By Averitt H.B. No. 3042
76R11950 PB-F
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to investment requirements for certain insurance
1-3 companies.
1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-5 SECTION 1. Article 2.10, Insurance Code, is amended to read
1-6 as follows:
1-7 Art. 2.10. INVESTMENT OF FUNDS IN EXCESS OF MINIMUM CAPITAL
1-8 AND MINIMUM SURPLUS. (a) The board of directors of each insurer,
1-9 or the corresponding authority designated by the charter, bylaws,
1-10 or plan of operations of an insurer that does not have a board of
1-11 directors, shall adopt a written investment plan consistent with
1-12 the requirements of this article and Articles 2.08, 2.09, 2.10-1,
1-13 2.10-2, 2.10-3, 2.10-4, 2.10-5, 6.08, 8.18, and 8.19 of this code
1-14 and the other applicable statutes governing investments by the
1-15 insurer. The investment plan must:
1-16 (1) specify the diversification of the insurer's
1-17 investments designed to reduce the risk of large losses, by:
1-18 (A) broad categories of investments, such as
1-19 bonds and real estate loans;
1-20 (B) kinds of investments, such as:
1-21 (i) obligations of governments or business
1-22 entities;
1-23 (ii) mortgage-backed securities; and
1-24 (iii) real estate loans on office, retail,
2-1 industrial, or residential properties;
2-2 (C) quality;
2-3 (D) maturity;
2-4 (E) type of industry; and
2-5 (F) geographical areas, as to both domestic and
2-6 foreign investments;
2-7 (2) balance the safety of principal with yield and
2-8 growth;
2-9 (3) seek a reasonable relationship of assets and
2-10 liabilities as to term and nature; and
2-11 (4) be appropriate considering the capital and surplus
2-12 and the business conducted by the insurer.
2-13 (b) At least annually, the board of directors or other
2-14 authority shall review the adequacy of the investment plan and the
2-15 implementation of the plan.
2-16 (c) The insurer shall maintain the investment plan in its
2-17 principal office and shall provide the plan to the commissioner or
2-18 the commissioner's designee on request. The commissioner or the
2-19 commissioner's designee shall maintain the investment plan as a
2-20 privileged and confidential document, and the plan is not subject
2-21 to public disclosure.
2-22 (d) The insurer shall maintain investment records covering
2-23 each transaction. At all times, the insurer must be able to
2-24 demonstrate to the department that its investments are within the
2-25 limitations prescribed by the statutes described by Subsection (a)
2-26 of this article.
2-27 (e) No company except any writing life, health and accident
3-1 insurance, organized under the laws of this state, shall invest
3-2 its funds over and above its minimum capital and its minimum
3-3 surplus, as provided in Article 2.02, except as otherwise provided
3-4 in this Code, in any other manner than as follows:
3-5 (1) as [1. As] provided for the investment of its
3-6 minimum capital and its minimum surplus in Article 2.08;
3-7 (2) in [2. In] bonds or other evidences of debt which
3-8 at the time of purchase are interest-bearing and are issued by
3-9 authority of law and are not in default as to principal or
3-10 interest, of any state [of the States of the United States], [or
3-11 of] Canada, or [any] province of Canada, or in the stock of any
3-12 National Bank, in stock of any State Bank of Texas whose deposits
3-13 are insured by the Federal Deposit Insurance Corporation;
3-14 provided, however, that if said funds are invested in the stock of
3-15 a State Bank of Texas that not more than thirty-five per cent (35%)
3-16 of the total outstanding stock of any one (1) State Bank of Texas
3-17 may be so purchased by any one (1) insurance company; and provided
3-18 further, that neither the insurance company whose funds are
3-19 invested in said bank stock nor any other insurance company may
3-20 invest its funds in the remaining stock of any such State Bank;
3-21 (3) in [3. In] bonds, notes, evidences of
3-22 indebtedness or participations therein secured by a valid first
3-23 lien upon real property or leasehold estate therein located in the
3-24 United States of America, its states, commonwealths, territories,
3-25 or possessions, provided that:
3-26 (A) the [(a) The] amount of any such obligation
3-27 secured by a first lien upon real property or leasehold estate
4-1 therein shall not exceed ninety per cent (90%) of the value of
4-2 such real property or leasehold estate therein, but the amount of
4-3 such obligation may:
4-4 (i) [(1) May] exceed ninety per cent
4-5 (90%) but shall not exceed one hundred per cent (100%) of the value
4-6 of such real property or leasehold estate therein if the insurer
4-7 or one or more wholly owned subsidiaries of the insurer own in the
4-8 aggregate a ten per cent (10%) or greater equity interest in such
4-9 real property or leasehold estate therein;
4-10 (ii) [(2) May] be ninety-five per cent
4-11 (95%) of the value of such real property if it contains only a
4-12 dwelling designed exclusively for occupancy by not more than four
4-13 families for residential purposes, and the portion of the unpaid
4-14 balance of such obligation which is in excess of an amount equal to
4-15 ninety per cent (90%) of such value is guaranteed or insured by a
4-16 mortgage insurance company licensed to do business in the State of
4-17 Texas; or
4-18 (iii) [(3) May] be greater than ninety
4-19 per cent (90%) of the value of such real property to the extent the
4-20 obligation is insured or guaranteed by the United States of
4-21 America, or an agency or instrumentality thereof, the Federal
4-22 Housing Administration pursuant to the National Housing Act of
4-23 1934, as amended (12 U.S.C. Sec. 1701 et seq.), or the State of
4-24 Texas; and
4-25 (B) the [(b) The] term of an obligation secured
4-26 by a first lien upon a leasehold estate in real property and
