By Averitt H.B. No. 3042
Line and page numbers may not match official copy.
Bill not drafted by TLC or Senate E&E.
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to amendments to Articles 2.10, 2.10-3, and 2.10-4, Texas
1-3 Insurance Code; providing an effective date; and declaring an
1-4 emergency.
1-5 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-6 SECTION 1. Article 2.10, Texas Insurance Code, is amended to
1-7 read as follows:
1-8 Art. 2.10. Investment of Funds in Excess of Minimum Capital
1-9 and Minimum Surplus
1-10 No company except any writing life, health and accident insurance,
1-11 organized under the laws of this state, shall invest its funds over
1-12 and above its minimum capital and its minimum surplus, as provided
1-13 in Article 2.02, except as otherwise provided in this Code, in any
1-14 other manner than as follows:
1-15 1. As provided for the investment of its minimum capital and
1-16 its minimum surplus in Article 2.08;
1-17 2. In bonds or other evidences of debt which at the time of
1-18 purchase are interest-bearing and are issued by authority of law
1-19 and are not in default as to principal or interest, of any of the
1-20 States of the United States, or of Canada, or any province of
1-21 Canada, or in the stock of any National Bank, in stock of any State
2-1 Bank of Texas whose deposits are insured by the Federal Deposit
2-2 Insurance Corporation; provided, however, that if said funds are
2-3 invested in the stock of a State Bank of Texas that not more than
2-4 thirty-five per cent (35%) of the total outstanding stock of any
2-5 one (1) State Bank of Texas may be so purchased by any one (1)
2-6 insurance company; and provided further, that neither the insurance
2-7 company whose funds are invested in said bank stock nor any other
2-8 insurance company may invest its funds in the remaining stock of
2-9 any such State Bank;
2-10 3. In bonds, notes, evidences of indebtedness or
2-11 participations therein secured by a valid first lien upon real
2-12 property or leasehold estate therein located in the United States
2-13 of America, its states, commonwealths, territories, or possessions,
2-14 provided:
2-15 (a) The amount of any such obligation secured by a first
2-16 lien upon real property or leasehold estate therein shall not
2-17 exceed ninety per cent (90%) of the value of such real property or
2-18 leasehold estate therein, but the amount of such obligation:
2-19 (1) May exceed ninety per cent (90%) but shall not
2-20 exceed one hundred per cent (100%) of the value of such real
2-21 property or leasehold estate therein if the insurer or one or more
2-22 wholly owned subsidiaries of the insurer own in the aggregate a ten
2-23 per cent (10%) or greater equity interest in such real property or
2-24 leasehold estate therein;
2-25 (2) May be ninety-five per cent (95%) of the value of
3-1 such real property if it contains only a dwelling designed
3-2 exclusively for occupancy by not more than four families for
3-3 residential purposes, and the portion of the unpaid balance of such
3-4 obligation which is in excess of an amount equal to ninety per cent
3-5 (90%) of such value is guaranteed or insured by a mortgage
3-6 insurance company licensed to do business in the State of Texas; or
3-7 (3) May be greater than ninety per cent (90%) of the
3-8 value of such real property to the extent the obligation is insured
3-9 or guaranteed by the United States of America, or an agency or
3-10 instrumentality thereof, the Federal Housing Administration
3-11 pursuant to the National Housing Act of 1934, as amended (12 U.S.C.
3-12 Sec. 1701 et seq.), or the State of Texas; and
3-13 (b) The term of an obligation secured by a first lien upon a
3-14 leasehold estate in real property and improvements situated thereon
3-15 shall not exceed a period equal to four-fifths (4/5) of the then
3-16 unexpired term of such leasehold estate, provided:
3-17 (1) The unexpired term of the leasehold estate must
3-18 extend at least ten (10) years beyond the term of the obligation;
3-19 and
3-20 (2) Each obligation shall be payable in equal monthly,
3-21 quarterly, semi-annual, or annual payments of principal plus
3-22 accrued interest to the date of such principal payment, so that
3-23 under either method of repayment such obligation will fully
3-24 amortize during a period of time not to exceed four-fifths (4/5) of
3-25 the then unexpired term of the security leasehold estate; and
4-1 (c) The amount of any one such obligation may not exceed ten
4-2 per cent (10%) of the insurer's capital and surplus; and
4-3 (d) The aggregate of investments made under this Section 3
4-4 may not exceed thirty per cent (30%) of the insurer's assets;
4-5 4. In bonds or other interest-bearing evidences of debt of
4-6 any county, municipality, road district, turnpike district or
4-7 authority, water district, any subdivision of a county,
4-8 incorporated city, town, school district, sanitary or navigation
4-9 district, any municipally owned revenue water system, sewer system
4-10 or electric utility company where special revenues to meet the
4-11 principal and interest payments of such municipally owned revenue
4-12 water system, sewer system or electric utility company bonds or
4-13 other evidences of debt shall have been appropriated, pledged or
4-14 otherwise provided for by such municipality. Provided, before
4-15 bonds or other evidences of debt of navigation districts shall be
4-16 eligible investments such navigation district shall be located in
