Section 6903. Contingency, loss and unearned premium reserves

(a)
  Contingency reserves. (1) A corporation  shall  establish  and  maintain
  contingency  reserves  for  the  protection  of  insureds  and claimants
  against  the  effects  of  excessive  losses  occurring  during  adverse
  economic cycles.
    (2)  With  respect to all financial guaranties written prior to and in
  force as of the first day of the next calendar quarter commencing  after
  the date that the act enacting this article shall become law:
    (A)  the  insurer  shall  establish and maintain a contingency reserve
  consistent  with  the  requirements  applicable   for   municipal   bond
  guaranties  in  effect prior to the effective date of this article equal
  to fifty percent of earned premiums on such policies; and
    (B) to the extent that the insurer's contingency  reserves  maintained
  as  of  the  first day of the next calendar quarter commencing after the
  date that the act enacting this article shall become law are  less  than
  those  required  for  municipal  bond guaranties, the insurer shall have
  three years from such  date  to  bring  its  contingency  reserves  into
  compliance.
    (3)  With  respect  to  financial  guaranties  of municipal obligation
  bonds, special revenue bonds, industrial development bonds  and  utility
  first  mortgage  obligations  written  on and after the first day of the
  next calendar quarter commencing after the date that  the  act  enacting
  this article shall become law:
    (A) the insurer shall establish and maintain a contingency reserve for
  all  such  insured issues in each calendar year for each category listed
  in subparagraph (B) of this paragraph;
    (B) the total contingency reserve required shall  be  the  greater  of
  fifty  percent  of  premiums  written  for  each  such  category  or the
  following amount prescribed for each such category:
    (i) municipal obligation bonds, 0.55 percent of principal guarantied;
    (ii) special  revenue  bonds,  and  obligations  demonstrated  to  the
  satisfaction  of  the  superintendent  to  be  the functional equivalent
  thereof, 0.85 percent of principal guarantied;
    (iii)  investment  grade  industrial  development  bonds,  secured  by
  collateral  or  having  a term of seven years or less, and utility first
  mortgage obligations, 1.0 percent of principal guarantied;
    (iv) other investment grade industrial development bonds, 1.5  percent
  of principal guarantied; and
    (v)  all  other industrial development bonds, 2.5 percent of principal
  guarantied; and
    (C)  Contributions  to  the  contingency  reserve  required  by   this
  paragraph,  equal  to one-eightieth of the total reserve required, shall
  be  made  each  quarter  for  twenty  years,  provided,  however,   that
  contributions  may  be discontinued so long as the total reserve for all
  categories listed in items (i) through (v) of subparagraph (B)  of  this
  paragraph  exceeds  the  percentages contained in such items (i) through
  (v) when applied against unpaid principal.
    (4) With respect to all other financial guaranties written on or after
  the first day of the next calendar quarter  commencing  after  the  date
  that the act enacting this article shall become law:
    (A) the insurer shall establish and maintain a contingency reserve for
  all  such  insured  issues  in each calendar year for each such category
  listed in subparagraph (B) of this paragraph;
    (B) the total contingency reserve required shall  be  the  greater  of
  fifty  percent  of  premiums  written  for  each  such  category  or the
  following amount prescribed for each such category:
    (i) investment grade obligations, secured by collateral  or  having  a
  term of seven years or less, 1.0 percent of principal guarantied;

