BILL ANALYSIS

 

 

                                                                                                                                    C.S.H.B. 3839

                                                                                                                                           By: Eiland

                                                                                                                                             Insurance

                                                                                                        Committee Report (Substituted)

 

BACKGROUND AND PURPOSE

 

Major national and regional insurers have been exiting the coastal areas, leaving many Texans with limited options for homeowners coverage.  One of the reasons that has been cited for the exodus is concerns over their concentration of exposures. 

 

There are mechanisms that have effectively provided capacity solutions in other states. These mechanisms include state sponsored investments in new capacity through matching surplus debentures for new specialty companies and others.

 

Certified Capital Companies (CAPCO) were created as a result of Senate Bill 601, which was passed in 2001 by the 77th Texas Legislature.  These CAPCOs were established to promote economic development in Texas.  C.S.H.B. 3839 uses CAPCOs to promote new companies to write property insurance in the coastal counties.

 

RULEMAKING AUTHORITY

 

This bill grants specific rulemaking authority to the commissioner of the Texas Department of Insurance in Section 1 of  the bill (Sections 229.051, 229.053, of the Insurance Code) and to the Comptroller in Section 1 of the bill (Sections 229.052, 229.102 of the Insurance Code).

 

ANALYSIS

 

SECTION 1 adds Chapter 229  to Subtitle B, Title 3 of the Insurance Code.

 

Section 229.001 defines the terms to be used in this chapter.

 

Section 229.002 defines affiliate for this chapter.

 

Section 229.051 grants the Comptroller the authority to administer the chapter provided that the Commissioner of Insurance administer the licensing of any qualified insurance carrier described by section 229.201 and adopt carrier licensing rules under Section 229.053.

Section 229.052 grants rulemaking authority to the Comptroller to implement the subchapter including rules that establish application procedures, facilitate the transfer or assignment of premium tax credits by certified investors, provide for the allocation of tax credits from certified insurance-capital companies.

 

Section 229.053 grants rulemaking authority to the Commissioner of Insurance to implement this chapter including rules that require as a condition of holding a certificate of authority that qualified insurance carriers implement catastrophe management plans to ensure the payment of insured claims resulting from not less than two reasonably anticipated probable maximum loss events, require that qualified insurance carriers offer coverage for  wind exposure, subject to a premium limit  equal to 10 percent of the insurer’s aggregate premiums, at rates that comply with Article 1.02 beginning not later than the third anniversary of the date the carrier obtained the certificate of authority to operate in this state, establish initial equity and capitalization requirements that must be at least $10 million in initial capital for qualifying insurance carriers, establish the percentage maximum limitation of business that may be written outside of first and second tier coastal counties, which may not exceed 50 percent of the qualified insurance carrier’s business, require the filing of rate information, provide for penalties, in addition to and cumulative of the penalties provided by this chapter, that require the disgorgement of capital and surplus to replenish the state’s general revenue if a qualified insurance carrier receives an investment of certified capital but fails to use that capital to write a substantial amount of insurance business in one or more first or second tier coastal counties.

 

Section 229.054 requires the comptroller and commissioner to each prepare a biennial report concerning the results of the implementation of this chapter and specifies what information  these reports must  include.  Requires the comptroller and commissioner to file the reports with the governor, the lieutenant governor, and the speaker of the house of representatives not later than December 15 of each even-numbered year.

 

Section 229.055  provides that  the program shall be promoted through the Texas Economic Development and Tourism Office in the Texas Business and Community Economic Development Clearinghouse.                

 

Section 229.101 lays out the application process for certification.  The applicant must file the application in a form prescribed by the comptroller and must be accompanied by a nonrefundable application fee of $7,500.  The application must include an audited balance sheet with an unqualified opinion from a CPA as of a date not more than 35 days before the date of application.

