By: Harris of Dallas S.B. No. 1134 A BILL TO BE ENTITLED AN ACT 1-1 relating to an amendment to the Texas Insurance Code including 1-2 Article 3.33 concerning the investments of insurers including the 1-3 treatment of money market funds. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. Section 4, Article 3.33, Insurance Code, is 1-6 amended to read as follows: 1-7 Sec. 4. Subject to the limitations and restrictions herein 1-8 contained, the investments and loans described in the following 1-9 subsections, and none other, are authorized for the insurers 1-10 subject hereto: 1-11 (a) United States Government Bonds. Bonds, evidences of 1-12 indebtedness or obligations of the United States of America, or 1-13 bonds, evidences of indebtedness or obligations guaranteed as to 1-14 principal and interest by the full faith and credit of the United 1-15 States of America, and bonds, evidences of indebtedness, or 1-16 obligations of agencies and instrumentalities of the government of 1-17 the United States of America; 1-18 (b) Other Governmental Bonds. Bonds, evidences of 1-19 indebtedness or obligations of governmental units in the United 1-20 States, Canada, or any province or city of Canada, and of the 1-21 instrumentalities of such governmental units; provided: 1-22 (1) such governmental unit or instrumentality is not 1-23 in default in the payment of principal or interest in any of its 2-1 obligations; and 2-2 (2) investments in the obligations of any one 2-3 governmental unit or instrumentality may not exceed 20 percent of 2-4 the insurer's capital and surplus; 2-5 (c) Corporate Bonds. Bonds, evidences of indebtedness or 2-6 obligations of corporations organized under the laws of the United 2-7 States of America or its states or Canada or any state, district, 2-8 province, or territory of Canada; provided: 2-9 (1) any such corporation must be solvent with at least 2-10 $1,000,000 of net worth as of the date of its latest annual or more 2-11 recent certified audited financial statement or will have at least 2-12 $1,000,000 of net worth after completion of a securities offering 2-13 which is being subscribed to by the insurer, or the obligation is 2-14 guaranteed as to principal and interest by a solvent corporation 2-15 meeting such net worth requirements which is organized under the 2-16 laws of the United States of America or one of its states or Canada 2-17 or any state, district, province, or territory of Canada; 2-18 (2) investments in the obligations of any one 2-19 corporation may not exceed 20 percent of the insurer's capital and 2-20 surplus; and 2-21 (3) the aggregate of all investments under this 2-22 subsection may not exceed: 2-23 (A) one hundred percent of the insurer's assets 2-24 (excluding, however, those assets representing the minimum capital 2-25 required for the insurer), but only if more than 75 percent of the 3-1 total amount invested by the insurer in such bonds, evidences of 3-2 indebtedness, or obligations of any such corporations qualifying 3-3 under Subdivision (1) of this subsection are rated either: (i) AA 3-4 or better by Standard and Poor's Bond Ratings service; or (ii) Aa 3-5 or better by Moody's Bond Ratings service; or 3-6 (B) eighty percent of the insurer's assets 3-7 (excluding, however, those assets representing the minimum capital 3-8 required for the insurer), but only if more than 50 percent of the 3-9 total amount invested by the insurer in such bonds, evidences of 3-10 indebtedness or obligations of any such corporations qualifying 3-11 under Subdivision (1) of this subsection are rated either: (i) BBB 3-12 or better by Standard and Poor's Bond Ratings service; or (ii) Baa 3-13 or better by Moody's Bond Ratings service; or 3-14 (C) fifty percent of the insurer's assets; 3-15 (d) International Market. Bonds issued, assumed, or 3-16 guaranteed by the Interamerican Development Bank, the International 3-17 Bank for Reconstruction and Development (the World Bank), the Asian 3-18 Development Bank, the State of Israel, the African Development 3-19 Bank, and the International Finance Corporation; provided: 3-20 (1) investments in the bonds of any one of the 3-21 entities specified above may not exceed 20 percent of the insurer's 3-22 capital and surplus; and 3-23 (2) the aggregate of all investments made under this 3-24 subsection may