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2005 Texas Insurance Code - Not Codified CHAPTER 2. INCORPORATION OF INSURANCE COMPANIES
INSURANCE CODE - NOT CODIFIED CHAPTER 2. INCORPORATION OF INSURANCE COMPANIES Art. 2.10. INVESTMENT OF FUNDS IN EXCESS OF MINIMUM CAPITAL AND MINIMUM SURPLUS.Article repealed effective April 1, 2007 (a) The board of directors of each insurer, or the corresponding authority designated by the charter, bylaws, or plan of operations of an insurer that does not have a board of directors, shall adopt a written investment plan consistent with the requirements of this article and Articles 2.08, 2.09, 2.10-1, 2.10-2, 2.10-3, 2.10-4, 2.10-5, 6.08, 8.18, and 8.19 of this code and the other applicable statutes governing investments by the insurer. The investment plan must: (1) specify the diversification of the insurer's investments designed to reduce the risk of large losses, by: (A) broad categories of investments, such as bonds and real estate loans; (B) kinds of investments, such as: (i) obligations of governments or business entities; (ii) mortgage-backed securities; and (iii) real estate loans on office, retail, industrial, or residential properties; (C) quality; (D) maturity; (E) type of industry; and (F) geographical areas, as to both domestic and foreign investments; (2) balance the safety of principal with yield and growth; (3) seek a reasonable relationship of assets and liabilities as to term and nature; and (4) be appropriate considering the capital and surplus and the business conducted by the insurer. (b) At least annually, the board of directors or other authority shall review the adequacy of the investment plan and the implementation of the plan. (c) The insurer shall maintain the investment plan in its principal office and shall provide the plan to the commissioner or the commissioner's designee on request. The commissioner or the commissioner's designee shall maintain the investment plan as a privileged and confidential document, and the plan is not subject to public disclosure. (d) The insurer shall maintain investment records covering each transaction. At all times, the insurer must be able to demonstrate to the department that its investments are within the limitations prescribed by the statutes described by Subsection (a) of this article. (e) No company except any writing life, health and accident insurance, organized under the laws of this state, shall invest its funds over and above its minimum capital and its minimum surplus, as provided in Article 2.02, except as otherwise provided in this Code, in any other manner than as follows: (1) as provided for the investment of its minimum capital and its minimum surplus in Article 2.08; (2) in bonds or other evidences of debt which at the time of purchase are interest-bearing and are issued by authority of law and are not in default as to principal or interest, of any state, Canada, or province of Canada, or in the stock of any National Bank, in stock of any State Bank of Texas whose deposits are insured by the Federal Deposit Insurance Corporation; provided, however, that if said funds are invested in the stock of a State Bank of Texas that not more than thirty-five per cent (35%) of the total outstanding stock of any one (1) State Bank of Texas may be so purchased by any one (1) insurance company; and provided further, that neither the insurance company whose funds are invested in said bank stock nor any other insurance company may invest its funds in the remaining stock of any such State Bank; (3) in bonds, notes, evidences of indebtedness or participations therein secured by a valid first lien upon real property or leasehold estate therein located in the United States of America, its states, commonwealths, territories, or possessions, provided that: (A) the amount of any such obligation secured by a first lien upon real property or leasehold estate therein shall not exceed ninety per cent (90%) of the value of such real property or leasehold estate therein, but the amount of such obligation may: (i) exceed ninety per cent (90%) but shall not exceed one hundred per cent (100%) of the value of such real property or leasehold estate therein if the insurer or one or more wholly owned subsidiaries of the insurer own in the aggregate a ten per cent (10%) or greater equity interest in such real property or leasehold estate therein; (ii) be ninety-five per cent (95%) of the value of such real property if it contains only a dwelling designed exclusively for occupancy by not more than four families for residential purposes, and the portion of the unpaid balance of such obligation which is in excess of an amount equal to ninety per cent (90%) of such value is guaranteed or insured by a mortgage insurance company licensed to do business in the State of Texas; or (iii) be greater than ninety per cent (90%) of the value of such real property to the extent the obligation is insured or guaranteed by the United States of America, or an agency or instrumentality thereof, the Federal Housing Administration pursuant to