RS C.S.H.B. 909 75(R) BILL ANALYSIS INSURANCE C.S.H.B. 909 By: Dutton 4-7-97 Committee Report (Substituted) BACKGROUND Investments made by insurers are subject to statutes that protect the solvency of the insurers. Article 3.33, Insurance Code, regulates the types and amounts of authorized investments for certain life, health and accident insurance companies. Article 2.10, Insurance Code, regulates the types and amounts of authorized investments for property and casualty insurers. These investment statutes have not been materially updated in recent years. PURPOSE The proposed amendments would define certain technical terms and broaden the investment opportunities for Texas insurers, subject to certain controls, to improve the competitive position of Texas domiciled insurers. RULEMAKING AUTHORITY It is the committee's opinion that this bill expressly grants rule making authority to the Commissioner of Insurance in Section 3 of this bill. (Section 4, Article 3.33, Insurance Code). SECTION BY SECTION ANALYSIS SECTION 1. - Amends section 2, article 3.33, Insurance Code, by deleting certain language which is moved to SECTION 2 of the bill. SECTION 2. - Amends section 3, article 3.33, Insurance Code, to clarify the requirements of "written investment plans" which, in turn, require insurers to diversify their investments. The amendment would also delete an administratively burdensome requirement that the records of insurers assign article 3.33 subsection reference numbers to each investment. SECTION 3.- Amends section 4, article 3.33, Insurance Code, to specify that each investment limit is based on an insurer's most recently filed statutory financial statement unless otherwise noted in the statute and to note other applicable authorized investments. SECTION 3. - Amends subsection 4(c), article 3.33, Insurance Code, to add "asset-backed" to the definition of "Obligations of Business Entities". Another addition adds any "counterparty exposure amount" for derivative transactions to the limits of this subsection. Finally, preferred stock is included in the rating category limits which is offset by deleting the perissuer limits for below investment grade bonds. SECTION 3. - Amends subsection 4(g), article 3.33, Insurance Code, new language is inserted in subsection 4(g) to permit insurers to invest in investment pools. "Short-term" investment pools may invest in (i) highly rated securities with a maturity of 397 days or less, or (ii) in money market funds. "Other" investment pools would be limited by the investment authority that exists in other sections and a further limit of 25% of the insurer's assets. Participation in the pools is limited to the insurer, its subsidiaries or affiliates and unaffiliated insurers. Investments in all pools would be subject to an aggregate limit of 35% of the insurer's assets. A written agreement is required which must include certain safety, disclosure and record-keeping provisions. The new provisions would essentially allow bulk investment transactions that have the potential of decreasing transaction costs (i.e. fees to brokers) and increasing investment returns. Finally, investments in pools would not be deemed to be affiliated transactions under holding company laws; although, the required written pooling agreement would be subject to the holding company standards and certain reporting requirements. SECTION 3. - Amends Subsection 4(g) to delete the provisions relating to equipment trusts which are no longer necessary as these investments may be made under section 4(c), article 3.33, as amended by the bill. SECTION 3. - Amends subsection 4(h), article 3.33, Insurance Code, to replace the definition of "common stock" with "equity interests" which is defined to include corporations, limited liability companies, associations, real estate investment tracts, joint ventures, mutual funds, trusts, joint tenancies, etc. Investments in general partnership are authorized if made through an investment subsidiary. Certain requirements would be deleted such as the requirement that an entity in which an insurer invests have a net worth of one million dollars. SECTION 3. - Amends subsection 4(i), article 3.33, Insurance Code, to allow greater authority to invest in preferred stocks of defined business entities, including those organized under the laws of Canada, subject to certain limits and investment quality restrictions. SECTION 3. - Amends subsection 4(n), article 3.33, Insurance Code, to provide greater authority to invest in foreign investments that are similar to US and Canadian investments, subject to a new limit of 20% of the insurer's assets. There is an additional internal-limit of 10% of the insurers's assets for investments denominated in foreign currency that are not hedged. This will essentially allow for more global investing by insurers. SECTION 3. - Amends subsection 4(o), article 3.33, Insurance Code, to add new subsection references needed because of other new changes resulting from the bill. SECTION 3. - Amends subsection 4(p), article 3.33, Insurance Code, to change investments made prior to the enactment of this article from admitted assets to "authorized" assets or transactions. SECTION 3. - Amends subsection 4(q), article 3.33, Insurance Code, to delete provisions no longer necessary as a result of other changes made by the bill. The bill would replace the deleted provisions with other provisions concerning securities lending, repurchase, reverse repurchase and dollar roll transactions. Transactions subject to this subsection are limited to a term of one year and have collateral requirements and are further limited to 40% of the insurer's assets. The provisions of article 3.39-1, Insurance Code, are not