§ 6903. Contingency, loss and unearned premium reserves. (a)
Contingency reserves. (1) A corporation shall establish and maintain
contingency reserves for the protection of insureds and claimants
against the effects of excessive losses occurring during adverse
economic cycles.

(2) With respect to all financial guaranties written prior to and in
force as of the first day of the next calendar quarter commencing after
the date that the act enacting this article shall become law:

(A) the insurer shall establish and maintain a contingency reserve
consistent with the requirements applicable for municipal bond
guaranties in effect prior to the effective date of this article equal
to fifty percent of earned premiums on such policies; and

(B) to the extent that the insurer's contingency reserves maintained
as of the first day of the next calendar quarter commencing after the
date that the act enacting this article shall become law are less than
those required for municipal bond guaranties, the insurer shall have
three years from such date to bring its contingency reserves into
compliance.

(3) With respect to financial guaranties of municipal obligation
bonds, special revenue bonds, industrial development bonds and utility
first mortgage obligations written on and after the first day of the
next calendar quarter commencing after the date that the act enacting
this article shall become law:

(A) the insurer shall establish and maintain a contingency reserve for
all such insured issues in each calendar year for each category listed
in subparagraph (B) of this paragraph;

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

(i) municipal obligation bonds, 0.55 percent of principal guarantied;

(ii) special revenue bonds, and obligations demonstrated to the
satisfaction of the superintendent to be the functional equivalent
thereof, 0.85 percent of principal guarantied;

(iii) investment grade industrial development bonds, secured by
collateral or having a term of seven years or less, and utility first
mortgage obligations, 1.0 percent of principal guarantied;

(iv) other investment grade industrial development bonds, 1.5 percent
of principal guarantied; and

(v) all other industrial development bonds, 2.5 percent of principal
guarantied; and

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

(4) With respect to all other financial guaranties written on or after
the first day of the next calendar quarter commencing after the date
that the act enacting this article shall become law:

(A) the insurer shall establish and maintain a contingency reserve for
all such insured issues in each calendar year for each such category
listed in subparagraph (B) of this paragraph;

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

(i) investment grade obligations, secured by collateral or having a
term of seven years or less, 1.0 percent of principal guarantied;

(ii) other investment grade obligations, 1.5 percent of principal
guarantied;

(iii) non-investment grade consumer debt obligations, 2.0 percent of
principal guarantied;

(iv) non-investment grade asset-backed securities, 2.0 percent of
principal guarantied;

(v) other non-investment grade obligations, 2.5 percent of principal
guarantied; and

(C) Contributions to the contingency reserve required by this
paragraph, equal to one-sixtieth of the total reserve required, shall be
made each quarter for fifteen years, provided, however, that
contributions may be discontinued so long as the total reserve for all
categories listed in items (i) through (v) of subparagraph (B) of this
paragraph exceeds the percentages contained in such items (i) through
(v) when applied against unpaid principal.

(5) Contingency reserves required in paragraphs two, three and four of
this subsection 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 insurer reduces its contingency
reserve, and contingency reserves required in paragraphs three and four
of this subsection may be maintained (A) net of refundings and
refinancings to the extent the refunded or refinanced issue is paid off
or secured by obligations which are directly payable or guarantied by
the United States government and (B) net of insured securities in a unit
investment trust or mutual fund that have been sold from the trust or
fund without insurance.

(6) 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:

(A) with the prior written approval of the superintendent:

(i) if the actual incurred losses for the year, in the case of the
categories of guaranties subject to paragraph three of this subsection
exceeds thirty-five percent of earned premiums, or in the case of the
categories of guaranties subject to paragraph four of this subsection
exceed sixty-five percent of earned premiums; or

(ii) if the contingency reserve applicable to the categories of
guaranties subject to paragraph three of this subsection has been in
existence for less than forty quarters, or for less than thirty quarters
for the categories of guaranties subject to paragraph four of this
subsection, upon a demonstration satisfactory to the superintendent that
the amount carried is excessive in relation to the insurer's outstanding
obligations under its financial guaranties.

(B) upon thirty days prior written notice to the superintendent,
provided that the contingency reserve applicable to the categories of
guaranties subject to paragraph three of this subsection has been in
existence for forty quarters, or thirty quarters for categories of
guaranties subject to paragraph four of this subsection, upon a
demonstration satisfactory to the superintendent that the amount carried
is excessive in relation to the insurer's outstanding obligations under
its financial guaranties.

(7) An insurer providing financial guaranty insurance 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 paragraphs one through
three of subsection (b) of section one thousand four hundred two of this
chapter and paragraphs one through three of subsection (a) of section
one thousand four hundred four of this chapter.

(b) Loss reserves. (1) The case basis method or such other method as
may be prescribed by the superintendent shall be used to establish and
maintain loss reserves, net of collateral, for claims reported and
unpaid, in a manner consistent with section four thousand one hundred
seventeen of this chapter. A deduction from loss reserves shall be
allowed for the time value of money by application of a discount rate
equal to the average rate of return on the admitted assets of the
insurer as of the date of the computation of any such reserves. The
discount rate shall be adjusted at the end of each calendar year.

(2) If the insured principal and interest on a defaulted issue of
obligations due and payable during any three years following the date of
default exceeds ten percent of the insurer's surplus to policyholders
and contingency reserves, its reserve so established shall be supported
by a report from an independent source acceptable to the superintendent.

(c) Unearned premium reserve. An unearned premium reserve shall be
established and maintained net of reinsurance and collateral with
respect to all financial guaranty premiums. Where financial guaranty
insurance premiums are paid on an installment basis, an unearned premium
reserve shall be established and maintained, net of reinsurance and
collateral, computed on a daily or monthly pro rata basis. All other
financial guaranty insurance premiums written shall be earned in
proportion with the expiration of exposure, or by such other method as
may be prescribed by the superintendent.