entitled

"The insurance code of 1956,"

(MCL 500.100 to 500.8302) by amending the title, as amended by 2002

PA 304, and by adding chapters 46, 47, and 48.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

TITLE

An act to revise, consolidate, and classify the laws relating

to the insurance and surety business; to regulate the incorporation

or formation of domestic insurance and surety companies and

associations and the admission of foreign and alien companies and

associations; to provide their rights, powers, and immunities and

to prescribe the conditions on which companies and associations

organized, existing, or authorized under this act may exercise

their powers; to provide the rights, powers, and immunities and to

prescribe the conditions on which other persons, firms,

corporations, associations, risk retention groups, and purchasing

groups engaged in an insurance or surety business may exercise

their powers; to provide for the imposition of a privilege fee on

domestic insurance companies and associations and the state

accident fund; to provide for the imposition of a tax on the

business of foreign and alien companies and associations; to

provide for the imposition of a tax on risk retention groups and

purchasing groups; to provide for the imposition of a tax on the

business of surplus line agents; to provide for the imposition,

levy, computation, collection, assessment, reporting, payment, and

enforcement of taxes on certain insurance companies; to provide for

the imposition of regulatory fees on certain insurers; to provide

for assessment fees on certain health maintenance organizations; to

modify tort liability arising out of certain accidents; to provide

for limited actions with respect to that modified tort liability

and to prescribe certain procedures for maintaining those actions;

to require security for losses arising out of certain accidents; to

provide for the continued availability and affordability of

automobile insurance and homeowners insurance in this state and to

facilitate the purchase of that insurance by all residents of this

state at fair and reasonable rates; to provide for certain

reporting with respect to insurance and with respect to certain

claims against uninsured or self-insured persons; to prescribe

duties for certain state departments and officers with respect to

that reporting; to provide for certain assessments; to establish

and continue certain state insurance funds; to modify and clarify

the status, rights, powers, duties, and operations of the nonprofit

malpractice insurance fund; to provide for the departmental

supervision and regulation of the insurance and surety business

within this state; to provide for regulation over worker's

compensation self-insurers; to provide for the conservation,

rehabilitation, or liquidation of unsound or insolvent insurers; to

provide for the protection of policyholders, claimants, and

creditors of unsound or insolvent insurers; to provide for

associations of insurers to protect policyholders and claimants in

the event of insurer insolvencies; to prescribe educational

requirements for insurance agents and solicitors; to provide for

the regulation of multiple employer welfare arrangements; to create

an automobile theft prevention authority to reduce the number of

automobile thefts in this state; to prescribe the powers and duties

of the automobile theft prevention authority; to provide certain

powers and duties upon certain officials, departments, and

authorities of this state; to provide for an appropriation; to

repeal acts and parts of acts; and to provide penalties for the

violation of this act.

CHAPTER 46

CAPTIVE INSURANCE COMPANIES

Sec. 4601. As used in this chapter:

(a) "Affiliated company" means a company in the same corporate

system as a parent, an industrial insured, or a member organization

by virtue of common ownership, control, operation, or management.

(b) "Alien captive insurance company" means an insurer formed

to write insurance business for its parents and affiliates and

licensed pursuant to the laws of a country other than the United

States, or any state, district, commonwealth, territory, or

possession of the United States other than the state of Michigan.

corporations, limited liability companies, partnerships, political

subdivisions, or groups that has been in continuous existence for

at least 1 year and the member organizations of which collectively,

or which does itself own, control, or hold, with power to vote, all

of the outstanding voting securities of an association captive

insurance company incorporated as a stock insurer or organized as a

limited liability company; or has complete voting control over an

association captive insurance company organized as a mutual

insurer.

(d) "Association captive insurance company" means a company

that insures risks of the member organizations of the association

and their affiliated companies.

(e) "Branch business" means any insurance business transacted

by a branch captive insurance company in this state.

(f) "Branch captive insurance company" means an alien captive

insurance company authorized by the commissioner to transact the

business of insurance in this state through a business unit with a

principal place of business in this state.

(g) "Branch operations" means any business operations of a

branch captive insurance company in this state.

(h) "Captive insurance company" means a pure captive insurance

company, association captive insurance company, sponsored captive

insurance company, special purpose captive insurance company, or

industrial insured captive insurance company authorized under this

chapter. For purposes of this chapter, a branch captive insurance

company shall be a pure captive insurance company with respect to

operations in this state, unless otherwise permitted by the

commissioner.

(i) "Commissioner" means the commissioner of the office of

financial and insurance services or the commissioner's designee.

(j) "Control", including the terms "controlling", "controlled

by", and "under common control with", means the possession, direct

or indirect, of the power to direct or cause the direction of the

management and policies of a person, whether through the ownership

of voting securities, by contract other than a commercial contract

for goods or nonmanagement services, or otherwise, unless the power

is the result of an official position with or corporate office held

by the person. Control is presumed to exist if a person, directly

or indirectly, owns, controls, holds with the power to vote, or

holds proxies representing 10% or more of the voting securities of

another person. A showing that control does not exist may rebut

this presumption.

(k) "Controlled unaffiliated business" means a company that

meets all of the following:

(i) Is not in the corporate system of a parent and affiliated

companies.

(ii) Has an existing contractual relationship with a parent or

affiliated company.

(iii) Has risks managed by a captive insurance company in

accordance with this chapter.

(l) "GAAP" means generally accepted accounting principles.

(m) "Industrial insured" means an insured that meets all of

the following:

(i) That procures insurance by use of the services of a full-

time employee acting as a risk manager or insurance manager or

utilizing the services of a regularly and continuously qualified

insurance consultant.

(ii) Whose aggregate annual premiums for insurance on all risks

total at least $25,000.00.

(iii) That has at least 25 full-time employees.

(n) "Industrial insured captive insurance company" means a

company that insures risks of the industrial insureds that comprise

the industrial insured group and their affiliated companies.

(o) "Industrial insured group" means a group that meets either

of the following criteria:

(i) Is a group of industrial insureds that collectively own,

control, or hold, with power to vote, all of the outstanding voting

securities of an industrial insured captive insurance company

incorporated as a stock insurer or limited liability company or

have complete voting control over an industrial insured captive

insurance company incorporated as a mutual insurer.

(ii) Is a group created under the product liability risk

retention act of 1981, 15 USC 3901 to 3906, and chapter 18, as a

corporation or other limited liability association taxable as a

stock insurance company or a mutual insurer under this chapter.

(p) "Irrevocable letter of credit" means a clean, irrevocable,

unconditional letter of credit, issued or confirmed by a qualified

United States financial institution. Letters of credit meeting

applicable standards of issuer acceptability as of the dates of

their issuance or confirmation shall, notwithstanding the issuing

or confirming institution's subsequent failure to meet applicable

standards of issuer acceptability, continue to be acceptable as

security until their expiration, extension, renewal, modification,

or amendment, whichever occurs first.

(q) "Member organization" means any individual, corporation,

limited liability company, partnership, or association that belongs

to an association.

(r) "Office" means the office of financial and insurance

services.

(s) "Organizational document" means the articles of

incorporation, articles of organization, bylaws, operating

agreement, or other foundational documents that create a legal

entity or prescribe its existence.

(t) "Parent" means any corporation, limited liability company,

partnership, or individual that directly or indirectly owns,

controls, or holds with power to vote more than 50% of the

outstanding voting interests of a company.

(u) "Participant" means an entity as described in section

4667, and any affiliates of that entity, that are insured by a

sponsored captive insurance company, where the recovery of the

participant is limited through a participant contract to the assets

of a protected cell.

(v) "Participant contract" means a contract by which a

sponsored captive insurance company insures the risks of a

participant and limits the recovery of the participant to the

assets of a protected cell.

(w) "Protected cell" means a segregated account established

and maintained by a sponsored captive insurance company for 1

participant.

(x) "Pure captive insurance company" means a company that

insures risks of its parent, affiliated companies, controlled

unaffiliated business, or a combination of its parent, affiliated

companies, and controlled unaffiliated business.

(y) "Qualified United States financial institution" means an

institution that meets 1 of the following:

(i) Is organized, or for a United States office of a foreign

banking organization, is licensed, under federal or state law, is

regulated, supervised, and examined by federal or state authorities

having regulatory authority over banks and trust companies, and has

been determined by the commissioner to meet such standards of

financial condition and standing as are considered necessary and

appropriate to regulate the quality of financial institutions whose

letters of credit will be acceptable to the commissioner.

(ii) For those institutions that are eligible to act as a

fiduciary of a trust, is organized, or for a United States branch

or agency office of a foreign banking organization, is licensed,

under federal or state law, has been granted authority to operate

with fiduciary powers, and is regulated, supervised, and examined

by federal or state authorities having regulatory authority over

banks and trust companies.

(z) "Special purpose captive insurance company" means a

captive insurance company that is authorized under this chapter and

chapter 47 that does not meet the definition of any other type of

captive insurance company defined in this section.

(aa) "Sponsor" means an entity that meets the requirements of

section 4665 and is approved by the commissioner to provide all or

part of the capital and retained earnings required by applicable

law and to organize and operate a sponsored captive insurance

company.

(bb) "Sponsored captive insurance company" means a captive

insurance company in which the minimum capital and retained

earnings required by applicable law is provided by 1 or more

sponsors, is authorized under this chapter, insures the risks of

separate participants through the contract, and segregates each

participant's liability through 1 or more protected cells.

(cc) "Surplus" means unassigned funds for an entity using

statutory accounting principles, with capital and surplus including

all capital stock, paid in capital and contributed surplus, and

other surplus funds, and is equivalent to retained earnings and

accumulated other comprehensive income, with capital and retained

earnings including all capital stock, additional paid in capital,

and other equity funds for an entity using GAAP.

(dd) "Treasury rates" means the United States treasury strips

asked yield as published in the Wall Street Journal as of a balance

sheet date.

(ee) "Voting security" includes any security convertible into

or evidencing the right to acquire a voting security.

Sec. 4603. (1) A captive insurance company, if permitted by

its articles of incorporation, articles of organization, operating

agreement, or charter, may apply to the commissioner for a

certificate of authority to do any and all insurance authorized by

this chapter except worker's compensation insurance, personal

automobile insurance, or homeowners insurance, or any component of

these coverages. A captive insurance company is subject to all of

the following:

(a) A pure captive insurance company shall not insure any

risks other than those of its parent, affiliated companies,

controlled unaffiliated business, or a combination of its parent,

affiliated companies, and controlled unaffiliated business.

