1-1 By: Averitt (Senate Sponsor - Sibley) H.B. No. 3042
1-2 (In the Senate - Received from the House May 10, 1999;
1-3 May 10, 1999, read first time and referred to Committee on Economic
1-4 Development; May 11, 1999, reported favorably by the following
1-5 vote: Yeas 5, Nays 0; May 11, 1999, sent to printer.)
1-6 A BILL TO BE ENTITLED
1-7 AN ACT
1-8 relating to investment requirements for certain insurance
1-9 companies.
1-10 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-11 SECTION 1. Article 2.10, Insurance Code, is amended to read
1-12 as follows:
1-13 Art. 2.10. INVESTMENT OF FUNDS IN EXCESS OF MINIMUM CAPITAL
1-14 AND MINIMUM SURPLUS. (a) The board of directors of each insurer,
1-15 or the corresponding authority designated by the charter, bylaws,
1-16 or plan of operations of an insurer that does not have a board of
1-17 directors, shall adopt a written investment plan consistent with
1-18 the requirements of this article and Articles 2.08, 2.09, 2.10-1,
1-19 2.10-2, 2.10-3, 2.10-4, 2.10-5, 6.08, 8.18, and 8.19 of this code
1-20 and the other applicable statutes governing investments by the
1-21 insurer. The investment plan must:
1-22 (1) specify the diversification of the insurer's
1-23 investments designed to reduce the risk of large losses, by:
1-24 (A) broad categories of investments, such as
1-25 bonds and real estate loans;
1-26 (B) kinds of investments, such as:
1-27 (i) obligations of governments or business
1-28 entities;
1-29 (ii) mortgage-backed securities; and
1-30 (iii) real estate loans on office, retail,
1-31 industrial, or residential properties;
1-32 (C) quality;
1-33 (D) maturity;
1-34 (E) type of industry; and
1-35 (F) geographical areas, as to both domestic and
1-36 foreign investments;
1-37 (2) balance the safety of principal with yield and
1-38 growth;
1-39 (3) seek a reasonable relationship of assets and
1-40 liabilities as to term and nature; and
1-41 (4) be appropriate considering the capital and surplus
1-42 and the business conducted by the insurer.
1-43 (b) At least annually, the board of directors or other
1-44 authority shall review the adequacy of the investment plan and the
1-45 implementation of the plan.
1-46 (c) The insurer shall maintain the investment plan in its
1-47 principal office and shall provide the plan to the commissioner or
1-48 the commissioner's designee on request. The commissioner or the
1-49 commissioner's designee shall maintain the investment plan as a
1-50 privileged and confidential document, and the plan is not subject
1-51 to public disclosure.
1-52 (d) The insurer shall maintain investment records covering
1-53 each transaction. At all times, the insurer must be able to
1-54 demonstrate to the department that its investments are within the
1-55 limitations prescribed by the statutes described by Subsection (a)
1-56 of this article.
1-57 (e) No company except any writing life, health and accident
1-58 insurance, organized under the laws of this state, shall invest
1-59 its funds over and above its minimum capital and its minimum
1-60 surplus, as provided in Article 2.02, except as otherwise provided
1-61 in this Code, in any other manner than as follows:
1-62 (1) as [1. As] provided for the investment of its
1-63 minimum capital and its minimum surplus in Article 2.08;
1-64 (2) in [2. In] bonds or other evidences of debt which
2-1 at the time of purchase are interest-bearing and are issued by
2-2 authority of law and are not in default as to principal or
2-3 interest, of any state [of the States of the United States], [or
2-4 of] Canada, or [any] province of Canada, or in the stock of any
2-5 National Bank, in stock of any State Bank of Texas whose deposits
2-6 are insured by the Federal Deposit Insurance Corporation;
2-7 provided, however, that if said funds are invested in the stock of
2-8 a State Bank of Texas that not more than thirty-five per cent (35%)
2-9 of the total outstanding stock of any one (1) State Bank of Texas
2-10 may be so purchased by any one (1) insurance company; and provided
2-11 further, that neither the insurance company whose funds are
2-12 invested in said bank stock nor any other insurance company may
2-13 invest its funds in the remaining stock of any such State Bank;
2-14 (3) in [3. In] bonds, notes, evidences of
2-15 indebtedness or participations therein secured by a valid first
2-16 lien upon real property or leasehold estate therein located in the
2-17 United States of America, its states, commonwealths, territories,
2-18 or possessions, provided that:
2-19 (A) the [(a) The] amount of any such obligation
2-20 secured by a first lien upon real property or leasehold estate
2-21 therein shall not exceed ninety per cent (90%) of the value of
2-22 such real property or leasehold estate therein, but the amount of
2-23 such obligation may:
2-24 (i) [(1) May] exceed ninety per cent
2-25 (90%) but shall not exceed one hundred per cent (100%) of the value
2-26 of such real property or leasehold estate therein if the insurer
2-27 or one or more wholly owned subsidiaries of the insurer own in the
2-28 aggregate a ten per cent (10%) or greater equity interest in such
2-29 real property or leasehold estate therein;
2-30 (ii) [(2) May] be ninety-five per cent
2-31 (95%) of the value of such real property if it contains only a
2-32 dwelling designed exclusively for occupancy by not more than four
2-33 families for residential purposes, and the portion of the unpaid
2-34 balance of such obligation which is in excess of an amount equal to
2-35 ninety per cent (90%) of such value is guaranteed or insured by a
2-36 mortgage insurance company licensed to do business in the State of
2-37 Texas; or
2-38 (iii) [(3) May] be greater than ninety
2-39 per cent (90%) of the value of such real property to the extent the
2-40 obligation is insured or guaranteed by the United States of
2-41 America, or an agency or instrumentality thereof, the Federal
2-42 Housing Administration pursuant to the National Housing Act of
2-43 1934, as amended (12 U.S.C. Sec. 1701 et seq.), or the State of
2-44 Texas; and