    (ii)  other  investment  grade  obligations,  1.5 percent of principal
  guarantied;
    (iii)  non-investment  grade consumer debt obligations, 2.0 percent of
  principal guarantied;
    (iv) non-investment grade  asset-backed  securities,  2.0  percent  of
  principal guarantied;
    (v)  other  non-investment grade obligations, 2.5 percent of principal
  guarantied; and
    (C)  Contributions  to  the  contingency  reserve  required  by   this
  paragraph, equal to one-sixtieth of the total reserve required, shall be
  made   each   quarter   for   fifteen  years,  provided,  however,  that
  contributions may be discontinued so long as the total reserve  for  all
  categories  listed  in items (i) through (v) of subparagraph (B) of this
  paragraph exceeds the percentages contained in such  items  (i)  through
  (v) when applied against unpaid principal.
    (5) Contingency reserves required in paragraphs two, three and four of
  this  subsection may be established and maintained net of collateral and
  reinsurance, provided that, in the case of reinsurance, the  reinsurance
  agreement  requires  that the reinsurer shall, on or after the effective
  date of the reinsurance, establish and maintain a reserve in  an  amount
  equal  to  the  amount  by  which  the  insurer  reduces its contingency
  reserve, and contingency reserves required in paragraphs three and  four
  of  this  subsection  may  be  maintained  (A)  net  of  refundings  and
  refinancings to the extent the refunded or refinanced issue is paid  off
  or  secured  by  obligations which are directly payable or guarantied by
  the United States government and (B) net of insured securities in a unit
  investment trust or mutual fund that have been sold from  the  trust  or
  fund without insurance.
    (6)  The  contingency  reserves may be released thereafter in the same
  manner in which they were established and withdrawals therefrom, to  the
  extent  of  any  excess,  may be made from the earliest contributions to
  such reserves remaining therein:
    (A) with the prior written approval of the superintendent:
    (i) if the actual incurred losses for the year, in  the  case  of  the
  categories  of  guaranties subject to paragraph three of this subsection
  exceeds thirty-five percent of earned premiums, or in the  case  of  the
  categories  of  guaranties  subject to paragraph four of this subsection
  exceed sixty-five percent of earned premiums; or
    (ii) if the  contingency  reserve  applicable  to  the  categories  of
  guaranties  subject  to  paragraph  three of this subsection has been in
  existence for less than forty quarters, or for less than thirty quarters
  for the categories of guaranties  subject  to  paragraph  four  of  this
  subsection, upon a demonstration satisfactory to the superintendent that
  the amount carried is excessive in relation to the insurer's outstanding
  obligations under its financial guaranties.
    (B)  upon  thirty  days  prior  written  notice to the superintendent,
  provided that the contingency reserve applicable to  the  categories  of
  guaranties  subject  to  paragraph  three of this subsection has been in
  existence for forty quarters,  or  thirty  quarters  for  categories  of
  guaranties  subject  to  paragraph  four  of  this  subsection,  upon  a
  demonstration satisfactory to the superintendent that the amount carried
  is excessive in relation to the insurer's outstanding obligations  under
  its financial guaranties.
    (7)  An  insurer providing financial guaranty insurance may invest the
  contingency reserve in  tax  and  loss  bonds  (or  similar  securities)
  purchased  pursuant  to  section 832(e) of the Internal Revenue Code (or
  any successor  provision),  only  to  the  extent  of  the  tax  savings
  resulting  from  the  deduction for federal income tax purposes of a sum

  equal to the  annual  contributions  to  the  contingency  reserve.  The
  contingency  reserve  shall  otherwise  be  invested  only in classes of
  securities or types of investments specified in paragraphs  one  through
  three of subsection (b) of section one thousand four hundred two of this
  chapter  and  paragraphs  one through three of subsection (a) of section
  one thousand four hundred four of this chapter.
    (b) Loss reserves. (1) The case basis method or such other  method  as
  may  be  prescribed by the superintendent shall be used to establish and
  maintain loss reserves, net  of  collateral,  for  claims  reported  and
  unpaid,  in  a  manner consistent with section four thousand one hundred
  seventeen of this chapter. A  deduction  from  loss  reserves  shall  be
  allowed  for  the  time value of money by application of a discount rate
  equal to the average rate of  return  on  the  admitted  assets  of  the
  insurer  as  of  the  date  of the computation of any such reserves. The
  discount rate shall be adjusted at the end of each calendar year.
    (2) If the insured principal and interest  on  a  defaulted  issue  of
  obligations due and payable during any three years following the date of
  default  exceeds  ten  percent of the insurer's surplus to policyholders
  and contingency reserves, its reserve so established shall be  supported
  by a report from an independent source acceptable to the superintendent.
    (c)  Unearned  premium  reserve.  An unearned premium reserve shall be
  established and  maintained  net  of  reinsurance  and  collateral  with
  respect  to  all  financial  guaranty premiums. Where financial guaranty
  insurance premiums are paid on an installment basis, an unearned premium
  reserve shall be established and  maintained,  net  of  reinsurance  and
  collateral,  computed  on  a  daily or monthly pro rata basis. All other
  financial  guaranty  insurance  premiums  written  shall  be  earned  in
  proportion  with  the expiration of exposure, or by such other method as
  may be prescribed by the superintendent.