A. Except as otherwise provided in this title, no insurer transacting business in this Commonwealth shall expose itself to any loss on any one risk or hazard in an amount exceeding ten percent of its surplus to policyholders. Any risk or portion of any risk reinsured by an insurer meeting standards of solvency equal to those set forth in Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 shall be deducted in determining the limitation of risk prescribed in this section.

B. For the purpose of this section, the surplus to policyholders shall be determined from (i) the insurer's last sworn statement filed with the Commission or (ii) the Commission's last report of examination, whichever is more recent at the time the risk is assumed.

C. For the purpose of this section, any one risk or hazard (i) in the case of municipal bond insurance shall mean average annual debt service of insured obligations backed by a single revenue source, provided that the insurance policy does not require any accelerated payment of principal by the insurer upon the event of default and (ii) in the case of all other kinds of financial guaranty insurance shall mean the insured unpaid principal with respect to obligations for any one entity, except that any risk or hazard shall be defined by revenue source, if the insured risk or hazard is payable from a specified revenue source or adequately secured by loan obligations or other assets.

D. As used in subsection C above:

"Municipal bond insurance" means a kind of financial guaranty insurance providing insurance against loss by reason of nonpayment of principal, interest or other payment obligations pursuant to the terms of municipal bonds.

"Municipal bond" means any security, or other instrument under which a payment obligation is created, issued by or on behalf of, or payable or guaranteed by, the United States, Canada, a state, a province of Canada, a municipality or political subdivision of any of the foregoing, or any public agency or instrumentality thereof, or by any other entity provided that such security is eligible for issuance by one of the foregoing.

"Average annual debt service" means the amount of insured unpaid principal and interest on an obligation multiplied by the number of such insured obligations, assuming that each obligation represents a $1,000 par value, divided by the amount equal to the aggregate life of all such obligations.

"Financial guaranty insurance" means insurance against loss by reason of the failure of any obligor on any debt instrument or other monetary obligation, including common or preferred stock or capital leases, to pay when due principal, interest, premium, dividend, or purchase price of or on such instrument or obligation, or a fee in connection therewith, when such failure is the result of a financial default or insolvency, regardless of whether such obligation is incurred directly or as a guarantor by or on behalf of another obligor that has also defaulted.

For the purposes of subsection C of this section, the amount of insured unpaid principal shall be reduced by the amount of deposit of (i) cash, or (ii) the market value of obligations rated in the four highest major rating categories by a securities rating agency recognized by the Commission, or (iii) the stated amount of an unconditional, irrevocable letter of credit issued or confirmed by a bank or trust company that (a) is a member of the federal reserve system or chartered by any state or (b) is organized and existing under the laws of a foreign country, has been licensed as a branch or agency by any state or the federal government and is rated in the two highest major rating categories by a securities ratings agency recognized by the Commission or (c) is otherwise acceptable to the Commission or (iv) a conveyance or mortgage of real property, or (v) the scheduled cash flow from obligations rated in the four highest major rating categories by a securities rating agency recognized by the Commission if scheduled to be received on or prior to the date of scheduled debt service on the insured obligations. Such deposit shall be held by the insurer or held in trust for the benefit of the insurer or held in trust for the benefit of holders of the insured obligation whether in the form of debt service, sinking funds or other reserves pursuant to the bond indenture by a trustee acceptable to the Commission.

For the purpose of subsection C of this section, an insurer's surplus to policyholders shall include the amount of any contingency or similar reserve established and maintained by the insurer pursuant to applicable law for the protection of insureds covered by financial guaranty insurance policies against the effect of excessive losses usually occurring during adverse economic cycles.

E. The limitation of risk prescribed in this section for any alien insurer shall apply only to the exposure to risk and the trusteed surplus of the alien insurer's policyholders.

F. This section shall not apply to (i) life insurance, (ii) annuities, (iii) accident and sickness insurance, (iv) insurance of marine risks or marine protection and indemnity risks, (v) workers' compensation or employers' liability risks, or (vi) risks covered by title insurance.

Code 1950, §§ 38-167, 38-168; 1952, c. 317, § 38.1-32; 1986, c. 562; 1987, c. 353; 1988, c. 554.