2-45 (B) the [(b) The] term of an obligation secured
2-46 by a first lien upon a leasehold estate in real property and
2-47 improvements situated thereon shall not exceed a period equal to
2-48 four-fifths (4/5) of the then unexpired term of such leasehold
2-49 estate, provided that:
2-50 (i) the [(1) The] unexpired term of the
2-51 leasehold estate must extend at least ten (10) years beyond the
2-52 term of the obligation; and
2-53 (ii) each [(2) Each] obligation shall be
2-54 payable in equal monthly, quarterly, semi-annual, or annual
2-55 payments of principal plus accrued interest to the date of such
2-56 principal payment, so that under either method of repayment such
2-57 obligation will fully amortize during a period of time not to
2-58 exceed four-fifths (4/5) of the then unexpired term of the security
2-59 leasehold estate; [and]
2-60 (C) the [(c) The] amount of any one such
2-61 obligation may not exceed ten per cent (10%) of the insurer's
2-62 capital and surplus; and
2-63 (D) the [(d) The] aggregate of investments made
2-64 under this Subdivision (3) [Section 3] may not exceed thirty per
2-65 cent (30%) of the insurer's assets;
2-66 (4) in [4. In] bonds or other interest-bearing
2-67 evidences of debt of any county, municipality, road district,
2-68 turnpike district or authority, water district, any subdivision of
2-69 a county, incorporated city, town, school district, sanitary or
3-1 navigation district, any municipally owned revenue water system,
3-2 sewer system or electric utility company where special revenues to
3-3 meet the principal and interest payments of such municipally owned
3-4 revenue water system, sewer system or electric utility company
3-5 bonds or other evidences of debt shall have been appropriated,
3-6 pledged or otherwise provided for by such municipality, provided
3-7 that:
3-8 (A) [. Provided,] before bonds or other
3-9 evidences of debt of navigation districts shall be eligible
3-10 investments such navigation district shall be located in whole or
3-11 in part in a county containing a population of not less than
3-12 100,000 according to the last preceding Federal Census; and
3-13 (B) [provided further, that] the interest due on
3-14 such navigation bonds or other evidences of debt of navigation
3-15 districts must never have been defaulted;
3-16 (5) in any type or form of savings deposits, time
3-17 deposits, certificates of deposit, NOW accounts, and money market
3-18 accounts in solvent banks, savings and loan associations, credit
3-19 unions, and branches of those financial institutions, organized
3-20 under the laws of the United States or of a state, if made in
3-21 accordance with the laws or regulations applicable to those
3-22 entities, provided that the amount of the deposits in any one bank,
3-23 savings and loan association, or credit union may not exceed the
3-24 greater of:
3-25 (A) 20 percent of the insurer's capital and
3-26 surplus;
3-27 (B) the amount of federal or state deposit
3-28 insurance coverage relating to that deposit; or
3-29 (C) 10 percent of the amount of capital,
3-30 surplus, and undivided profits of the entity receiving the
3-31 deposits;
3-32 (6) in [5. In] the stocks, bonds, debentures, bills
3-33 of exchange, evidence of indebtedness, or other commercial notes or
3-34 bills and securities of any solvent partnership or solvent dividend
3-35 paying corporation at time of purchase, incorporated under the laws
3-36 of this state, [or of] any other state [State of the United
3-37 States], [or of] the United States, [or of] Canada, or any province
3-38 of Canada, which has not defaulted in the payment of any of its
3-39 obligations for a period of five (5) years, immediately preceding
3-40 the date of the investment; provided that:
3-41 (A) such funds may not be invested in the stock
3-42 of any oil, manufacturing or mercantile corporation organized under
3-43 the laws of this state, unless such corporation has at the time of
3-44 investment a net worth of not less than $250,000.00 nor in the
3-45 stock of any oil, manufacturing or mercantile corporation not
3-46 organized under the laws of this state, unless such corporation has
3-47 a combined capital, surplus and undivided profits of not less than
3-48 $2,500,000.00;
3-49 (B) any [provided further: (a) Any] such
3-50 insurance company may invest its funds over and above its minimum
3-51 capital stock, its minimum surplus, and all reserves required by
3-52 law, in the stocks, bonds or debentures of any solvent corporation
3-53 organized under the laws of this state, [or of] any other state
3-54 [State of the United States], [or of] the United States, [or of]
3-55 Canada, or any province of Canada;
3-56 (C) no [. (b) No] such insurance company shall
3-57 invest any of its funds in its own stock or in any stock on account
3-58 of which the holders or owners thereof may, in any event, be or
3-59 become liable to any assessment, except for taxes; and
3-60 (D) no [. (c) No] such insurance company shall
3-61 invest any of its funds in stocks, bonds or other securities issued
3-62 by a corporation if a majority of the stock having voting powers of
3-63 such issuing corporation is owned, directly or indirectly, by or
3-64 for the benefit of one or more officers or directors of such
3-65 insurance company; provided, however, that this paragraph
3-66 [Section] shall not apply to any insurance company which has been
3-67 in continuous operation for five (5) years;
3-68 (7) in [. 6. In] shares of mutual funds doing business
3-69 under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1
4-1 et seq.), as amended, provided that:
4-2 (A) [(a)] mutual funds must be solvent with at
4-3 least $1,000,000 of net assets as of the date of its latest annual
4-4 or more recent certified audited financial statement; and
4-5 (B) [(b)] investment in any one mutual fund may
4-6 not exceed 15 percent of the insurer's capital and surplus;
4-7 (8) in [and]
4-8 [(c) the aggregate of all investments made under this
4-9 subsection shall not exceed 25 percent of the insurer's assets.]