(b) An association captive insurance company shall not insure

any risks other than those of the member organizations of its

association and their affiliated companies.

insure any risks other than those of the industrial insureds that

comprise the industrial insured group and their affiliated

companies.

(d) In general, a special purpose captive insurance company

shall only insure the risks of its parent. Notwithstanding any

other provisions of this chapter, a special purpose captive

insurance company may provide insurance or reinsurance, or both,

for risks as approved by the commissioner.

(e) A captive insurance company shall not accept or cede

reinsurance except as provided in section 4641.

(2) To conduct insurance business in this state, a captive

insurance company shall do all of the following:

(a) Obtain from the commissioner a certificate of authority

authorizing it to conduct insurance business in this state.

(b) Hold at least 1 board of directors meeting, or for a

limited liability company, a meeting of the managing board, each

year in this state.

for a branch captive insurance company, maintain the principal

place of business for its branch operations in this state.

(d) File with the commissioner the name and address of a

resident registered agent designated to accept service of process

and to otherwise act on its behalf in this state. The designation

shall remain in force as long as any liability remains within this

state. Whenever the registered agent cannot with reasonable

diligence be found at the registered office of the captive

insurance company, the commissioner shall be an agent of the

captive insurance company upon whom any process, notice, or demand

may be served.

(3) Before granting a certificate of authority, the

commissioner shall require the applicant to submit organizational

documents that contain the following:

(a) The names and places of residence of at least 3

incorporators or organizers of whom at least 2 are residents of

this state.

(b) The location of the principal office in this state.

(d) The purposes of the creation of the entity including a

reference to this chapter.

(e) The manner in which the corporate powers are to be

exercised.

(f) The number of directors or managers, as applicable.

(g) The number of directors or managers, as applicable, that

constitute a quorum for the purposes of doing business which shall

consist of no fewer than 1/3 of the directors or managers.

(h) The amount and value of capital stock, if any.

(i) The term of existence of the entity.

(4) The articles of incorporation of a proposed captive

insurance company may contain a provision providing that a director

is not personally liable to the corporation or its shareholders or

policyholders for monetary damages for a breach of the director's

fiduciary duty. However, the provision does not eliminate or limit

the liability of a director for any of the following:

(a) A breach of the director's duty of loyalty to the

corporation or its shareholders or policyholders.

(b) Acts or omissions not in good faith or that involve

intentional misconduct or knowing violation of law.

personal benefit.

(5) Before the organizational documents shall be effective for

the purposes of this chapter, the organizational documents shall be

submitted to the office of the attorney general for examination. If

such documents are found to be in compliance with this chapter, the

office of the attorney general shall so certify to the

commissioner. Each applicant for a captive insurance company

certificate of authority that submits its organizational documents

to the office of the attorney general shall pay to the attorney

general the examination fee provided in section 240(2).

(6) Prior to granting a certificate of authority to any

captive insurance company, the commissioner shall require,

consider, and review all of the following:

(a) A statement acknowledging that all financial records of

the captive insurance company, including records pertaining to

protected cells, if applicable, shall be made available for

inspection or examination by the commissioner and, if applicable, a

business plan demonstrating how the applicant will account for the

loss and expense experience of each protected cell at a level of

detail found to be sufficient by the commissioner and how it will

report the experience to the commissioner.

(b) A plan of operation, including, if applicable, a business

plan demonstrating how the applicant will account for the loss and

expense experience of each protected cell at a level of detail

found to be sufficient by the commissioner and how it will report

the experience to the commissioner.

capitalization to be contributed to the company.

(d) Evidence of the amount and liquidity of its assets

relative to the risks to be assumed.

(e) Evidence of the character, reputation, financial standing,

and purposes of the incorporators or organizers.

(f) Evidence of the character, reputation, financial

responsibility, insurance experience, and business qualifications

of the officers and directors or managers.

(g) Biographical affidavits in the format prescribed by the

national association of insurance commissioners for all officers

and directors.

(h) Evidence of the adequacy of the loss prevention programs

of its parent, member organization, or industrial insureds as

applicable.

(i) For sponsored insurance companies, copies of all contracts

or sample contracts with participants and evidence that expenses

will be allocated to each protected cell in an equitable manner.

(j) Such other factors or documentation considered relevant by

the commissioner.

(7) The commissioner shall issue a certificate of authority to

a captive insurance company if, after reviewing the documents and

information provided pursuant to this chapter, the commissioner

finds that the captive insurance company meets the standards in

this chapter and will promote the general good of the state.

(8) Information submitted pursuant to this section is

confidential as provided in section 4609.

(9) A captive insurance company shall pay to the office a

nonrefundable $200.00 fee for processing its application for a

certificate of authority. In addition, the commissioner may retain

legal, financial, and examination services from outside the office

to examine and investigate the application, the reasonable cost of

which may be charged against the applicant, or the commissioner may

use internal resources to examine and investigate the application

for a $2,700.00 fee. In addition, a captive insurance company shall

pay a $500.00 annual renewal fee.

(10) If the commissioner is satisfied that the documents and

statements filed by the captive insurance company comply with this

chapter, the commissioner may grant a certificate of authority

authorizing the company to do business in this state until March 1,

at which time the certificate of authority may be renewed.

(11) A captive insurance company not domiciled in this state,

upon approval of the commissioner, may become a domestic captive

insurance company by complying with all of the requirements of law

relative to the authorization of a domestic captive insurance

company of the same or equivalent type in this state. After this is

accomplished, the captive insurance company is entitled to a

certificate of authority to transact business in this state and is

subject to the authority and jurisdiction of this state. In

connection with this redomestication, the commissioner may waive

any requirements for public hearings. It is not necessary for a

company redomesticating into this state to merge, consolidate,

transfer assets, or otherwise engage in any other reorganization,

other than as specified in this section.

Sec. 4607. A captive insurance company shall not adopt a name

that is the same as, deceptively similar to, or likely to be

confused with or mistaken for any other existing business name

registered in this state.

Sec. 4609. (1) Information and testimony submitted or

furnished to the office pursuant to this chapter, examination

reports, preliminary examination reports or results, and the

office's work papers, correspondence, memoranda, reports, records,

and other written or oral information related to an examination

report or an investigation shall be confidential, shall be withheld

from public inspection, shall not be subject to subpoena, and shall

not be divulged to any person, except as provided in this section

or with the written consent of the company. If assurances are

provided that the information will be kept confidential, the

commissioner may disclose confidential work papers, correspondence,

memoranda, reports, records, or other information as follows:

(a) To the governor or the attorney general.

(b) To any relevant regulatory agency, including regulatory

agencies of other states or the federal government.

to this or another applicable act.

(d) To law enforcement officials.

(e) To persons authorized by the Ingham county circuit court

to receive the information.

(f) To persons entitled to received such information in order

to discharge duties specifically provided for in this act.

(2) The confidentiality requirements of subsection (1) do not

apply in any proceeding or action brought against or by the insurer

under this act or any other applicable act of this state, any other

state, or the United States.

(3) The information listed in subsection (1) may be

discoverable by a party in a civil action or contested case to

which the submitting captive insurance company is a party, upon

showing by the party seeking to discover the information that all

of the following apply:

(a) The information sought is relevant to and necessary for

the furtherance of the action or case.

(b) The information sought is unavailable from other

nonconfidential sources.

officer of competent jurisdiction has been submitted to the

commissioner.

Sec. 4611. (1) The commissioner shall not issue or renew a

certificate of authority to a captive insurance company unless the

company possesses and maintains paid in capital and retained

earnings as follows:

(a) For a pure captive insurance company, not less than

$150,000.00.

(b) For an association captive insurance company incorporated

as a stock insurer or organized as a limited liability company, not

less than $400,000.00.

as a mutual insurer, not less than $750,000.00.

(d) For an industrial insured captive insurance company

incorporated as a stock insurer or organized as a limited liability

company, not less than $300,000.00.

(e) For a sponsored captive insurance company, not less than

$500,000.00. However, if the sponsored captive insurance company

does not assume any risk, the risks insured by the protected cells

are homogeneous, and there are no more than 10 cells, the

commissioner may reduce this amount to an amount not less than

$150,000.00.

(f) For a special purpose captive insurance company, an amount

determined by the commissioner after giving due consideration to

the company's business plan, feasibility study, and pro formas,

including the nature of the risks to be insured.

(2) Except for a sponsored captive insurance company that does

not assume any risk, the capital required by subsection (1) shall

be in the form of cash, cash equivalent, or an irrevocable letter

of credit. For a sponsored captive insurance company that does not

assume any risk, the capital also may be in the form of other high

quality securities as approved by the commissioner.

(3) The commissioner shall not issue a certificate of

authority to a captive insurance company incorporated as a

nonprofit corporation unless the company possesses and maintains

unencumbered equity as follows:

(a) For a pure captive insurance company, not less than

$250,000.00.

(b) For a special purpose captive insurance company, an amount

determined by the commissioner after giving due consideration to

the company's business plan, feasibility study, and pro formas,

including the nature of the risks to be insured.

(4) Net assets required by subsection (3) of a captive

insurance company incorporated as a nonprofit corporation shall be

in the form of cash, cash equivalent, or an irrevocable letter of

credit.

(5) For the purposes of subsections (1) through (4), the

commissioner may issue a certificate of authority expressly

conditioned upon the captive insurance company providing to the

commissioner satisfactory evidence of possession of the minimum

required unimpaired paid in capital. Until this evidence is

provided, the captive insurance company shall not issue any policy,

assume any liability, or otherwise provide coverage. The

commissioner summarily may revoke the conditional certificate of

authority without legal recourse by the company if satisfactory

evidence of the required capital is not provided within a maximum

period of time, not to exceed 1 year, to be established by the

commissioner at the time the conditional certificate of authority

is issued.

(6) The commissioner may prescribe additional capital based

upon the type, volume, and nature of insurance business transacted.

This additional capital shall be in the form of cash, cash

equivalent, an irrevocable letter of credit, or securities invested

as provided in section 4639.