4-17 whole or in part in a county containing a population of not less
4-18 than 100,000 according to the last preceding Federal Census; and
4-19 provided further, that the interest due on such navigation bonds or
4-20 other evidences of debt of navigation districts must never have
4-21 been defaulted;
4-22 5. Time and Savings Deposits. Any type or form of savings
4-23 deposits, time deposits, certificates of deposit, NOW accounts, and
4-24 money market accounts in solvent banks, savings and loan
4-25 associations, and credit unions and branches thereof, organized
5-1 under the laws of the United States of America or its states, when
5-2 made in accordance with the laws or regulations applicable to such
5-3 entities; provided, the amount of the deposits in any one bank,
5-4 savings and loan association, or credit union will not exceed the
5-5 greater of:
5-6 (1) 20 percent of the insurer's capital and surplus;
5-7 (2) the amount of federal or state deposit insurance
5-8 coverage pertaining to such deposit; or
5-9 (3) 10 percent of the amount of capital, surplus, and
5-10 undivided profits of the entity receiving such deposits;
5-11 6 [5]. In the stocks, bonds, debentures, bills of exchange,
5-12 evidence of indebtedness or other commercial notes or bills and
5-13 securities of any partnership or solvent dividend paying
5-14 corporation at time of purchase, incorporated under the laws of
5-15 this state, or of any other State of the United States, or of the
5-16 United States, or of Canada, or any province of Canada, which has
5-17 not defaulted in the payment of any of its obligations for a period
5-18 of five (5) years, immediately preceding the date of the
5-19 investment; provided such funds may not be invested in the stock of
5-20 any oil, manufacturing or mercantile corporation organized under
5-21 the laws of this state, unless such corporation has at the time of
5-22 investment a net worth of not less than $250,000.00 nor in the
5-23 stock of any oil, manufacturing or mercantile corporation not
5-24 organized under the laws of this state, unless such corporation has
5-25 a combined capital, surplus and undivided profits of not less than
6-1 $2,500,000.00; provided further:
6-2 (a) Any such insurance company may invest its funds over and
6-3 above its minimum capital stock, its minimum surplus, and all
6-4 reserves required by law, in the stocks, bonds or debentures of any
6-5 solvent corporation organized under the laws of this state, or of
6-6 any other State of the United States, or of the United States, or
6-7 of Canada, or any province of Canada.
6-8 (b) No such insurance company shall invest any of its funds
6-9 in its own stock or in any stock on account of which the holders or
6-10 owners thereof may, in any event, be or become liable to any
6-11 assessment, except for taxes.
6-12 (c) No such insurance company shall invest any of its funds
6-13 in stocks, bonds or other securities issued by a corporation if a
6-14 majority of the stock having voting powers of such issuing
6-15 corporation is owned, directly or indirectly, by or for the benefit
6-16 of one or more officers or directors of such insurance company;
6-17 provided, however, that this Section shall not apply to any
6-18 insurance company which has been in continuous operation for five
6-19 (5) years.
6-20 7 [6]. In shares of mutual funds doing business under the
6-21 Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.),
6-22 provided:
6-23 (a) mutual funds must be solvent with at least $1,000,000 of
6-24 net assets as of the date of its latest annual or more recent
6-25 certified audited financial statement; and
7-1 (b) investment in any one mutual fund may not exceed 15
7-2 percent of the insurer's capital and surplus; [and]
7-3 [(c) the aggregate of all investments made under this
7-4 subsection shall not exceed 25 percent of the insurer's assets.]
7-5 8 [7]. In addition to the investments in Canada authorized
7-6 in other subsections of this section, investments in other foreign
7-7 countries or in commonwealths, territories or possessions of the
7-8 United States, or in foreign securities originating in such foreign
7-9 countries, commonwealths, territories or possessions of the United
7-10 States, provided:
7-11 (a) such investments are similar to those authorized for
7-12 investment within the United States or Canada by other provisions
7-13 of this section and, if debt obligations, are rated one or two by
7-14 the Securities Valuation Office of the National Association of
7-15 Insurance Commissioners; and
7-16 (b) the aggregate amount of foreign investments held by the
7-17 insurer under this subsection in a single foreign jurisdiction does
7-18 not exceed either 10 percent of its admitted assets as to a foreign
7-19 jurisdiction that has a sovereign debt rating of Securities
7-20 Valuation Office 1 by the Securities Valuation Office of the
7-21 National Association of Insurance Commissioners or five percent of
7-22 its admitted assets as to any other foreign jurisdiction; and
7-23 (c) such investments when added to the amount of similar
7-24 investments made within the United States and Canada and any
7-25 amounts authorized by Article 2.10-2 do not result in the combined
8-1 total of such investments exceeding the limitations specified
8-2 elsewhere in this section; and
8-3 (d) such investments may not exceed the sum of:
8-4 (i) the amounts authorized by Article 2.10-2; and
8-5 (ii) 20 percent of the insurer's assets.