4-10 [7. In] addition to the investments in Canada
4-11 authorized in other subdivisions [subsections] of this subsection
4-12 [section], investments in other foreign countries, [or in]
4-13 commonwealths, territories or possessions of the United States, or
4-14 [in] foreign securities originating in such foreign countries,
4-15 commonwealths, territories or possessions of the United States,
4-16 provided that:
4-17 (A) [(a)] such investments are similar to those
4-18 authorized for investment within the United States or Canada by
4-19 other provisions of this subsection [section] and, if debt
4-20 obligations, are rated one or two by the Securities Valuation
4-21 Office of the National Association of Insurance Commissioners;
4-22 [and]
4-23 (B) [(b)] the aggregate amount of foreign
4-24 investments held by the insurer under this subsection in a single
4-25 foreign jurisdiction does not exceed either 10 percent of its
4-26 admitted assets as to a foreign jurisdiction that has a sovereign
4-27 debt rating of Securities Valuation Office 1 by the Securities
4-28 Valuation Office of the National Association of Insurance
4-29 Commissioners or five percent of its admitted assets as to any
4-30 other foreign jurisdiction; [and]
4-31 (C) [(c)] such investments when added to the
4-32 amount of similar investments made within the United States and
4-33 Canada and any amounts authorized by Article 2.10-2 of this Code do
4-34 not result in the combined total of such investments exceeding the
4-35 limitations specified elsewhere in this subsection [section]; and
4-36 (D) [(d)] such investments may not exceed the
4-37 sum of:
4-38 (i) the amounts authorized by Article
4-39 2.10-2 of this Code; and
4-40 (ii) 20 percent of the insurer's assets;
4-41 (9) in [. 8. In] loans upon the pledge of any
4-42 mortgage, stock, bonds or other evidence of indebtedness acceptable
4-43 as investments under the terms of this Article, if the current
4-44 value of such mortgage, stock, bonds or other evidence of
4-45 indebtedness is at least twenty-five per cent (25%) more than the
4-46 amount loaned thereon;
4-47 (10) in [9. In] interest-bearing notes or bonds of
4-48 The University of Texas issued under the laws of this state [and by
4-49 virtue of Chapter 40, Acts of the 43rd Legislature, Second Called
4-50 Session];
4-51 (11) in [10. (a) In] real estate to the extent as
4-52 elsewhere authorized by this Code; provided that:
4-53 (A) any [(b) Any] such company with admitted
4-54 assets in excess of $500,000,000.00 may own other investment real
4-55 property or participations therein, which must be materially
4-56 enhanced in value by the construction of durable, permanent type
4-57 buildings and other improvements costing an amount at least equal
4-58 to the cost of such real property, exclusive of buildings and
4-59 improvements at the time of acquisition, or by the construction of
4-60 such buildings and improvements which must be commenced within two
4-61 years of the date of acquisition of such real property;
4-62 [provided,] however, nothing in this Article shall allow ownership
4-63 of, development of, or equity interest in any residential property
4-64 or subdivision, single or multiunit family dwelling property, or
4-65 undeveloped real estate for the purpose of subdivision for or
4-66 development of residential, single or multiunit family dwellings,
4-67 except those properties acquired as provided in Article 6.08 of
4-68 this Code, and such ownership, development, or equity interests
4-69 shall be specifically prohibited;
5-1 (B) the [(c) The] total amount invested by any
5-2 such company in all such investment real property and improvements
5-3 thereof shall not exceed fifteen per cent (15%) of its admitted
5-4 assets which are in excess of $500,000,000.00; [, provided,]
5-5 however, [that] the amount invested in any one such property and
5-6 its improvements or interest therein shall not exceed five per cent
5-7 (5%) of its admitted assets which are in excess of $500,000,000.00.
5-8 The admitted assets of the company at any time shall be determined
5-9 from its annual statements made as of the last preceding December
5-10 31 and filed with the department [State Board of Insurance] as
5-11 required by law. The value of any investment made under this
5-12 Article shall be subject to the appraisal provision set forth in
5-13 [Paragraph 5 of] Article 6.08 of this Code;
5-14 (C) the [(d) The] investment authority granted
5-15 by Paragraphs (A) and (B) [(b) and (c)] of this subdivision
5-16 [Paragraph 10] is in addition to and separate and apart from that
5-17 granted by Article 6.08 of this Code; [, provided,] however, [that]
5-18 no such company shall make any investment in such real estate
5-19 which, when added to those properties described in [Paragraph 1 of]
5-20 Article 6.08 of this Code, would be in excess of the limitations
5-21 provided by [Paragraph 5 of] Article 6.08 of this Code; and
5-22 (D) the [(e) The] insurance companies defined
5-23 in Article 2.01 of this Code and other insurers specifically made
5-24 subject to the provisions of this Article shall not engage in the
5-25 business of a real estate broker or a real estate salesperson
5-26 [salesman] as defined by The Real Estate License Act [Chapter 1,
5-27 page 560, General Laws, Acts of the 46th Legislature, 1939]
5-28 (Article 6573a, Vernon's Texas Civil Statutes), except that such
5-29 insurers may hold, improve, maintain, manage, rent, lease, sell,
5-30 exchange, or convey any of the real property interests legally
5-31 owned as investments under this Code;
5-32 (12) in [11. In] equipment trust obligations or
5-33 certificates that are adequately secured or in other adequately
5-34 secured instruments evidencing an interest in transportation
5-35 equipment in whole or in part within the United States and a right
5-36 to receive determined portions of rental, purchase, or other fixed
5-37 obligatory payments for the use or purchase of the transportation
5-38 equipment; and
5-39 (13) in:
5-40 (A) [12. In] insured accounts and evidences of
5-41 indebtedness as defined and limited by Section 1, Chapter 618, page
5-42 1356, Acts of the 47th Legislature;
5-43 (B) [in] shares or share accounts as authorized
5-44 by Chapter 65, Finance Code [in Section 1, page 76, Acts 1939, 46th
5-45 Legislature];
5-46 (C) [in] insured or guaranteed obligations as
5-47 authorized in Chapter 230, [page 315,] Acts of the [1945,] 49th
5-48 Legislature, Regular Session, 1945 (Article 842a-1, Vernon's Texas
5-49 Civil Statutes);
5-50 (D) [in] bonds issued under the provisions
5-51 authorized by Section 9, Chapter 231, General Laws [page 774], Acts
5-52 of the [1933,] 43rd Legislature, Regular Session, 1933 (Article
5-53 1187a, Vernon's Texas Civil Statutes);
5-54 (E) [in] bonds issued under the authority of
5-55 Section 1, Chapter 1, page 427, General Laws, Acts of the [1939,]
5-56 46th Legislature, Regular Session, 1939 (Article 1269k-1, Vernon's
5-57 Texas Civil Statutes);
5-58 (F) [in] bonds and other indebtedness as
5-59 authorized by Sections 435.045 and 435.046, Government Code [in
5-60 Section 1, Chapter 3, page 494, Acts 1939, 46th Legislature];
5-61 (G) [in] "Municipal Bonds" issued under Sections
5-62 51.038 and 51.039, Water Code [and by virtue of Chapter 280, Acts
5-63 1929, 41st Legislature];
5-64 (H) [or in] bonds as authorized by Subchapter B,
5-65 Chapter 284, Transportation Code [Section 5, Chapter 122, page 219,
5-66 Acts 1949, 51st Legislature];
5-67 (I) [or in bonds as authorized by Section 10,
5-68 Chapter 159, page 326, Acts 1949, 51st Legislature; or in] bonds as
5-69 authorized by Section 19, Chapter 340, [page 655,] Acts of the
6-1 [1949,] 51st Legislature, Regular Session, 1949;
6-2 (J) [or in] bonds as authorized by Section 10,
6-3 Chapter 398, [page 737,] Acts of the [1949,] 51st Legislature,
6-4 Regular Session, 1949;
6-5 (K) [or in] bonds as authorized by Section 18,
6-6 Chapter 465, [page 855,] Acts of the [1949,] 51st Legislature,
6-7 Regular Session, 1949;
6-8 (L) [or in shares or share accounts authorized
6-9 in Chapter 534, page 966, Acts 1949, 51st Legislature; or in] bonds
6-10 as authorized by Section 24, Chapter 110, [page 193,] Acts of the
6-11 [1949,] 51st Legislature, Regular Session, 1949; and
6-12 (M) [together with] such other investments as
6-13 are now or may hereafter be specifically authorized by law.