(7) For a branch captive insurance company, as security for

the payment of liabilities attributable to branch operations, the

commissioner shall require that a trust fund, funded by an

irrevocable letter of credit or other acceptable asset, be

established and maintained in the United States for the benefit of

United States policyholders and United States ceding insurers under

insurance policies issued or reinsurance contracts issued or

assumed, by the branch captive insurance company through its branch

operations. The amount of the security shall be no less than the

capital and retained earnings required by this chapter and the

reserves on these insurance policies or reinsurance contracts,

including reserves for losses, allocated loss adjustment expenses,

incurred but not reported losses and unearned premiums with regard

to business written through branch operations; however, the

commissioner may permit a branch captive insurance company that is

required to post security for loss reserves on branch business by

its reinsurer to reduce the funds in the trust account required by

this section by the same amount so long as the security remains

posted with the reinsurer.

(8) A captive insurance company shall not pay a dividend out

of, or other distribution with respect to, capital or retained

earnings, in excess of the limitations set forth in section 1343,

without the prior approval of the commissioner. Approval of an

ongoing plan for the payment of dividends or other distributions

shall be conditioned upon retention, at the time of each payment,

of capital or retained earnings in excess of amounts specified by,

or determined in accordance with formulas approved by, the

commissioner. A captive insurance company incorporated as a

nonprofit corporation shall not make any distributions without the

prior approval of the commissioner.

Sec. 4619. (1) A pure captive insurance company or a sponsored

captive insurance company may be any of the following:

(a) Incorporated as a stock insurer with its capital divided

into shares and held by the stockholders.

(b) Incorporated as a public benefit, mutual benefit, or

religious nonprofit corporation with members in accordance with the

Michigan nonprofit corporation act of 1982, 1982 PA 162, MCL

450.2101 to 450.3192.

divided into capital accounts and held by its members.

(2) An association captive insurance company or an industrial

insured captive insurance company may be any of the following:

(a) Incorporated as a stock insurer with its capital divided

into shares and held by the stockholders.

(b) Organized as a limited liability company with its capital

divided into capital accounts and held by its members.

the governing body of which is elected by the member organizations

of its association.

(3) The capital stock or membership interests of a captive

insurance company incorporated as a stock insurer or limited

liability company shall be issued at not less than par value.

(4) For a captive insurance company formed as a corporation or

a nonprofit corporation, at least 1 of the members of the board of

directors of a captive insurance company incorporated in this state

shall be a resident of this state.

(5) For a captive insurance company formed as a limited

liability company, at least 1 of the managers of the captive

insurance company shall be a resident of this state.

(6) A captive insurance company formed as a limited liability

company pursuant to this chapter has the privileges and is subject

to the provisions of the Michigan limited liability company act,

1993 PA 23, MCL 450.4101 to 450.5200, for limited liability

companies, as well as the applicable provisions contained in this

chapter. If a conflict occurs between a provision of the Michigan

limited liability company act, 1993 PA 23, MCL 450.4101 to

450.5200, for limited liability companies, and a provision of this

chapter, this chapter controls.

(7) This act's provisions pertaining to mergers,

consolidations, conversions, mutualizations, and redomestications

apply in determining the procedures to be followed by a captive

insurance company in carrying out any of the transactions described

in those provisions, except the commissioner may waive or modify

the requirements for public notice and hearing in accordance with

regulations that the commissioner may issue addressing categories

of transactions. If a notice of public hearing is required, but no

one requests a hearing, the commissioner may cancel the hearing.

Sec. 4621. (1) A captive insurance company shall not be

required to make an annual report except as provided in this

chapter.

(2) Annually, on or before March 1 of each year, a captive

insurance company shall submit to the commissioner a report of its

financial condition, verified by oath of 2 of its executive

officers. A captive insurance company may report using generally

accepted accounting principles or statutory accounting principles,

with useful or necessary modifications or adaptations required or

approved or accepted by the commissioner for the type of insurance

and kinds of insurers to be reported upon, and as supplemented by

additional information required by the commissioner. The

commissioner by regulation shall prescribe the forms in which

captive insurance companies shall report. Information submitted

pursuant to this section is confidential as provided in section

4609.

(3) A pure captive insurance company may make written

application for filing the annual report on a fiscal year end that

is consistent with the parent company's fiscal year. The annual

report shall be on a form prescribed by the commissioner.

(4) A branch captive insurance company shall file with the

commissioner 60 days after the fiscal year end a copy of all

reports and statements required to be filed under the laws of the

jurisdiction in which the alien captive insurance company is

formed, verified by oath by 2 of its executive officers. If the

commissioner is satisfied that the annual report filed by the alien

captive insurance company in its domiciliary jurisdiction provides

adequate information concerning the financial condition of the

alien captive insurance company, the commissioner may waive the

requirement for completion of the captive annual statement.

Sec. 4623. (1) A sponsored captive insurance company may

discount its loss and loss adjustment expense reserves at treasury

rates applied to the applicable payments projected through the use

of the expected payment pattern associated with the reserves.

(2) A sponsored captive insurance company shall annually

submit to the commissioner the opinion of a qualified actuary as to

whether the reserves and related actuarial items held in support of

the reserves are computed appropriately, are based on assumptions

that satisfy contractual provisions, are consistent with prior

reported amounts, and comply with applicable laws of this state.

The actuarial opinion required by this section shall be submitted

in a form prescribed by the commissioner. For purposes of this

section, "qualified actuary" means a member of either the American

academy of actuaries or the society of actuaries who also meets any

other criteria that the commissioner may establish by rule pursuant

to the administrative procedures act of 1969, 1969 PA 306, MCL

24.201 to 24.328.

(3) The commissioner may disallow the discounting of reserves

if a sponsored captive insurance company violates a provision of

this act.

Sec. 4625. (1) To the extent that the provisions of chapter 2

do not contradict the provisions of this chapter, chapter 2 applies

to captive insurance companies authorized under this chapter.

(2) The expenses and charges of a captive insurance company

examination shall be paid to the state by the captive insurance

company or companies examined, and the office shall issue the

warrants for the proper charges incurred in all examinations.

(3) The confidentiality provisions of this chapter do not

extend to final examination reports produced by the commissioner in

inspecting or examining a captive insurance company formed as a

risk retention group under the product liability risk retention act

of 1981, 15 USC 3901 to 3906.

(4) Section 222 applies to all business written by a captive

insurance company except that the examination for a branch captive

insurance company shall be of branch business and branch operations

only, as long as the branch captive insurance company provides

annually to the commissioner, a certificate of compliance, or its

equivalent, issued by or filed with the licensing authority of the

jurisdiction in which the branch captive insurance company is

formed and demonstrates to the commissioner's satisfaction that it

is operating in sound financial condition in accordance with all

applicable laws and regulations of that jurisdiction.

Sec. 4637. (1) The certificate of authority of a captive

insurance company to conduct an insurance business in this state

may be suspended or revoked by the commissioner for any of the

following:

(a) Insolvency or impairment of capital or retained earnings.

(b) Failure to meet the requirements of section 4611.

by section 4621, or any other report or statement required by law

or by lawful order of the commissioner.

(d) Failure to comply with its own charter, bylaws, or other

organizational document.

(e) Failure to submit to examination or any legal obligation

relative to an examination, as required by section 4625.

(f) Refusal or failure to pay the cost of examination as

required by section 4625.

(g) The company is no longer safe, reliable, or entitled to

public confidence or is unsound, or is using financial methods and

practices in the conduct of its business that render further

transaction of insurance by the company in this state hazardous to

policyholders, creditors, or the public.

(h) The certificate of authority or equivalent authorization

of a branch captive insurance company has been suspended or revoked

in the jurisdiction in which the company was formed.

(i) The company has failed, after written request by the

commissioner, to remove or discharge an officer or director whose

record of business conduct does not satisfy the requirements of

section 4603 or who has been convicted of any crime involving

fraud, dishonesty, or like moral turpitude.

(j) The company has failed, within 30 days after notice of

delinquency from the commissioner, to cure its failure to pay

taxes, fees, assessments, or expenses required by this act.

(k) Failure otherwise to comply with the laws of this state.

(2) If the commissioner finds, upon examination, hearing, or

other evidence, that a captive insurance company has committed any

of the acts specified in subsection (1), the commissioner may

suspend or revoke the captive insurance company's certificate of

authority if the commissioner considers it in the best interest of

the public and the policyholders of the captive insurance company,

notwithstanding any other provision of this act.

Sec. 4639. (1) An association captive insurance company and an

industrial insured captive insurance company insuring the risks of

an industrial insured group shall comply with the investment

requirements contained in sections 910 to 947. Notwithstanding any

other provision of this chapter or in chapter 9, the commissioner

may approve the use of alternative reliable methods of valuation

and rating.

(2) A pure captive insurance company and a special purpose

captive insurance company are not subject to any restrictions on

allowable investments contained in chapter 9 except that the

commissioner may request a written investment plan and may prohibit

or limit an investment that threatens the solvency or liquidity of

the company.

(3) Only a pure captive insurance company may make loans to

its parent company or affiliates and only upon the prior written

approval of the commissioner evidenced by a note in a form approved

by the commissioner. Loans of minimum capital and retained earnings

required to be held by section 4611(1) are prohibited.

(4) Notwithstanding the provisions of sections 4663 and 4665,

the assets of 2 or more protected cells may be combined for

purposes of investment, and this combination shall not be construed

as defeating the segregation of those assets for accounting or

other purposes.

(5) Sponsored captive insurance companies shall comply with

the investment requirements contained in chapter 9, as applicable;

provided, however, that compliance with such investment

requirements shall be waived for sponsored captive insurance

companies to the extent that credit for reinsurance ceded to

reinsurers is allowed pursuant to section 4641(2) or to the extent

otherwise considered reasonable and appropriate by the

commissioner. Sections 841 and 842 shall apply to sponsored captive

insurance companies except to the extent it is inconsistent with

approved accounting standards in use by the company.

Notwithstanding any other provision of this act, the commissioner

may approve the use of alternative reliable methods of valuation

and rating.

Sec. 4641. (1) A captive insurance company may provide

reinsurance, as authorized by this act, on risks ceded by any other

insurer.

(2) A captive insurance company may take credit for reserves

on risks or portions of risks ceded to reinsurers complying with

the provisions of sections 1103 and 1105. A captive insurer shall

not take credit for reserves on risks or portions of risks ceded to

a reinsurer if the reinsurer is not in compliance with sections

1103 and 1105.

Sec. 4643. A captive insurance company shall not be required

to join a rating organization.