4-27 improvements situated thereon shall not exceed a period equal to
5-1 four-fifths (4/5) of the then unexpired term of such leasehold
5-2 estate, provided that:
5-3 (i) the [(1) The] unexpired term of the
5-4 leasehold estate must extend at least ten (10) years beyond the
5-5 term of the obligation; and
5-6 (ii) each [(2) Each] obligation shall be
5-7 payable in equal monthly, quarterly, semi-annual, or annual
5-8 payments of principal plus accrued interest to the date of such
5-9 principal payment, so that under either method of repayment such
5-10 obligation will fully amortize during a period of time not to
5-11 exceed four-fifths (4/5) of the then unexpired term of the security
5-12 leasehold estate; [and]
5-13 (C) the [(c) The] amount of any one such
5-14 obligation may not exceed ten per cent (10%) of the insurer's
5-15 capital and surplus; and
5-16 (D) the [(d) The] aggregate of investments made
5-17 under this Subdivision (3) [Section 3] may not exceed thirty per
5-18 cent (30%) of the insurer's assets;
5-19 (4) in [4. In] bonds or other interest-bearing
5-20 evidences of debt of any county, municipality, road district,
5-21 turnpike district or authority, water district, any subdivision of
5-22 a county, incorporated city, town, school district, sanitary or
5-23 navigation district, any municipally owned revenue water system,
5-24 sewer system or electric utility company where special revenues to
5-25 meet the principal and interest payments of such municipally owned
5-26 revenue water system, sewer system or electric utility company
5-27 bonds or other evidences of debt shall have been appropriated,
6-1 pledged or otherwise provided for by such municipality, provided
6-2 that:
6-3 (A) [. Provided,] before bonds or other
6-4 evidences of debt of navigation districts shall be eligible
6-5 investments such navigation district shall be located in whole or
6-6 in part in a county containing a population of not less than
6-7 100,000 according to the last preceding Federal Census; and
6-8 (B) [provided further, that] the interest due on
6-9 such navigation bonds or other evidences of debt of navigation
6-10 districts must never have been defaulted;
6-11 (5) in any type or form of savings deposits, time
6-12 deposits, certificates of deposit, NOW accounts, and money market
6-13 accounts in solvent banks, savings and loan associations, credit
6-14 unions, and branches of those financial institutions, organized
6-15 under the laws of the United States or of a state, if made in
6-16 accordance with the laws or regulations applicable to those
6-17 entities, provided that the amount of the deposits in any one bank,
6-18 savings and loan association, or credit union may not exceed the
6-19 greater of:
6-20 (A) 20 percent of the insurer's capital and
6-21 surplus;
6-22 (B) the amount of federal or state deposit
6-23 insurance coverage relating to that deposit; or
6-24 (C) 10 percent of the amount of capital,
6-25 surplus, and undivided profits of the entity receiving the
6-26 deposits;
6-27 (6) in [5. In] the stocks, bonds, debentures, bills
7-1 of exchange, evidence of indebtedness, or other commercial notes or
7-2 bills and securities of any solvent partnership or solvent dividend
7-3 paying corporation at time of purchase, incorporated under the laws
7-4 of this state, [or of] any other state [State of the United
7-5 States], [or of] the United States, [or of] Canada, or any province
7-6 of Canada, which has not defaulted in the payment of any of its
7-7 obligations for a period of five (5) years, immediately preceding
7-8 the date of the investment; provided that:
7-9 (A) such funds may not be invested in the stock
7-10 of any oil, manufacturing or mercantile corporation organized under
7-11 the laws of this state, unless such corporation has at the time of
7-12 investment a net worth of not less than $250,000.00 nor in the
7-13 stock of any oil, manufacturing or mercantile corporation not
7-14 organized under the laws of this state, unless such corporation has
7-15 a combined capital, surplus and undivided profits of not less than
7-16 $2,500,000.00;
7-17 (B) any [provided further: (a) Any] such
7-18 insurance company may invest its funds over and above its minimum
7-19 capital stock, its minimum surplus, and all reserves required by
7-20 law, in the stocks, bonds or debentures of any solvent corporation
7-21 organized under the laws of this state, [or of] any other state
7-22 [State of the United States], [or of] the United States, [or of]
7-23 Canada, or any province of Canada;
7-24 (C) no [. (b) No] such insurance company shall
7-25 invest any of its funds in its own stock or in any stock on account
7-26 of which the holders or owners thereof may, in any event, be or
7-27 become liable to any assessment, except for taxes; and
8-1 (D) no [. (c) No] such insurance company shall
8-2 invest any of its funds in stocks, bonds or other securities issued
8-3 by a corporation if a majority of the stock having voting powers of
8-4 such issuing corporation is owned, directly or indirectly, by or
8-5 for the benefit of one or more officers or directors of such
8-6 insurance company; provided, however, that this paragraph
8-7 [Section] shall not apply to any insurance company which has been
8-8 in continuous operation for five (5) years;
8-9 (7) in [. 6. In] shares of mutual funds doing business
8-10 under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1
8-11 et seq.), as amended, provided that:
8-12 (A) [(a)] mutual funds must be solvent with at
8-13 least $1,000,000 of net assets as of the date of its latest annual
8-14 or more recent certified audited financial statement; and
8-15 (B) [(b)] investment in any one mutual fund may
8-16 not exceed 15 percent of the insurer's capital and surplus;
8-17 (8) in [and]
8-18 [(c) the aggregate of all investments made under this
8-19 subsection shall not exceed 25 percent of the insurer's assets.]
