KRS 304.7-413: Permitted acquisitions -- Loan-to-value ratio -- Exemption for certain

mortgage loans and credit lease transactions -- Real estate -- Ratios relating to

aggregate amount of investments.

(1) (a) Subject to the limitations of KRS 304.7 -403, an insurer may acquire, either

directly or indirectly through limited partnership interests and general

partnership interests not otherwise prohibited by KRS 304.7 -363(4), joint

ventures, stock of an investment subsidiary or membership interests in a

limited liabili ty company, trust certificates, or other similar instruments,

obligations secured by mortgages on real estate situated within a domestic

jurisdiction, but a mortgage loan that is secured by other than a first lien shall

not be acquired unless the insurer i s the holder of the first lien. The

obligations held by the insurer and any obligations with an equal lien priority,

shall not, at the time of acquisition of the obligation, exceed:

1. Ninety percent (90%) of the fair market value of the real estate, if th e

mortgage loan is secured by a purchase money mortgage or like security

received by the insurer upon disposition of the real estate;

2. Eighty percent (80%) of the fair market value of the real estate, if the

mortgage loan requires immediate scheduled pay ment in periodic

installments of principal and interest, has an amortization period of

thirty (30) years or less, and periodic payments made no less frequently

than annually. Each periodic payment shall be sufficient to assure that at

all times the outstanding principal balance of the mortgage loan shall be

no greater than the outstanding principal balance that would be

outstanding under a mortgage loan with the same original principal

balance, with the same interest rate, and requiring equal payments of

principal and interest with the same frequency over the same

amortization period. Mortgage loans permitted under this subsection are

permitted notwithstanding the fact that they provide for a payment of the

principal balance prior to the end of the period of amortization of the

loan. For residential mortgage loans, the eighty percent (80%) limitation

may be increased to ninety -seven percent (97%) if acceptable private

mortgage insurance has been obtained; or

3. Seventy-five percent (75%) of the fair market va lue of the real estate for

mortgage loans that do not meet the requirements of subparagraph 1. or

2. of this paragraph.

(b) For purposes of paragraph (a) of this subsection, the amount of an obligation

required to be included in the calculation of the loan -to-value ratio may be

reduced to the extent the obligation is insured by the Federal Housing

Administration, guaranteed by the Administrator of Veteran Affairs, or their

successors.

(c) A mortgage loan that is held by an insurer under KRS 304.7 -014(7) or

acquired under this section and is restructured in a manner that meets the

requirements of a restructured mortgage loan in accordance with the NAIC

Accounting Practices and Procedures Manual or successor publication shall

continue to qualify as a mortgage loan under this subtitle.

(d) Subject to the limitations of KRS 304.7 -403, credit lease transactions that do

not qualify for investment under KRS 304.7 -405 with the following

characteristics shall be exempt from the provisions of paragraph (a) of this

subsection:

1. The loan amortizes over the initial fixed lease term at least in an amount

sufficient so that the loan balance at the end of the lease term does not

exceed the original appraised value of the real estate;

2. The lease payments cover or exceed the total debt service over the life of

the loan;

3. A tenant or its affiliated entity whose rated credit instruments have a

SVO 1 or 2 designation or a comparable rating from a nationally

recognized statistical rating organization recognized by the SVO has a

full faith and credit obligation to make the lease payments;

4. The insurer holds or is the beneficial holder of a first lien mortgage on

the real estate;

5. The expenses of the real estate are passed through to the tenant,

excluding exterior, structural , parking, and heating, ventilation, and air

conditioning replacement expenses, unless annual escrow contributions,

from cash flows derived from the lease payments, cover the expense

shortfall; and

6. There is a perfected assignment of the re nts due in accordance with the

lease to or for the benefit of the insurer.

(2) (a) An insurer may acquire, manage, and dispose of real estate situated in a

domestic jurisdiction either directly or indirectly through limited partnership

interests and genera l partnership interests not otherwise prohibited by KRS

304.7-363(4), joint ventures, stock of an investment subsidiary or membership

interests in a limited liability company, trust certificates, or other similar

instruments. The real estate shall be incom e producing or intended for

improvement or development for investment purposes under an existing

program in which case the real estate shall be deemed to be income producing.