Sec. 4645. A captive insurance company shall not join or

contribute financially to a plan, pool, association, or guaranty or

insolvency fund in this state. A captive insurance company, its

insured, its parent, or any affiliated company or any member

organization of its association, shall not receive a benefit from a

plan, pool, association, or guaranty or insolvency fund for claims

arising out of the operations of the captive insurance company.

Sec. 4647. (1) Except as otherwise provided under this

section, each captive insurance company shall pay a tax on the

direct premiums written or contracted for on policies or contracts

of insurance written by a captive insurance company during the tax

year less the amounts paid to policyholders as return premiums,

which shall include dividends on unabsorbed premiums, and premium

deposits returned or credited to policyholders. The tax imposed

under this subsection shall be calculated by multiplying the amount

of the direct premiums written or contracted for on policies or

contracts of insurance written by a captive insurance company

during the tax year after deducting the amounts paid to

policyholders as return premiums, which shall include dividends on

unabsorbed premiums, and premium deposits returned or credited to

policyholders by the following rates:

(a) For the first $20,000,000.00, 0.4%.

(b) For every dollar greater than $20,000,000.00, 0.3%.

(2) In addition to the tax imposed under subsection (1),

except as otherwise provided under this section, each captive

insurance company shall also pay a tax on reinsurance premiums. For

purposes of this subsection, reinsurance premiums do not include

premiums for risks or portions of risks that are subject to the tax

imposed under subsection (1) or receipt of assets in exchange for

the assumption of loss reserves and other liabilities of another

insurer or other funding mechanism under common ownership and

control if the transaction is part of a plan to discontinue the

operations related to the loss reserves and other liabilities being

assumed of the other insurer or funding mechanism and if the intent

of the parties to the transaction is to renew or maintain business

with the captive insurance company. The tax imposed under this

subsection shall be calculated by multiplying the amount of

reinsurance premiums by the following rates:

(a) For the first $20,000,000.00, 0.225%.

(b) For the next $20,000,000.00, 0.15%.

(d) For every dollar greater than $60,000,000.00, 0.025%.

(3) The aggregate amount of the tax imposed and levied on any

captive insurance company under subsections (1) and (2) shall not

exceed $100,000.00 for any single tax year. However, if the

aggregate amount of taxes imposed on a captive insurance company

under subsections (1) and (2) is less than $5,000.00 for that tax

year, a captive insurance company shall pay a minimum tax of

$5,000.00 unless it is the first year in which the captive

insurance company was issued a certificate of authority. For a

captive insurance company that has been issued a certificate of

authority for a year or less during the tax year for which the

minimum tax is to be imposed, the minimum tax shall be prorated on

a quarterly basis as follows:

(a) For a captive insurance company issued a certificate of

authority in the first quarter, $5,000.00.

(b) For a captive insurance company issued a certificate of

authority in the second quarter, $3,750.00.

authority in the third quarter, $2,500.00.

(d) For a captive insurance company issued a certificate of

authority in the fourth quarter, $1,250.00.

(4) Regardless of whether 2 or more captive insurance

companies are under common ownership and control, each captive

insurance company is subject to the tax imposed under subsections

(1) and (2). The tax imposed under subsections (1) and (2) only

applies to that branch of business that is under common ownership

and control that is a captive insurance company.

(5) The tax imposed under this section shall be administered

by the department of treasury pursuant to 1941 PA 122, MCL 205.1 to

205.31. If a conflict exists between 1941 PA 122, MCL 205.1 to

205.31, and this section, the provisions of this section apply. The

department of treasury shall promulgate rules to implement this

section pursuant to the administrative procedures act of 1969, 1969

PA 306, MCL 24.201 to 24.328. The department of treasury shall

prescribe forms for use by taxpayers and may promulgate rules in

conformity with this act for the maintenance by taxpayers of

records, books, and accounts, and for the computation of the tax,

the making of returns, and the ascertainment, assessment, and

collection of the tax imposed under this section.

(6) An annual return shall be filed with the department of

treasury in the form and content prescribed by the department of

treasury by the first day of the third month after the end of the

captive insurance company's tax year. Any liability shall be

remitted with this return.

(7) For each fiscal year after the effective date of the

amendatory act that added this chapter, 20% of the revenue

collected under this section and section 4737 shall be distributed

to the captive insurance regulatory and supervision fund created

under section 4673.

(8) As used in this section, "common ownership and control"

shall be determined as follows:

(a) For stock corporations or limited liability companies,

means the direct or indirect ownership of 80% or more of the

outstanding voting stock or membership interests of 2 or more

corporations or limited liability companies by the same person or

entity.

(b) For nonprofit corporations, means the direct or indirect

ownership of 80% or more of the voting power of 2 or more nonprofit

corporations by the same member or members.

ownership of 80% or more of the surplus and the voting power of 2

or more corporations by the same member or members.

Sec. 4651. The commissioner may promulgate pursuant to the

administrative procedures act of 1969, 1969 PA 306, MCL 24.201 to

24.328, rules, and may issue regulations and orders relating to

captive insurance companies as are necessary to enable the

commissioner to carry out the provisions of this chapter.

Sec. 4653. (1) No provisions of this act, other than those

specifically referenced in this chapter or contained in specific

references contained in this chapter, apply to captive insurance

companies. If a conflict occurs between a provision of this act and

a provision of this chapter, this chapter controls.

(2) The commissioner by rule, regulation, or order may exempt

special purpose captive insurance companies, on a case-by-case

basis, from provisions of this chapter that the commissioner

determines to be inappropriate given the nature of the risks to be

insured.

Sec. 4655. (1) Except as otherwise provided in this section,

the terms and conditions set forth in this act pertaining to

insurance reorganizations, receiverships, and injunctions apply in

full to captive insurance companies authorized under this chapter.

(2) For a sponsored captive insurance company, both of the

following apply:

(a) The assets of the protected cell shall not be used to pay

expenses or claims other than those attributable to the protected

cell.

(b) The capital and surplus of the sponsored captive insurance

company shall at all times be available to pay expenses of or

claims against the sponsored captive insurance company and shall

not be used to pay expenses or claims attributable to a protected

cell.

Sec. 4659. The commissioner shall promulgate rules pursuant to

the administrative procedures act of 1969, 1969 PA 306, MCL 24.201

to 24.328, establishing standards to ensure that a parent or

affiliated company is able to exercise control of the risk

management function of any controlled unaffiliated business to be

insured by the pure captive insurance company. Until such time as

these rules are promulgated, the commissioner may by temporary

order grant authority to a pure captive insurance company to insure

risks.

Sec. 4663. (1) One or more sponsors may form a sponsored

captive insurance company under this chapter.

(2) A sponsored captive insurance company authorized under

this chapter may establish and maintain 1 or more protected cells

to insure risks of 1 or more participants, subject to all of the

following:

(a) The shareholders of a sponsored captive insurance company

shall be limited to its participants and sponsors, provided that a

sponsored captive insurance company may issue nonvoting securities

to other persons on terms approved by the commissioner.

(b) Each protected cell shall be accounted for separately on

the books and records of the sponsored captive insurance company to

reflect the financial condition and results of operations of the

protected cell, net income or loss, dividends or other

distributions to participants, and other factors may be provided in

the participant contract or required by the commissioner.

with liabilities arising out of any other insurance business the

sponsored captive insurance company may conduct.

(d) No sale, exchange, or other transfer of assets shall be

made by the sponsored captive insurance company between or among

any of its protected cells without the consent of the protected

cells.

(e) No sale, exchange, transfer of assets, dividend, or

distribution shall be made from a protected cell to a sponsor or

participant without the commissioner's approval and in no event

shall the approval be given if the sale, exchange, transfer,

dividend, or distribution would result in insolvency or impairment

with respect to a protected cell.

(f) A sponsored captive insurance company shall file annually

with the commissioner financial reports the commissioner requires,

which shall include, but are not limited to, accounting statements

detailing the financial experience of each protected cell.

(g) A sponsored captive insurance company shall notify the

commissioner in writing within 10 business days of a protected cell

that is insolvent or otherwise unable to meet its claim or expense

obligations.

(h) No participant contract shall take effect without the

commissioner's prior written approval, and the addition of each new

protected cell and withdrawal of any participant of any existing

protected cell constitutes a change in the business plan requiring

the commissioner's prior written approval.

Sec. 4665. A sponsor of a sponsored captive insurance company

shall be an insurer authorized pursuant to the laws of a state or

the District of Columbia, an insurance holding company that

controls an insurer authorized pursuant to the laws of a state or

the District of Columbia and subject to registration pursuant to

the insurance holding company system laws of the state of domicile

of the insurer, a reinsurer authorized or approved pursuant to the

laws of a state or the District of Columbia, or a captive insurance

company authorized pursuant to this chapter. A risk retention group

shall not be either a sponsor or a participant of a sponsored

captive insurance company. The business written by a sponsored

captive insurance company with respect to each protected cell shall

meet at least 1 of the following:

(a) Be fronted by an insurance company authorized pursuant to

the laws of any state or any jurisdiction if the insurance company

is a wholly owned subsidiary of an insurance company authorized

pursuant to the laws of any state or any jurisdiction.

(b) Be reinsured by a reinsurer authorized or approved by this

state.

benefit of policyholders and claimants funded by an irrevocable

letter of credit or other asset acceptable to the commissioner. The

amount of security provided by the trust fund shall not be less

than the reserves associated with those liabilities, including

reserves for losses, allocated loss adjustment expenses, incurred

but not reported losses, and unearned premiums for business written

through the participant's protected cell. The commissioner may

require the sponsored captive to increase the funding of a trust

established pursuant to this subdivision. A trust and trust

instrument maintained pursuant to this subdivision shall be in a

form and upon terms approved by the commissioner.

Sec. 4667. (1) An association, a corporation, a limited

liability company, a partnership, a trust, or other business entity

may be a participant in a sponsored captive insurance company

authorized pursuant to this chapter.

(2) A sponsor may be a participant in a sponsored captive

insurance company.

(3) A participant need not be a shareholder of the sponsored

captive insurance company or an affiliate of the company.

(4) A participant shall insure only its own risks through a

sponsored captive insurance company, unless otherwise approved by

the commissioner.

Sec. 4669. (1) Except as otherwise provided in this chapter,

the terms and conditions provided in chapter 48 relating to a

protected cell insurance company apply in full to a sponsored

captive insurance company.