the National Housing Act of 1934, as amended (12 U.S.C. Sec. 1701 et seq.), or the State of Texas; and (B) the term of an obligation secured by a first lien upon a leasehold estate in real property and improvements situated thereon shall not exceed a period equal to four-fifths (4/5) of the then unexpired term of such leasehold estate, provided that: (i) the unexpired term of the leasehold estate must extend at least ten (10) years beyond the term of the obligation; and (ii) each obligation shall be payable in equal monthly, quarterly, semi-annual, or annual payments of principal plus accrued interest to the date of such principal payment, so that under either method of repayment such obligation will fully amortize during a period of time not to exceed four-fifths (4/5) of the then unexpired term of the security leasehold estate; (C) the amount of any one such obligation may not exceed ten per cent (10%) of the insurer's capital and surplus; and (D) the aggregate of investments made under this Subdivision (3) may not exceed thirty per cent (30%) of the insurer's assets; (4) in bonds or other interest-bearing evidences of debt of any county, municipality, road district, turnpike district or authority, water district, any subdivision of a county, incorporated city, town, school district, sanitary or navigation district, any municipally owned revenue water system, sewer system or electric utility company where special revenues to meet the principal and interest payments of such municipally owned revenue water system, sewer system or electric utility company bonds or other evidences of debt shall have been appropriated, pledged or otherwise provided for by such municipality, provided that: (A) before bonds or other evidences of debt of navigation districts shall be eligible investments such navigation district shall be located in whole or in part in a county containing a population of not less than 100,000 according to the last preceding Federal Census; and (B) the interest due on such navigation bonds or other evidences of debt of navigation districts must never have been defaulted; (5) in any type or form of savings deposits, time deposits, certificates of deposit, NOW accounts, and money market accounts in solvent banks, savings and loan associations, credit unions, and branches of those financial institutions, organized under the laws of the United States or of a state, if made in accordance with the laws or regulations applicable to those entities, provided that the amount of the deposits in any one bank, savings and loan association, or credit union may not exceed the greater of: (A) 20 percent of the insurer's capital and surplus; (B) the amount of federal or state deposit insurance coverage relating to that deposit; or (C) 10 percent of the amount of capital, surplus, and undivided profits of the entity receiving the deposits; (6) in the stocks, bonds, debentures, bills of exchange, evidence of indebtedness, or other commercial notes or bills and securities of any solvent partnership or solvent dividend paying corporation at time of purchase, incorporated under the laws of this state, any other state, the United States, Canada, or any province of Canada, which has not defaulted in the payment of any of its obligations for a period of five (5) years, immediately preceding the date of the investment; provided that: (A) such funds may not be invested in the stock of any oil, manufacturing or mercantile corporation organized under the laws of this state, unless such corporation has at the time of investment a net worth of not less than $250,000.00 nor in the stock of any oil, manufacturing or mercantile corporation not organized under the laws of this state, unless such corporation has a combined capital, surplus and undivided profits of not less than $2,500,000.00; (B) any such insurance company may invest its funds over and above its minimum capital stock, its minimum surplus, and all reserves required by law, in the stocks, bonds or debentures of any solvent corporation organized under the laws of this state, any other state, the United States, Canada, or any province of Canada; (C) no such insurance company shall invest any of its funds in its own stock or in any stock on account of which the holders or owners thereof may, in any event, be or become liable to any assessment, except for taxes; and (D) no such insurance company shall invest any of its funds in stocks, bonds or other securities issued by a corporation if a majority of the stock having voting powers of such issuing corporation is owned, directly or indirectly, by or for the benefit of one or more officers or directors of such insurance company; provided, however, that this paragraph shall not apply to any insurance company which has been in continuous operation for five (5) years; (7) in shares of mutual funds doing business under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), as amended, provided that: (A) mutual funds must be solvent with at least $1,000,000 of net assets as of the date of its latest annual or more recent