8-20 [7. In] addition to the investments in Canada
8-21 authorized in other subdivisions [subsections] of this subsection
8-22 [section], investments in other foreign countries, [or in]
8-23 commonwealths, territories or possessions of the United States, or
8-24 [in] foreign securities originating in such foreign countries,
8-25 commonwealths, territories or possessions of the United States,
8-26 provided that:
8-27 (A) [(a)] such investments are similar to those
9-1 authorized for investment within the United States or Canada by
9-2 other provisions of this subsection [section] and, if debt
9-3 obligations, are rated one or two by the Securities Valuation
9-4 Office of the National Association of Insurance Commissioners;
9-5 [and]
9-6 (B) [(b)] the aggregate amount of foreign
9-7 investments held by the insurer under this subsection in a single
9-8 foreign jurisdiction does not exceed either 10 percent of its
9-9 admitted assets as to a foreign jurisdiction that has a sovereign
9-10 debt rating of Securities Valuation Office 1 by the Securities
9-11 Valuation Office of the National Association of Insurance
9-12 Commissioners or five percent of its admitted assets as to any
9-13 other foreign jurisdiction; [and]
9-14 (C) [(c)] such investments when added to the
9-15 amount of similar investments made within the United States and
9-16 Canada and any amounts authorized by Article 2.10-2 of this Code do
9-17 not result in the combined total of such investments exceeding the
9-18 limitations specified elsewhere in this subsection [section]; and
9-19 (D) [(d)] such investments may not exceed the
9-20 sum of:
9-21 (i) the amounts authorized by Article
9-22 2.10-2 of this Code; and
9-23 (ii) 20 percent of the insurer's assets;
9-24 (9) in [. 8. In] loans upon the pledge of any
9-25 mortgage, stock, bonds or other evidence of indebtedness acceptable
9-26 as investments under the terms of this Article, if the current
9-27 value of such mortgage, stock, bonds or other evidence of
10-1 indebtedness is at least twenty-five per cent (25%) more than the
10-2 amount loaned thereon;
10-3 (10) in [9. In] interest-bearing notes or bonds of
10-4 The University of Texas issued under the laws of this state [and by
10-5 virtue of Chapter 40, Acts of the 43rd Legislature, Second Called
10-6 Session];
10-7 (11) in [10. (a) In] real estate to the extent as
10-8 elsewhere authorized by this Code; provided that:
10-9 (A) any [(b) Any] such company with admitted
10-10 assets in excess of $500,000,000.00 may own other investment real
10-11 property or participations therein, which must be materially
10-12 enhanced in value by the construction of durable, permanent type
10-13 buildings and other improvements costing an amount at least equal
10-14 to the cost of such real property, exclusive of buildings and
10-15 improvements at the time of acquisition, or by the construction of
10-16 such buildings and improvements which must be commenced within two
10-17 years of the date of acquisition of such real property;
10-18 [provided,] however, nothing in this Article shall allow ownership
10-19 of, development of, or equity interest in any residential property
10-20 or subdivision, single or multiunit family dwelling property, or
10-21 undeveloped real estate for the purpose of subdivision for or
10-22 development of residential, single or multiunit family dwellings,
10-23 except those properties acquired as provided in Article 6.08 of
10-24 this Code, and such ownership, development, or equity interests
10-25 shall be specifically prohibited;
10-26 (B) the [(c) The] total amount invested by any
10-27 such company in all such investment real property and improvements
11-1 thereof shall not exceed fifteen per cent (15%) of its admitted
11-2 assets which are in excess of $500,000,000.00; [, provided,]
11-3 however, [that] the amount invested in any one such property and
11-4 its improvements or interest therein shall not exceed five per cent
11-5 (5%) of its admitted assets which are in excess of $500,000,000.00.
11-6 The admitted assets of the company at any time shall be determined
11-7 from its annual statements made as of the last preceding December
11-8 31 and filed with the department [State Board of Insurance] as
11-9 required by law. The value of any investment made under this
11-10 Article shall be subject to the appraisal provision set forth in
11-11 [Paragraph 5 of] Article 6.08 of this Code;
11-12 (C) the [(d) The] investment authority granted
11-13 by Paragraphs (A) and (B) [(b) and (c)] of this subdivision
11-14 [Paragraph 10] is in addition to and separate and apart from that
11-15 granted by Article 6.08 of this Code; [, provided,] however, [that]
11-16 no such company shall make any investment in such real estate
11-17 which, when added to those properties described in [Paragraph 1 of]
11-18 Article 6.08 of this Code, would be in excess of the limitations
11-19 provided by [Paragraph 5 of] Article 6.08 of this Code; and
11-20 (D) the [(e) The] insurance companies defined
11-21 in Article 2.01 of this Code and other insurers specifically made
11-22 subject to the provisions of this Article shall not engage in the
11-23 business of a real estate broker or a real estate salesperson
11-24 [salesman] as defined by The Real Estate License Act [Chapter 1,
11-25 page 560, General Laws, Acts of the 46th Legislature, 1939]
11-26 (Article 6573a, Vernon's Texas Civil Statutes), except that such
11-27 insurers may hold, improve, maintain, manage, rent, lease, sell,
12-1 exchange, or convey any of the real property interests legally
12-2 owned as investments under this Code;
12-3 (12) in [11. In] equipment trust obligations or
12-4 certificates that are adequately secured or in other adequately
12-5 secured instruments evidencing an interest in transportation
12-6 equipment in whole or in part within the United States and a right
12-7 to receive determined portions of rental, purchase, or other fixed
12-8 obligatory payments for the use or purchase of the transportation
12-9 equipment; and
12-10 (13) in:
12-11 (A) [12. In] insured accounts and evidences of
12-12 indebtedness as defined and limited by Section 1, Chapter 618, page
12-13 1356, Acts of the 47th Legislature;
12-14 (B) [in] shares or share accounts as authorized
12-15 by Chapter 65, Finance Code [in Section 1, page 76, Acts 1939, 46th
12-16 Legislature];
12-17 (C) [in] insured or guaranteed obligations as
12-18 authorized in Chapter 230, [page 315,] Acts of the [1945,] 49th
12-19 Legislature, Regular Session, 1945 (Article 842a-1, Vernon's Texas
12-20 Civil Statutes);
12-21 (D) [in] bonds issued under the provisions
12-22 authorized by Section 9, Chapter 231, General Laws [page 774], Acts
12-23 of the [1933,] 43rd Legislature, Regular Session, 1933 (Article
12-24 1187a, Vernon's Texas Civil Statutes);
12-25 (E) [in] bonds issued under the authority of
12-26 Section 1, Chapter 1, page 427, General Laws, Acts of the [1939,]
12-27 46th Legislature, Regular Session, 1939 (Article 1269k-1, Vernon's
13-1 Texas Civil Statutes);
13-2 (F) [in] bonds and other indebtedness as
13-3 authorized by Sections 435.045 and 435.046, Government Code [in
13-4 Section 1, Chapter 3, page 494, Acts 1939, 46th Legislature];
13-5 (G) [in] "Municipal Bonds" issued under Sections
13-6 51.038 and 51.039, Water Code [and by virtue of Chapter 280, Acts
13-7 1929, 41st Legislature];
13-8 (H) [or in] bonds as authorized by Subchapter B,
13-9 Chapter 284, Transportation Code [Section 5, Chapter 122, page 219,
13-10 Acts 1949, 51st Legislature];
13-11 (I) [or in bonds as authorized by Section 10,
13-12 Chapter 159, page 326, Acts 1949, 51st Legislature; or in] bonds as
13-13 authorized by Section 19, Chapter 340, [page 655,] Acts of the
13-14 [1949,] 51st Legislature, Regular Session, 1949;
13-15 (J) [or in] bonds as authorized by Section 10,
13-16 Chapter 398, [page 737,] Acts of the [1949,] 51st Legislature,
13-17 Regular Session, 1949;
13-18 (K) [or in] bonds as authorized by Section 18,
13-19 Chapter 465, [page 855,] Acts of the [1949,] 51st Legislature,
13-20 Regular Session, 1949;
13-21 (L) [or in shares or share accounts authorized
13-22 in Chapter 534, page 966, Acts 1949, 51st Legislature; or in] bonds
13-23 as authorized by Section 24, Chapter 110, [page 193,] Acts of the
13-24 [1949,] 51st Legislature, Regular Session, 1949; and
13-25 (M) [together with] such other investments as
13-26 are now or may hereafter be specifically authorized by law.
