Rules on Debt Limits, Premium Retention Limits, and Investment Adequacy

RULES ON DEBT LIMITS, PREMIUM RETENTION LIMITS, AND INVESTMENT ADEQUACY Approved in Resolution CD-SUPERINTENDENCIA-XLIX-1-97 of January 8, 1997 Modified in Resolution CD-SIBOIF-199-2-ABR10-2002 of April 10, 2002

I - DEBT LIMITS.
1.- The maximum limit of total debt in relation to the net worth of Property Insurance Companies listed in item 1) of Article 27 of the General Law of Insurance Institutions shall not exceed five (5) times.
For Insurance Companies for persons referred to in item (2) of the aforementioned Article 27, the limit shall be equal to 15 times.
2.- For companies of either group, the total of obligations or debts contracted with third parties for operations that do not generate technical insurance reserves shall in no case exceed one times the net worth of the company.
3.- When dealing with companies operating in both insurance lines, the total debt amounts shall be established for each line, for which the insurance company shall present the corresponding breakdown.
In this same case, the debt limit referred to in 2.- shall be established in relation to the total debt of that nature.

II - RETENTION LIMITS.
4.- Without prejudice to the limits or full retention for individual risks or insurance, no company may retain net premiums issued for an amount greater than three (3) times its net worth.

III - DEFINITIONS.
5. a) MINIMUM CAPITAL: That established by Law or the regulatory authority as the minimum required for the authorization and operation of insurance companies.
b) NET WORTH: For the purposes of these Rules, the Net Worth of a company is understood as the difference between the value of total assets, deducting the value of any asset that does not constitute effective investment and the due liabilities.
Only investments in assets that have a clear realization value or income-producing capacity are considered effective investments. c) ASSETS THAT DO NOT CONSTITUTE EFFECTIVE INVESTMENT: Assets that do not constitute effective investment are all those that do not have a clear realization value nor income-producing capacity. The following must be included as such:

• Other Debtors except Products to be collected
• Furniture and Equipment
• Other Assets
• Deferred Charges
  d) DUE LIABILITIES: Due Liabilities are all those liabilities that represent a current responsibility - whether immediate or deferred, defined or estimated - on the part of the company and that do not depend on the occurrence of some fortuitous event for their exigibility.
  The following are Due Liabilities:
• Technical Reserves for Premiums: The estimate of unearned premium for damages and the surrender value of life policies. They include the following accounts:
  • Life Insurance Reserves.
  • Annuities and Pensions Reserves
  • Accident and Illness Reserves
  • Property Insurance Reserves
  • Suretyship Reserves
  • Reinsurance and Suretyship Taken Reserves
  • Coinsurance and Co-suretyship Taken Reserves
• Reserves for Pending Claims: Represents the responsibility generated by incurred reported claims and an estimate of incurred unreported claims (IBNR).
• Contractual Obligations: These are obligations arising from life insurance by matured endowment policies, surrenders, annuities, pensions, etc.
• Reinsurance and Surety Companies: Represent accounts payable to reinsurers for the different reinsurance contracts signed, including reserves retained with those reinsurers. Included are:
  • Reinsurance Companies Current Account
  • Reserves Retained by Ceded Reinsurance
  • Excess of Loss
  • Surety Companies Current Account.
  • Reserves Retained by Ceded Suretyship.
• Loans Payable.
• Various Creditors
• Payable to Head Office.
• Other Liabilities.
• Deferred Credits
  e) NON-DUE LIABILITIES: Non-Due Liabilities are all those liabilities that represent a contingent obligation, and are created with the purpose of amortizing the effect of a company's results, which may be caused by events of uncertain incidence and severity. These liabilities only become due if the event occurs and disappear if the company is liquidated or the contractual relationship is otherwise dissolved before the event has occurred. Exigibility only occurs as a consequence of significant statistical deviations in the case of the Provision Reserve, and as a consequence of the occurrence of catastrophic events in the case of the Catastrophic Reserve. In addition to other contingent obligations accounted for off-balance sheet, the following are non-due liabilities:
• Provision Reserve.
• Catastrophic Reserve
  f) RISK NET WORTH: The Net Worth that the company must have to maintain the debt relationships established in 1.- and 2.- of these Rules. Risk Net Worth shall not be less than the minimum capital and must be backed by the Investments listed in 2.- of the Rules for Investment of Capital, Capital Reserves and Technical and Mathematical Reserves, issued by this Superintendence.