(2) Except as otherwise provided, all of the following apply

to a sponsored captive insurance company:

(a) A protected cell need not be established solely for the

purpose of effecting insurance securitizations, but may be

established for the purpose of isolating the expenses and claims of

a sponsored captive insurance company participant.

(b) The sponsored captive insurance company shall attribute

all insurance obligations, assets, and liabilities relating to a

participant's risks to the participant's protected cell.

Sec. 4673. The captive insurance regulatory and supervision

fund shall be a separate fund and shall be administered by the

commissioner for the purpose of administering chapters 18 and 47

and this chapter and for reasonable expenses incurred in promoting

the captive insurance industry in this state. Twenty percent of the

taxes collected pursuant to this chapter and chapter 47 and all

fees and assessments received by the department of treasury or the

office pursuant to the administration of this chapter and chapter

47 shall be credited to the captive insurance regulatory and

supervision fund. All fees received by the department of treasury

from reinsurers who assume risk only from captive insurance

companies shall be deposited into the captive insurance regulatory

and supervision fund. All fines and administrative penalties shall

be deposited directly into the general fund. Money in the captive

insurance regulatory and supervision fund shall not revert to the

general fund at the close of the fiscal year but shall remain in

the captive insurance regulatory and supervision fund.

CHAPTER 47

SPECIAL PURPOSE FINANCIAL CAPTIVES

Sec. 4701. As used in this chapter:

(a) "Affiliated company" means a company in the same corporate

system as a parent, by virtue of common ownership, control,

operation, or management.

(b) "Captive LLC" means a limited liability company

established under the Michigan limited liability company act, 1993

PA 23, MCL 450.4101 to 450.5200, or comparable provisions of any

other state law, including the District of Columbia by a parent,

counterparty, affiliated company, or SPFC for the purpose of

issuing SPFC securities, entering an SPFC contract with a

counterparty, or otherwise facilitating an insurance

securitization.

financial and insurance services or the commissioner's designee.

(d) "Contested case" means a proceeding in which the legal

rights, duties, obligations, or privileges of a party are required

by law to be determined by the circuit court after an opportunity

for hearing.

(e) "Control" including the terms "controlling", "controlled

by", and "under common control with" means the possession, direct

or indirect, of the power to direct or cause the direction of the

management and policies of a person, whether through the ownership

of voting securities, by contract other than a commercial contract

for goods or nonmanagement services, or otherwise, unless the power

is the result of an official position with or corporate office held

by the person. Control shall be presumed to exist if a person,

directly or indirectly, owns, controls, holds with the power to

vote, or holds proxies representing 10% or more of the voting

securities of another person. This presumption may be rebutted by a

showing that control does not exist. However, for purposes of this

chapter, the fact that an SPFC exclusively provides reinsurance to

a ceding insurer under an SPFC contract is not by itself sufficient

grounds for a finding that the SPFC and ceding insurer are under

common control.

(f) "Counterparty" means an SPFC's parent or affiliated

company, or, subject to the prior approval of the commissioner, a

nonaffiliated company as ceding insurer to the SPFC contract.

(g) "Fair value" means the following:

(i) For cash, the amount of the cash.

(ii) For assets other than cash, the amount at which that asset

could be bought or sold in a current transaction between arm's

length, willing parties. If available, the quoted mid-market price

for the asset in active markets shall be used; and if quoted mid-

market prices are not available, a value shall be determined using

the best information available considering values of similar assets

and other valuation methods, such as present value of future cash

flows, historical value of the same or similar assets, or

comparison to values of other asset classes, the value of which

have been historically related to the subject asset.

(h) "Foreign captive" means a captive insurer formed under the

laws of the District of Columbia or some state, commonwealth,

territory, or possession of the United States other than the state

of Michigan.

(i) "Insolvency" or "insolvent" means that the SPFC or 1 or

more of its protected cells is unable to pay its obligations when

they are due, unless those obligations are the subject of a bona

fide dispute, or the commissioner previously has established by

order other criteria for determining the solvency of the SPFC or 1

or more of its protected cells, in which case the SPFC is insolvent

if it fails to meet that criteria.

(j) "Insurance securitization" means a package of related risk

transfer instruments, capital market offerings, and facilitating

administrative agreements by which proceeds of the sale of SPFC

securities are obtained by an SPFC directly by the issuance of the

SPFC securities by the SPFC or indirectly through the issuance of

preferred securities by the SPFC in exchange for some or all of the

proceeds of the sale of SPFC securities by the SPFC's parent, an

affiliated company of the SPFC, a counterparty, or a captive LLC,

in transactions that comply with applicable securities laws and

where the proceeds of the issuance of the SPFC securities, whether

obtained directly or indirectly, secure the obligations of the SPFC

under 1 or more SPFC contracts with a counterparty and where the

obligation to the holders of the SPFC securities is secured by

assets obtained with proceeds of the SPFC securities in accordance

with the transaction terms.

(k) "Irrevocable letter of credit" means a clean, irrevocable,

unconditional letter of credit, issued or confirmed by a qualified

United States financial institution. Letters of credit meeting

applicable standards of issuer acceptability as of the dates of

their issuance or confirmation shall, notwithstanding the issuing

or confirming institution's subsequent failure to meet applicable

standards of issuer acceptability, continue to be acceptable as

security until their expiration, extension, renewal, modification,

or amendment, whichever occurs first.

(l) "Management" means the board of directors, managing board,

or other individual or individuals vested with overall

responsibility for the management of the affairs of the SPFC,

including the election and appointment of officers or other agents

to act on behalf of the SPFC.

(m) "Office" means the office of financial and insurance

services.

(n) "Organizational document" means the SPFC's articles of

incorporation, articles of organization, bylaws, operating

agreement, or other foundational documents that establish the SPFC

as a legal entity or prescribes its existence.

(o) "Parent" means any corporation, limited liability company,

partnership, or individual that directly or indirectly owns,

controls, or holds with power to vote more than 50% of the

outstanding voting securities of an SPFC.

(p) "Permitted investments" means those investments that meet

the qualifications in section 4727(1).

(q) "Preferred securities" means securities, whether stock or

debt, issued by an SPFC to the issuer of the SPFC securities in

exchange for some or all of the proceeds of the issuance of the

SPFC securities.

(r) "Protected cell" means a segregated account established

and maintained by an SPFC for 1 or more SPFC contracts that are

part of a single securitization transaction as further provided for

in chapter 48.

(s) "Qualified United States financial institution" means, for

purposes of meeting the requirements of a trustee as specified in

section 4727, a financial institution that is eligible to act as a

fiduciary of a trust, and meets all of the following:

(i) Organized, or for a United States branch or agency office

of a foreign banking organization, is licensed under, the laws of

the United States or any state of the United States.

(ii) Regulated, supervised, and examined by federal or state

authorities having regulatory authority over banks and trust

companies.

(t) "Reserves" means that term as used in chapter 8.

(u) "Securities" means those different types of debt

obligations, equity, surplus certificates, surplus notes, funding

agreements, derivatives, and other legal forms of financial

instruments.

(v) "Securities commissioner" means the commissioner.

(w) "SPFC" or "special purpose financial captive" means a

captive insurance company, a captive LLC, or a company otherwise

qualified as an authorized insurer that has received a certificate

of authority from the commissioner for the limited purposes

provided for in this chapter.

(x) "SPFC contract" means a contract between the SPFC and the

counterparty pursuant to which the SPFC agrees to provide insurance

or reinsurance protection to the counterparty for risks associated

with the counterparty's insurance or reinsurance business.

(y) "SPFC securities" means the securities issued pursuant to

an insurance securitization, the proceeds of which are used in the

manner described in subdivision (j).

(z) "Surplus note" means an unsecured subordinated debt

obligation possessing characteristics consistent with paragraph 3

of the statement of statutory accounting principles no. 41,

national association of insurance commissioners.

(aa) "Third party" means a person unrelated to an SPFC or its

counterparty, or both, that has been aggrieved by a decision of a

commissioner regarding that SPFC or its activities.

Sec. 4703. (1) No provisions of this act, other than those

specifically referenced in this chapter, apply to an SPFC, and

those provisions apply only as modified by this chapter. If a

conflict occurs between a provision of this act and a provision of

this chapter, this chapter controls.

(2) Sections 210 to 223, 225 to 238, 244 to 251, 2057 to 2062,

and 4673 and chapter 45 apply to SPFCs.

(3) The commissioner, by rule, regulation, or order, may

exempt an SPFC or its protected cells, on a case-by-case basis,

from provisions of this chapter that the commissioner determines to

be inappropriate given the nature of the risks to be insured.

Sec. 4705. (1) A captive insurance company, a captive LLC, or

a company otherwise qualified as an authorized insurer may apply to

the commissioner for a certificate of authority to transact

insurance or reinsurance business as authorized by this chapter. An

SPFC only may insure or reinsure the risks of its counterparty.

Notwithstanding any other provision of this chapter, an SPFC may

purchase reinsurance to cede the risks assumed under the SPFC

contract as approved by the commissioner.

(2) To transact business in this state, an SPFC shall do all

of the following:

(a) Obtain from the commissioner a certificate of authority

authorizing it to conduct insurance or reinsurance business, or

both, in this state.

(b) Hold at least 1 management meeting each year in this

state.

(d) File with the commissioner the name and address of a

resident registered agent designated to accept service of process

and to otherwise act on its behalf in this state. The designation

shall remain in force as long as any liability remains within the

state. Whenever the registered agent cannot with reasonable

diligence be found at the registered office of the SPFC, the

commissioner shall be an agent of the SPFC upon whom any process,

notice, or demand may be served.

(e) Provide such documentation of the insurance securitization

as requested by the commissioner immediately upon the closing of

the insurance securitization transaction, including an opinion of

legal counsel with respect to compliance with this chapter and any

other applicable laws as of the effective date of the insurance

securitization transaction and a statement under oath of its

president and secretary showing its financial condition.

(f) Provide a complete set of documentation of the insurance

securitization to the commissioner shortly following closing of the

insurance securitization transaction.

(3) Before granting a certificate of authority for an SPFC,

the commissioner shall require the applicant to submit

organizational documents that contain all of the following:

(a) The names and places of residence of at least 3

incorporators or organizers of whom at least 2 are residents of

this state.

(b) The location of the principal office in this state.

(d) The purposes of the creation of the entity including a

reference to this chapter.

(e) The manner in which the corporate powers are to be

exercised.