13-27 (f) The percentage authorizations and limitations set forth
14-1 in this article apply only at the time of the original acquisition
14-2 of an investment or at the time a transaction is entered into and
14-3 do not thereafter apply to the insurer or the investment or
14-4 transaction except as provided by this subsection. An investment,
14-5 once qualified under this article, remains qualified
14-6 notwithstanding any refinancing, restructuring, or modification of
14-7 the investment; however, the insurer may not engage in that
14-8 refinancing, restructuring, or modification solely to circumvent
14-9 the requirements or limitations of this article.
14-10 (g) Notwithstanding Subsections (a)-(e) of this article:
14-11 (1) investment in all or any types of securities,
14-12 loans, obligations, or evidences of indebtedness of a single issuer
14-13 or borrower, including the issuer's or borrower's majority-owned
14-14 subsidiaries or parent or the majority-owned subsidiaries of that
14-15 parent, other than those authorized investments that either are
14-16 direct obligations of or are guaranteed by the full faith and
14-17 credit of the United States of America, this state, or a political
14-18 subdivision of this state, or are insured by any agency of the
14-19 United States of America or this state, may not in the aggregate
14-20 exceed five percent of the insurer's total assets, other than
14-21 investments described by Subsection (e)(5) or (e)(7) of this
14-22 article; and
14-23 (2) the quantitative limitations regarding any
14-24 investment authorized by this article may be waived by prior
14-25 written approval of the commissioner if:
14-26 (A) a hearing is held to determine whether
14-27 approval should be granted;
15-1 (B) the applicant seeking approval establishes
15-2 that unreasonable or unnecessary loss or harm to the insurer will
15-3 result if approval is withheld;
15-4 (C) the excessive investment will not have a
15-5 material adverse effect on the insurer;
15-6 (D) the size of the investment is reasonable in
15-7 relation to the insurer's assets, capital, surplus, and
15-8 liabilities; and
15-9 (E) the commissioner's prior authorization may
15-10 treat the resulting excessive investment as an asset not admitted.
15-11 SECTION 2. Chapter 2, Insurance Code, is amended by adding
15-12 Article 2.10-3A to read as follows:
15-13 Art. 2.10-3A. SECURITIES LENDING; REPURCHASE, REVERSE
15-14 REPURCHASE, AND DOLLAR ROLL TRANSACTIONS
15-15 Sec. 1. DEFINITIONS. In this article:
15-16 (1) "Dollar roll transaction" means two simultaneous
15-17 transactions, with settlement dates not more than 96 days apart, in
15-18 one of which an insurer sells to a business entity and in the other
15-19 the insurer is obligated to purchase from the same business entity
15-20 substantially similar securities of the following types:
15-21 (A) mortgage-backed securities issued, assumed,
15-22 or guaranteed by the Government National Mortgage Association, the
15-23 Federal National Mortgage Association, or the Federal Home Loan
15-24 Mortgage Corporation or their successor organizations; or
15-25 (B) other mortgage-backed securities described
15-26 under Section 106, Title I, Secondary Mortgage Market Enhancement
15-27 Act of 1984 (15 U.S.C. Section 77r-1), as amended.
16-1 (2) "Repurchase transaction" means a transaction in
16-2 which an insurer purchases securities from a business entity that
16-3 is obligated to repurchase the purchased securities or equivalent
16-4 securities from the insurer at a specified price, either within a
16-5 specified period or on demand.
16-6 (3) "Reverse repurchase transaction" means a
16-7 transaction in which an insurer sells securities to a business
16-8 entity and is obligated to repurchase the sold securities or
16-9 equivalent securities from the business entity at a specified
16-10 price, either within a specified period or on demand.
16-11 (4) "Securities lending transaction" means a
16-12 transaction in which securities are loaned by an insurer to a
16-13 business entity that is obligated to return the loaned securities
16-14 or equivalent securities to the insurer, either within a specified
16-15 period or on demand.
16-16 Sec. 2. TRANSACTIONS AUTHORIZED. (a) An insurer may engage
16-17 in securities lending, repurchase, reverse repurchase, and dollar
16-18 roll transactions as provided by this article.
16-19 (b) The insurer shall enter into a written agreement for
16-20 each transaction, other than a dollar roll transaction, that
16-21 requires each transaction to terminate not later than the first
16-22 anniversary of the inception of the transaction.
16-23 Sec. 3. TRANSACTION REQUIREMENTS. (a) Cash received in a
16-24 transaction under this article must be:
16-25 (1) invested in accordance with this article and in a
16-26 manner that recognizes the liquidity needs of the transaction; or
16-27 (2) used by the insurer for the insurer's general
17-1 corporate purposes.
17-2 (b) While the transaction is outstanding, the insurer, or
17-3 the insurer's agent or custodian, shall maintain, as to acceptable
17-4 collateral received in a transaction under this section, either
17-5 physically or through the book entry systems of the Federal
17-6 Reserve, Depository Trust Company, Participants Trust Company, or
17-7 other securities depositories approved by the commissioner:
17-8 (1) possession of the acceptable collateral;
17-9 (2) a perfected security interest in the acceptable
17-10 collateral; or
17-11 (3) in the case of a jurisdiction outside of the
17-12 United States, title to, or rights of a secured creditor to, the
17-13 acceptable collateral.