IV - MEASURES TO BE TAKEN IN CASE OF DEFICIENCIES.
6.- FOR NET WORTH DEFICIT. a) The reduction of a company's net worth below the minimum established by the Bank Superintendence must be overcome within the deadlines and conditions indicated below.
When a company's net worth is reduced below the aforementioned minimum, it shall present to the Superintendence, within five (5) business days following the discovery of this fact, a detailed explanation of the reasons for its occurrence and, within a period of ten (10) business days counted from the same date, a detail of the measures it has adopted or will adopt for its resolution. In the event that the company does not inform the Superintendence, or indicates a date of discovery different from the effective one, this shall be established by the Superintendence, without prejudice to the application of sanctions as appropriate. b) If the decrease in net worth below the legal minimum is not overcome before ninety (90) business days from the date of its detection, the company's board of directors or, in its absence, the Superintendence, shall call in a single notice, an extraordinary general meeting of shareholders, intended to approve the capital increase necessary to meet the minimum amount required by the Rules issued by the Bank Superintendence.

Such call shall be made within five (5) business days following the aforementioned deadline and the holding of the meeting must occur before thirty (30) business days following the first publication of the call.
The meeting shall be constituted with the shares that are present or represented, regardless of their number, and the agreements shall be adopted by the absolute majority of the shareholders present or represented with voting rights. c) In the case where the extraordinary general meeting of shareholders agrees to the capital increase, this must be paid within a period not exceeding 90 business days counted from the date of the agreement and its payment shall be made in cash. If after this period the company's net worth does not exceed the legal minimum, the concession to operate shall be revoked.

The same sanction shall be applied in the case where the meeting does not constitute or does not agree to increase the company's share capital and the net worth deficit has not been overcome within the stated period.
7.- FOR INVESTMENT DEFICIT OR OVER-INDEBTEDNESS. a) When an insurance company does not comply with one or more of the rules on maximum debt relationships, or presents an investment deficit representative of technical reserves or risk net worth, it shall present to the Superintendence, within 10 business days following the discovery of such facts, a detailed explanation of its reasons and, within 15 business days counted from the same date, a detail of the measures it has adopted or will adopt for its solution. The Superintendence may determine the date for the computation of the period as provided in 6 a). b) If any of the problems indicated in the preceding subsection persists for more than sixty (60) business days counted from its detection, the company shall present before the expiration of said term, for the knowledge and approval of the Superintendence, an adjustment plan that allows achieving full compliance with the violated rules within a period not exceeding 120 business days following its approval. This approval shall be understood as granted if the plan is not objected to by the Superintendence within 15 business days of its presentation. The adjustment plan mentioned in the previous subsection may concern the substitution of investments, reinsurance contracts, portfolio transfer, and, in general, any measure that seeks the solution of existing problems. c) If after 120 business days of the plan being approved the facts indicated in subsection a) of this section have not been overcome, the Superintendence may order the company to comply with one or more measures that allow it to save the situation in which it finds itself, within a period not exceeding 60 business days counted from the aforementioned date. The same power shall proceed if the Superintendence has rejected, by technically founded resolution, the aforementioned plan or if it has not been presented within the period established for it.

The measures that for the purposes of the preceding subsections the Superintendence orders may concern investment adequacy, reinsurance contracts, portfolio transfer, suspension of policy issuance, and others that go towards the solution of the detected problems. d) Upon expiration of the 60 business days period established in the previous subsection, if any of the non-compliances indicated in subsection a) still persists, the Superintendence, by founded resolution, may assume the administration of the company for a period not exceeding 60 business days, renewable once, during which it shall take the necessary measures for the full compliance of the current regulations. For such purposes, the Superintendent or his representative shall be endowed with the powers that the laws confer on the directors and managers of anonymous societies, in addition to his own, being able to alienate or acquire goods, contract or cancel insurance and reinsurance, transfer portfolios and cede business, call an extraordinary general meeting of shareholders to propose the capitalization of the company, and in general may take any measure that seeks the solution of existing problems. From this resolution, an appeal may be filed before the Court of Appeals under the terms, deadlines and conditions established by the Laws. 8.- FOR NET WORTH DEFICIT AND INVESTMENT DEFICIT OR OVER-INDEBTEDNESS CONCURRENTLY. a) If the reduction of a company's net worth below the minimum established in the Laws, Rules and Regulations, as the case may be, occurs concurrently with any of the situations provided for in subsection a) 7.-, the deadlines and measures contemplated in paragraph 6.- shall be applied; however, the Superintendence may additionally require compliance with the terms and measures established in the paragraph, regarding the situations provided for in this. b) If, upon conclusion of the regularization process, a company has not managed to overcome the situations indicated in article a) 7.-, the Superintendence shall proceed to inform the Ministry of Economy and Development, so that it proceeds to cancel the concession or authorization to operate.

V - VALIDITY
9- VALIDITY.- The Regulatory Rules approved by this Resolution shall enter into force from the date on which they are communicated by personal delivery to an authorized official of each of the Insurance Companies.
10- TRANSITIONAL PROVISION.- Without prejudice to what is provided in the previous Article, the Superintendent is authorized to agree on special deadlines for the application of this Rule, to established insurance companies, when so required.