8-6 9 [8]. In loans upon the pledge of any mortgage, stock,
8-7 bonds or other evidence of indebtedness acceptable as investments
8-8 under the terms of this article, if the current value of such
8-9 mortgage, stock, bonds or other evidence of indebtedness is at
8-10 least twenty-five per cent (25%) more than the amount loaned
8-11 thereon;
8-12 10 [9]. In interest-bearing notes or bonds of The University
8-13 of Texas issued under and by virtue of Chapter 40, Acts of the 43rd
8-14 Legislature, Second Called Session;
8-15 11 [10]. (a) In real estate to the extent as elsewhere
8-16 authorized by this Code;
8-17 (b) Any such company with admitted assets in excess of
8-18 $500,000,000.00 may own other investment real property or
8-19 participations therein, which must be materially enhanced in value
8-20 by the construction of durable, permanent type buildings and other
8-21 improvements costing an amount at least equal to the cost of such
8-22 real property, exclusive of buildings and improvements at the time
8-23 of acquisition, or by the construction of such buildings and
8-24 improvements which must be commenced within two years of the date
8-25 of acquisition of such real property; provided, however, nothing in
9-1 this article shall allow ownership of, development of, or equity
9-2 interest in any residential property or subdivision, single or
9-3 multiunit family dwelling property, or undeveloped real estate for
9-4 the purpose of subdivision for or development of residential,
9-5 single or multiunit family dwellings, except those properties
9-6 acquired as provided in Article 6.08 of this Code, and such
9-7 ownership, development, or equity interests shall be specifically
9-8 prohibited;
9-9 (c) The total amount invested by any such company in all
9-10 such investment real property and improvements thereof shall not
9-11 exceed fifteen per cent (15%) of its admitted assets which are in
9-12 excess of $500,000,000.00, provided, however, that the amount
9-13 invested in any one such property and its improvements or interest
9-14 therein shall not exceed five per cent (5%) of its admitted assets
9-15 which are in excess of $500,000,000.00. The admitted assets of the
9-16 company at any time shall be determined from its annual statements
9-17 made as of the last preceding December 31 and filed with the State
9-18 Board of Insurance as required by law. The value of any investment
9-19 made under this article shall be subject to the appraisal provision
9-20 set forth in Paragraph 5 of Article 6.08 of this Code;
9-21 (d) The investment authority granted by (b) and (c) of this
9-22 Paragraph 11 [10] is in addition to and separate and apart from
9-23 that granted by Article 6.08 of this Code, provided, however, that
9-24 no such company shall make any investment in such real estate
9-25 which, when added to those properties described in Paragraph 1 of
10-1 Article 6.08 of this Code, would be in excess of the limitations
10-2 provided by Paragraph 5 of Article 6.08 of this Code;
10-3 (e) The insurance companies defined in Article 2.01 of this
10-4 Code and other insurers specifically made subject to the provisions
10-5 of this article shall not engage in the business of a real estate
10-6 broker or a real estate salesman as defined by Chapter 1, page 560,
10-7 General Laws, Acts of the 46th Legislature, 1939 (Article 6573a,
10-8 Vernon's Texas Civil Statutes), except that such insurers may hold,
10-9 improve, maintain, manage, rent, lease, sell, exchange, or convey
10-10 any of the real property interests legally owned as investments
10-11 under this Code;
10-12 12 [11]. In equipment trust obligations or certificates that
10-13 are adequately secured or in other adequately secured instruments
10-14 evidencing an interest in transportation equipment in whole or in
10-15 part within the United States and a right to receive determined
10-16 portions of rental, purchase, or other fixed obligatory payments
10-17 for the use or purchase of the transportation equipment;
10-18 13 [12]. In insured accounts and evidences of indebtedness
10-19 as defined and limited by Section 1, Chapter 618, page 1356, Acts
10-20 of the 47th Legislature; in shares or share accounts as authorized
10-21 in Section 1, page 76, Acts 1939, 46th Legislature; in insured or
10-22 guaranteed obligations as authorized in Chapter 230, page 315, Acts
10-23 1945, 49th Legislature; in bonds issued under the provisions
10-24 authorized by Section 9, Chapter 231, page 774, Acts 1933, 43rd
10-25 Legislature; in bonds under authority of Section 1, Chapter 1, page
11-1 427, Acts 1939, 46th Legislature; in bonds and other indebtedness
11-2 as authorized in Section 1, Chapter 3, page 494, Acts 1939, 46th
11-3 Legislature; in "Municipal Bonds" issued under and by virtue of
11-4 Chapter 280, Acts 1929, 41st Legislature; or in bonds as authorized
11-5 by Section 5, Chapter 122, page 219, Acts 1949, 51st Legislature;
11-6 or in bonds as authorized by Section 10, Chapter 159, page 326,
11-7 Acts 1949, 51st Legislature; or in bonds as authorized by Section
11-8 19, Chapter 340, page 655, Acts 1949, 51st Legislature; or in bonds
11-9 as authorized by Section 10, Chapter 398, page 737, Acts 1949, 51st
11-10 Legislature; or in bonds as authorized by Section 18, Chapter 465,
11-11 page 855, Acts 1949, 51st Legislature; or in shares or share
11-12 accounts authorized in Chapter 534, page 966, Acts 1949, 51st
11-13 Legislature; or in bonds as authorized by Section 24, Chapter 110,
11-14 page 193, Acts 1949, 51st Legislature; together with such other
11-15 investments as are now or may hereafter be specifically authorized
11-16 by law; [.]
11-17 14. The percentage authorizations and limitations set forth
11-18 in any or all of the provisions of this article shall apply only at
11-19 the time of the original acquisition of an investment or at the
11-20 time a transaction is entered into and shall not be applicable to
11-21 the insurer or such investment or transaction thereafter except as
11-22 provided in this section. In addition, any investment, once
11-23 qualified under any subsection of this section, shall remain
11-24 qualified notwithstanding any refinancing, restructuring or
11-25 modification of such investment provided that, the insurer shall
12-1 not engage in any such refinancing, restructuring or modification
12-2 of any investment for the purpose of circumventing the requirements
12-3 or limitations of this article.