 

Section 229.102 provides that in order to qualify as a certified insurance-capital company, the applicant must have at the time of application an equity capitalization of at least $500,000 in unencumbered cash or cash equivalents,  at least two principals or persons employed to manage the funds must have at least 4 years of experience in the venture capital industry, and the applicant must satisfy any additional requirements imposed by Comptroller by rule. 

 

Section 229.103 prohibits insurers, groups of insurers, or other persons who may have state premium tax liability  from having certain ownership interests in and managing certain insurance entities.

 

Section 229.104 outlines the actions that the comptroller must take regarding the application.

 

Section 229.105 requires that a certified insurance capital company make certain qualified investments in order to maintain certification.

 

Section 229.106 outlines the requirements for reports and an audited financial statement that a certified insurance capital company must provide to the comptroller.

 

Section 229.107 requires each certified insurance-capital company to pay a non-refundable renewal fee of $5,000 to the comptroller not later than January 31 of each year, institutes a late fee, provides that a renewal fee is not required within six months of the date on which a company’s initial certification is issued.

 

Section 229.108 provides language that must be included in any offering material involving the sale of securities of  a certified capital company.               

 

Section 229.151 outlines the schedule of investment that a certified insurance capital company must follow.                   

 

Section 229.152 defines an early stage carrier and requires that a certified insurance capital company must place 50 percent of the qualified investments in early stage carriers.

 

Section 229.153 allows a certified insurance-capital company to place up to 50 percent of the amount of qualified investments in an existing qualified insurance carrier or carriers that do not qualify as early stage carriers.

 

Section 229.154 requires that certified capitol not invested in qualified investments be invested in certain ways, provides a list of allowable investments.

 

Section 229.155 Requires that the aggregate cumulative amount of all qualified investments

made by a certified insurance-capital company after the company’s allocation date shall be considered in the computation of the percentage requirements under this subchapter.  Allows a certified insurance-capital company to invest proceeds received from a qualified investment in another qualified investment, and provides that that investment counts toward any requirement of this chapter with respect to investments of certified capital.                       

 

Section 229.156 requires that a certified insurance capital company not make a qualified investment at a cost that is greater than 50 percent of the company’s total certified capital at the time of investment.

 

Section 229.157 outlines the requirements for distribution or payment by a certified capital company.  A qualified distribution means any distribution or payment from certified capital by a certified insurance-capital company in connection with the cost and expenses of forming, syndicating, managing, and operating the company so long as it is not made directly to a certified investor, and in connection with a projected increase in federal or state taxes to the extent that the increase is related to the ownership, management, or operation of the company.  A qualified distribution may be made at any time so long as a company has made qualified investments in an amount cumulatively equal to 100% of the company’s certified capital.  If a carrier in which a qualified investment is made, relocates its principal business operation to another state during the term of the certified insurance-capital company’s investment, the cumulative amount of qualified investments for the purposes of satisfying the above requirements is reduced by the amount of the qualified investments in the carrier that has relocated.  If the company relocates back in state within 90 days the above reduction does not apply.   

 

Section 229.158 allows a certified insurance capital company to make repayments of principal and interest on the company’s indebtedness without any restriction, notwithstanding section 229.157 (b), including repaying the company’s indebtedness on which the certified investors earned premium tax credits.

 

Section 229.201 defines a qualified insurance carrier as a carrier that complies with this section at the time the certified insurance-capital company’s first investment in the carrier.  The carrier must legally domiciled in this state and intend to remain, have the principal business operations in this state after receipt of the investment, hold a certificate of authority issued by the commissioner to engage in business as a property and casualty insurance company, receive from private sources that may be in the form of a surplus debenture and that match dollar for dollar all investments of certified capital.  If a surplus debenture is used as part of the capital structure, the debenture must provide for the repayment of principal not earlier that the fifth anniversary of the date of debenture and an interest rate that does not exceed the London Inter-Bank Offered Rate plus two percent subject to a maximum rate of seven percent.  The qualified insurance carrier must agree to use the qualified investments to write commercial and personal property insurance in one or more first or second tier coastal counties, support or establish a carrier to conduct business in one or more coastal counties, and support business operations in this state and the economic development of the state and its seacoast.  An early stage carrier or qualified insurance carrier is exempt from certain rate filings.  A qualified insurance carrier must employ 80 percent of the carrier employees in this state or pay 80 percent of its payroll to employees in this state.