17-14 (c) An insurer may not enter into a transaction under this
17-15 article if, as a result of and after giving effect to the
17-16 transaction, the aggregate amount of securities loaned, sold to, or
17-17 purchased from:
17-18 (1) any one business entity counterparty under this
17-19 article would exceed five percent of the insurer's assets; or
17-20 (2) all business entities under this article would
17-21 exceed 40 percent of the insurer's assets.
17-22 (d) In computing the amount sold to or purchased from a
17-23 business entity counterparty under a repurchase or reverse
17-24 repurchase transaction, effect may be given to netting provisions
17-25 under a master written agreement.
17-26 (e) The amount of collateral required for a securities
17-27 lending, repurchase, or reverse repurchase transaction is the
18-1 amount required under the Purposes and Procedures Manual of the
18-2 Securities Valuation Office or a successor publication.
18-3 (f) The commissioner may adopt reasonable rules and orders
18-4 consistent with, and as necessary to implement, this article.
18-5 SECTION 3. Article 2.10-4, Insurance Code, is amended to
18-6 read as follows:
18-7 Art. 2.10-4. RISK-LIMITING PROVISIONS
18-8 Sec. 1. DEFINITIONS. In this article:
18-9 (1) "Acceptable collateral" means:
18-10 (A) cash;
18-11 (B) cash equivalents;
18-12 (C) letters of credit and direct obligations;
18-13 and
18-14 (D) securities that are fully guaranteed as to
18-15 principal and interest by the United States.
18-16 (2) "Business entity" includes a sole proprietorship,
18-17 corporation, limited liability company, association, partnership,
18-18 joint stock company, joint venture, mutual fund, bank, trust, joint
18-19 tenancy, or other similar form of business organization, whether
18-20 organized for profit or not for profit.
18-21 (3) "Cap" means an agreement under which a seller is
18-22 obligated to make payments to the buyer with each payment based on
18-23 the amount by which a reference price or level or the performance
18-24 or value of one or more underlying interests exceeds a
18-25 predetermined number, sometimes called the strike rate or strike
18-26 price.
18-27 (4) "Cash equivalent" means an investment or security
19-1 that is short-term, highly rated, highly liquid, and readily
19-2 marketable. The term includes money market funds as described by
19-3 Article 2.10 of this code. For purposes of this subdivision:
19-4 (A) a short-term investment is an investment
19-5 with a remaining term to maturity of one year or less; and
19-6 (B) a highly rated investment is an investment
19-7 rated:
19-8 (i) "P-1" by Moody's Investors Service,
19-9 Inc.;
19-10 (ii) "A-1" by the Standard and Poor's
19-11 Division of the McGraw Hill Companies, Inc.; or
19-12 (iii) an equivalent rating by a nationally
19-13 recognized statistical rating organization recognized by the
19-14 Securities Valuation Office.
19-15 (5) "Collar" means an agreement to receive payments as
19-16 the buyer of an option, cap, or floor and to make payments as the
19-17 seller of a different option, cap, or floor.
19-18 (6)(A) "Counterparty exposure amount" means:
19-19 (i) for an over-the-counter derivative
19-20 instrument that is not entered into under a written master
19-21 agreement that provides for netting of payments owed by the
19-22 respective parties:
19-23 (a) the market value of the
19-24 over-the-counter derivative instrument if the liquidation of the
19-25 derivative instrument would result in a final cash payment to the
19-26 insurer; or
19-27 (b) zero if the liquidation
20-1 of the derivative instrument would not result in a final cash
20-2 payment to the insurer; or
20-3 (ii) for an over-the-counter derivative
20-4 instrument that is entered into under a written master agreement
20-5 that provides for netting of payments owed by the respective
20-6 parties and in which the domiciliary jurisdiction of the
20-7 counterparty is either in the United States or in a foreign
20-8 jurisdiction listed in the Purposes and Procedures Manual of the
20-9 Securities Valuation Office as eligible for netting, the greater
20-10 of:
20-11 (a) zero; or
20-12 (b) the net sum payable to
20-13 the insurer in connection with all derivative instruments subject
20-14 to the written master agreement on their liquidation in the event
20-15 of default by the counterparty under the master agreement, if there
20-16 are no conditions precedent to the obligations of the counterparty
20-17 to make such a payment and no setoff of amounts payable under any
20-18 other instrument or agreement.
20-19 (B) For purposes of this subdivision, the market
20-20 value or the net sum payable, as applicable, is determined at the
20-21 end of the most recent quarter of the insurer's fiscal year and is
20-22 reduced by the market value of acceptable collateral held by the
20-23 insurer or a custodian on the insurer's behalf.
20-24 (7) "Derivative instrument" means an agreement,
20-25 option, or instrument, or any series or combination of agreements,
20-26 options, or instruments, to make or take delivery of, or assume or
20-27 relinquish, a specified amount of one or more underlying interests,
21-1 or instead to make a cash settlement, or that has a price,
21-2 performance, value, or cash flow based primarily on the actual or
21-3 expected price, yield, level, performance, value, or cash flow of
21-4 one or more underlying interests. The term includes an option, a
21-5 warrant not otherwise permitted to be held by the insurer under
21-6 this article, a cap, a floor, a collar, a swap, a swaption, a
21-7 forward, a future, and any other substantially similar agreement,
21-8 option, or instrument or series or combinations of those
21-9 agreements, options, or instruments. The term does not include a
21-10 collateralized mortgage obligation, another asset-backed security,
21-11 a principal-protected structured security, a floating rate
21-12 security, an instrument that an insurer is otherwise permitted to
21-13 invest in or receive under this article other than under this
21-14 definition, or any debt obligation of the insurer.
21-15 (8) "Derivative transaction" means a transaction that
21-16 involves the use of one or more derivative instruments. The term
21-17 does not include a dollar roll transaction, repurchase transaction,
21-18 reverse repurchase transaction, or securities lending transaction.
21-19 (9) "Floor" means an agreement under which the seller
21-20 is obligated to make payments to the buyer and in which each
21-21 payment is based on the amount by which a predetermined number,
21-22 sometimes called the floor rate or price, exceeds a reference
21-23 price, level, performance, or value of one or more underlying
21-24 interests.
21-25 (10) "Forward" means an agreement to make or take
21-26 delivery in the future of one or more underlying interests, or
21-27 effect a cash settlement, based on the actual or expected price,
22-1 level, performance, or value of those underlying interests. The
22-2 term does not include a future or a spot transaction effected
22-3 within customary settlement periods, when-issued purchases, or
22-4 other similar cash market transactions.