12-4 SECTION 2. Article 2.10-3, Texas Insurance Code, is amended
12-5 to read as follows:
12-6 Art. 2.10-3. Securities Lending, Repurchase, Reverse Repurchase
12-7 and Dollar Roll Transactions [Repurchase Agreements]
12-8 (a) For purposes of this article, the following definitions
12-9 shall apply:
12-10 (1) "Repurchase transaction" means a transaction in
12-11 which an insurer purchases securities from a business entity that
12-12 is obligated to repurchase the purchased securities or equivalent
12-13 securities from the insurer at a specified price, either within a
12-14 specified period of time or upon demand.
12-15 (2) "Reverse repurchase transaction" means a
12-16 transaction in which an insurer sells securities to a business
12-17 entity and is obligated to repurchase the sold securities or
12-18 equivalent securities from the business entity at a specified
12-19 price, either within a specified period of time or upon demand.
12-20 (3) "Securities lending transaction" means a
12-21 transaction in which securities are loaned by an insurer to a
12-22 business entity that is obligated to return the loaned securities
12-23 or equivalent securities to the insurer, either within a specified
12-24 period of time or upon demand.
12-25 (4) "Dollar roll transaction" means two simultaneous
13-1 transactions with settlement dates no more than 96 days apart so
13-2 that in one transaction an insurer sells to a business entity, and
13-3 in the other transaction the insurer is obligated to purchase from
13-4 the same business entity, substantially similar securities of the
13-5 following types:
13-6 (A) mortgage-backed securities issued, assumed
13-7 or guaranteed by the Government National Mortgage Association, the
13-8 Federal National Mortgage Association or the Federal Home Loan
13-9 Mortgage Corporation or their respective successors; and
13-10 (B) other mortgage-backed securities referred to
13-11 in Section 106 of Title I of the Secondary Mortgage Market
13-12 Enhancement Act of 1984 (15 U.S.C. Section 77r-1), as amended.
13-13 (b) An insurer may engage in securities lending, repurchase,
13-14 reverse repurchase and dollar roll transactions as set forth
13-15 herein. The insurer shall enter into a written agreement for all
13-16 transactions, except dollar roll transactions, that shall require
13-17 each transaction terminate no more than one year from its
13-18 inception.
13-19 (c) Cash received in a transaction under this article shall
13-20 be invested in accordance with this article and in a manner that
13-21 recognizes the liquidity needs of the transaction or used by the
13-22 insurer for its general corporate purposes. For so long as the
13-23 transaction remains outstanding, the insurer, its agent or
13-24 custodian shall maintain, as to acceptable collateral received in a
13-25 transaction under this subsection, either physically or through the
14-1 book entry systems of the Federal Reserve, Depository Trust
14-2 Company, Participants Trust Company or other securities
14-3 depositories approved by the Commissioner:
14-4 (1) possession of the acceptable collateral;
14-5 (2) a perfected security interest in the acceptable
14-6 collateral; or
14-7 (3) in the case of a jurisdiction outside of the
14-8 United States, title to, or rights of a secured creditor to, the
14-9 acceptable collateral; and
14-10 (d) An insurer shall not enter into a transaction under this
14-11 article if, as a result of and after giving effect to the
14-12 transaction:
14-13 (1) the aggregate amount of securities then loaned,
14-14 sold to, or purchased from, any one business entity counterparty
14-15 under this article would exceed 5 percent of its assets. In
14-16 calculating the amount sold to or purchased from a business entity
14-17 counterparty under repurchase or reverse repurchase transactions,
14-18 effect may be given to netting provisions under a master written
14-19 agreement; or
14-20 (2) the aggregate amount of all securities then
14-21 loaned, sold to or purchased from all business entities under this
14-22 article would exceed 40 percent of its assets.
14-23 (e) The amount of collateral required for securities
14-24 lending, repurchase and reverse repurchase transactions is the
14-25 amount required pursuant to the provisions of the Purposes and
15-1 Procedures of the Securities Valuation Office or such successor
15-2 publication.
15-3 [(a) Subject to the limitations and restrictions contained
15-4 herein an insurer may make loans to or purchases of securities
15-5 from a solvent bank, savings and loan association, credit union, or
15-6 securities broker registered under the federal Securities Exchange
15-7 Act of 1934 under an agreement (commonly called repurchase
15-8 agreement), which agreement provides for the purchase by the
15-9 insurer of securities and which agreement matures in 90 days or
15-10 less and provides for the repurchase by such entity of the same or
15-11 similar securities purchased by the insurer provided:]
15-12 [(1) such loan collateral or securities purchased are
15-13 of the type of investments described and authorized by Paragraph 3
15-14 of Article 2.08 of this code and provided that the total market
15-15 value of such securities shall equal or exceed the amount of such
15-16 loan or purchase when it is made; and]
15-17 [(2) such loan collateral or securities purchased from
15-18 any one bank, savings and loan association, credit union, or
15-19 securities broker may not exceed the greater of five percent of the
15-20 insurer's assets or five percent of the amount of capital, surplus,
15-21 and undivided profits of such bank, savings and loan association,
15-22 credit union, or securities broker.]
15-23 [(b) The State Board of Insurance may promulgate reasonable
15-24 rules, regulations, and orders consistent with and implementing the
15-25 provisions of this article.]