not exceed 20 percent of the insurer's assets; 3-25 (e) Policy Loans. Loans upon the security of the insurer's 4-1 own policies not in excess of the amount of the reserve values 4-2 thereof; 4-3 (f) Time and Savings Deposits. Any type or form of savings 4-4 deposits, time deposits, certificates of deposit, NOW accounts, and 4-5 money market accounts in solvent banks, savings and loan 4-6 associations, and credit unions and branches thereof, organized 4-7 under the laws of the United States of America or its states, when 4-8 made in accordance with the laws or regulations applicable to such 4-9 entities; provided the amount of the deposits in any one bank, 4-10 savings and loan association, or credit union will not exceed the 4-11 greater of: 4-12 (1) twenty percent of the insurer's capital and 4-13 surplus; 4-14 (2) the amount of federal or state deposit insurance 4-15 coverage pertaining to such deposit; or 4-16 (3) ten percent of the amount of capital, surplus, and 4-17 undivided profits of the entity receiving such deposits; 4-18 (g) Equipment Trusts. Equipment trust obligations or 4-19 certificates; provided: 4-20 (1) any such obligation or certificate is secured by 4-21 an interest in transportation equipment that is in whole or in part 4-22 within the United States of America and the amount of the 4-23 obligation or certificate may not exceed 90 percent of the value of 4-24 the equipment; 4-25 (2) the obligation or certificate provides a right to 5-1 receive determined portions of rental, purchase, or other fixed 5-2 obligatory payments for the use or purchase of the transportation 5-3 equipment; 5-4 (3) investment in any one equipment trust obligation 5-5 or certificate may not exceed 10 percent of the insurer's capital 5-6 and surplus; and 5-7 (4) the aggregate of all investments made under this 5-8 subsection may not exceed 10 percent of the insurer's assets; 5-9 (h) Common Stock. Common stock of any corporation organized 5-10 under the laws of the United States of America or any of its 5-11 states, shares of mutual funds doing business under the Investment 5-12 Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), other than 5-13 money market funds as defined in Subsection (s), and shares in real 5-14 estate investment trusts as defined in the Internal Revenue Code of 5-15 1954 (26 U.S.C. Section 856); provided: 5-16 (1) any such corporation, other than a mutual fund, 5-17 must be solvent with at least $1,000,000 net worth as of the date 5-18 of its latest annual or more recent certified audited financial 5-19 statement or will have at least $1,000,000 of net worth after 5-20 completion of a securities offering which is being subscribed to by 5-21 the insurer; 5-22 (2) mutual funds, other than money market funds as 5-23 defined in Subsection (s), and real estate investment trusts must 5-24 be solvent with at least $1,000,000 of net assets as of the date of 5-25 its latest annual or more recent certified audited financial 6-1 statement; 6-2 (3) investments in any one corporation, mutual fund, 6-3 other than a money market fund as described in Subsection (s), or 6-4 real estate investment trust may not exceed 10 percent of the 6-5 insurer's capital and surplus; and 6-6 (4) the aggregate of all investments made under this 6-7 subsection may not exceed 20 percent of the insurer's assets; 6-8 (i) Preferred Stock. Preferred stock of corporations 6-9 organized under the laws of the United States of America or any of 6-10 its states; provided: 6-11 (1) such corporation must be solvent with at least 6-12 $1,000,000 of net worth as of the date of its latest annual or more 6-13 recent certified audited financial statement or will have at least 6-14 $1,000,000 of net worth after completion of a security offering 6-15 which is being subscribed to by the insurer; 6-16 (2) investments in the preferred stock of any one 6-17 corporation will not exceed 20 percent of the insurer's capital and 6-18 surplus; 6-19 (3) in the aggregate not more than 10 percent of the 6-20 insurer's assets may be invested in preferred stock, the redemption 6-21 and retirement of which is not provided for by a sinking fund 6-22 meeting the standards established by the National Association of 6-23 Insurance Commissioners to value the preferred stock at cost; and 6-24 (4) the aggregate of all investments