(a) An admitted financial guaranty insurance corporation shall establish and maintain a contingency reserve.

(b) With respect to all financial guaranties written prior to and in force as of July 1, 1989:

(1) The financial guaranty insurance corporation shall establish and maintain a contingency reserve consistent with the requirements applicable for municipal bond insurance policies which were in effect prior to July 1, 1989, in an amount equal to 50 percent of earned premiums on those policies.

(2) To the extent that the financial guaranty insurance corporation’s contingency reserves maintained as of July 1, 1989, are less than those required for municipal bond insurance policies pursuant to paragraph (1), the corporation shall have until January 1, 1994, to bring its reserves into compliance.

(c) With respect to financial guaranties of municipal obligation bonds, special revenue bonds and investment grade industrial development bonds written after July 1, 1989:

(1) The financial guaranty insurance corporation shall establish and maintain a contingency reserve in accordance with paragraph (3) of subdivision (d) for all those insured issues in each calendar year for each category listed in paragraph (2) of this subdivision.

(2) The total contingency reserve required shall be the greater of 50 percent of premiums written for each such category or the following amount prescribed for each such category:

(A) Municipal obligation bonds, 0.8 percent of principal outstanding.

(B) Special revenue bonds, 1.2 percent of principal outstanding.

(C) Investment grade industrial development bonds secured by collateral or with a remaining term at the date of insurance of seven years or less and utility first mortgage obligations, 1.4 percent of principal outstanding.

(D) All other investment grade industrial development bonds, 1.6 percent of principal outstanding.

(3) Contributions to the contingency reserve required by this paragraph, equal to one-eightieth of the total reserve required, shall be made each quarter for 20 years, provided, however, that contributions may be discontinued so long as the total reserve for all categories listed in items (A) through (D) of subparagraph (2) exceeds the percentages contained in items (A) through (D) when applied against unpaid principal.

(d) With respect to all other financial guaranties written on or after July 1, 1989:

(1) The financial guaranty insurance corporation shall establish and maintain a contingency reserve in accordance with paragraph (3) for all those insured issues in each calendar year for each such category listed in paragraph (2).

(2) The total contingency reserve required shall be the greater of 50 percent of premiums written for each such category or the following amount prescribed for each such category:

(A) Investment grade obligations, secured by collateral, or with a remaining term at the date of insurance of seven years or less, 1.2 percent of principal outstanding.

(B) Other investment grade obligations, 1.7 percent of principal outstanding.

(C) Noninvestment grade obligations secured by collateral, 2.5 percent of principal outstanding.

(D) Other noninvestment grade obligations, 3.0 percent of principal outstanding.

(3) Contributions to the contingency reserve required by subparagraphs (A) and (B) of paragraph (2), equal to one-sixtieth of the total reserve required, shall be made each quarter for 15 years, and contributions to the contingency reserve required by subparagraphs (C) and (D) of paragraph (2), equal to one-fortieth of the total reserve required, shall be made each quarter for 10 years provided, however, that contributions may be discontinued so long as the total reserve for all categories listed in subparagraphs (A) through (D) of paragraph (2) exceeds the percentages contained in subparagraphs (A) through (D) when applied against unpaid principal.

(e) Contingency reserves required in subdivisions (b), (c), and (d) 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 financial guaranty insurance corporation reduces its contingency reserve. In addition, contingency reserves required in subdivisions (c) and (d) may be maintained net of refundings and refinancings to the extent the refunded or refinanced issue is paid off or secured by obligations that are directly payable or guarantied by the United States government, and net of insured securities in a unit investment trust or mutual fund that have been sold from the trust or fund without insurance.

(f) 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:

(1) With the prior written approval of the commissioner, if the actual incurred losses for the year, in the case of the categories of guaranties subject to subdivision (c) exceeds 35 percent of earned premiums, or in the case of the categories of guaranties subject to subdivision (d) exceed 65 percent of earned premiums.

(2) Upon 30 days prior written notice to the commissioner, provided that the contingency reserve has been in existence for 40 quarters, for reserves subject to subdivision (c), and 30 quarters, for reserves subject to subdivision (d), upon demonstration that the amount carried is in excess of required amounts or excessive in relation to the financial guaranty insurance corporation’s outstanding obligations.

(3) A financial guaranty insurance corporation 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 Article 3 (commencing with Section 1170) of Chapter 2 of Part 2 of Division 1 and Article 4 (commencing with Section 1190) of Chapter 2 of Part 2 of Division 1.

(Amended by Stats. 2005, Ch. 412, Sec. 3. Effective January 1, 2006.)