By Shields                                            H.B. No. 2793
                                 A BILL TO BE ENTITLED
    1-1                                AN ACT
    1-2  relating to amendments to certain provisions of the Texas Insurance
    1-3  Holding Company System Regulatory Act.
    1-4        BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
    1-5        SECTION 1.  Section 4(c)(2) of Article 21.49-1, Insurance
    1-6  Code, is amended as follows:
    1-7              (2)  For purposes of this section an extraordinary
    1-8  dividend or distribution includes any dividend or distribution of
    1-9  cash or other property, whose fair market value together with that
   1-10  of other dividends or distributions made within the preceding 12
   1-11  months exceeds the greater of (i) ten percent (20 percent if such
   1-12  insurer is a title insurer) of such insurer's surplus as regards
   1-13  policyholders as of the 31st day of December next preceding, or
   1-14  (ii) the net gain for operations of such insurer, if such insurer
   1-15  is a life or title insurer, or the net <investment> income, if such
   1-16  insurer is not a life or title insurer, for the 12-month period
   1-17  ending the 31st day of December next preceding, but shall not
   1-18  include pro rata distributions of any class of the insurer's own
   1-19  securities.  In determining whether a dividend or distribution is
   1-20  extraordinary, an insurer other than a life insurer may carry
   1-21  forward net income from the previous two (2) calendar years that
   1-22  has not already been paid out as dividends.  This carry forward
   1-23  shall be computed by taking the net income from the second and
    2-1  third preceding calendar years, not including realized capital
    2-2  gains, less dividends paid in the second and immediate preceding
    2-3  calendar years.
    2-4        SECTION 2.  Section 6(b) of Article 21.49-1, Insurance Code,
    2-5  is amended as follows:
    2-6        (b)  Additional investment authority. In addition to
    2-7  investments in common stock, preferred stock, debt obligations, and
    2-8  other securities permitted under all other sections of the
    2-9  Insurance Code, a domestic insurer may also:
   2-10              (1)  invest in common stock, preferred stock, debt
   2-11  obligations, and other securities of one or more subsidiaries and
   2-12  affiliates organized for any lawful purpose amounts which in the
   2-13  aggregate do not exceed the lesser of <five> ten percent of the
   2-14  insurer's assets or 50 percent of the insurer's surplus as regards
   2-15  policyholders, but after such investments the insurer's surplus as
   2-16  regards policyholders must be reasonable in relation to the
   2-17  insurer's outstanding liabilities and adequate to its financial
   2-18  needs.  In calculating the amount of such investments, investments
   2-19  in domestic or foreign insurance subsidiaries shall be excluded,
   2-20  and there must be included (i) total net money or other
   2-21  consideration expended and obligations assumed in the acquisition
   2-22  or formation of a subsidiary, including all organizational expenses
   2-23  and contributions to capital and surplus of the subsidiary whether
   2-24  or not represented by the purchase of capital stock or issuance of
   2-25  other securities, and (ii) all amounts expended in acquiring
    3-1  additional common stock, preferred stock, debt obligations, and
    3-2  other securities and all contributions to the capital or surplus of
    3-3  a subsidiary subsequent to its acquisition or formation;
    3-4              (2)  if the insurer's total liabilities, as calculated
    3-5  for National Association of Insurance Commissioners annual
    3-6  statement purposes, are less than 10 percent of assets, invest any
    3-7  amount in common stock, preferred stock, debt obligations, and
    3-8  other securities of one or more subsidiaries and affiliates
    3-9  organized for any lawful purpose, but after such investment the
   3-10  insurer's surplus as regards policyholders, considering such
   3-11  investment as if it were a nonadmitted asset, must be reasonable in
   3-12  relation to the insurer's outstanding liabilities and adequate to
   3-13  its financial needs;
   3-14              (3)  invest any amount in common stock, preferred
   3-15  stock, debt obligations, and other securities of one or more
   3-16  subsidiaries and affiliates organized for any lawful purpose,
   3-17  provided that such subsidiary or affiliate agrees to limit its
   3-18  investments in any particular asset so that such investments will
   3-19  not cause the amount of the total investment of the insurer to
   3-20  exceed the amount the insurer could have directly invested in such
   3-21  asset.  For the purpose of this clause, "the total investment of
   3-22  the insurer" will include (i) any direct investment by the insurer
   3-23  in an asset and (ii) the insurer's proportionate share of any
   3-24  investment in such asset by any subsidiary or affiliate of the
   3-25  insurer, which must be calculated by multiplying the amount of the
    4-1  subsidiary's or affiliate's investment by the percentage of the
    4-2  insurer's ownership of such subsidiary or affiliate; and
    4-3              (4)  with the prior approval of the commissioner,
    4-4  invest any amount in common stock, preferred stock, debt
    4-5  obligations, or other securities of one or more subsidiaries and
    4-6  affiliates, but after such investment the insurer's surplus as
    4-7  regards policyholders must be reasonable in relation to the
    4-8  insurer's outstanding liabilities and adequate to its financial
    4-9  needs.