6-14 (f) The percentage authorizations and limitations set forth
6-15 in this article apply only at the time of the original acquisition
6-16 of an investment or at the time a transaction is entered into and
6-17 do not thereafter apply to the insurer or the investment or
6-18 transaction except as provided by this subsection. An investment,
6-19 once qualified under this article, remains qualified
6-20 notwithstanding any refinancing, restructuring, or modification of
6-21 the investment; however, the insurer may not engage in that
6-22 refinancing, restructuring, or modification solely to circumvent
6-23 the requirements or limitations of this article.
6-24 (g) Notwithstanding Subsections (a)-(e) of this article:
6-25 (1) investment in all or any types of securities,
6-26 loans, obligations, or evidences of indebtedness of a single issuer
6-27 or borrower, including the issuer's or borrower's majority-owned
6-28 subsidiaries or parent or the majority-owned subsidiaries of that
6-29 parent, other than those authorized investments that either are
6-30 direct obligations of or are guaranteed by the full faith and
6-31 credit of the United States of America, this state, or a political
6-32 subdivision of this state, or are insured by any agency of the
6-33 United States of America or this state, may not in the aggregate
6-34 exceed five percent of the insurer's total assets, other than
6-35 investments described by Subsection (e)(5) or (e)(7) of this
6-36 article; and
6-37 (2) the quantitative limitations regarding any
6-38 investment authorized by this article may be waived by prior
6-39 written approval of the commissioner if:
6-40 (A) a hearing is held to determine whether
6-41 approval should be granted;
6-42 (B) the applicant seeking approval establishes
6-43 that unreasonable or unnecessary loss or harm to the insurer will
6-44 result if approval is withheld;
6-45 (C) the excessive investment will not have a
6-46 material adverse effect on the insurer;
6-47 (D) the size of the investment is reasonable in
6-48 relation to the insurer's assets, capital, surplus, and
6-49 liabilities; and
6-50 (E) the commissioner's prior authorization may
6-51 treat the resulting excessive investment as an asset not admitted.
6-52 SECTION 2. Chapter 2, Insurance Code, is amended by adding
6-53 Article 2.10-3A to read as follows:
6-54 Art. 2.10-3A. SECURITIES LENDING; REPURCHASE, REVERSE
6-55 REPURCHASE, AND DOLLAR ROLL TRANSACTIONS
6-56 Sec. 1. DEFINITIONS. In this article:
6-57 (1) "Dollar roll transaction" means two simultaneous
6-58 transactions, with settlement dates not more than 96 days apart, in
6-59 one of which an insurer sells to a business entity and in the other
6-60 the insurer is obligated to purchase from the same business entity
6-61 substantially similar securities of the following types:
6-62 (A) mortgage-backed securities issued, assumed,
6-63 or guaranteed by the Government National Mortgage Association, the
6-64 Federal National Mortgage Association, or the Federal Home Loan
6-65 Mortgage Corporation or their successor organizations; or
6-66 (B) other mortgage-backed securities described
6-67 under Section 106, Title I, Secondary Mortgage Market Enhancement
6-68 Act of 1984 (15 U.S.C. Section 77r-1), as amended.
6-69 (2) "Repurchase transaction" means a transaction in
7-1 which an insurer purchases securities from a business entity that
7-2 is obligated to repurchase the purchased securities or equivalent
7-3 securities from the insurer at a specified price, either within a
7-4 specified period or on demand.
7-5 (3) "Reverse repurchase transaction" means a
7-6 transaction in which an insurer sells securities to a business
7-7 entity and is obligated to repurchase the sold securities or
7-8 equivalent securities from the business entity at a specified
7-9 price, either within a specified period or on demand.
7-10 (4) "Securities lending transaction" means a
7-11 transaction in which securities are loaned by an insurer to a
7-12 business entity that is obligated to return the loaned securities
7-13 or equivalent securities to the insurer, either within a specified
7-14 period or on demand.
7-15 Sec. 2. TRANSACTIONS AUTHORIZED. (a) An insurer may engage
7-16 in securities lending, repurchase, reverse repurchase, and dollar
7-17 roll transactions as provided by this article.
7-18 (b) The insurer shall enter into a written agreement for
7-19 each transaction, other than a dollar roll transaction, that
7-20 requires each transaction to terminate not later than the first
7-21 anniversary of the inception of the transaction.
7-22 Sec. 3. TRANSACTION REQUIREMENTS. (a) Cash received in a
7-23 transaction under this article must be:
7-24 (1) invested in accordance with this article and in a
7-25 manner that recognizes the liquidity needs of the transaction; or
7-26 (2) used by the insurer for the insurer's general
7-27 corporate purposes.
7-28 (b) While the transaction is outstanding, the insurer, or
7-29 the insurer's agent or custodian, shall maintain, as to acceptable
7-30 collateral received in a transaction under this section, either
7-31 physically or through the book entry systems of the Federal
7-32 Reserve, Depository Trust Company, Participants Trust Company, or
7-33 other securities depositories approved by the commissioner:
7-34 (1) possession of the acceptable collateral;
7-35 (2) a perfected security interest in the acceptable
7-36 collateral; or
7-37 (3) in the case of a jurisdiction outside of the
7-38 United States, title to, or rights of a secured creditor to, the
7-39 acceptable collateral.