22-5 (11) "Future" means an agreement that is traded on a
22-6 futures exchange to make or take delivery of, or effect a cash
22-7 settlement, based on the actual or expected price, level,
22-8 performance, or value of, one or more underlying interests.
22-9 (12) "Futures exchange" means a foreign or domestic
22-10 exchange, contract market, or board of trade on which trading in
22-11 futures is conducted and that, in the United States, is authorized
22-12 to conduct that trading by the Commodities Futures Trading
22-13 Commission or any successor organization.
22-14 (13) "Hedging transaction" means a derivative
22-15 transaction that is entered into and maintained to manage:
22-16 (A) the risk of a change in the value, yield,
22-17 price, cash flow, or quantity of assets or liabilities, or a
22-18 portfolio of assets or liabilities, that the insurer has acquired
22-19 or incurred or anticipates acquiring or incurring; or
22-20 (B) the currency exchange rate risk related to
22-21 assets or liabilities, or a portfolio of assets or liabilities,
22-22 that an insurer has acquired or incurred or anticipates acquiring
22-23 or incurring.
22-24 (14) "Income generation transaction" means a
22-25 derivative transaction that is entered into to generate income.
22-26 The term does not include a derivative transaction entered into as
22-27 a hedging transaction or a replication transaction.
23-1 (15) "Market value" means the price for a security or
23-2 derivative instrument obtained from a generally recognized source
23-3 or the most recent quotation from such a source or, if a generally
23-4 recognized source does not exist, the price for the security or
23-5 derivative instrument as determined under the terms of the
23-6 instrument or in good faith by the insurer, as can be reasonably
23-7 demonstrated to the commissioner on request, plus accrued but
23-8 unpaid income on the security or derivative instrument to the
23-9 extent not included in the price as of the applicable date.
23-10 (16) "Option" means an agreement under which the buyer
23-11 has the right to buy or receive, referred to as a "call option,"
23-12 sell or deliver, referred to as a "put option," enter into, extend
23-13 or terminate, or effect a cash settlement based on the actual or
23-14 expected price, spread, level, performance, or value of one or more
23-15 underlying interests.
23-16 (17) "Over-the-counter derivative instrument" means a
23-17 derivative instrument entered into with a business entity other
23-18 than through a securities exchange or futures exchange or cleared
23-19 through a qualified clearinghouse.
23-20 (18) "Potential exposure" means:
23-21 (A) as to a futures position, the amount of
23-22 initial margin required for that position; or
23-23 (B) as to swaps, collars, and forwards, one-half
23-24 percent times the notional amount times the square root of the
23-25 remaining years to maturity.
23-26 (19) "Qualified clearinghouse" means a clearinghouse
23-27 that is subject to the rules of a securities exchange or a futures
24-1 exchange and provides clearing services, including acting as a
24-2 counterparty to each of the parties to a transaction in such a
24-3 manner that the parties no longer have credit risk to each other.
24-4 (20) "Replication transaction" means a derivative
24-5 transaction or combination of derivative transactions effected
24-6 either separately or in conjunction with cash market investments
24-7 included in the insurer's investment portfolio to replicate the
24-8 risks and returns of another authorized transaction, investment, or
24-9 instrument or to operate as a substitute for a cash market
24-10 transaction. The term does not include a derivative transaction
24-11 entered into by the insurer as a hedging transaction.
24-12 (21) "Securities exchange" means:
24-13 (A) an exchange registered as a national
24-14 securities exchange or a securities market registered under the
24-15 Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.), as
24-16 amended;
24-17 (B) the Private Offerings Resales and Trading
24-18 through Automated Linkages (PORTAL); or
24-19 (C) a designated offshore securities market as
24-20 defined by Securities Exchange Commission Regulation S, 17 C.F.R.
24-21 Part 230, as amended.
24-22 (22) "Swap" means an agreement to exchange or to net
24-23 payments at one or more times based on the actual or expected
24-24 price, yield, level, performance, or value of one or more
24-25 underlying interests.
24-26 (23) "Swaption" means an option to purchase or sell a
24-27 swap at a given price and time or at a series of prices and times.
25-1 The term does not include a swap with an embedded option.
25-2 (24) "Underlying interest" means the assets,
25-3 liabilities, or other interests, or a combination of those assets,
25-4 liabilities, or other interests, that underlie a derivative
25-5 instrument. The term includes securities, currencies, rates,
25-6 indices, commodities, or derivative instruments.
25-7 (25) "Warrant" means an instrument under which the
25-8 holder has the right to purchase or sell the underlying interest at
25-9 a given price and time or at a series of prices and times stated in
25-10 the warrant.
25-11 Sec. 2. AUTHORIZED RISK CONTROL TRANSACTIONS; GENERAL
25-12 REQUIREMENTS RELATING TO DERIVATIVE TRANSACTIONS. (a) Except as
25-13 provided by Section 8 of this article, an [Subject to the rules and
25-14 regulations promulgated by the State Board of Insurance and the
25-15 limitations contained in Subsections (b) and (d) of this article
25-16 with respect to assets owned by an insurer, an] insurer may, for
25-17 purposes of protecting the [such] assets owned by the insurer
25-18 against the risk of changing asset values or interest rates and for
25-19 risk reduction and income generation, engage in risk control
25-20 transactions authorized under this article [only, buy put options
25-21 or sell call options and terminate the same, buy or sell interest
25-22 rate futures contracts and options on interest rate futures
25-23 contracts, or utilize such other instruments or devices as are
25-24 consistent with this article and are traded on an established
25-25 exchange regulated by the Securities and Exchange Commission or the
25-26 Commodities Futures Trading Commission].
25-27 (b) Before entering into a derivative transaction, the board
26-1 of directors of the insurer must approve a derivative use plan as
26-2 part of the insurer's investment plan otherwise required by law.
26-3 The derivative use plan must:
26-4 (1) describe investment objectives and risk
26-5 constraints, such as counterparty exposure amounts;
26-6 (2) define permissible transactions, identifying the
26-7 risks to be hedged and the assets or liabilities being replicated;
26-8 and
26-9 (3) require compliance with the insurer's internal
26-10 control procedures established under Subsection (c) of this
26-11 section.