certified audited financial statement; and (B) investment in any one mutual fund may not exceed 15 percent of the insurer's capital and surplus; (8) in addition to the investments in Canada authorized in other subdivisions of this subsection, investments in other foreign countries, commonwealths, territories or possessions of the United States, or foreign securities originating in such foreign countries, commonwealths, territories or possessions of the United States, provided that: (A) such investments are similar to those authorized for investment within the United States or Canada by other provisions of this subsection and, if debt obligations, are rated one or two by the Securities Valuation Office of the National Association of Insurance Commissioners; (B) the aggregate amount of foreign investments held by the insurer under this subsection in a single foreign jurisdiction does not exceed either 10 percent of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of Securities Valuation Office 1 by the Securities Valuation Office of the National Association of Insurance Commissioners or five percent of its admitted assets as to any other foreign jurisdiction; (C) such investments when added to the amount of similar investments made within the United States and Canada and any amounts authorized by Article 2.10-2 of this Code do not result in the combined total of such investments exceeding the limitations specified elsewhere in this subsection; and (D) such investments may not exceed the sum of: (i) the amounts authorized by Article 2.10-2 of this Code; and (ii) 20 percent of the insurer's assets; (9) in loans upon the pledge of any mortgage, stock, bonds or other evidence of indebtedness acceptable as investments under the terms of this Article, if the current value of such mortgage, stock, bonds or other evidence of indebtedness is at least twenty-five per cent (25%) more than the amount loaned thereon; (10) in interest-bearing notes or bonds of The University of Texas issued under the laws of this state; (11) in real estate to the extent as elsewhere authorized by this Code; provided that: (A) any such company with admitted assets in excess of $500,000,000.00 may own other investment real property or participations therein, which must be materially enhanced in value by the construction of durable, permanent type buildings and other improvements costing an amount at least equal to the cost of such real property, exclusive of buildings and improvements at the time of acquisition, or by the construction of such buildings and improvements which must be commenced within two years of the date of acquisition of such real property; however, nothing in this Article shall allow ownership of, development of, or equity interest in any residential property or subdivision, single or multiunit family dwelling property, or undeveloped real estate for the purpose of subdivision for or development of residential, single or multiunit family dwellings, except those properties acquired as provided in Article 6.08 of this Code, and such ownership, development, or equity interests shall be specifically prohibited; (B) the total amount invested by any such company in all such investment real property and improvements thereof shall not exceed fifteen per cent (15%) of its admitted assets which are in excess of $500,000,000.00; however, the amount invested in any one such property and its improvements or interest therein shall not exceed five per cent (5%) of its admitted assets which are in excess of $500,000,000.00. The admitted assets of the company at any time shall be determined from its annual statements made as of the last preceding December 31 and filed with the department as required by law. The value of any investment made under this Article shall be subject to the appraisal provision set forth in Article 6.08 of this Code; (C) the investment authority granted by Paragraphs (A) and (B) of this subdivision is in addition to and separate and apart from that granted by Article 6.08 of this Code; however, no such company shall make any investment in such real estate which, when added to those properties described in Article 6.08 of this Code, would be in excess of the limitations provided by Article 6.08 of this Code; and (D) the insurance companies defined in Article 2.01 of this Code and other insurers specifically made subject to the provisions of this Article shall not engage in the business of a real estate broker or a real estate salesperson as defined by The Real Estate License Act (Article 6573a, Vernon's Texas Civil Statutes), except that such insurers may hold, improve, maintain, manage, rent, lease, sell, exchange, or convey any of the real property interests legally owned as investments under this Code; (12) in equipment trust obligations or certificates that are adequately secured or in other adequately secured instruments evidencing an interest in transportation equipment in whole or in part within the United States and a right to receive determined portions of rental, purchase, or other fixed obligatory