 

Section 229.202 requires that a qualified insurance carrier at all times be primarily engaged in the business of selling commercial and personal property insurance in one or more Tier 1 and Tier 2 coastal counties and may not sell more than 50 percent of its insurance business in other counties.  The failure to comply with this section may result in penalties under Section 229.303 and the recapture and forfeiture of premium tax credits under Section 229.351.

 

Section 229.203 states that a qualified insurance carrier in which a certified insurance-capital company has invested must not move its principal business operations from this state before the 90th day of the investment to be considered a qualified investment.

 

Section 229.204 allows a certified insurance capital company to request a written opinion from the comptroller as to whether the entity in which the company proposes to invest is a qualified insurance carrier or an early stage carrier.   Requires the Department of Insurance to provide information requested by the comptroller to make such determinations. Requires that the comptroller shall make a determination and notify the company and sets out requirements and a timeline for response and provides that if the comptroller fails to notify the company with respect to the proposed investment within the required time frame, the entity in which the company proposes to invest is considered to be a qualified insurance carrier or early stage carrier, only for the purposes of the availability of tax credits under Subchapter F.

 

Section 229.205 outlines that a business that is classified as a qualified business at the time of the first investment remains classified as a qualified business and authorizes follow-on investments.  States that follow-on investments are qualified investments even if the business may not meet the definition of a qualified insurance carrier at the time of the follow-on investment, exception provided for a business that no longer has its principal business operation in this state.

 

Section 229.251 states that a certified investor who makes an investment of certified capital shall earn in the year of investment a vested credit against the state premium tax liability equal to 100 percent of the certified investor’s investment of certified capital subject to the limits in this chapter.  Beginning with the tax report due on March 1, 2011 for the 2010 tax year, a certified investor may take up to 25 percent of the vested premium tax credit in any taxable year.  The credit may not be applied to estimated payments due in 2010.                                                   

Section 229.252 places limits on the premium tax credits.  The credit may not exceed the state premium tax liability of the investor for the taxable year, though a certified investor may carry forward any unused credit indefinitely until the credits are used.

 

Section 229.253 requires a premium tax credit allocation claim be prepared and executed on a form provided by the comptroller, provides a time frame for filing the claim, and lists requirements of the form.  It also prohibits a premium tax credit for an investment that has not been funded.                                          

 

Section 229.254 limits the total limit of certified capital for which premium tax credits may be allowed under this chapter to $200 million and outlines details.

 

Section 229.255 outlines how the premium tax credit will be allocated if the total amount of credits claimed exceeds the amount of credits allowed under this chapter.  The comptroller shall allocate the total amount of credits allowed on a pro rata basis.  Formulas are provided.

 

Section 229.256 states that the certified capital may be treated as an admitted asset subject to applicable valuation procedures.     

 

Section 229.257 allows for the transfer or assignment of the premium tax credit only in compliance with rules adopted under section 229.052. The transfer or assignment of a premium tax credit does not affect the schedule for taking the premium tax credit under this chapter.

 

Section 229.258 states that a certified investor is not required to reduce the amount of premium tax included by the investor in connection with ratemaking for an insurance contract written in this state because of a reduction in the investor’s premium tax derived from premium tax credits granted under this chapter.                                

 

Section 229.259 provides that a tax credit allowed under this chapter and similar tax credits allowed by other states are not to be used in the computation of retaliatory taxes under Chapter 281.

 

Section 229.301 requires that the comptroller conduct an annual review of each certified insurance-capital company, sets out requirements for the review,  requires the certified insurance-capital company pay the cost.

