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.