payments for the use or purchase of the transportation equipment; and (13) in: (A) insured accounts and evidences of indebtedness as defined and limited by Section 1, Chapter 618, page 1356, Acts of the 47th Legislature; (B) shares or share accounts as authorized by Chapter 65, Finance Code; (C) insured or guaranteed obligations as authorized in Chapter 230, Acts of the 49th Legislature, Regular Session, 1945 (Article 842a-1, Vernon's Texas Civil Statutes); (D) bonds issued under the provisions authorized by Section 9, Chapter 231, General Laws, Acts of the 43rd Legislature, Regular Session, 1933 (Article 1187a, Vernon's Texas Civil Statutes); (E) bonds issued under the authority of Section 1, Chapter 1, page 427, General Laws, Acts of the 46th Legislature, Regular Session, 1939 (Article 1269k-1, Vernon's Texas Civil Statutes); (F) bonds and other indebtedness as authorized by Sections 435.045 and 435.046, Government Code; (G) "Municipal Bonds" issued under Sections 51.038 and 51.039, Water Code; (H) bonds as authorized by Subchapter B, Chapter 284, Transportation Code; (I) bonds as authorized by Section 19, Chapter 340, Acts of the 51st Legislature, Regular Session, 1949; (J) bonds as authorized by Section 10, Chapter 398, Acts of the 51st Legislature, Regular Session, 1949; (K) bonds as authorized by Section 18, Chapter 465, Acts of the 51st Legislature, Regular Session, 1949; (L) bonds as authorized by Section 24, Chapter 110, Acts of the 51st Legislature, Regular Session, 1949; and (M) such other investments as are now or may hereafter be specifically authorized by law. (f) The percentage authorizations and limitations set forth in this article apply only at the time of the original acquisition of an investment or at the time a transaction is entered into and do not thereafter apply to the insurer or the investment or transaction except as provided by this subsection. An investment, once qualified under this article, remains qualified notwithstanding any refinancing, restructuring, or modification of the investment; however, the insurer may not engage in that refinancing, restructuring, or modification solely to circumvent the requirements or limitations of this article. (g) Notwithstanding Subsections (a)-(e) of this article: (1) investment in all or any types of securities, loans, obligations, or evidences of indebtedness of a single issuer or borrower, including the issuer's or borrower's majority-owned subsidiaries or parent or the majority-owned subsidiaries of that parent, other than those authorized investments that either are direct obligations of or are guaranteed by the full faith and credit of the United States of America, this state, or a political subdivision of this state, or are insured by any agency of the United States of America or this state, may not in the aggregate exceed five percent of the insurer's total assets, other than investments described by Subsection (e)(5) or (e)(7) of this article; and (2) the quantitative limitations regarding any investment authorized by this article may be waived by prior written approval of the commissioner if: (A) a hearing is held to determine whether approval should be granted; (B) the applicant seeking approval establishes that unreasonable or unnecessary loss or harm to the insurer will result if approval is withheld; (C) the excessive investment will not have a material adverse effect on the insurer; (D) the size of the investment is reasonable in relation to the insurer's assets, capital, surplus, and liabilities; and (E) the commissioner's prior authorization may treat the resulting excessive investment as an asset not admitted. Acts 1951, 52nd Leg., ch. 491. Amended by Acts 1955, 54th Leg., p. 413, ch. 117, Sec. 10; Acts 1959, 56th Leg., p. 96, ch. 49, Sec. 1; Acts 1961, 57th Leg., p. 979, ch. 426, Sec. 2; Acts 1979, 66th Leg., p. 325, ch. 151, Sec. 1, May 11, 1979; Acts 1979, 66th Leg., p. 1885, ch. 762, Sec. 1, eff. June 13, 1979. Amended by Acts 1983, 68th Leg., p. 5115, ch. 932, Sec. 1, eff. June 19, 1983; Acts 1985, 69th Leg., ch. 174, Sec. 1, eff. Aug. 26, 1985; Acts 1997, 75th Leg., ch. 556, Sec. 7, eff. Sept. 1, 1997; Acts 1999, 76th Leg., ch. 1040, Sec. 1, eff. Sept. 1, 1999. Art. 2.10-1. ADDITIONAL INVESTMENT AUTHORITY.Article repealed effective April 1, 2007 (1) In addition to the securities authorized as investments in Article 2.10, a company may also invest its funds over and above its minimum capital and minimum surplus, as provided in Article 2.02, in bonds, issued, assumed, or guaranteed by certain international financial institutions in which the United States is a member, to wit: the Inter-American Development Bank, the International Bank for Reconstruction and Development (the World Bank), the African Development Bank, the Asian Development Bank, and the International Finance Corporation. (2) Insurers may make additional investments which are not otherwise permitted by Article 2.08, Article 2.10, or Article 2.10-1 of this code, or which are not otherwise authorized by this code for such insurers, and which