16-1 SECTION 3. Article 2.10-4, Texas Insurance Code, is amended
16-2 to read as follows:
16-3 Art. 2.10-4. Risk-Limiting Provisions
16-4 Sec. 1. [(a) Subject to the rules and regulations
16-5 promulgated by the State Board of Insurance and the limitations
16-6 contained in Subsections (b) and (d) of this article with respect
16-7 to assets owned by an insurer,] A[a]n insurer may, for purposes of
16-8 protecting the [such] assets owned by the insurer against the risk
16-9 of changing asset values or interest rates and for risk reduction
16-10 and income generation, engage in the following risk control
16-11 transactions:
16-12 1. For the purposes of this article, the following
16-13 definitions shall apply:
16-14 (A) "Acceptable collateral" means cash, cash
16-15 equivalents, letters or credit and direct obligations, or
16-16 securities that are fully guaranteed as to principal and interest
16-17 by, the government of the United States.
16-18 (B) "Business entity" includes a sole
16-19 proprietorship, corporation, limited liability company,
16-20 association, partnership, joint stock company, joint venture,
16-21 mutual fund, bank, trust, joint tenancy or other similar form of
16-22 business organization, whether organized for-profit or
16-23 not-for-profit.
16-24 (C) "Cap" means an agreement obligating the
16-25 seller to make payments to the buyer with each payment based on the
17-1 amount by which a reference price or level or the performance or
17-2 value of one or more underlying interests exceeds a predetermined
17-3 number, sometimes called the strike rate or strike price.
17-4 (D) "Cash equivalents" means short-term, highly
17-5 rated, highly liquid and readily marketable investments or
17-6 securities, which includes money market funds as defined in Article
17-7 2.10, sections 1(3) and (4). For purposes of this definition:
17-8 (i) "short-term" means investments with a remaining
17-9 term to maturity of one year or less; and
17-10 (ii) "highly rated" means an investment rated "P-1" by
17-11 Moody's Investors Service, Inc., or "A-1" by the Standard and
17-12 Poor's Division of the McGraw Hill Companies, Inc., or its
17-13 equivalent rating by a nationally recognized statistical rating
17-14 organization recognized by the Securities Valuation Office.
17-15 (E) "Collar" means an agreement to receive
17-16 payments as the buyer of an option, cap or floor and to make
17-17 payments as the seller of a different option, cap or floor.
17-18 (F) "Counterparty exposure amount" means:
17-19 (i) for an over-the-counter derivative instrument not
17-20 entered into pursuant to a written master agreement which provides
17-21 for netting of payments owed by the respective parties:
17-22 (a) the market value of the over-the-counter derivative
17-23 instrument if the liquidation of the derivative instrument would
17-24 result in a final cash payment to the insurer; or
17-25 (b) zero if the liquidation of the derivative instrument
18-1 would not result in a final cash payment to the insurer;
18-2 (ii) for over-the-counter derivative instruments
18-3 entered into pursuant to a written master agreement which provides
18-4 for netting of payments owed by the respective parties, and the
18-5 domiciliary jurisdiction of the counterparty is either within the
18-6 United States, or if not within the United States, is within a
18-7 foreign (not United States) jurisdiction listed in the Purposes and
18-8 Procedures Manual of the Securities Valuation Office as eligible
18-9 for netting, the greater of zero or the net sum payable to the
18-10 insurer in connection with all derivative instruments subject to
18-11 the written master agreement upon their liquidation in the event of
18-12 default by the counterparty pursuant to the master agreement
18-13 (assuming no conditions precedent to the obligations of the
18-14 counterparty to make such a payment and assuming no setoff of
18-15 amounts payable pursuant to any other instrument or agreement);
18-16 (iii) for purposes of this definition, market value or
18-17 the net sum payable, as the case may be, shall be determined at the
18-18 end of the most recent quarter of the insurer's fiscal year and
18-19 shall be reduced by the market value of acceptable collateral held
18-20 by the insurer or a custodian on the insurer's behalf.
18-21 (G) "Derivative instrument" means any agreement,
18-22 option or instrument, or any series or combinations thereof:
18-23 (i) to make or take delivery of, or assume or
18-24 relinquish, a specified amount of one or more underlying interests,
18-25 or to make a cash settlement in lieu thereof; or
19-1 (ii) that have a price, performance, value or cash
19-2 flow based primarily upon the actual or expected price, yield,
19-3 level, performance, value or cash flow of one or more underlying
19-4 interests.
19-5 Derivative instruments include options, warrants not
19-6 otherwise permitted to be held by the insurer under this article,
19-7 caps, floors, collars, swaps, swaptions, forwards, futures and any
19-8 other agreements, options or instruments substantially similar
19-9 thereto, or any series or combinations thereof.
19-10 Derivative instruments do not include collateralized mortgage
19-11 obligations, other asset-backed securities, principal-protected
19-12 structured securities, floating rate securities, or instruments
19-13 which an insurer is otherwise permitted to invest in or receive
19-14 under this article other than under this subsection, and any debt
19-15 obligations of the insurer.
19-16 (H) "Derivative transaction" means a transaction
19-17 involving the use of one or more derivative instruments. Dollar
19-18 roll transactions, repurchase transactions, reverse repurchase
19-19 transactions and securities lending transactions shall not be
19-20 included as derivative transactions for purposes of this
19-21 subsection.
19-22 (I) "Floor" means an agreement obligating the
19-23 seller to make payments to the buyer in which each payment is based
19-24 on the amount by which a predetermined number, sometimes called the
19-25 floor rate or price, exceeds a reference price, level, performance
20-1 or value of one or more underlying interests.