26-12 (c) The insurer shall establish written internal control
26-13 procedures that require:
26-14 (1) a quarterly report to be made to the board of
26-15 directors that reviews:
26-16 (A) all derivative transactions entered into,
26-17 outstanding, or closed out;
26-18 (B) the results and effectiveness of the
26-19 derivatives program; and
26-20 (C) the credit risk exposure to each
26-21 counterparty for over-the-counter derivative transactions based on
26-22 the counterparty exposure amount;
26-23 (2) a system for determining whether hedging or
26-24 replication strategies used by the insurer have been effective;
26-25 (3) a system of reports, at least as frequent as
26-26 monthly, to the insurer's management, that include:
26-27 (A) a description of each derivative transaction
27-1 entered into, outstanding, or closed out during the period since
27-2 the last report;
27-3 (B) the purpose of each outstanding derivative
27-4 transaction;
27-5 (C) a performance review of the derivative
27-6 instrument program; and
27-7 (D) the counterparty exposure amount for
27-8 over-the-counter derivative transactions;
27-9 (4) written authorizations that identify the
27-10 responsibilities and limitations of authority of persons authorized
27-11 to effect and maintain derivative transactions; and
27-12 (5) appropriate documentation for each transaction,
27-13 including:
27-14 (A) the purpose of the transaction;
27-15 (B) the assets or liabilities to which the
27-16 transaction relates;
27-17 (C) the specific derivative instrument used in
27-18 the transaction;
27-19 (D) for over-the-counter derivative instrument
27-20 transactions, the name of the counterparty and the counterparty
27-21 exposure amount; and
27-22 (E) for exchange-traded derivative instruments,
27-23 the name of the exchange and the name of the firm that handled the
27-24 transaction.
27-25 (d) The insurer must be able to demonstrate to the
27-26 commissioner, on request, the intended hedging characteristics and
27-27 ongoing effectiveness of the derivative transaction or combination
28-1 of transactions through cash flow testing, duration analysis, or
28-2 any other appropriate analysis.
28-3 (e) The insurer shall include all counterparty exposure
28-4 amounts in determining compliance with the limitations of this
28-5 article.
28-6 (f) An insurer may purchase or sell one or more derivative
28-7 instruments to offset, in whole or in part, a derivative instrument
28-8 previously purchased or sold without regard to the quantitative
28-9 limitations of this article if the offsetting transaction uses the
28-10 same type of derivative instrument as the derivative instrument
28-11 being offset.
28-12 Sec. 3. REQUIREMENTS RELATING TO HEDGING TRANSACTIONS. (a)
28-13 Not later than the 10th day before the date on which an insurer is
28-14 scheduled to enter into an initial hedging transaction, the insurer
28-15 shall notify the commissioner in writing that:
28-16 (1) the insurer's board of directors has adopted an
28-17 investment plan that authorizes hedging transactions; and
28-18 (2) all hedging transactions will comply with this
28-19 article.
28-20 (b) An insurer engaged in hedging transactions on September
28-21 1, 1999, shall send to the commissioner a notice containing the
28-22 statements required by Subsection (a) of this section not later
28-23 than October 1, 1999.
28-24 (c) After the notice under Subsection (a) or (b), the
28-25 insurer may enter into hedging transactions under this article, if
28-26 as a result of and after giving effect to each hedging transaction:
28-27 (1) the aggregate statement value of all outstanding
29-1 options, caps, floors, swaptions, and warrants that are not
29-2 attached to another financial instrument purchased by the insurer,
29-3 but not including collars, under this article does not exceed seven
29-4 and one-half percent of the insurer's assets;
29-5 (2) the aggregate statement value of all outstanding
29-6 options, swaptions, warrants, caps, and floors, but not including
29-7 collars, written by the insurer under this article does not exceed
29-8 three percent of the insurer's assets; and
29-9 (3) the aggregate potential exposure of all
29-10 outstanding collars, swaps, forwards, and futures entered into or
29-11 acquired by the insurer under this article does not exceed six and
29-12 one-half percent of the insurer's assets.
29-13 (d) If a hedging transaction entered into under this section
29-14 is not in compliance with this article or, if continued, may create
29-15 a hazardous financial condition to the insurer that affects the
29-16 insurer's policyholders or creditors or the public, the
29-17 commissioner may, after notice and an opportunity for a hearing,
29-18 order the insurer to take action that the commissioner determines
29-19 is reasonably necessary to:
29-20 (1) rectify a hazardous financial condition; or
29-21 (2) prevent an impending hazardous financial condition
29-22 from occurring.
29-23 Sec. 4. REQUIREMENTS RELATING TO INCOME GENERATION
29-24 TRANSACTIONS. (a) An insurer may enter into an income generation
29-25 transaction only as provided by this section.
29-26 (b) An insurer may enter into an income generation
29-27 transaction only if, as a result of and after giving effect to the
30-1 transaction, the aggregate statement value of admitted assets that
30-2 are then subject to call or that generate the cash flows for
30-3 payments required to be made by the insurer under caps and floors
30-4 sold by the insurer and then outstanding under this article, plus
30-5 the statement value of admitted assets underlying derivative
30-6 instruments then subject to calls sold by the insurer and
30-7 outstanding under this article, plus the purchase price of assets
30-8 subject to puts then outstanding under this article, does not
30-9 exceed 10 percent of the insurer's assets.
30-10 (c) The transaction must be a sale of:
30-11 (1) a call option on assets that meets the
30-12 requirements of Subsection (d);
30-13 (2) a put option on assets that meets the requirements
30-14 of Subsection (e);
30-15 (3) a call option on a derivative instrument,
30-16 including a swaption that meets the requirements of Subsection (f);
30-17 or
30-18 (4) a cap or floor that meets the requirements of
30-19 Subsection (g).
30-20 (d) If the transaction is a sale of a call option on assets,
30-21 the insurer must hold or have a currently exercisable right to
30-22 acquire the underlying assets during the entire period that the
30-23 option is outstanding.
