REGULATION 3-2-7

CONCERNING THE DEFINITION OF INSTRUMENTALITY AND INVESTMENTS  IN MORTGAGE-BACKED SECURITIES

I. AUTHORITY

This regulation is promulgated under the authority of sections 10-1-108(8), 10-1-109 and 10-16-109, Colorado
Revised Statutes (C.R.S.).

II. PURPOSE

The insurance laws will often refer to a governmental, state or United States instrumentality. Confusion has developed as to what form or type of entity constitutes an instrumentality. The purpose of this regulation is to provide clarity and to establish standards for the use of "instrumentality" and to define the extent of investments permitted in mortgage-backed securities.

III. SCOPE

This regulation shall apply to all entities regulated by the Colorado Division of Insurance.

IV. DEFINITION

An "Instrumentality" shall mean an entity which is created or authorized by a legislative branch of government to perform a significant function for a public rather than a private purpose. The entity shall clearly have the authority to issue securities and/or insure or guarantee financial obligations. Examples of instrumentalities include, but are not limited to, the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and the Federal Agricultural Mortgage Corporation (FAMC).

V. INSTRUMENTALITIES

A company investing in securities or obligations of an instrumentality shall be responsible for acquiring and maintaining in their possession evidence that the instrumentality issuing such security or obligation meets the definition contained herein. When principal and interest are fully guaranteed or insured by the instrumentality, evidence supporting such guarantee or insurance shall also be maintained by the company. Such evidence may include a copy of the enabling statute creating such instrumentality or other documentation demonstrating the authorization meeting the definition acceptable to the Commissioner.

VI. MORTGAGE-BACKED SECURITIES

The maximum investment permitted in mortgage-backed securities is restricted by § 10-3-215(2), C.R.S. to a percentage of admitted assets. These percentage restrictions relate to the proportion of the aggregate value of any "one issue" of such obligations to the insurer's admitted assets. When multiple investments are made in a single pool of the same underlying mortgages, they shall be determined to be "one issue" for the purposes of determining investment limitations. This is necessary in order to maintain the integrity and conservativeness of statutory accounting principles and to prevent financial harm to the entity should an entire pool of mortgages default.

VII. SEVERABILITY

If any provision of this regulation or the application thereof to any person or circumstance is for any reason held to be invalid, the remainder of this regulation shall not be affected thereby.

VIII. EFFECTIVE DATE

This regulation is hereby amended and restated and effective December 1, 1992.
Effective December 1, 2012