20-2 (J) "Forward" means an agreement (other than a
20-3 future) to make or take delivery in the future of one or more
20-4 underlying interests, or effect a cash settlement, based on the
20-5 actual or expected price, level, performance or value of such
20-6 underlying interests, but shall not mean or include spot
20-7 transactions effected within customary settlement periods,
20-8 when-issued purchases or other similar cash market transactions.
20-9 (K) "Future" means an agreement, traded on a
20-10 futures exchange, to make or take delivery of, or effect a cash
20-11 settlement based on the actual or expected price, level,
20-12 performance or value of, one or more underlying interests.
20-13 (L) "Futures exchange" means a foreign or
20-14 domestic exchange, contract market or board of trade on which
20-15 trading in futures is conducted and, in the United States, which
20-16 has been authorized for such trading by the Commodities Futures
20-17 Trading Commission or any successor thereof.
20-18 (M) "Hedging transaction" means a derivative
20-19 transaction which is entered into and maintained to manage:
20-20 (i) the risk of a change in the value, yield, price,
20-21 cash flow or quantity of assets or liabilities (or a portfolio of
20-22 assets and/or liabilities) which the insurer has acquired or
20-23 incurred or anticipates acquiring or incurring; or
20-24 (ii) the currency exchange rate risk related to assets
20-25 or liabilities (or a portfolio of assets and/or liabilities) which
21-1 an insurer has acquired or incurred or anticipates acquiring or
21-2 incurring.
21-3 (N) "Income generation transaction" means a
21-4 derivative transaction which is entered into to generate income. A
21-5 derivative transaction which is entered into as a hedging
21-6 transaction or a replication transaction shall not be considered an
21-7 income generation transaction.
21-8 (O) "Market value" means the price for the
21-9 security or derivative instrument obtained from a generally
21-10 recognized source or the most recent quotation from such a source
21-11 or, to the extent no generally recognized source exists, the price
21-12 for the security or derivative instrument as determined pursuant to
21-13 the terms of the instrument or in good faith by the insurer as can
21-14 be reasonably demonstrated to the Commissioner upon request, plus
21-15 accrued but unpaid income thereon to the extent not included in the
21-16 price as of the date.
21-17 (P) "Option" means an agreement giving the buyer
21-18 the right to buy or receive (a "call option"), sell or deliver (a
21-19 "put option"), enter into, extend or terminate or effect a cash
21-20 settlement based on the actual or expected price, spread, level,
21-21 performance or value of one or more underlying interests.
21-22 (Q) "Over-the-counter derivative instrument"
21-23 means a derivative instrument entered into with a business entity,
21-24 other than through a securities exchange, futures exchange, or
21-25 cleared through a qualified clearinghouse.
22-1 (R) "Potential exposure" means:
22-2 (i) as to a futures position, the amount of initial
22-3 margin required for that position; or
22-4 (ii) as to swaps, collars and forwards, one-half
22-5 percent times the notional amount times the square root of the
22-6 remaining years to maturity.
22-7 (S) "Qualified clearinghouse" means a
22-8 clearinghouse subject to the rules of a securities exchange or a
22-9 futures exchange, which provides clearing services, including
22-10 acting as a counterparty to each of the parties to a transaction
22-11 such that the parties no longer have credit risk to each other.
22-12 (T) "Replication transaction" means a derivative
22-13 transaction or combination of derivative transactions effected
22-14 either separately or in conjunction with cash market investments
22-15 included in the insurer's investment portfolio in order to
22-16 replicate the risks and returns of another authorized transaction,
22-17 investment or instrument and/or operate as a substitute for cash
22-18 market transactions. A derivative transaction entered into by the
22-19 insurer as a hedging transaction shall not be considered a
22-20 replication transaction.
22-21 (U) "Securities exchange" means:
22-22 (i) an exchange registered as a national securities
22-23 exchange or a securities market registered under the Securities
22-24 Exchange Act of 1934 (15 U.S.C. Section 78 et seq.), as amended;
22-25 (ii) Private Offerings Resales and Trading through
23-1 Automated Linkages (PORTAL); or
23-2 (iii) a designated offshore securities market as
23-3 defined in Securities Exchange Commission Regulation S, 17 C.F.R.
23-4 Part 230, as amended.
23-5 (V) "Swap" means an agreement to exchange or to
23-6 net payments at one or more times based on the actual or expected
23-7 price, yield, level, performance or value of one or more underlying
23-8 interests.
23-9 (W) "Swaption" means an option to purchase or
23-10 sell a swap at a given price and time or at a series of prices and
23-11 times. A swaption does not mean a swap with an embedded option.
23-12 (X) "Underlying interest" means the assets,
23-13 liabilities or other interests, or a combination thereof,
23-14 underlying a derivative instrument, such as any one or more
23-15 securities, currencies, rates, indices, commodities or derivatives
23-16 instruments.
23-17 (Y) "Warrant" means an instrument that gives the
23-18 holder the right to purchase or sell the underlying interest at a
23-19 given price and time or at a series of prices and times outlined in
23-20 the warrant agreement.
23-21 2. Prior to entering into any derivative transaction, the
23-22 board of directors of the insurer shall approve a derivative use
23-23 plan, as part of the insurer's investment plan otherwise required
23-24 by law, that:
23-25 (A) describes investment objectives and risk
24-1 constraints, such as counterparty exposure amounts;
24-2 (B) defines permissible transactions identifying
24-3 the risks to be hedged, the assets or liabilities being replicated;
24-4 and
24-5 (C) requires compliance with internal control
24-6 procedures.