made under this 6-25 subsection may not exceed 40 percent of the insurer's assets; 7-1 (j) Collateral Loans. Collateral loans secured by a first 7-2 lien upon or a valid and perfected first security interest in an 7-3 asset; provided: 7-4 (1) the amount of any such collateral loan will not 7-5 exceed 80 percent of the value of the collateral asset at any time 7-6 during the duration of the loan; and 7-7 (2) the asset used as collateral would be authorized 7-8 for direct investment by the insurer under other provisions of this 7-9 Section 4, except real property in Subsection (l); 7-10 (k) Real Estate Loans. Notes, evidences of indebtedness, or 7-11 participations therein secured by a valid first lien upon real 7-12 property or leasehold estate therein located in the United States 7-13 of America; provided: 7-14 (1) the amount of any such obligation secured by a 7-15 first lien upon real property or leasehold estate therein shall not 7-16 exceed 90 percent of the value of such real property or leasehold 7-17 estate therein, but the amount of such obligation: 7-18 (A) may exceed 90 percent but shall not exceed 7-19 100 percent of the value of such real property or leasehold estate 7-20 therein if the insurer or one or more wholly owned subsidiaries of 7-21 the insurer owns in the aggregate a 10 percent or greater equity 7-22 interest in such real property or leasehold estate therein; 7-23 (B) may be 95 percent of the value of such real 7-24 property or leasehold estate therein if it contains only a dwelling 7-25 designed exclusively for occupancy by not more than four families 8-1 for residential purposes, and the portion of the unpaid balance of 8-2 such obligation which is in excess of an amount equal to 90 percent 8-3 of such value is guaranteed or insured by a mortgage insurance 8-4 company qualified to do business in the State of Texas; or 8-5 (C) may be greater than 90 percent of the value 8-6 of such real property or leasehold estate therein to the extent the 8-7 obligation is insured or guaranteed by the United States of 8-8 America, the Federal Housing Administration pursuant to the 8-9 National Housing Act of 1934, as amended (12 U.S.C. Section 1701 et 8-10 seq.), or the State of Texas; and 8-11 (2) the term of an obligation secured by a first lien 8-12 upon a leasehold estate in real property shall not exceed a period 8-13 equal to four-fifths of the then unexpired term of such leasehold 8-14 estate; provided the unexpired term of the leasehold estate may 8-15 extend at least 10 years beyond the term of the obligation, and 8-16 each obligation shall be payable in an installment or installments 8-17 of sufficient amount or amounts so that at any time after the 8-18 expiration of two-thirds of the original loan term, the principal 8-19 balance will be no greater than the principal balance would have 8-20 been if the loan had been amortized over the original loan term in 8-21 equal monthly, quarterly, semiannual, or annual payments of 8-22 principal and interest, it being required that under any method of 8-23 repayment such obligations will fully amortize during a period of 8-24 time not exceeding four-fifths of the then unexpired term of the 8-25 security leasehold estate; and 9-1 (3) if any part of the value of buildings is to be 9-2 included in the value of such real property or leasehold estate 9-3 therein to secure the obligations provided for in this subsection, 9-4 such buildings shall be covered by adequate property insurance, 9-5 including but not limited to fire and extended coverage insurance 9-6 issued by a company authorized to transact business in the State of 9-7 Texas or by a company recognized as acceptable for such purpose by 9-8 the insurance regulatory official of the state in which such real 9-9 estate is located, and the amount of insurance granted in the 9-10 policy or policies shall be not less than the unpaid balance of the 9-11 obligation or the insurable value of such buildings, whichever is 9-12 the lesser; the loss clause shall be payable to the insurer as its 9-13 interest may appear; and 9-14 (4) to the extent any note, evidence of indebtedness, 9-15 or participation therein under this subsection represents an equity 9-16 interest in the underlying real property, the value of such equity 9-17 interest shall be determined at the