(b) The real estate may be subject to mortgages, liens, or other encumbrances, th e

amount of which shall, to the extent that the obligations secured by the

mortgages, liens, or encumbrances are without recourse to the insurer, be

deducted from the amount of the investment of the insurer in the real estate for

purposes of determining co mpliance with subsection (4)(b) and (c) of this

section.

(3) (a) An insurer may acquire, manage, and dispose of real estate for the convenient

accommodation of the insurer's, which may include its affiliates, business

operations, including home office, branch office, and field office operations:

1. Real estate acquired under this subsection may include excess space for

rent to others, if the excess space, valued at its fair market value, would

otherwise be a permitted investment under subsection (2) of this section

and is so qualified by the insurer;

2. The real estate acquired under this subsection may be subject to one (1)

or more mortgages, liens, or other encumbrances, the amount of which

shall, to the extent that the obligations secured by the mortgages , liens,

or encumbrances are without recourse to the insurer, be deducted from

the amount of the investment of the insurer in the real estate for

purposes of determining compliance with paragraph (d) of subsection

(4) of this section; and

3. For purposes o f this subsection, "business operations" shall not include

that portion of real estate used for the direct provision of health care

services by an accident and health insurer or its insured. An insurer may

acquire real estate used for these purposes under subsection (2) of this

section.

(4) (a) An insurer shall not acquire an investment under subsection (1) of this section

if, as a result of and after giving effect to the investment, the aggregate amount

of all investments then held by the insurer under sub section (1) of this section

would exceed:

1. One percent (1%) of its admitted assets in mortgage loans covering any

one (1) secured location;

2. One-quarter of one percent (0.25%) of its admitted assets in construction

loans covering any one (1) secured location; or

3. Two percent (2%) of its admitted assets in construction loans in the

aggregate.

(b) An insurer shall not acquire an investment under subsection (2) of this section

if, as a result of and after giving effect to the investment and any outstandi ng

guarantees made by the insurer in connection with the investment, the

aggregate amount of investments then held by the insurer under subsection (2)

of this section plus the guarantees then outstanding would exceed:

1. One percent (1%) of its admitted as sets in one (1) parcel or group of

contiguous parcels of real estate, except that this limitation shall not

apply to that portion of real estate used for the direct provision of health

care services by an accident and health insurer for its insureds, such as

hospitals, medical clinics, medical professional buildings, or other health

facilities used for the purpose of providing health services; or

2. Fifteen percent (15%) of its admitted assets in the aggregate, but not

more than five percent (5%) of its adm itted assets as to properties that

are to be improved or developed.

(c) An insurer shall not acquire an investment under subsection (1) or (2) of this

section if, as a result of and after giving effect to the investment and any

guarantees made by the insur er in connection with the investment, the

aggregate amount of all investments then held by the insurer under

subsections (1) and (2) of this section plus the guarantees then outstanding

would exceed forty -five percent (45%) of its admitted assets. However, an

insurer may exceed this limitation by no more than thirty percent (30%) of its

admitted assets if:

1. This increased amount is invested only in residential mortgage loans;

2. The insurer has no more than ten percent (10%) of its admitted assets

invested in mortgage loans other than residential mortgage loans;

3. The loan -to-value ratio of each residential mortgage loan does not

exceed sixty percent (60%) at the time the mortgage loan is qualified

under this increased authority, and the fair market value is supported by

an appraisal no more than two (2) years old, prepared by an independent

appraiser;

4. A single mortgage loan qualified under this increased authority shall not

exceed one-half of one percent (0.5%) of its admitted assets;

5. The insurer files with the commissioner, and receives approval from the

commissioner for, a plan that is designed to result in a portfolio of

residential mortgage loans that is sufficiently geographically diversified;

and

6. The insurer agrees to file annually with the commissioner records that

demonstrate that its portfolio of residential mortgage loans is

geographically diversified in accordance with the plan.

(d) The limitations of KRS 304.7-403 shall not apply to an insurer's acquisition of

real estate under subsecti on (3) of this section. An insurer shall not acquire

real estate under subsection (3) of this section if, as a result of and after giving

effect to the acquisition, the aggregate amount of real estate then held by the

insurer under subsection (3) of this section would exceed ten percent (10%) of

its admitted assets. With the permission of the commissioner, additional

amounts of real estate may be acquired under subsection (3) of this section.