investments are not otherwise specifically prohibited by law, or which investments exceed the limits otherwise specified in this code, provided: (a) The amount of any one such investment may not exceed five percent of the insurer's capital and surplus in excess of the insurer's statutory minimum capital and surplus; and (b) The aggregate of the investments made under this Subsection (2) may not exceed five per cent of the insurer's assets. Added by Acts 1971, 62nd Leg., p. 1668, ch. 472, Sec. 1, eff. Aug. 30, 1971. Amended by Acts 1983, 68th Leg., p. 5120, ch. 932, Sec. 2, eff. June 19, 1983. Sec. (1) amended by Acts 1985, 69th Leg., ch. 542, Sec. 3, eff. Aug. 26, 1985; amended by Acts 1991, 72nd Leg., ch. 408, Sec. 6, eff. Aug. 26, 1991. Art. 2.10-2. FURTHER INVESTMENT AUTHORITY FOR COMPANIES DOING BUSINESS IN FOREIGN COUNTRIES.Article repealed effective April 1, 2007 In addition to the securities authorized as investments by Article 2.10 of the Insurance Code, any insurer subject to the provisions of Article 2.10 of the Insurance Code that is authorized by the law of a foreign country to engage in a line or lines of insurance which the insurer is authorized to transact in this state may invest in the same kinds of foreign securities originating in such foreign country as would be authorized by Article 2.10 of the Insurance Code (as the same now exists or may be amended in the future) for domestic securities originating in the United States of America; provided, however, that the aggregate investment made under the provisions of this Article in any one country shall not exceed by more than 10% at any time the lesser of the following amounts: (a) The funds required by the law of the foreign country to be maintained in securities originating in such country. (b) The total unearned premium reserves, reinsurance reserves, loss reserves and other liabilities, if any, required by the law of this state to be carried by the insurer that are directly attributable to the particular policies or contracts of insurance on residents or property located in the foreign country. Provided, however, this Article shall not constitute authority to invest in foreign securities originating in any foreign country where the President of the United States or other federal authority is authorized but has refused to issue on projects in the country guarantees to citizens or corporations of the United States of America guaranteeing against loss by reason of inconvertibility of currency, expropriation, confiscation, war, revolution or insurrection because of the omission or failure of such foreign country to enter into arrangements for the security of American property required by the federal authority for the issuance of such guarantees. Added by Acts 1973, 63rd Leg., p. 1300, ch. 490, Sec. 1, eff. June 14, 1973. Art. 2.10-3A. SECURITIES LENDING; REPURCHASE, REVERSE REPURCHASE, AND DOLLAR ROLL TRANSACTIONS.Article repealed effective April 1, 2007 Definitions Sec. 1. In this article: (1) "Dollar roll transaction" means two simultaneous transactions, with settlement dates not more than 96 days apart, in one of which an insurer sells to a business entity and in the other the insurer is obligated to purchase from the same business entity substantially similar securities of the following types: (A) mortgage-backed securities issued, assumed, or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation or their successor organizations; or (B) other mortgage-backed securities described under Section 106, Title I, Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. Section 77r-1), as amended. (2) "Repurchase transaction" means a transaction in which an insurer purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period or on demand. (3) "Reverse repurchase transaction" means a transaction in which an insurer sells securities to a business entity and is obligated to repurchase the sold securities or equivalent securities from the business entity at a specified price, either within a specified period or on demand. (4) "Securities lending transaction" means a transaction in which securities are loaned by an insurer to a business entity that is obligated to return the loaned securities or equivalent securities to the insurer, either within a specified period or on demand.Transactions Authorized Sec. 2. (a) An insurer may engage in securities lending, repurchase, reverse repurchase, and dollar roll transactions as provided by this article. (b) The insurer shall enter into a written agreement for each transaction, other than a dollar roll transaction, that requires each transaction to terminate not later than the first anniversary of the inception of the transaction.Transaction Requirements Sec. 3. (a) Cash received in a transaction under this article must be: (1) invested in accordance with this article and in a manner that recognizes the liquidity needs of the transaction; or (2) used by the insurer for the insurer's general corporate purposes. (b) While the transaction is outstanding, the insurer, or the insurer's agent or custodian, shall