applicable to transactions under this subsection. SECTION 3. -Amends subsection 4(s), article 3.33, Insurance Code, to specify the authority to invest in money market mutual funds. SECTION 3. - Amends subsection 4(t), article 3.33, Insurance Code, to provide that an investment, once qualified, will remain qualified notwithstanding any refinancing, restructuring or modification of the investment, provided such refinancing, restructuring or modification was not transacted for the purpose of circumventing the limits of this article. SECTION 3. -Amends subsection 4(u), article 3.33, Insurance Code, to permit insurers to enter "risk control transactions". These provisions would allow insurers to use derivatives for (i) hedging transactions, after initial notice to the Commissioner, who is provided certain authority to act in the event that the transactions may cause an insurer to be in a hazardous financial condition, (ii) replication transactions, after prior written approval from the Commissioner and (iii) certain limited income generation transaction. Transactions made under this subsection are subject to certain regulatory safeguards such as the requirement for an specialized investment plan, internal control requirements and other investment limits, etc. The provisions of article 3.39-2, Insurance Code, are not applicable to transactions under this subsection. SECTION 3. - Amends subsection 4(v), article 3.33, Insurance Code, to clarify that insurers may acquire additional obligations, securities, or other assets if received as a dividend or as a distribution of assets. It also would apply to securities, obligations or other assets accepted incident to the workout, adjustment or realization of any kind when deemed by the board of directors, or by a duly authorized committee, to be in the best interests of the insurer. Finally, the provision would state that Article 3.33 does not apply to assets acquired pursuant to lawful and bona fide agreements of bulk reinsurance, merger or consolidation, if such assets constituted legal admissible investments for the ceding, merged or consolidated company. SECTION 3. - Amends section 4, article 3.33, Insurance Code, by adding new subsection (w) to clarify that investments may be qualified under one or more subsections from time-to-time, and an investment authorized by more than one subsection may be held under whichever authorizing subsection the insurer elects. It also provides that, if an investment or investment practice qualified when originally made, it will continue to be qualified under this subsection. SECTION 4. - Amends section 5, article 3.33, Insurance Code, to add conforming subsection references. SECTION 5. - Repeals section 7(e), article 3.33, Insurance Code, as it is no longer necessary given the amendments that the bill would make regarding equity investments made under article subsection 4(h), art. 3.33. SECTION 6. -Amends article 2.10, Insurance Code, to allow insurers greater authority to invest in bonds or other evidences of debt of Canada or any province of Canada. SECTION 6. -Amends article 2.10, Insurance Code, to allow insurers greater authority to invest in the stocks, bonds, debentures, bills of exchange, or any other commercial notes of any solvent dividend paying corporation created under the laws of Canada or any province of Canada. SECTION 6. - Amends article 2.10, Insurance Code, by adding new paragraph 6 which permits investments in mutual funds, provided such funds are solvent with at least $1 million of net assets and the investment in any one fund may not exceed 15% of the insurer's capital and surplus, with an aggregate of all such investments not to exceed 25% of the insurer's assets. SECTION 6. - Amends article 2.10, Insurance Code, by adding new paragraph 7 which permits investments in foreign countries or commonwealths, territories, or possessions of the United States, or foreign securities, provided such investments are similar to those authorized for investment within the United States, and subject to certain limits such as a total limit for such investments of 20% of the insurer's assets. SECTION 7. - Repeals section 5, article 21.39-B, Insurance Code, because it is no longer necessary because of other changes brought by the bill relative to the authority to invest in pools under subsection 4(g), article 3.33. SECTION 8. - Act takes effect on September 1, 1997. SECTION 9. - Emergency Clause. COMPARISON OF ORIGINAL TO SUBSTITUTE HB909 and CSHB909 both amend statutes relating to investments which are authorized for insurers. Insurers may invest their assets and funds only as authorized by these statutes in order to protect the interests of insurance policyholders. CSHB909 is substantially similar to HB909 in terms of its authorizations and limitations relative to the investment practices of insurers. The vast majority of the changes are merely technical and editorial corrections to ensure that the statute is written in proper English (using paper syntax). These changes simply serve to amend the underlying statute in a manner which will be clearer per its terms and thus less subject to possible misinterpretation. One substantive change between CSHB909 and HB909 is that certain language has been added to Section 3 of the Act to amend Sec. 4(t)of art. 3.33, Insurance Code. This new language prohibits insurers from engaging in certain transactions and taking certain actions as a means of indirectly circumventing the requirements and limitations of the Act. The other substantive change between CSHB909 and HB909 is that CSHB909 would not delete current articles 3.39-1 and 3.39-2, Insurance Code, so that these statutes may remain available for use by certain insurers.