7-40 (c) An insurer may not enter into a transaction under this
7-41 article if, as a result of and after giving effect to the
7-42 transaction, the aggregate amount of securities loaned, sold to, or
7-43 purchased from:
7-44 (1) any one business entity counterparty under this
7-45 article would exceed five percent of the insurer's assets; or
7-46 (2) all business entities under this article would
7-47 exceed 40 percent of the insurer's assets.
7-48 (d) In computing the amount sold to or purchased from a
7-49 business entity counterparty under a repurchase or reverse
7-50 repurchase transaction, effect may be given to netting provisions
7-51 under a master written agreement.
7-52 (e) The amount of collateral required for a securities
7-53 lending, repurchase, or reverse repurchase transaction is the
7-54 amount required under the Purposes and Procedures Manual of the
7-55 Securities Valuation Office or a successor publication.
7-56 (f) The commissioner may adopt reasonable rules and orders
7-57 consistent with, and as necessary to implement, this article.
7-58 SECTION 3. Article 2.10-4, Insurance Code, is amended to
7-59 read as follows:
7-60 Art. 2.10-4. RISK-LIMITING PROVISIONS
7-61 Sec. 1. DEFINITIONS. In this article:
7-62 (1) "Acceptable collateral" means:
7-63 (A) cash;
7-64 (B) cash equivalents;
7-65 (C) letters of credit and direct obligations;
7-66 and
7-67 (D) securities that are fully guaranteed as to
7-68 principal and interest by the United States.
7-69 (2) "Business entity" includes a sole proprietorship,
8-1 corporation, limited liability company, association, partnership,
8-2 joint stock company, joint venture, mutual fund, bank, trust, joint
8-3 tenancy, or other similar form of business organization, whether
8-4 organized for profit or not for profit.
8-5 (3) "Cap" means an agreement under which a seller is
8-6 obligated to make payments to the buyer with each payment based on
8-7 the amount by which a reference price or level or the performance
8-8 or value of one or more underlying interests exceeds a
8-9 predetermined number, sometimes called the strike rate or strike
8-10 price.
8-11 (4) "Cash equivalent" means an investment or security
8-12 that is short-term, highly rated, highly liquid, and readily
8-13 marketable. The term includes money market funds as described by
8-14 Article 2.10 of this code. For purposes of this subdivision:
8-15 (A) a short-term investment is an investment
8-16 with a remaining term to maturity of one year or less; and
8-17 (B) a highly rated investment is an investment
8-18 rated:
8-19 (i) "P-1" by Moody's Investors Service,
8-20 Inc.;
8-21 (ii) "A-1" by the Standard and Poor's
8-22 Division of the McGraw Hill Companies, Inc.; or
8-23 (iii) an equivalent rating by a nationally
8-24 recognized statistical rating organization recognized by the
8-25 Securities Valuation Office.
8-26 (5) "Collar" means an agreement to receive payments as
8-27 the buyer of an option, cap, or floor and to make payments as the
8-28 seller of a different option, cap, or floor.
8-29 (6)(A) "Counterparty exposure amount" means:
8-30 (i) for an over-the-counter derivative
8-31 instrument that is not entered into under a written master
8-32 agreement that provides for netting of payments owed by the
8-33 respective parties:
8-34 (a) the market value of the
8-35 over-the-counter derivative instrument if the liquidation of the
8-36 derivative instrument would result in a final cash payment to the
8-37 insurer; or
8-38 (b) zero if the liquidation
8-39 of the derivative instrument would not result in a final cash
8-40 payment to the insurer; or
8-41 (ii) for an over-the-counter derivative
8-42 instrument that is entered into under a written master agreement
8-43 that provides for netting of payments owed by the respective
8-44 parties and in which the domiciliary jurisdiction of the
8-45 counterparty is either in the United States or in a foreign
8-46 jurisdiction listed in the Purposes and Procedures Manual of the
8-47 Securities Valuation Office as eligible for netting, the greater
8-48 of:
8-49 (a) zero; or
8-50 (b) the net sum payable to
8-51 the insurer in connection with all derivative instruments subject
8-52 to the written master agreement on their liquidation in the event
8-53 of default by the counterparty under the master agreement, if there
8-54 are no conditions precedent to the obligations of the counterparty
8-55 to make such a payment and no setoff of amounts payable under any
8-56 other instrument or agreement.
8-57 (B) For purposes of this subdivision, the market
8-58 value or the net sum payable, as applicable, is determined at the
8-59 end of the most recent quarter of the insurer's fiscal year and is
8-60 reduced by the market value of acceptable collateral held by the
8-61 insurer or a custodian on the insurer's behalf.
8-62 (7) "Derivative instrument" means an agreement,
8-63 option, or instrument, or any series or combination of agreements,
8-64 options, or instruments, to make or take delivery of, or assume or
8-65 relinquish, a specified amount of one or more underlying interests,
8-66 or instead to make a cash settlement, or that has a price,
8-67 performance, value, or cash flow based primarily on the actual or
8-68 expected price, yield, level, performance, value, or cash flow of
8-69 one or more underlying interests. The term includes an option, a
9-1 warrant not otherwise permitted to be held by the insurer under
9-2 this article, a cap, a floor, a collar, a swap, a swaption, a
9-3 forward, a future, and any other substantially similar agreement,
9-4 option, or instrument or series or combinations of those
9-5 agreements, options, or instruments. The term does not include a
9-6 collateralized mortgage obligation, another asset-backed security,
9-7 a principal-protected structured security, a floating rate
9-8 security, an instrument that an insurer is otherwise permitted to
9-9 invest in or receive under this article other than under this
9-10 definition, or any debt obligation of the insurer.
9-11 (8) "Derivative transaction" means a transaction that
9-12 involves the use of one or more derivative instruments. The term
9-13 does not include a dollar roll transaction, repurchase transaction,
9-14 reverse repurchase transaction, or securities lending transaction.
9-15 (9) "Floor" means an agreement under which the seller
9-16 is obligated to make payments to the buyer and in which each
9-17 payment is based on the amount by which a predetermined number,
9-18 sometimes called the floor rate or price, exceeds a reference
9-19 price, level, performance, or value of one or more underlying
9-20 interests.