 

Section 229.302 provides guidelines for the decertification of certified insurance-capital companies.                                

 

Section 229.303 provides for administrative penalties to be levied by the comptroller.  The amount of the penalty may not exceed $25,000. Sets out requirements for calculating the amount of the penalty, authorizes the attorney general to sue to collect the penalty, allows the company to request a redetermination, provides that a proceeding to impose a penalty is a contested case under Chapter 2001, Government Code.

 

Section 229.351outlines the procedures and requirements for recapture and forfeiture of the premium tax credit after decertification.

 

Section 229.352 requires the comptroller to send written notice to each certified investor whose premium tax credit is subject to recapture or forfeiture, using the address last shown on the investor’s last premium tax filing.

 

Section 229.353 authorizes indemnity agreements and the purchase of insurance against losses resulting from the recapture or forfeiture of the premium tax credit. Requires that any guaranty, indemnity, bond, insurance policy, or other payment undertaking made under this section may not be provided by more than one certified investor of the certified insurance-capital company or affiliate of the certified investor.

 

Section  2: Amends Article 4.51(12), Insurance Code, to provide that “qualified investment” includes surplus debentures issued by qualified insurance carriers authorized by Subchapter E, Chapter 229, provided that the surplus debentures do not have voting rights and do not constitute a majority of the issuing entity’s capital structure.

 

Section  3: Amends Subchapter B, Chapter 4 of the Insurance Code by adding Article 4.515.  Provides that notwithstanding Article 4.51 (9) (F) of this code, the limitation on a qualified business does not include investments in surplus debentures issued by qualified insurance carriers authorized by subchapter E, Chapter 229, provided that the surplus debentures do not have voting rights and do not constitute a majority of the issuing entity’s capital structure.

 

Section  4: As soon as practicable after the effective date, the comptroller and the commissioner of insurance shall adopt rules as required by Sections 292.052 and 229.053, as added by this Act.

 

Section  5:  Requires the comptroller to begin accepting applications for certification not later than November 1,2007; and accept premium tax credit allocation claims on behalf of certified investors on a date not later than January 1, 2008.  Not later than January 16, 2008, the comptroller shall notify each certified insurance-capital company of the amount of

tax credits allocated to each certified investor. Each certified insurance-capital company shall notify each certified investor of the investor ’s premium tax credit allocation. If a certified insurance-capital company does not receive an investment of certified capital equaling the amount of premium tax credits allocated to a certified investor for which it filed a premium tax credit allocation claim before the end of the 10th business day after the date of receipt of notice of allocation under Subsection (b) of this section, requires the company to notify the comptroller by overnight common carrier delivery service and that portion of capital allocated to the certified investor shall be forfeited.  Requires the comptroller to reallocate the forfeited capital

among the certified investors in the other certified insurance-capital companies that originally received an allocation so that the result after reallocation is the same as if the initial

allocation under this section had been performed without considering the premium tax credit allocation claims that were subsequently forfeited.

 

SECTION 6:  Provides that this Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this

Act takes effect September 1, 2007.

 

EFFECTIVE DATE

 

Upon passage, or, if the Act does not receive the necessary vote, the Act takes effect September 1, 2007.

 

 

COMPARISON OF ORIGINAL TO SUBSTITUTE

 

The committee substitute is a Legislative Council draft.  It makes technical corrections and renumbers accordingly. The new chapter added under Subtitle B, Title 3 of the Insurance Code is re-numbered “Chapter 229" in the substitute and all references to this chapter are re-numbered.  The caption changes to include; “providing an administrative penalty”.  In Section 229.053 the references to flood insurance are removed. Section 229.251 changes the date when tax credits may be taken.  It moves the date from 2009 to 2011.  Also, the exact language found in SECTIONS  2, 3, 4, 5 in the substitute is not in the original house bill.