time of execution of such note, 9-18 evidence of indebtedness, or participation therein and that portion 9-19 shall be designated as an investment subject to the provisions of 9-20 Subsection (l)(2) of this section; and 9-21 (5) the amount of any one such obligation may not 9-22 exceed 25 percent of the insurer's capital and surplus; 9-23 (l) Real Estate. Real property fee simple or leasehold 9-24 estates located within the United States of America, as follows: 9-25 (1) home and branch office real property or 10-1 participations therein, which must be materially enhanced in value 10-2 by the construction of durable, permanent-type buildings and other 10-3 improvements costing an amount at least equal to the cost of such 10-4 real property, exclusive of buildings and improvements at the time 10-5 of acquisition, or by the construction of such buildings and 10-6 improvements which must be commenced within two years of the date 10-7 of the acquisition of such real property; provided: 10-8 (A) at least 30 percent of the available space 10-9 in such building shall be occupied for the business purposes of the 10-10 insurer and its affiliates; and 10-11 (B) the aggregate investment in such home and 10-12 branch offices shall not exceed 20 percent of the insurer's assets; 10-13 and 10-14 (2) other investment property or participations 10-15 therein, which must be materially enhanced in value by the 10-16 construction of durable, permanent-type buildings and other 10-17 improvements costing an amount at least equal to the cost of such 10-18 real property, exclusive of buildings and improvements at the time 10-19 of acquisition, or by the construction of such buildings and 10-20 improvements which must be commenced within two years of the date 10-21 of acquisition of such real property; provided that such investment 10-22 in any one piece of property or interest therein, including the 10-23 improvements, fixtures, and equipment pertaining thereto may not 10-24 exceed five percent of the insurer's assets; provided, however, 10-25 nothing in this article shall allow ownership of, development of, 11-1 or equity interest in any residential property or subdivision, 11-2 single or multiunit family dwelling property, or undeveloped real 11-3 estate for the purpose of subdivision for or development of 11-4 residential, single, or multiunit family dwellings, except 11-5 acquisitions as provided in Subdivision (4) below, and such 11-6 ownership, development, or equity interests shall be specifically 11-7 prohibited; 11-8 (3) the admissible asset value of each such investment 11-9 in the properties acquired under Subdivisions (1) and (2) of this 11-10 subsection shall be subject to review and approval by the 11-11 Commissioner of Insurance. The commissioner shall have discretion 11-12 at the time such investment is made or any time when an examination 11-13 of the company is being made to cause any such investment to be 11-14 appraised by an appraiser, appointed by the commissioner, and the 11-15 reasonable expense of such appraisal shall be paid by such 11-16 insurance company and shall be deemed to be a part of the expense 11-17 of examination of such company; if the appraisal is made upon 11-18 application of the company, the expense of such appraisal shall not 11-19 be considered a part of the expense of examination of such company; 11-20 no insurance company may hereafter make any write-up in the 11-21 valuation of any of the properties described in Subdivision (1) or 11-22 (2) of this subsection unless and until it makes application 11-23 therefor and such increase in valuation shall be approved by the 11-24 commissioner; and 11-25 (4) other real property acquired: 12-1 (A) in good faith by way of security for loans 12-2 previously contracted or money due; or 12-3 (B) in satisfaction of debts previously 12-4 contracted for in the course of its dealings; or 12-5 (C) by purchase at sales under judgment or 12-6 decrees of court, or mortgage or other lien held by such insurer; 12-7 and 12-8 (5) regardless of the mode of acquisition specified 12-9 herein, upon sale of any such real property, the fee title to the 12-10 mineral estate or any portion thereof may be retained by the 12-11 insurance company indefinitely; 12-12 (m) Oil, Gas, and Minerals. In addition to and without 12-13 limitation