maintain, as to acceptable collateral received in a transaction under this section, either physically or through the book entry systems of the Federal Reserve, Depository Trust Company, Participants Trust Company, or other securities depositories approved by the commissioner: (1) possession of the acceptable collateral; (2) a perfected security interest in the acceptable collateral; or (3) in the case of a jurisdiction outside of the United States, title to, or rights of a secured creditor to, the acceptable collateral. (c) An insurer may not enter into a transaction under this article if, as a result of and after giving effect to the transaction, the aggregate amount of securities loaned, sold to, or purchased from: (1) any one business entity counterparty under this article would exceed five percent of the insurer's assets; or (2) all business entities under this article would exceed 40 percent of the insurer's assets. (d) In computing the amount sold to or purchased from a business entity counterparty under a repurchase or reverse repurchase transaction, effect may be given to netting provisions under a master written agreement. (e) The amount of collateral required for a securities lending, repurchase, or reverse repurchase transaction is the amount required under the Purposes and Procedures Manual of the Securities Valuation Office or a successor publication. (f) The commissioner may adopt reasonable rules and orders consistent with, and as necessary to implement, this article. Added by Acts 1999, 76th Leg., ch. 1040, Sec. 2, eff. Sept. 1, 1999. Art. 2.10-4. RISK-LIMITING PROVISIONS.Article repealed effective April 1, 2007 Definitions Sec. 1. In this article: (1) "Acceptable collateral" means: (A) cash; (B) cash equivalents; (C) letters of credit and direct obligations; and (D) securities that are fully guaranteed as to principal and interest by the United States. (2) "Business entity" includes a sole proprietorship, corporation, limited liability company, association, partnership, joint stock company, joint venture, mutual fund, bank, trust, joint tenancy, or other similar form of business organization, whether organized for profit or not for profit. (3) "Cap" means an agreement under which a seller is obligated to make payments to the buyer with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number, sometimes called the strike rate or strike price. (4) "Cash equivalent" means an investment or security that is short-term, highly rated, highly liquid, and readily marketable. The term includes money market funds as described by Article 2.10 of this code. For purposes of this subdivision: (A) a short-term investment is an investment with a remaining term to maturity of one year or less; and (B) a highly rated investment is an investment rated: (i) "P-1" by Moody's Investors Service, Inc.; (ii) "A-1" by the Standard and Poor's Division of the McGraw Hill Companies, Inc.; or (iii) an equivalent rating by a nationally recognized statistical rating organization recognized by the Securities Valuation Office. (5) "Collar" means an agreement to receive payments as the buyer of an option, cap, or floor and to make payments as the seller of a different option, cap, or floor. (6)(A) "Counterparty exposure amount" means: (i) for an over-the-counter derivative instrument that is not entered into under a written master agreement that provides for netting of payments owed by the respective parties: (a) the market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or (b) zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer; or (ii) for an over-the-counter derivative instrument that is entered into under a written master agreement that provides for netting of payments owed by the respective parties and in which the domiciliary jurisdiction of the counterparty is either in the United States or in a foreign jurisdiction listed in the Purposes and Procedures Manual of the Securities Valuation Office as eligible for netting, the greater of: (a) zero; or (b) the net sum payable to the insurer in connection with all derivative instruments subject to the written master agreement on their liquidation in the event of default by the counterparty under the master agreement, if there are no conditions precedent to the obligations of the counterparty to make such a payment and no setoff of amounts payable under any other instrument or agreement. (B) For purposes of this subdivision, the market value or the net sum payable, as applicable, is determined at the end of the most recent quarter of the insurer's fiscal year and is reduced by the market value of acceptable collateral held by the insurer or a custodian on the insurer's behalf. (7) "Derivative instrument" means an agreement, option, or instrument, or any series or combination of agreements, options, or instruments, to make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or instead to make a cash settlement, or that has a price, performance, value, or cash flow based primarily on the actual or expected price, yield, level, performance, value, or cash