9-21 (10) "Forward" means an agreement to make or take
9-22 delivery in the future of one or more underlying interests, or
9-23 effect a cash settlement, based on the actual or expected price,
9-24 level, performance, or value of those underlying interests. The
9-25 term does not include a future or a spot transaction effected
9-26 within customary settlement periods, when-issued purchases, or
9-27 other similar cash market transactions.
9-28 (11) "Future" means an agreement that is traded on a
9-29 futures exchange to make or take delivery of, or effect a cash
9-30 settlement, based on the actual or expected price, level,
9-31 performance, or value of, one or more underlying interests.
9-32 (12) "Futures exchange" means a foreign or domestic
9-33 exchange, contract market, or board of trade on which trading in
9-34 futures is conducted and that, in the United States, is authorized
9-35 to conduct that trading by the Commodities Futures Trading
9-36 Commission or any successor organization.
9-37 (13) "Hedging transaction" means a derivative
9-38 transaction that is entered into and maintained to manage:
9-39 (A) the risk of a change in the value, yield,
9-40 price, cash flow, or quantity of assets or liabilities, or a
9-41 portfolio of assets or liabilities, that the insurer has acquired
9-42 or incurred or anticipates acquiring or incurring; or
9-43 (B) the currency exchange rate risk related to
9-44 assets or liabilities, or a portfolio of assets or liabilities,
9-45 that an insurer has acquired or incurred or anticipates acquiring
9-46 or incurring.
9-47 (14) "Income generation transaction" means a
9-48 derivative transaction that is entered into to generate income.
9-49 The term does not include a derivative transaction entered into as
9-50 a hedging transaction or a replication transaction.
9-51 (15) "Market value" means the price for a security or
9-52 derivative instrument obtained from a generally recognized source
9-53 or the most recent quotation from such a source or, if a generally
9-54 recognized source does not exist, the price for the security or
9-55 derivative instrument as determined under the terms of the
9-56 instrument or in good faith by the insurer, as can be reasonably
9-57 demonstrated to the commissioner on request, plus accrued but
9-58 unpaid income on the security or derivative instrument to the
9-59 extent not included in the price as of the applicable date.
9-60 (16) "Option" means an agreement under which the buyer
9-61 has the right to buy or receive, referred to as a "call option,"
9-62 sell or deliver, referred to as a "put option," enter into, extend
9-63 or terminate, or effect a cash settlement based on the actual or
9-64 expected price, spread, level, performance, or value of one or more
9-65 underlying interests.
9-66 (17) "Over-the-counter derivative instrument" means a
9-67 derivative instrument entered into with a business entity other
9-68 than through a securities exchange or futures exchange or cleared
9-69 through a qualified clearinghouse.
10-1 (18) "Potential exposure" means:
10-2 (A) as to a futures position, the amount of
10-3 initial margin required for that position; or
10-4 (B) as to swaps, collars, and forwards, one-half
10-5 percent times the notional amount times the square root of the
10-6 remaining years to maturity.
10-7 (19) "Qualified clearinghouse" means a clearinghouse
10-8 that is subject to the rules of a securities exchange or a futures
10-9 exchange and provides clearing services, including acting as a
10-10 counterparty to each of the parties to a transaction in such a
10-11 manner that the parties no longer have credit risk to each other.
10-12 (20) "Replication transaction" means a derivative
10-13 transaction or combination of derivative transactions effected
10-14 either separately or in conjunction with cash market investments
10-15 included in the insurer's investment portfolio to replicate the
10-16 risks and returns of another authorized transaction, investment, or
10-17 instrument or to operate as a substitute for a cash market
10-18 transaction. The term does not include a derivative transaction
10-19 entered into by the insurer as a hedging transaction.
10-20 (21) "Securities exchange" means:
10-21 (A) an exchange registered as a national
10-22 securities exchange or a securities market registered under the
10-23 Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.), as
10-24 amended;
10-25 (B) the Private Offerings Resales and Trading
10-26 through Automated Linkages (PORTAL); or
10-27 (C) a designated offshore securities market as
10-28 defined by Securities Exchange Commission Regulation S, 17 C.F.R.
10-29 Part 230, as amended.
10-30 (22) "Swap" means an agreement to exchange or to net
10-31 payments at one or more times based on the actual or expected
10-32 price, yield, level, performance, or value of one or more
10-33 underlying interests.
10-34 (23) "Swaption" means an option to purchase or sell a
10-35 swap at a given price and time or at a series of prices and times.
10-36 The term does not include a swap with an embedded option.
10-37 (24) "Underlying interest" means the assets,
10-38 liabilities, or other interests, or a combination of those assets,
10-39 liabilities, or other interests, that underlie a derivative
10-40 instrument. The term includes securities, currencies, rates,
10-41 indices, commodities, or derivative instruments.
10-42 (25) "Warrant" means an instrument under which the
10-43 holder has the right to purchase or sell the underlying interest at
10-44 a given price and time or at a series of prices and times stated in
10-45 the warrant.
10-46 Sec. 2. AUTHORIZED RISK CONTROL TRANSACTIONS; GENERAL
10-47 REQUIREMENTS RELATING TO DERIVATIVE TRANSACTIONS. (a) Except as
10-48 provided by Section 8 of this article, an [Subject to the rules and
10-49 regulations promulgated by the State Board of Insurance and the
10-50 limitations contained in Subsections (b) and (d) of this article
10-51 with respect to assets owned by an insurer, an] insurer may, for
10-52 purposes of protecting the [such] assets owned by the insurer
10-53 against the risk of changing asset values or interest rates and for
10-54 risk reduction and income generation, engage in risk control
10-55 transactions authorized under this article [only, buy put options
10-56 or sell call options and terminate the same, buy or sell interest
10-57 rate futures contracts and options on interest rate futures
10-58 contracts, or utilize such other instruments or devices as are
10-59 consistent with this article and are traded on an established
10-60 exchange regulated by the Securities and Exchange Commission or the
10-61 Commodities Futures Trading Commission].
10-62 (b) Before entering into a derivative transaction, the board
10-63 of directors of the insurer must approve a derivative use plan as
10-64 part of the insurer's investment plan otherwise required by law.
10-65 The derivative use plan must:
10-66 (1) describe investment objectives and risk
10-67 constraints, such as counterparty exposure amounts;
10-68 (2) define permissible transactions, identifying the
10-69 risks to be hedged and the assets or liabilities being replicated;
11-1 and
11-2 (3) require compliance with the insurer's internal
11-3 control procedures established under Subsection (c) of this
11-4 section.