on the purposes for which real property may be acquired, 12-14 secured, held, or retained pursuant to other provisions of this 12-15 section, every such insurance company may secure, hold, retain, and 12-16 convey production payments, producing royalties and producing 12-17 overriding royalties, or participations therein as an investment 12-18 for the production of income; provided: 12-19 (1) in no event may such company carry such assets in 12-20 an amount in excess of 90 percent of the appraised value thereof; 12-21 and 12-22 (2) no one investment under this subsection may exceed 12-23 10 percent of the insurer's capital and surplus in excess of 12-24 statutory minimum capital and surplus applicable to that insurer, 12-25 and the aggregate of all such investments may not exceed 10 percent 13-1 of the insurer's assets as of December 31st next preceding the date 13-2 of such investment; and 13-3 (3) for the purposes of this subsection, the following 13-4 definitions apply: 13-5 (A) a production payment is defined to mean a 13-6 right to oil, gas, or other minerals in place or as produced that 13-7 entitles its owner to a specified fraction of production until a 13-8 specified sum of money, or a specified number of units of oil, gas, 13-9 or other minerals, has been received; 13-10 (B) a royalty and an overriding royalty are each 13-11 defined to mean a right to oil, gas, and other minerals in place or 13-12 as produced that entitles the owner to a specified fraction of 13-13 production without limitation to a specified sum of money or a 13-14 specified number of units of oil, gas, or other minerals; 13-15 (C) "producing" is defined to mean producing 13-16 oil, gas, or other minerals in paying quantities, provided that it 13-17 shall be deemed that oil, gas, or other minerals are being produced 13-18 in paying quantities if a well has been "shut in" and "shut-in 13-19 royalties" are being paid; 13-20 (n) Foreign Countries and United States Territories. 13-21 Investments in foreign countries or in commonwealths, territories, 13-22 or possessions of the United States where the insurer conducts an 13-23 insurance business; provided: 13-24 (1) such investments are similar to those authorized 13-25 for investment within the United States of America by other 14-1 provisions of this section; and 14-2 (2) such investments when added to the amount of 14-3 similar investments made within the United States do not result in 14-4 the combined total of such investments exceeding the limitations 14-5 specified in Subsections (a) through (p) of this section; and 14-6 (3) such investments may not exceed the amount of 14-7 reserves attributable to the business in force in said countries; 14-8 provided, however, such investments may exceed such reserves to the 14-9 extent required by any country as a condition to doing business 14-10 therein, but to the extent such investments exceed such reserves 14-11 said investments shall not be considered as admitted assets of the 14-12 insurer; 14-13 (o) Investments Not Otherwise Specified. Investments which 14-14 are not otherwise authorized by this article and which are not 14-15 specifically prohibited by statute, including that portion of any 14-16 investments which may exceed the limits specified in Subsections 14-17 (a) through (n) of this section; provided: 14-18 (1) if any aggregate or individual specified 14-19 investment limitation in Subsections (a) through (n) of this 14-20 section is exceeded, then the excess portion of such investment 14-21 shall be an investment under this subsection; and 14-22 (2) the burden of establishing the value of such 14-23 investments shall be upon the insurer; and 14-24 (3) the amount of any one such investment may not 14-25 exceed 10 percent of the insurer's capital and surplus in excess of 15-1 the statutory minimum capital and surplus applicable to that 15-2 insurer; and 15-3 (4) the aggregate of all investments made under this 15-4 subsection may not exceed the lesser of either five percent of the 15-5 insurer's assets or the insurer's capital and surplus applicable to 15-6 that insurer; 15-7 (p) Other Authorized Investments. Those other investments 15-8 as follows: 15-9 (1) any investment held by an insurer on the effective 15-10 date of this Act, which was legally authorized at the time it was 15-11 