flow of one or more underlying interests. The term includes an option, a warrant not otherwise permitted to be held by the insurer under this article, a cap, a floor, a collar, a swap, a swaption, a forward, a future, and any other substantially similar agreement, option, or instrument or series or combinations of those agreements, options, or instruments. The term does not include a collateralized mortgage obligation, another asset-backed security, a principal-protected structured security, a floating rate security, an instrument that an insurer is otherwise permitted to invest in or receive under this article other than under this definition, or any debt obligation of the insurer. (8) "Derivative transaction" means a transaction that involves the use of one or more derivative instruments. The term does not include a dollar roll transaction, repurchase transaction, reverse repurchase transaction, or securities lending transaction. (9) "Floor" means an agreement under which the seller is obligated to make payments to the buyer and in which each payment is based on the amount by which a predetermined number, sometimes called the floor rate or price, exceeds a reference price, level, performance, or value of one or more underlying interests. (10) "Forward" means an agreement to make or take delivery in the future of one or more underlying interests, or effect a cash settlement, based on the actual or expected price, level, performance, or value of those underlying interests. The term does not include a future or a spot transaction effected within customary settlement periods, when-issued purchases, or other similar cash market transactions. (11) "Future" means an agreement that is traded on a futures exchange to make or take delivery of, or effect a cash settlement, based on the actual or expected price, level, performance, or value of, one or more underlying interests. (12) "Futures exchange" means a foreign or domestic exchange, contract market, or board of trade on which trading in futures is conducted and that, in the United States, is authorized to conduct that trading by the Commodities Futures Trading Commission or any successor organization. (13) "Hedging transaction" means a derivative transaction that is entered into and maintained to manage: (A) the risk of a change in the value, yield, price, cash flow, or quantity of assets or liabilities, or a portfolio of assets or liabilities, that the insurer has acquired or incurred or anticipates acquiring or incurring; or (B) the currency exchange rate risk related to assets or liabilities, or a portfolio of assets or liabilities, that an insurer has acquired or incurred or anticipates acquiring or incurring. (14) "Income generation transaction" means a derivative transaction that is entered into to generate income. The term does not include a derivative transaction entered into as a hedging transaction or a replication transaction. (15) "Market value" means the price for a security or derivative instrument obtained from a generally recognized source or the most recent quotation from such a source or, if a generally recognized source does not exist, the price for the security or derivative instrument as determined under the terms of the instrument or in good faith by the insurer, as can be reasonably demonstrated to the commissioner on request, plus accrued but unpaid income on the security or derivative instrument to the extent not included in the price as of the applicable date. (16) "Option" means an agreement under which the buyer has the right to buy or receive, referred to as a "call option," sell or deliver, referred to as a "put option," enter into, extend or terminate, or effect a cash settlement based on the actual or expected price, spread, level, performance, or value of one or more underlying interests. (17) "Over-the-counter derivative instrument" means a derivative instrument entered into with a business entity other than through a securities exchange or futures exchange or cleared through a qualified clearinghouse. (18) "Potential exposure" means: (A) as to a futures position, the amount of initial margin required for that position; or (B) as to swaps, collars, and forwards, one-half percent times the notional amount times the square root of the remaining years to maturity. (19) "Qualified clearinghouse" means a clearinghouse that is subject to the rules of a securities exchange or a futures exchange and provides clearing services, including acting as a counterparty to each of the parties to a transaction in such a manner that the parties no longer have credit risk to each other. (20) "Replication transaction" means a derivative transaction or combination of derivative transactions effected either separately or in conjunction with cash market investments included in the insurer's investment portfolio to replicate the risks and returns of another authorized transaction, investment, or instrument or to operate as a substitute for a cash market transaction. The term does not include a derivative transaction entered into by the insurer as