(f) The number of directors or managers, as applicable.

(g) The number of directors or managers, as applicable, that

constitute a quorum for the purposes of doing business which

consists of no fewer than 1/3 of the managers required by the

organizational document.

(h) The amount and value of capital stock, if any.

(i) The term of existence of the entity.

(4) The articles of incorporation of an SPFC may contain a

provision providing that a director is not personally liable to the

corporation or its shareholders or policyholders for monetary

damages for a breach of the director's fiduciary duty. However, the

provision does not eliminate or limit the liability of a director

for any of the following:

(a) A breach of the director's duty of loyalty to the

corporation or its shareholders or policyholders.

(b) Acts or omissions not in good faith or that involve

intentional misconduct or knowing violation of law.

personal benefit.

(5) Before the organizational documents shall be effective for

the purposes of this chapter, the organizational documents shall be

submitted to the office of the attorney general for examination. If

such documents are found to be in compliance with this chapter, the

office of the attorney general shall so certify to the

commissioner. Each applicant for an SPFC certificate of authority

that submits its organizational documents to the office of the

attorney general shall pay to the attorney general the examination

fee provided in section 240(2).

(6) Prior to granting a certificate of authority to any SPFC,

the commissioner shall require, consider, and review all of the

following:

(a) Evidence of all of the following:

(i) The amount and liquidity of its assets relative to the

risks to be assumed.

(ii) The adequacy of the expertise, experience, and character

of the person or persons who manage it.

(iii) The overall soundness of its plan of operation.

(iv) Other factors considered relevant by the commissioner in

ascertaining whether the proposed SPFC is able to meet its policy

obligations.

(v) The applicant SPFC's financial condition, including the

source and form of the minimum capitalization to be contributed to

the SPFC.

(b) A plan of operation, consisting of a description of or

statement of intent with respect to the contemplated insurance

securitization, the SPFC contract, and related transactions, which

shall include all of the following:

(i) Draft documentation or, at the commissioner's discretion, a

written summary of all material agreements that are entered into in

connection with the SPFC contracts and the insurance

securitization, including the names of the counterparty, the nature

of the risks to be assumed, and the proposed use of protected

cells, if any. The documentation or written summary shall also

include the maximum amounts, purpose, nature, and the relationship

between the various transactions effectuating the insurance

securitization.

(ii) A description of any party, other than the SPFC or the

counterparty, that will issue SPFC securities in an insurance

securitization, including a description of its contemplated

operation.

(iii) The source and form of additional capitalization to be

contributed to the SPFC.

(iv) The proposed investment strategy of the SPFC.

(v) A description of the underwriting, reporting, and claims

payment methods by which reserves covered by the SPFC contract are

reported, accounted for, and settled.

(vi) A pro forma balance sheet and income statement

illustrating various stress case scenarios for the performance of

the SPFC under the SPFC contract.

insurance commissioner's format of all of the prospective SPFC's

officers and directors, providing their legal names, any names

under which they have or are conducting their affairs, and any

affiliations with other persons, together with other biographical

information as the commissioner may request.

(d) An affidavit from the applicant SPFC verifying all of the

following:

(i) The applicant SPFC meets the provisions of this chapter.

(ii) The applicant SPFC operates only pursuant to the

provisions in this chapter.

(iii) The applicant SPFC's investment strategy reflects and

takes into account the liquidity of assets and the reasonable

preservation, administration, and asset management of such assets

relative to the risks associated with the SPFC contract and the

insurance securitization transaction.

(iv) The SPFC securities proposed to be issued are valid legal

obligations that are either properly registered with the securities

commissioner or constitute an exempt security or form part of an

exempt transaction under section 402 of the uniform securities act,

1964 PA 265, MCL 451.802. If the issuer of the SPFC securities is

not the SPFC, the SPFC shall obtain and submit an affidavit from

the issuer that the securities proposed to be issued satisfy this

subparagraph.

(v) Unless otherwise exempted by the commissioner, the trust

agreement, the trusts holding assets that secure the obligations of

the SPFC under the SPFC contract, and the SPFC contract with the

counterparty in connection with the contemplated insurance

securitization are structured pursuant to the provisions in this

chapter.

(e) Any other statements or documents required by the

commissioner to evaluate and authorize the SPFC.

(7) In addition to the requirements of this section and

section 4713, if a protected cell is used, an applicant SPFC shall

file with the commissioner all of the following:

(a) A business plan demonstrating how the applicant accounts

for the paid losses, reserves, and expenses of each protected cell

at a level of detail found to be sufficient by the commissioner,

and how it reports those paid losses, reserves, and expenses to the

commissioner.

(b) A statement acknowledging that all financial records of

the SPFC, including reports pertaining to any protected cells,

shall be made available for inspection or examination by the

commissioner.

counterparty or captive LLC related to each protected cell.

(d) A description of the expenses allocated to each protected

cell.

(8) Information submitted pursuant to this section is

confidential and is subject to sections 4734 and 4743.

(9) To transact insurance or reinsurance business in this

state, an SPFC shall pay to the office all of the following:

(a) A nonrefundable fee of $200.00 for processing its

application for a certificate of authority. In addition, the

commissioner may retain legal, financial, actuarial, and

examination services from outside the office to examine and

investigate the application, the reasonable cost of which may be

charged against the applicant, or the commissioner may use internal

resources to examine and investigate the application for a fee of

$1,500.00, $600.00 of which is payable upon filing of the

application and the remaining $900.00 upon receipt of its

certificate of authority.

(b) A $500.00 annual renewal fee.

determined by the commissioner if the costs of the annual review

are higher than $2,400.00.

(10) The commissioner may grant a certificate of authority

authorizing the SPFC to transact insurance or reinsurance business

as an SPFC in this state until March 1, at which time the

certificate of authority may be renewed, upon finding by the

commissioner of all of the following:

(a) The proposed plan of operation provides a reasonable and

expected successful operation.

(b) The terms of the SPFC contract and related transactions

comply with this chapter.

counterparty.

(d) The commissioner of the state of domicile of each

counterparty has notified the commissioner in writing or otherwise

provided assurance satisfactory to the commissioner that it has

approved or not disapproved the transaction.

(e) The certificate of authority authorizing the SPFC to

transact business is limited to the insurance or reinsurance

activities that the SPFC is allowed to conduct pursuant to this

chapter.

(11) A foreign captive, upon approval of the commissioner, may

become a domestic SPFC by complying with all of the provisions of

this chapter. After this is accomplished, the foreign captive is

entitled to a certificate of authority to transact business as an

SPFC in this state and is subject to the authority and jurisdiction

of this state. In connection with this redomestication, the

commissioner may waive any requirements for public hearings. It is

not necessary for a foreign captive redomesticating into this state

to merge, consolidate, transfer assets, or otherwise engage in

another reorganization, other than as specified in this section.

Sec. 4707. (1) An SPFC may be established as a stock

corporation, limited liability company, mutual, partnership, or

other form of organization approved by the commissioner.

(2) The SPFC's organizational documents shall limit the SPFC's

authority to transact the business of insurance or reinsurance to

those activities the SPFC conducts to accomplish its purpose as

expressed in this chapter.

(3) The SPFC shall not adopt a name that is the same as,

deceptively similar to, or likely to be confused with or mistaken

for another existing business name registered in this state.

(4) The provisions of this act pertaining to mergers,

consolidations, conversions, mutualizations, and redomestications

apply in determining the procedures to be followed by an SPFC in

carrying out any of the transactions described in those provisions,

except the commissioner may waive or modify the requirements for

public notice and hearing in accordance with regulations that the

commissioner may issue addressing categories of transactions. If a

notice of public hearing is required, but no one requests a

hearing, the commissioner may cancel the hearing.

(5) At least 1 of the members of the management of the SPFC

shall be a resident of this state.

(6) An SPFC or captive LLC formed as a limited liability

company pursuant to this chapter has the privileges and is subject

to the provisions of the Michigan limited liability company act,

1993 PA 23, MCL 450.4101 to 450.5200, for limited liability

companies, as well as the applicable provisions contained in this

chapter. Nothing contained in this provision with respect to an

SPFC shall abrogate, limit, or rescind in any way the authority of

the commissioner.

Sec. 4709. (1) An SPFC initially shall possess and after that

maintain minimum capitalization of not less than $250,000.00. All

of the minimum initial capitalization shall be in cash. All other

funds of the SPFC in excess of its minimum initial capitalization

shall be in the forms as provided in section 4727.

(2) Additional capitalization for the SPFC shall be

determined, if so required, by the commissioner after giving due

consideration to the SPFC's business plan, feasibility study, pro

formas, and the nature of the risks being insured or reinsured,

which may be prescribed in formulas approved by the commissioner.

(3) An SPFC that is authorized as an insurer other than solely

pursuant to this chapter and chapter 46 initially shall possess,

and after that maintain, minimum capital and surplus in compliance

with sections 408 to 410a.

(4) An SPFC that is authorized as an insurer other than solely

pursuant to this chapter and chapter 46 shall maintain deposits as

specified in section 411.

Sec. 4711. (1) An SPFC may insure or reinsure only the risks

insured or reinsured by a counterparty.

(2) An SPFC shall not issue a contract for assumption of risk

or indemnification of loss other than an SPFC contract. However,

the SPFC may cede risks assumed through an SPFC contract to third

party reinsurers through the purchase of reinsurance or

retrocession protection.

(3) An SPFC may enter into contracts and conduct other

commercial activities related or incidental to and necessary to

fulfill the purposes of the SPFC contract, insurance

securitization, and this chapter. Those activities may include, but

are not limited to: entering into SPFC contracts; issuing

securities of the SPFC in accordance with applicable securities

law; complying with the terms of these contracts or securities;

entering into trust, swap, tax, administration, reimbursement, or

fiscal agent transactions; or complying with trust indenture,

reinsurance, or retrocession, and other agreements necessary or

incidental to effectuate an insurance securitization in compliance

with this chapter or the plan of operation submitted to the

commissioner.

(4) An SPFC shall annually submit to the commissioner the

opinion of a qualified actuary as to whether the reserves and

related actuarial items held in support of the reserves are

computed appropriately, are based on assumptions that satisfy

contractual provisions, are consistent with prior reported amounts,

and comply with applicable laws of this state. The actuarial

opinion required by this section shall be submitted in a form

prescribed by the commissioner. For purposes of this section,

"qualified actuary" means a member of either the American academy

of actuaries or the society of actuaries who also meets any other

criteria that the commissioner may establish by rule pursuant to

the administrative procedures act of 1969, 1969 PA 306, MCL 24.201

to 24.328.