11-5 (c) The insurer shall establish written internal control
11-6 procedures that require:
11-7 (1) a quarterly report to be made to the board of
11-8 directors that reviews:
11-9 (A) all derivative transactions entered into,
11-10 outstanding, or closed out;
11-11 (B) the results and effectiveness of the
11-12 derivatives program; and
11-13 (C) the credit risk exposure to each
11-14 counterparty for over-the-counter derivative transactions based on
11-15 the counterparty exposure amount;
11-16 (2) a system for determining whether hedging or
11-17 replication strategies used by the insurer have been effective;
11-18 (3) a system of reports, at least as frequent as
11-19 monthly, to the insurer's management, that include:
11-20 (A) a description of each derivative transaction
11-21 entered into, outstanding, or closed out during the period since
11-22 the last report;
11-23 (B) the purpose of each outstanding derivative
11-24 transaction;
11-25 (C) a performance review of the derivative
11-26 instrument program; and
11-27 (D) the counterparty exposure amount for
11-28 over-the-counter derivative transactions;
11-29 (4) written authorizations that identify the
11-30 responsibilities and limitations of authority of persons authorized
11-31 to effect and maintain derivative transactions; and
11-32 (5) appropriate documentation for each transaction,
11-33 including:
11-34 (A) the purpose of the transaction;
11-35 (B) the assets or liabilities to which the
11-36 transaction relates;
11-37 (C) the specific derivative instrument used in
11-38 the transaction;
11-39 (D) for over-the-counter derivative instrument
11-40 transactions, the name of the counterparty and the counterparty
11-41 exposure amount; and
11-42 (E) for exchange-traded derivative instruments,
11-43 the name of the exchange and the name of the firm that handled the
11-44 transaction.
11-45 (d) The insurer must be able to demonstrate to the
11-46 commissioner, on request, the intended hedging characteristics and
11-47 ongoing effectiveness of the derivative transaction or combination
11-48 of transactions through cash flow testing, duration analysis, or
11-49 any other appropriate analysis.
11-50 (e) The insurer shall include all counterparty exposure
11-51 amounts in determining compliance with the limitations of this
11-52 article.
11-53 (f) An insurer may purchase or sell one or more derivative
11-54 instruments to offset, in whole or in part, a derivative instrument
11-55 previously purchased or sold without regard to the quantitative
11-56 limitations of this article if the offsetting transaction uses the
11-57 same type of derivative instrument as the derivative instrument
11-58 being offset.
11-59 Sec. 3. REQUIREMENTS RELATING TO HEDGING TRANSACTIONS. (a)
11-60 Not later than the 10th day before the date on which an insurer is
11-61 scheduled to enter into an initial hedging transaction, the insurer
11-62 shall notify the commissioner in writing that:
11-63 (1) the insurer's board of directors has adopted an
11-64 investment plan that authorizes hedging transactions; and
11-65 (2) all hedging transactions will comply with this
11-66 article.
11-67 (b) An insurer engaged in hedging transactions on September
11-68 1, 1999, shall send to the commissioner a notice containing the
11-69 statements required by Subsection (a) of this section not later
12-1 than October 1, 1999.
12-2 (c) After the notice under Subsection (a) or (b), the
12-3 insurer may enter into hedging transactions under this article, if
12-4 as a result of and after giving effect to each hedging transaction:
12-5 (1) the aggregate statement value of all outstanding
12-6 options, caps, floors, swaptions, and warrants that are not
12-7 attached to another financial instrument purchased by the insurer,
12-8 but not including collars, under this article does not exceed seven
12-9 and one-half percent of the insurer's assets;
12-10 (2) the aggregate statement value of all outstanding
12-11 options, swaptions, warrants, caps, and floors, but not including
12-12 collars, written by the insurer under this article does not exceed
12-13 three percent of the insurer's assets; and
12-14 (3) the aggregate potential exposure of all
12-15 outstanding collars, swaps, forwards, and futures entered into or
12-16 acquired by the insurer under this article does not exceed six and
12-17 one-half percent of the insurer's assets.
12-18 (d) If a hedging transaction entered into under this section
12-19 is not in compliance with this article or, if continued, may create
12-20 a hazardous financial condition to the insurer that affects the
12-21 insurer's policyholders or creditors or the public, the
12-22 commissioner may, after notice and an opportunity for a hearing,
12-23 order the insurer to take action that the commissioner determines
12-24 is reasonably necessary to:
12-25 (1) rectify a hazardous financial condition; or
12-26 (2) prevent an impending hazardous financial condition
12-27 from occurring.
12-28 Sec. 4. REQUIREMENTS RELATING TO INCOME GENERATION
12-29 TRANSACTIONS. (a) An insurer may enter into an income generation
12-30 transaction only as provided by this section.
12-31 (b) An insurer may enter into an income generation
12-32 transaction only if, as a result of and after giving effect to the
12-33 transaction, the aggregate statement value of admitted assets that
12-34 are then subject to call or that generate the cash flows for
12-35 payments required to be made by the insurer under caps and floors
12-36 sold by the insurer and then outstanding under this article, plus
12-37 the statement value of admitted assets underlying derivative
12-38 instruments then subject to calls sold by the insurer and
12-39 outstanding under this article, plus the purchase price of assets
12-40 subject to puts then outstanding under this article, does not
12-41 exceed 10 percent of the insurer's assets.
12-42 (c) The transaction must be a sale of:
12-43 (1) a call option on assets that meets the
12-44 requirements of Subsection (d);
12-45 (2) a put option on assets that meets the requirements
12-46 of Subsection (e);
12-47 (3) a call option on a derivative instrument,
12-48 including a swaption that meets the requirements of Subsection (f);
12-49 or
12-50 (4) a cap or floor that meets the requirements of
12-51 Subsection (g).
12-52 (d) If the transaction is a sale of a call option on assets,
12-53 the insurer must hold or have a currently exercisable right to
12-54 acquire the underlying assets during the entire period that the
12-55 option is outstanding.