30-24 (e) If the transaction is a sale of a put option on assets,
30-25 the insurer must hold sufficient cash, cash equivalents, or
30-26 interests in a short-term investment pool to be able to purchase
30-27 the underlying assets on exercise of the option during the entire
31-1 period that the option is outstanding, and must be able to hold the
31-2 underlying assets in the insurer's portfolio. If the total market
31-3 value of all put options sold by the insurer exceeds two percent of
31-4 the insurer's assets, the insurer shall set aside, under a
31-5 custodial or escrow agreement, cash or cash equivalents that have a
31-6 market value equal to the amount of the insurer's put option
31-7 obligations in excess of two percent of the insurer's assets during
31-8 the entire period the option is outstanding.
31-9 (f) If the transaction is a sale of a call option on a
31-10 derivative instrument, including a swaption, the insurer must hold
31-11 or have a currently exercisable right to acquire assets generating
31-12 the cash flow necessary to make any payments for which the insurer
31-13 is liable under the underlying derivative instrument during the
31-14 entire period that the call option is outstanding, and must be able
31-15 to enter into the underlying derivative transaction for the
31-16 insurer's portfolio.
31-17 (g) If the transaction is a sale of a cap or a floor, the
31-18 insurer must hold or have a currently exercisable right to acquire
31-19 assets generating the cash flow necessary to make any payments for
31-20 which the insurer is liable under the cap or floor during the
31-21 entire period that the cap or floor is outstanding.
31-22 Sec. 5. REQUIREMENTS RELATING TO REPLICATION TRANSACTIONS.
31-23 (a) An insurer may enter into a replication transaction only with
31-24 the prior written approval of the commissioner. To be eligible for
31-25 approval by the commissioner:
31-26 (1) the insurer must be otherwise authorized to
31-27 invest its funds under this chapter in the asset being replicated;
32-1 and
32-2 (2) the asset being replicated must be subject to all
32-3 the provisions and limitations on the making of the transaction
32-4 specified by this article relating to investments by the insurer as
32-5 if the transaction constituted a direct investment by the insurer
32-6 in the replicated asset.
32-7 (b) The commissioner may adopt rules regarding replication
32-8 transactions as necessary to implement this section.
32-9 Sec. 6. TRADING REQUIREMENTS. Each derivative instrument
32-10 must be:
32-11 (1) traded on a securities exchange;
32-12 (2) entered into with, or guaranteed by, a business
32-13 entity;
32-14 (3) issued or written by, or entered into with, the
32-15 issuer of the underlying interest on which the derivative
32-16 instrument is based; or
32-17 (4) in the case of futures, traded through a broker
32-18 who is registered as a futures commission merchant under the
32-19 Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended, or
32-20 who is exempt from that registration under 17 C.F.R. Rule 30.10,
32-21 adopted under the Commodity Exchange Act (7 U.S.C. Section 1 et
32-22 seq.), as amended [An insurer may engage in the purchase of put
32-23 options or sale of call options and terminate such option, only
32-24 with regard to:]
32-25 [(1) securities owned by the insurer; or]
32-26 [(2) securities which the insurer may obtain through
32-27 exercise of warrants or conversion rights held by the insurer.]
33-1 [(c) Subject to the rules and regulations promulgated by the
33-2 State Board of Insurance and the limitations contained in
33-3 Subsection (d) of this article with respect to cash flows
33-4 reasonably anticipated to be available for investment purposes
33-5 within the succeeding 12 months, which anticipation cannot exceed
33-6 an amount equal to 10 percent of such insurer's admitted assets, an
33-7 insurer may, for purposes of protecting such cash flows against the
33-8 risk of changing asset values or interest rates and for risk
33-9 reduction only, buy or sell interest rate futures contracts and
33-10 options on interest rate futures contracts or utilize such other
33-11 instruments or devices as are consistent with this article and are
33-12 traded on an established exchange regulated by the Securities and
33-13 Exchange Commission or the Commodities Futures Trading Commission.]
33-14 [(d) An insurer may engage in the practices authorized by
33-15 this article only if prior thereto the board of directors of such
33-16 insurer has adopted a written policy which specifies:]
33-17 [(1) the types of risk-limiting practices approved for
33-18 such insurer;]
33-19 [(2) the aggregate maximum limits in such instruments,
33-20 which maximum limits must be reasonably related to the insurer's
33-21 business needs and its capacity to fulfill its obligations
33-22 thereunder;]
33-23 [(3) the specific assets or class of assets or cash
33-24 flows for which risk-limiting practices may be employed; and]
33-25 [(4) that the insurer's accounting or investment
33-26 records shall specifically identify the assets or cash flows for
33-27 which each risk-limiting practice is used].
34-1 Sec. 7. RULES. [(e)] The commissioner may [State Board of
34-2 Insurance is hereby authorized to] adopt [such reasonable] rules
34-3 consistent [and regulations, not inconsistent] with [the provisions
34-4 of] this article that[, which] prescribe reasonable limits,
34-5 standards, and guidelines with respect to the [such] risk-limiting
34-6 transactions authorized under this article [devices] and plans
34-7 related to those transactions [thereto].
34-8 Sec. 8. NOTICE TO COMMISSIONER. (a) Before engaging in a
34-9 transaction authorized under this article, an insurer that has a
34-10 statutory net capital and surplus of less than $10 million shall
34-11 file a written notice with the commissioner describing the need to
34-12 engage in the transaction, the lack of acceptable alternatives, and
34-13 the insurer's plan to engage in the transaction. If the
34-14 commissioner does not issue an order prohibiting the insurer from
34-15 engaging in the transaction within 90 days after the date of
34-16 receipt of the insurer's notice, the insurer may engage in the
34-17 transaction described in the notice.
34-18 (b) An insurer with a statutory net capital and surplus less
34-19 than the minimum amount of capital and surplus required for a new
34-20 charter and certificate of authority for the same type of insurer
34-21 may not engage in the transactions authorized under this article.
34-22 (c) For purposes of this section, net capital and surplus
34-23 are determined by the most recent financial statement of the
34-24 insurer required to be filed with the department.
34-25 SECTION 4. Article 2.10-3, Insurance Code, is repealed.
34-26 SECTION 5. This Act takes effect September 1, 1999.
34-27 SECTION 6. The importance of this legislation and the
35-1 crowded condition of the calendars in both houses create an
35-2 emergency and an imperative public necessity that the
35-3 constitutional rule requiring bills to be read on three several
35-4 days in each house be suspended, and this rule is hereby suspended.