Sec. 4713. (1) This section and section 4715 provide a basis

for the creation and use of protected cells by an SPFC. If a

conflict occurs between a provision of chapter 46 or chapter 48 and

either this section or section 4715, this section and section 4715

control.

(2) An SPFC may establish and maintain 1 or more protected

cells with prior written approval of the commissioner and subject

to compliance with the applicable provisions of this chapter and

the following conditions:

(a) A protected cell shall be established only for the purpose

of isolating and identifying the assets and liabilities

attributable to the risk ceded to the SPFC by the counterparty

pursuant to 1 or more SPFC contracts and the assets and liabilities

of the SPFC arising out of the related insurance securitization.

(b) Each protected cell shall be accounted for separately on

the books and records of the SPFC to reflect the financial

condition and results of operations of the protected cell,

including income, gain, expense, or loss; dividends; other

distributions to the counterparty for the SPFC contract with each

cell; and other items as may be provided in the SPFC contract,

insurance securitization transaction documents, plan of operation,

or business plan, or as required by the commissioner.

including assets transferred to a protected cell account, are owned

by the SPFC, and the SPFC shall not be, or shall not hold itself

out to be, a trustee with respect to those protected cell assets of

that protected cell account.

(d) All attributions of assets and liabilities between a

protected cell and the general account shall be in accordance with

the plan of operation submitted to the commissioner. No other

attribution of assets or liabilities shall be made by an SPFC

between the SPFC's general account and its protected cell or cells.

The SPFC shall attribute all insurance obligations, assets, and

liabilities relating to an SPFC contract and all obligations,

assets, and liabilities of the SPFC arising out of the related

insurance securitization transaction to a particular protected

cell. The rights, benefits, obligations, and liabilities of any

securities attributable to that protected cell, the performance

under an SPFC contract and the related securitization transaction,

and any tax benefits, losses, refunds, or credits allocated at any

point in time pursuant to a tax allocation agreement between the

SPFC and the SPFC's counterparty, parent, or affiliated company, as

the case may be, including any payments made by or due to be made

to the SPFC pursuant to the terms of the tax allocation agreement,

shall reflect the insurance obligations, assets, and liabilities

relating to the SPFC contract and proceeds of the insurance

securitization transaction that are attributed to a particular

protected cell.

(e) The assets of a protected cell shall not be chargeable

with liabilities arising out of an SPFC contract related to or

associated with another protected cell. However, 1 or more SPFC

contracts may be attributed to a protected cell so long as those

SPFC contracts are intended to be, and ultimately are, part of a

single securitization transaction.

(f) A sale, an exchange, or another transfer of assets shall

not be made by the SPFC between or among any of its protected cells

without the consent of the commissioner, counterparty, and each

protected cell.

(g) Except as otherwise contemplated in the SPFC contract or

related insurance securitization transaction documents, or both, a

sale, an exchange, a transfer of assets, a dividend, or a

distribution shall not be made from a protected cell to a

counterparty, captive LLC, or parent or affiliated company of the

SPFC without the commissioner's approval and shall not be approved

if the sale, exchange, transfer, dividend, or distribution would

result in insolvency or impairment with respect to a protected

cell.

(h) An SPFC shall pay interest or repay principal or both or

make distributions or repayments of any SPFC securities issued by

the SPFC or make payments of preferred securities issued to a

particular protected cell from assets or cash flows relating to or

emerging from the SPFC contract and the insurance securitization

transactions that are attributable to that particular protected

cell as provided in this chapter or as otherwise approved by the

commissioner.

(3) An SPFC contract with or attributable to a protected cell

does not take effect without the commissioner's prior written

approval, and the addition of each new protected cell constitutes a

change in the business plan requiring the commissioner's prior

written approval. The commissioner may retain legal, financial, and

examination services from outside the office to examine and

investigate the application for a protected cell, the reasonable

cost of which may be charged against the applicant, or the

commissioner may use internal resources to examine and investigate

the application the reasonable cost of which may be charged against

the applicant up to a maximum of $1,200.00, or may use both

retained services and internal resources.

(4) An SPFC utilizing protected cells shall possess minimum

capitalization for each protected cell separate and apart from the

capitalization required by section 4709. For purposes of

determining the capitalization of each protected cell, an SPFC

initially shall capitalize and after that time maintain

capitalization in each protected cell in the amount and manner

required for an SPFC in section 4709.

(5) The establishment of 1 or more protected cells alone does

not constitute, and shall not be considered to be, a fraudulent

conveyance, an intent by the SPFC to defraud creditors, or the

carrying out of business by the SPFC for any other fraudulent

purpose.

Sec. 4715. (1) The creation of a protected cell does not

create, with respect to that protected cell, a legal person

separate from the SPFC.

(2) Notwithstanding subsection (1), a protected cell shall

have its own distinct name or designation that includes the words

"protected cell". The SPFC shall transfer all assets attributable

to the protected cell to 1 or more separately established and

identified protected cell accounts bearing the name or designation

of that protected cell.

(3) Although the protected cell is not a separate legal

person, the property of an SPFC in a protected cell is subject to

orders of a court by name as it would have been if the protected

cell were a separate legal person.

(4) The property of an SPFC in a protected cell shall be

served in its own name with process in all civil actions or

proceedings involving or relating to the activities of that

protected cell or a breach by the SPFC of a duty to the protected

cell or to a counterparty to a transaction linked or attributed to

it by serving the SPFC in the manner described in section 1920 of

the revised judicature act of 1961, 1961 PA 236, MCL 600.1920.

(5) A protected cell exists only at the pleasure of the SPFC.

At the cessation of business of a protected cell in accordance with

the plan of operation submitted to the commissioner, the SPFC

voluntarily shall close out the protected cell account.

(6) Nothing in this section shall be construed to prohibit an

SPFC from contracting with, or arranging for, an investment

advisor, commodity trading advisor, or other third party to manage

the assets of a protected cell, if all remuneration, expenses, and

other compensation of the third party advisor or manager are

payable from the assets of that protected cell and not from the

assets of other protected cells or the assets of the SPFC's general

account, unless approved by the commissioner.

(7) Creditors to a protected cell are not entitled to have

recourse against the protected cell assets of other protected cells

or the assets of the SPFC's general account. If an obligation of an

SPFC relates only to the general account, the obligation of the

SPFC extends only to that creditor for that obligation and that

creditor is entitled to have recourse only to the assets of the

SPFC's general account.

(8) The assets of the protected cell shall not be used to pay

expenses or claims other than those attributable to the protected

cell. Protected cell assets are available only to the SPFC

counterparty and other creditors of the SPFC that are creditors

only to that protected cell and, accordingly, are entitled, in

conformity with this chapter, to have recourse to the protected

cell assets attributable to that protected cell. Protected cell

assets are absolutely protected from the creditors of the SPFC that

are not creditors with respect to that protected cell and who,

accordingly, are not entitled to have recourse to the protected

cell assets attributable to that protected cell. If an obligation

of an SPFC to a person or counterparty arises from an SPFC contract

or related insurance securitization transaction or is otherwise

incurred for a protected cell, both of the following apply:

(a) That obligation of the SPFC extends only to the protected

cell assets attributable to that protected cell, and the person or

counterparty, for that obligation, is entitled to have recourse

only to the protected cell assets attributable to that protected

cell.

(b) That obligation of the SPFC does not extend to the

protected cell assets of another protected cell or the assets of

the SPFC's general account, and that person, for that obligation,

is not entitled to have recourse to the protected cell assets of

another protected cell or the assets of the SPFC's general account.

The SPFC's capitalization of its protected cell or cells as

required by section 4713(4) shall be available at all times to pay

expenses of or claims against the SPFC and shall not be used to pay

expenses or claims attributable to any protected cell.

(9) Notwithstanding any other provision of law, an SPFC may

allow for a security interest in accordance with applicable law to

attach to protected cell assets or a protected cell account when in

favor of a creditor of the protected cell or to facilitate the

insurance securitization, including, without limitation, the

issuance of the SPFC contract, to the extent those protected cell

assets are not required at all times to support the risk, but

without otherwise affecting the discharge of liabilities under the

SPFC contract, or as otherwise approved by the commissioner.

(10) An SPFC shall establish administrative and accounting

procedures necessary to properly identify the 1 or more protected

cells of the SPFC and the assets and liabilities of each protected

cell. The directors of an SPFC shall keep protected cell assets and

liabilities separate and separately identifiable from the assets

and liabilities of the SPFC's general account. The assets and

liabilities attributable to 1 protected cell shall be kept separate

and separately identifiable from the assets and liabilities

attributable to other protected cells.

(11) All contracts or other documentation reflecting protected

cell liabilities shall indicate clearly that only the protected

cell assets are available for the satisfaction of those protected

cell liabilities. In all SPFC insurance securitizations involving a

protected cell, including the issuance of preferred securities, the

contracts or other documentation effecting the transaction shall

contain provisions identifying the protected cell to which the

transaction is attributed. In addition, the contracts or other

documentation shall disclose clearly that the assets of that

protected cell, and only those assets, are available to pay the

obligations of that protected cell. Notwithstanding the provisions

of this subsection and subject to the provisions of this chapter

and any other applicable law or regulation, the failure to include

this language in the contracts or other documentation shall not be

used as the sole basis by creditors, insureds or reinsureds,

insurers or reinsurers, or other claimants to circumvent this

section.

(12) The income, and gains and losses, whether realized or

unrealized, from protected cell assets and protected cell

liabilities shall be credited to or charged against the protected

cell without regard to other income and gains or losses of the

SPFC, including income and gains or losses of other protected

cells. Amounts attributed to any protected cell and accumulations

on the attributed amounts may be invested and reinvested. The

investments in a protected cell or cells shall not be taken into

account in applying the investment limitations otherwise applicable

to the investments of the SPFC.

(13) An SPFC with protected cells shall file annually with the

office accounting statements and financial reports required by this

chapter that, among other things, shall do all of the following:

(a) Detail the financial experience of each protected cell and

the SPFC separately.

(b) Provide the combined financial experience of the SPFC and

all protected cells.

insurer, account for the financial experience of each protected

cell and the SPFC, both separately and on a combined basis, in

satisfaction of section 4731(3).