24-7 3. The insurer shall establish written internal control
24-8 procedures that provide for:
24-9 (A) a quarterly report to the board of directors
24-10 that reviews:
24-11 (i) all derivative transactions entered into,
24-12 outstanding or closed out;
24-13 (ii) the results and effectiveness of the derivatives
24-14 program; and
24-15 (iii) the credit risk exposure to each counterparty
24-16 for over-the-counter derivative transactions based upon the
24-17 counterparty exposure amount;
24-18 (B) a system for determining whether hedging or
24-19 replication strategies utilized have been effective;
24-20 (C) a system of regular reports (not less
24-21 frequently than monthly) to management including:
24-22 (i) a description of all the derivative transactions
24-23 entered into, outstanding or closed out during the period since the
24-24 last report;
24-25 (ii) the purpose of each outstanding derivative
25-1 transaction;
25-2 (iii) a performance review of the derivative
25-3 instrument program; and
25-4 (iv) the counterparty exposure amount for
25-5 over-the-couter derivative transactions;
25-6 (D) written authorizations that identify the
25-7 responsibilities and limitations of authority of persons authorized
25-8 to effect and maintain derivative transactions;
25-9 (E) documentation appropriate for each
25-10 transaction including:
25-11 (i) the purpose of the transaction;
25-12 (ii) the assets or liabilities to which the
25-13 transaction relates;
25-14 (iii) the specific derivative instrument used in the
25-15 transaction;
25-16 (iv) for over-the-counter derivative instrument
25-17 transactions, the name of the counterparty and the counterparty
25-18 exposure amount; and
25-19 (v) for exchange-traded derivative instruments, the
25-20 name of the exchange and the name of the firm that handled the
25-21 transaction.
25-22 4. An insurer shall be able to demonstrate to the
25-23 Commissioner, upon request, the intended hedging characteristics
25-24 and ongoing effectiveness of the derivative transaction or
25-25 combination of transactions through cash flow testing, duration
26-1 analysis or other appropriate analysis.
26-2 5. An insurer shall include all counterparty exposure
26-3 amounts in determining compliance with the limitations of
26-4 Subsection (c).
26-5 6. (a) Ten days prior to entering into the initial hedging
26-6 transaction, the insurer shall notify the Commissioner in writing
26-7 that: (i) the insurer's board of directors has adopted an
26-8 investment plan which authorizes hedging transactions, and (ii) all
26-9 hedging transactions will comply with this article. Insurers
26-10 already engaged in hedging transactions shall notify the
26-11 Commissioner as set forth in the preceding sentence within 30 days
26-12 of the effective date of this article. Thereafter, an insurer may
26-13 enter into hedging transactions under this article, if as a result
26-14 of and after giving effect to each such transaction:
26-15 (A) the aggregate statement value of all
26-16 outstanding options (other than collars), caps, floors, swaptions
26-17 and warrants (not attached to another financial instrument
26-18 purchased by the insurer) pursuant to this article does not exceed
26-19 7.5 percent of its assets;
26-20 (B) the aggregate statement value of all
26-21 outstanding options (other than collars), swaptions, warrants, caps
26-22 and floors written by the insurer pursuant to this article does not
26-23 exceed three percent of its assets; and
26-24 (C) the aggregate potential exposure of all
26-25 outstanding collars, swaps, forwards and futures entered into or
27-1 acquired by the insurer pursuant to this article does not exceed
27-2 6.5 percent of its assets.
27-3 (b) Whenever the derivative transactions entered into under
27-4 this Subsection 6, are not in compliance with this Subsection 6 or,
27-5 if continued, may now or subsequently, create a hazardous financial
27-6 condition to the insurer which affects its policyholders, creditors
27-7 or the general public, the Commissioner may, after notice and an
27-8 opportunity for a hearing, order the insurer to take such action as
27-9 may be reasonably necessary to (i) rectify a hazardous financial
27-10 condition, or (ii) to prevent an impending hazardous financial
27-11 condition from occurring.
27-12 7. An insurer may only enter into an income generation
27-13 transaction if:
27-14 (A) as a result of and after giving effect to
27-15 the transaction, the aggregate statement value of admitted assets
27-16 that are then subject to call or that generate the cash flows for
27-17 payments required to be made by the insurer under caps and floors
27-18 sold by the insurer and then outstanding under this article, plus
27-19 the statement value of admitted assets underlying derivative
27-20 instruments then subject to calls sold by the insurer and
27-21 outstanding under this article, plus the purchase price of assets
27-22 subject to puts then outstanding under this article does not exceed
27-23 10 percent of its assets; and
27-24 (B) the transaction is one of the following
27-25 types, is covered in the manner specified below and meets the other
28-1 requirements specified below:
28-2 (i) sales of call options on assets, provided that the
28-3 insurer holds or has a currently exercisable right to acquire the
28-4 underlying assets during the entire period that the option is
28-5 outstanding;
28-6 (ii) sales of put options on assets, provided that the
28-7 insurer holds sufficient cash, cash equivalents or interests in a
28-8 short-term investment pool to purchase the underlying assets upon
28-9 exercise during the entire period that the option is outstanding,
28-10 and has the ability to hold the underlying assets in its portfolio.