made or acquired or which the insurer was authorized to hold or 15-12 possess immediately prior to such effective date, but which does 15-13 not conform to the requirements of the investments authorized in 15-14 Subsections (a) through (o) of this section, may continue to be 15-15 held by and considered as an admitted asset of the insurer; 15-16 provided the investment is disposed of at its maturity date, if 15-17 any, or within the time prescribed by the law under which it was 15-18 acquired, if any; and provided further, in no event shall the 15-19 provisions of the subdivision alter the legal or accounting status 15-20 of such asset; and 15-21 (2) any other investment which may be authorized by 15-22 other provisions of this code or by other laws of this state for 15-23 the insurers which are subject to this article. 15-24 (q) Special Limitations for Certain Fixed Annuity Insurers. 15-25 The quantitative limitations imposed above in Subsections (b)(2), 16-1 (c)(2), (f)(1), (g)(3), (h)(3), (i)(2), and (k)(5) of this section 16-2 shall not apply to any insurer with assets in excess of 16-3 $2,500,000,000 and that receives more than 90 percent of its 16-4 premium income from fixed rate annuity contracts and that has more 16-5 than 90 percent of its assets allocated to its reserves held for 16-6 fixed rate annuity contracts, excluding, however, any premium 16-7 income, assets, and reserves received from, held for, or allocated 16-8 to separate accounts from the computation of the above percentages, 16-9 and in lieu thereof, the following quantitative limitations shall 16-10 apply to such insurers: 16-11 (1) the limitation in Subsection (b)(2) of this 16-12 section shall be two percent of the insurer's assets; 16-13 (2) the limitation in Subsection (c)(2) of this 16-14 section shall be two percent of the insurer's assets; 16-15 (3) the limitation in Subsection (f)(1) of this 16-16 section shall be two percent of the insurer's assets; 16-17 (4) the limitation in Subsection (g)(3) of this 16-18 section shall be one percent of the insurer's assets; 16-19 (5) the limitation in Subsection (h)(3) of this 16-20 section shall be one percent of the insurer's assets; 16-21 (6) the limitation in Subsection (i)(2) of this 16-22 section shall be two percent of the insurer's assets; and 16-23 (7) the limitation in Subsection (k)(5) of this 16-24 section shall be two percent of the insurer's assets. 16-25 (r) Premium Loans. Loans to finance the payment of premiums 17-1 for the insurer's own insurance policies or annuity contracts; 17-2 provided that the amount of any such loan does not exceed the sum 17-3 of: (i) the available cash value of such insurance policy or 17-4 annuity contract; and (ii) the amount of any escrowed commissions 17-5 payable relating to such insurance policy or annuity contract for 17-6 which the premium loan is made. 17-7 (s) Money market funds are those defined by 17 CFR 270.2a-7 17-8 under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) 17-9 and further which meet the following conditions: 17-10 (1) such funds shall invest 100% of its total assets 17-11 in U.S. treasury bills, notes, and bonds and collateralized 17-12 repurchase agreements comprised of those obligations at all times; 17-13 or 17-14 (2) such funds shall invest 100% of its total assets 17-15 in other full faith and credit instruments of the United States 17-16 government; or 17-17 (3) such funds shall invest at least 95% of its total 17-18 assets in exempt securities short-term debt instruments with a 17-19 maturity of 397 days or less, class and bonds, and collateralized 17-20 repurchase agreements comprised of those securities at all times. 17-21 For purposes of complying with subsection (h) herein, funds 17-22 qualifying for listing within these categories must conform to the 17-23 Purpose and Procedures Manual of the Valuation of Securities Manual 17-24 of the National Association of Insurance Commissioners. 17-25 SECTION 2. This Act takes effect September 1, 1993. 18-1 SECTION 3. The importance of this legislation and the 18-2 crowded condition of the calendars in both houses create an 18-3 emergency and an imperative public necessity that the 18-4 constitutional rule requiring bills to be read on three several 18-5 days in each house be suspended, and this rule is hereby suspended.