(14) An SPFC with protected cells shall notify the

commissioner in writing within 10 business days of a protected cell

becoming insolvent.

Sec. 4717. (1) An SPFC may issue securities, including SPFC

securities and preferred securities, surplus notes, and other forms

of financial instruments, subject to and in accordance with

applicable law, the SPFC's approved plan of operation, and its

organizational documents.

(2) An SPFC, its parent or an affiliated company, its

counterparty, or a captive LLC may issue SPFC securities and any

other securities necessary to implement the insurance

securitization.

(3) Preferred securities may be issued by the SPFC to the

issuer of the SPFC securities in connection with the insurance

securitization in order to facilitate distributions to service SPFC

securities and these preferred securities shall identify the

associated protected cell. The SPFC may lawfully account for

preferred securities as surplus and not as debt for purposes of

statutory accounting.

(4) An SPFC, in connection with the issuance of securities,

may enter into and perform all of its obligations under any

required contracts to facilitate the issuance of these securities.

(5) Subject to the commissioner's approval, the issuer of the

SPFC securities or, if the issuer is a captive LLC, the party

controlling the captive LLC, may lawfully account for the SPFC

securities as surplus and not as debt for purposes of statutory

accounting and submit for the commissioner's prior approval

periodic written requests for payments of interest on and

repayments of principal of surplus notes.

(6) Surplus notes issued pursuant to this section constitute

surplus or contribution notes of the type described in section

8142(1)(h).

(7) The commissioner, without otherwise prejudicing the

commissioner's authority, may approve formulas for an ongoing plan

of interest payments, principal repayments, or both interest

payments and principal repayments, to provide guidance in

connection with his or her ongoing reviews of requests to approve

the payments on and principal repayments of the surplus notes.

(8) The obligation to repay principal or interest, or both, on

the SPFC securities shall reflect, in whole or in part, the risk

associated with the obligations of the SPFC to the counterparty

under the SPFC contract, either directly or by being secured by

assets, including the preferred securities, obtained with the

proceeds of the sale of the SPFC securities.

Sec. 4719. An SPFC may enter into swap agreements, or other

forms of asset management agreements, including guaranteed

investment contracts, or other transactions that have the objective

of leveling timing differences in funding of up front or ongoing

transaction expenses or managing asset, credit, or interest rate

risk of the investments in the trust to ensure that the investments

are sufficient to assure payment or repayment of the securities,

and related interest or principal payments, issued pursuant to an

SPFC insurance securitization transaction or the obligations of the

SPFC under the SPFC contract.

Sec. 4721. (1) An SPFC, at any given time, may enter into and

effectuate an SPFC contract with a counterparty, provided that the

SPFC contract meets all of the following:

(a) Complies with the plan of operation submitted to the

commissioner.

(b) Obligates the SPFC to indemnify the counterparty for

losses.

SPFC contract are securitized through an SPFC insurance

securitization and are funded and secured with assets held in trust

for the benefit of the counterparty pursuant to this chapter and

under agreements contemplated by this chapter and that are invested

in a manner that meet the criteria under section 4727.

(2) An SPFC may enter into agreements with affiliated

companies and third parties and conduct business necessary to

fulfill its obligations and administrative duties incidental to the

insurance securitization and the SPFC contract. The agreements may

include management and administrative services agreements and other

allocation and cost sharing agreements, or swap and asset

management agreements, or both, or agreements for other

contemplated types of transactions provided in section 4719.

(3) An SPFC contract shall contain all of the following:

(a) A requirement for the SPFC to enter into a trust agreement

specifying what recoverables or reserves, or both, the agreement is

to cover and to establish a trust account for the benefit of the

counterparty.

(b) A stipulation that assets deposited in the trust account

shall be valued according to their current fair value and shall

consist only of permitted investments.

the trustee, to execute assignments, endorsements in blank, or to

transfer legal title to the trustee of all shares, obligations, or

any other assets requiring assignments, in order that the

counterparty, or the trustee upon the direction of the

counterparty, may negotiate whenever necessary the assets without

consent or signature from the SPFC or another entity.

(d) A requirement that all settlements of account between the

counterparty and the SPFC be made in cash or its equivalent.

(e) A stipulation that the SPFC and the counterparty agree

that the assets in the trust account, established pursuant to the

SPFC contract, are under the control of the counterparty and may be

withdrawn by the counterparty at any time, notwithstanding any

other provisions in the SPFC contract, and shall be utilized and

applied by the counterparty or any successor by operation of law of

the counterparty, including, subject to the provisions of section

4741, but without further limitation, any liquidator,

rehabilitator, receiver, or conservator of the counterparty,

without diminution because of insolvency on the part of the

counterparty or the SPFC, only for the following purposes:

(i) To transfer all of the assets into 1 or more trust accounts

for the benefit of the counterparty pursuant to the terms of the

SPFC contract and in compliance with this chapter.

(ii) To pay any other incurred and paid amounts that the

counterparty claims are due pursuant to the terms of the SPFC

contract and in compliance with this chapter.

(4) The SPFC contract may contain provisions that give the

SPFC the right to seek approval from the counterparty to withdraw

from the trust all or part of the assets, or income from them,

contained in the trust and to transfer the assets to the SPFC,

provided that at the time of the withdrawal, the SPFC shall replace

the withdrawn assets, excluding any income withdrawn, with other

assets having a fair value equal to the fair value of the assets

withdrawn and that meet the provisions of section 4727; and after

the withdrawals and transfer, the fair value of the assets in trust

securing the obligations of the SPFC under the SPFC contract is no

less than an amount needed to satisfy the funded requirement of the

SPFC contract. The counterparty shall be the sole judge as to the

application of these provisions but shall not unreasonably nor

arbitrarily withhold its approval.

Sec. 4723. SPFC securities and preferred securities issued

pursuant to an insurance securitization are not, and shall not be

considered to be, insurance or reinsurance contracts. An investor

in these securities or a holder or issuer of these securities, by

sole means of this investment, holding, or issuance, is not, and

shall not be considered to be, transacting the business of

insurance in this state. The underwriter's placement agent or

selling agent and their partners, directors, officers, members,

managers, employees, agents, representatives, and advisors involved

in an insurance securitization pursuant to this chapter shall not

be considered to be insurance producers or brokers or conducting

business as an insurance or reinsurance company or agency,

brokerage, intermediary, advisory, or consulting business only by

virtue of their activities in connection with them.

Sec. 4725. In fulfilling its function, the SPFC shall adhere

to the following and, to the extent of its powers, shall ensure

that contracts obligating other parties to perform certain

functions incident to its operations are substantively and

materially consistent with all of the following:

(a) The assets of an SPFC shall be preserved and administered

by or on behalf of the SPFC to satisfy the liabilities and

obligations of the SPFC incident to the SPFC contract with the

counterparty, the issuance of preferred securities, or the

insurance securitization and other related agreements.

(b) Assets held by an SPFC in trust shall be valued at their

fair value.

the insurance securitization shall be deposited with the trustee to

the extent required to secure the obligations of the SPFC under the

SPFC contract as provided by this chapter and shall be held or

invested by the trustee pursuant to section 4727 and an asset

management agreement, if any.

(d) Assets of the SPFC, other than those held in trust for the

counterparty, and income on trust assets received by the SPFC may

be used to pay interest or other consideration on any SPFC

securities or other securities or outstanding debt or payments on

preferred securities or other obligation of the SPFC. Nothing in

this chapter shall be construed or interpreted to prevent an SPFC

from entering into a swap agreement or other asset management

transaction that has the effect of hedging or guaranteeing the

fixed or floating interest rate returns paid on the assets in trust

or required for the securities issued by the SPFC generated from or

other consideration or payment flows in the transaction.

(e) In the SPFC insurance securitization, the contracts or

other relating documentation shall contain provisions identifying

the SPFC.

(f) Unless otherwise approved by the commissioner, an SPFC

shall not do any of the following:

(i) Issue or otherwise administer primary insurance policies.

(ii) Enter into an SPFC contract with a person that is not

licensed or otherwise authorized to transact the business of

insurance or reinsurance in at least its state or country of

domicile.

(iii) Assume or retain exposure to insurance or reinsurance

losses for its own account that is not funded by proceeds from an

SPFC insurance securitization that meets the provisions of this

chapter. However, the SPFC may wholly or partially reinsure or

retrocede the risks assumed to a third party reinsurer.

(g) An SPFC shall not do any of the following:

(i) Have any direct obligation to the policyholders or

reinsureds of the counterparty.

(ii) Lend or otherwise invest, or place in custody, trust, or

under management any of its assets with, or to borrow money or

receive a loan from, other than by issuance of the securities

pursuant to an insurance securitization, or advance from, anyone

convicted of a felony, anyone who is untrustworthy or of known bad

character, or anyone convicted of a criminal offense involving the

conversion or misappropriation of fiduciary funds or insurance

accounts, theft, deceit, fraud, misrepresentation, or corruption.

Sec. 4727. (1) Assets of the SPFC held in trust to secure

obligations under the SPFC contract shall at all times be held in

cash and cash equivalents, securities listed by the securities

valuation office of the national association of insurance

commissioners and considered as admitted assets under statutory

accounting convention in its state of domicile, or another form of

security acceptable to the commissioner.

(2) Assets of the SPFC that are pledged to secure obligations

of the SPFC to a counterparty under an SPFC contract shall be held

in trust and administered by a qualified United States financial

institution that does not control, is not controlled by, or is not

under common control with, the SPFC or the counterparty.

(3) The agreement governing a trust described in this section

shall create 1 or more trust accounts into which all pledged assets

shall be deposited and held until distributed in accordance with

the trust agreement. The pledged assets shall be held by the

trustee at 1 of the trustee's offices or branch offices in the

United States and may be held in certificated or electronic form.

(4) The provisions for withdrawal by the counterparty of

assets from the trust shall be clean and unconditional, subject

only to the following:

(a) The counterparty has the right to withdraw assets from the

trust account at any time, without notice to the SPFC, subject only

to written notice to the trustee from the counterparty that funds

in the amount requested are due and payable by the SPFC, pursuant

to the SPFC contract.

(b) A statement or document does not need to be presented in

order to withdraw assets, except the counterparty may be required

to acknowledge receipt of withdrawn assets.

to any conditions or qualifications outside of the trust agreement.

(d) The trust agreement shall not contain references to any