28-11 If the total market value of all put options sold by the insurer
28-12 exceeds two percent of the insurer's assets, the insurer shall set
28-13 aside pursuant to a custodial or escrow agreement cash or cash
28-14 equivalents having a market value equal to the amount of its put
28-15 option obligations in excess of two percent of the insurer's assets
28-16 during the entire period the option is outstanding;
28-17 (iii) sales of call options on derivative instruments
28-18 (including swaptions), provided that the insurer holds or has a
28-19 currently exercisable right to acquire assets generating the cash
28-20 flow to make any payments for which the insurer is liable pursuant
28-21 to the underlying derivative instruments during the entire period
28-22 that the call options are outstanding and has the ability to enter
28-23 into the underlying derivative transactions for its portfolio; and
28-24 (iv) sales of caps and floors, provided that the
28-25 insurer holds or has a currently exercisable right to acquire
29-1 assets generating the cash flow to make any payments for which the
29-2 insurer is liable pursuant to the caps and floors during the entire
29-3 period that the caps and floors are outstanding.
29-4 8. (a) An insurer may enter into replication transactions
29-5 only with prior written approval from the Commissioner, provided
29-6 that:
29-7 (A) the insurer would otherwise be authorized to
29-8 invest its funds under Chapter 2 of this Code in the asset being
29-9 replicated; and
29-10 (B) the asset being replicated is subject to all
29-11 the provisions and limitations on the making thereof specified in
29-12 this article with respect to investments by the insurer as if the
29-13 transaction constituted a direct investment by the insurer in the
29-14 replicated asset.
29-15 (b) The Commissioner may adopt such rules and regulations
29-16 regarding replication transactions as may be fair and reasonable to
29-17 implement this Subsection 8.
29-18 9. An insurer may purchase or sell one or more derivative
29-19 instruments to offset, in whole or in part, any derivative
29-20 instrument previously purchased or sold, as the case may be,
29-21 without regard to the quantitative limitations of this article,
29-22 provided that such offsetting transaction utilizes the same type of
29-23 derivative instrument as the derivative instrument being offset.
29-24 10. Trading Requirements. Each derivative instrument shall
29-25 be:
30-1 (A) traded on a securities exchange;
30-2 (B) entered into with, or guaranteed by, a
30-3 business entity;
30-4 (C) issued or written by or entered into with
30-5 the issuer of the underlying interest on which the derivative
30-6 instrument is based; or
30-7 (D) in the case of futures, traded through a
30-8 broker which is registered as a futures commission merchant under
30-9 the Commodity Exchange Act or which has received exemptive relief
30-10 from such registration under Rule 30.10 promulgated under the
30-11 Commodity Exchange Act. [only, buy put options or sell call options
30-12 and terminate the same, buy or sell interest rate futures contracts
30-13 and options on interest rate futures contracts, or utilize such
30-14 other instruments or devices as are consistent with this article
30-15 and are traded on an established exchange regulated by the
30-16 Securities and Exchange Commission or the Commodities Futures
30-17 Trading Commission.]
30-18 [(b) An insurer may engage in the purchase of put options or
30-19 sale of call options and terminate such option, only with regard
30-20 to:]
30-21 [(1) securities owned by the insurer; or]
30-22 [(2) securities which the insurer may obtain through
30-23 exercise of warrants or conversion rights held by the insurer.]
30-24 [(c) Subject to the rules and regulations promulgated by the
30-25 State Board of Insurance and the limitations contained in
31-1 Subsection (d) of this article with respect to cash flows
31-2 reasonably anticipated to be available for investment purposes
31-3 within the succeeding 12 months, which anticipation cannot exceed
31-4 an amount equal to 10 percent of such insurer's admitted assets, an
31-5 insurer may, for purposes of protecting such cash flows against the
31-6 risk of changing asset values or interest rates and for risk
31-7 reduction only, buy or sell interest rate futures contracts and
31-8 options on interest rate futures contracts or utilize such other
31-9 instruments or devices as are consistent with this article and are
31-10 traded on an established exchange regulated by the Securities and
31-11 Exchange Commission or the Commodities Futures Trading Commission.]
31-12 [(d) An insurer may engage in the practices authorized by
31-13 this article only if prior thereto the board of directors of such
31-14 insurer has adopted a written policy which specifies:]
31-15 [(1) the types of risk-limiting practices approved for
31-16 such insurer;]
31-17 [(2) the aggregate maximum limits in such instruments,
31-18 which maximum limits must be reasonably related to the insurer's
31-19 business needs and its capacity to fulfill its obligations
31-20 thereunder;]
31-21 [(3) the specific assets or class of assets or cash
31-22 flows for which risk-limiting practices may be employed; and]
31-23 [(4) that the insurer's accounting or investment
31-24 records shall specifically identify the assets or cash flows for
31-25 which each risk-limiting practice is used.]
32-1 Sec. 2. [e] The Commissioner [State Board of Insurance] is
32-2 hereby authorized to adopt such reasonable rules and regulations,
32-3 not inconsistent with the provisions of this article, which
32-4 prescribe reasonable limits, standards, and guidelines with respect
32-5 to such risk-limiting devices and plans related thereto.
32-6 SECTION 4. This Act takes effect September 1, 1999.
32-7 SECTION 5. The importance of this legislation and the
32-8 crowded condition of the calendars in both houses create an
32-9 emergency and an imperative public necessity that the
32-10 constitutional rule requiring bills to be read on three several
32-11 days in each house be suspended, and this rule is hereby suspended.