12-56 (e) If the transaction is a sale of a put option on assets,
12-57 the insurer must hold sufficient cash, cash equivalents, or
12-58 interests in a short-term investment pool to be able to purchase
12-59 the underlying assets on exercise of the option during the entire
12-60 period that the option is outstanding, and must be able to hold the
12-61 underlying assets in the insurer's portfolio. If the total market
12-62 value of all put options sold by the insurer exceeds two percent of
12-63 the insurer's assets, the insurer shall set aside, under a
12-64 custodial or escrow agreement, cash or cash equivalents that have a
12-65 market value equal to the amount of the insurer's put option
12-66 obligations in excess of two percent of the insurer's assets during
12-67 the entire period the option is outstanding.
12-68 (f) If the transaction is a sale of a call option on a
12-69 derivative instrument, including a swaption, the insurer must hold
13-1 or have a currently exercisable right to acquire assets generating
13-2 the cash flow necessary to make any payments for which the insurer
13-3 is liable under the underlying derivative instrument during the
13-4 entire period that the call option is outstanding, and must be able
13-5 to enter into the underlying derivative transaction for the
13-6 insurer's portfolio.
13-7 (g) If the transaction is a sale of a cap or a floor, the
13-8 insurer must hold or have a currently exercisable right to acquire
13-9 assets generating the cash flow necessary to make any payments for
13-10 which the insurer is liable under the cap or floor during the
13-11 entire period that the cap or floor is outstanding.
13-12 Sec. 5. REQUIREMENTS RELATING TO REPLICATION TRANSACTIONS.
13-13 (a) An insurer may enter into a replication transaction only with
13-14 the prior written approval of the commissioner. To be eligible for
13-15 approval by the commissioner:
13-16 (1) the insurer must be otherwise authorized to
13-17 invest its funds under this chapter in the asset being replicated;
13-18 and
13-19 (2) the asset being replicated must be subject to all
13-20 the provisions and limitations on the making of the transaction
13-21 specified by this article relating to investments by the insurer as
13-22 if the transaction constituted a direct investment by the insurer
13-23 in the replicated asset.
13-24 (b) The commissioner may adopt rules regarding replication
13-25 transactions as necessary to implement this section.
13-26 Sec. 6. TRADING REQUIREMENTS. Each derivative instrument
13-27 must be:
13-28 (1) traded on a securities exchange;
13-29 (2) entered into with, or guaranteed by, a business
13-30 entity;
13-31 (3) issued or written by, or entered into with, the
13-32 issuer of the underlying interest on which the derivative
13-33 instrument is based; or
13-34 (4) in the case of futures, traded through a broker
13-35 who is registered as a futures commission merchant under the
13-36 Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended, or
13-37 who is exempt from that registration under 17 C.F.R. Rule 30.10,
13-38 adopted under the Commodity Exchange Act (7 U.S.C. Section 1 et
13-39 seq.), as amended [An insurer may engage in the purchase of put
13-40 options or sale of call options and terminate such option, only
13-41 with regard to:]
13-42 [(1) securities owned by the insurer; or]
13-43 [(2) securities which the insurer may obtain through
13-44 exercise of warrants or conversion rights held by the insurer.]
13-45 [(c) Subject to the rules and regulations promulgated by the
13-46 State Board of Insurance and the limitations contained in
13-47 Subsection (d) of this article with respect to cash flows
13-48 reasonably anticipated to be available for investment purposes
13-49 within the succeeding 12 months, which anticipation cannot exceed
13-50 an amount equal to 10 percent of such insurer's admitted assets, an
13-51 insurer may, for purposes of protecting such cash flows against the
13-52 risk of changing asset values or interest rates and for risk
13-53 reduction only, buy or sell interest rate futures contracts and
13-54 options on interest rate futures contracts or utilize such other
13-55 instruments or devices as are consistent with this article and are
13-56 traded on an established exchange regulated by the Securities and
13-57 Exchange Commission or the Commodities Futures Trading Commission.]
13-58 [(d) An insurer may engage in the practices authorized by
13-59 this article only if prior thereto the board of directors of such
13-60 insurer has adopted a written policy which specifies:]
13-61 [(1) the types of risk-limiting practices approved for
13-62 such insurer;]
13-63 [(2) the aggregate maximum limits in such instruments,
13-64 which maximum limits must be reasonably related to the insurer's
13-65 business needs and its capacity to fulfill its obligations
13-66 thereunder;]
13-67 [(3) the specific assets or class of assets or cash
13-68 flows for which risk-limiting practices may be employed; and]
13-69 [(4) that the insurer's accounting or investment
14-1 records shall specifically identify the assets or cash flows for
14-2 which each risk-limiting practice is used].
14-3 Sec. 7. RULES. [(e)] The commissioner may [State Board of
14-4 Insurance is hereby authorized to] adopt [such reasonable] rules
14-5 consistent [and regulations, not inconsistent] with [the provisions
14-6 of] this article that[, which] prescribe reasonable limits,
14-7 standards, and guidelines with respect to the [such] risk-limiting
14-8 transactions authorized under this article [devices] and plans
14-9 related to those transactions [thereto].
14-10 Sec. 8. NOTICE TO COMMISSIONER. (a) Before engaging in a
14-11 transaction authorized under this article, an insurer that has a
14-12 statutory net capital and surplus of less than $10 million shall
14-13 file a written notice with the commissioner describing the need to
14-14 engage in the transaction, the lack of acceptable alternatives, and
14-15 the insurer's plan to engage in the transaction. If the
14-16 commissioner does not issue an order prohibiting the insurer from
14-17 engaging in the transaction within 90 days after the date of
14-18 receipt of the insurer's notice, the insurer may engage in the
14-19 transaction described in the notice.
14-20 (b) An insurer with a statutory net capital and surplus less
14-21 than the minimum amount of capital and surplus required for a new
14-22 charter and certificate of authority for the same type of insurer
14-23 may not engage in the transactions authorized under this article.
14-24 (c) For purposes of this section, net capital and surplus
14-25 are determined by the most recent financial statement of the
14-26 insurer required to be filed with the department.
14-27 SECTION 4. Article 2.10-3, Insurance Code, is repealed.
14-28 SECTION 5. This Act takes effect September 1, 1999.
14-29 SECTION 6. The importance of this legislation and the
14-30 crowded condition of the calendars in both houses create an
14-31 emergency and an imperative public necessity that the
14-32 constitutional rule requiring bills to be read on three several
14-33 days in each house be suspended, and this rule is hereby suspended.
14-34 * * * * *