   4-10        SECTION 3.  Section 6(d) of Article 21.49-1, Insurance Code,
   4-11  is amended as follows:
   4-12        (d)  Qualification of Investment.  Whether any investment
   4-13  under Subsection (b) hereof meets the applicable requirements
   4-14  thereof is to be determined <on a pro forma basis as of the time
   4-15  immediately after such investment is made, taking into account the
   4-16  insurer's assets, liabilities, and surplus as regards
   4-17  policyholders, the then outstanding principal balance of all
   4-18  previous investments in equity securities of subsidiaries and
   4-19  affiliates.>  before such investment is made, by calculating the
   4-20  applicable investment limitations as though the investment has
   4-21  already been made, taking into account the then outstanding
   4-22  principal balance on all previous investments in debt obligations,
   4-23  and the value of all previous investments in equity securities as
   4-24  of the day they were made, net of any return of capital invested,
   4-25  not including dividends.
    5-1        SECTION 4.  Section 6A of Article 21.49-1, Insurance Code, is
    5-2  amended as follows:
    5-3        Sec. 6A.  (a) For financial statement valuation purposes
    5-4  only, and not for the purposes of determining the amount invested
    5-5  pursuant to the quantitative limitations as set forth in Section
    5-6  6(b)(1) of this Article, <V>valuation of an investment by an
    5-7  insurer or a subsidiary or affiliate of an insurer, which is not
    5-8  itself an insurer, shall be valued, subject to the additional
    5-9  provisions of this section, on the basis of the greater of:
   5-10              (1)  the net stockholder equity value owned by the
   5-11  insurer in the subsidiary or affiliate, adjusted to include the
   5-12  value of only such of the assets of such subsidiary as would
   5-13  constitute lawful investments for the insurer if acquired or held
   5-14  directly by the insurer, or
   5-15              (2)  one of the following bases appropriate to each
   5-16  type of subsidiary or affiliate owned by it, provided, however,
   5-17  that an insurer shall not be required to value the stock of all its
   5-18  subsidiaries or affiliates on the same basis:
   5-19                    (i)  the net worth of the subsidiary or affiliate
   5-20  determined in accordance with generally accepted accounting
   5-21  principles as of the end of its most recent fiscal year, provided,
   5-22  subject to the other provisions of this section, that the financial
   5-23  statements of the subsidiary or affiliate for its most recent
   5-24  fiscal year have been audited by an independent certified public
   5-25  accountant in accordance with generally accepted auditing
    6-1  standards; or
    6-2                    (ii)  a value equal to the cost of the stock of
    6-3  the subsidiary or affiliate, provided such value is determined and
    6-4  adjusted to reflect subsequent operating results in accordance with
    6-5  generally accepted accounting principles; or
    6-6                    (iii)  the market value of the stock of the
    6-7  subsidiary or affiliate, if the stock is listed on a national
    6-8  securities exchange; or
    6-9                    (iv)  the value, if any, placed on the stock of
   6-10  such subsidiary or affiliate by the National Association of
   6-11  Insurance Commissioners; or
   6-12                    (v)  any other value which the insurer can
   6-13  substantiate to the satisfaction of the commissioner as being a
   6-14  reasonable value.
   6-15        SECTION 5.  This Act takes effect September 1, 1995.
   6-16        SECTION 6.  The importance of this legislation and the
   6-17  crowded condition of the calendars in both houses create an
   6-18  emergency and an imperative public necessity that the
   6-19  constitutional rule requiring bills to be read on three several
   6-20  days in each house be suspended, and this rule is hereby suspended.