a hedging transaction. (21) "Securities exchange" means: (A) an exchange registered as a national securities exchange or a securities market registered under the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.), as amended; (B) the Private Offerings Resales and Trading through Automated Linkages (PORTAL); or (C) a designated offshore securities market as defined by Securities Exchange Commission Regulation S, 17 C.F.R. Part 230, as amended. (22) "Swap" means an agreement to exchange or to net payments at one or more times based on the actual or expected price, yield, level, performance, or value of one or more underlying interests. (23) "Swaption" means an option to purchase or sell a swap at a given price and time or at a series of prices and times. The term does not include a swap with an embedded option. (24) "Underlying interest" means the assets, liabilities, or other interests, or a combination of those assets, liabilities, or other interests, that underlie a derivative instrument. The term includes securities, currencies, rates, indices, commodities, or derivative instruments. (25) "Warrant" means an instrument under which the holder has the right to purchase or sell the underlying interest at a given price and time or at a series of prices and times stated in the warrant.Authorized Risk Control Transactions; General Requirements Relating to Derivative Transactions Sec. 2. (a) Except as provided by Section 8 of this article, an insurer may, for purposes of protecting the assets owned by the insurer against the risk of changing asset values or interest rates and for risk reduction and income generation, engage in risk control transactions authorized under this article. (b) Before entering into a derivative transaction, the board of directors of the insurer must approve a derivative use plan as part of the insurer's investment plan otherwise required by law. The derivative use plan must: (1) describe investment objectives and risk constraints, such as counterparty exposure amounts; (2) define permissible transactions, identifying the risks to be hedged and the assets or liabilities being replicated; and (3) require compliance with the insurer's internal control procedures established under Subsection (c) of this section. (c) The insurer shall establish written internal control procedures that require: (1) a quarterly report to be made to the board of directors that reviews: (A) all derivative transactions entered into, outstanding, or closed out; (B) the results and effectiveness of the derivatives program; and (C) the credit risk exposure to each counterparty for over-the-counter derivative transactions based on the counterparty exposure amount; (2) a system for determining whether hedging or replication strategies used by the insurer have been effective; (3) a system of reports, at least as frequent as monthly, to the insurer's management, that include: (A) a description of each derivative transaction entered into, outstanding, or closed out during the period since the last report; (B) the purpose of each outstanding derivative transaction; (C) a performance review of the derivative instrument program; and (D) the counterparty exposure amount for over-the-counter derivative transactions; (4) written authorizations that identify the responsibilities and limitations of authority of persons authorized to effect and maintain derivative transactions; and (5) appropriate documentation for each transaction, including: (A) the purpose of the transaction; (B) the assets or liabilities to which the transaction relates; (C) the specific derivative instrument used in the transaction; (D) for over-the-counter derivative instrument transactions, the name of the counterparty and the counterparty exposure amount; and (E) for exchange-traded derivative instruments, the name of the exchange and the name of the firm that handled the transaction. (d) The insurer must be able to demonstrate to the commissioner, on request, the intended hedging characteristics and ongoing effectiveness of the derivative transaction or combination of transactions through cash flow testing, duration analysis, or any other appropriate analysis. (e) The insurer shall include all counterparty exposure amounts in determining compliance with the limitations of this article. (f) An insurer may purchase or sell one or more derivative instruments to offset, in whole or in part, a derivative instrument previously purchased or sold without regard to the quantitative limitations of this article if the offsetting transaction uses the same type of derivative instrument as the derivative instrument being offset.Requirements Relating to Hedging Transactions Sec. 3. (a) Not later than the 10th day before the date on which an insurer is scheduled to enter into an initial hedging transaction, the insurer shall notify the commissioner in writing that: (1) the insurer's board of directors has adopted an investment plan that authorizes hedging transactions; and (2) all hedging transactions will comply with this article. (b) An insurer engaged in hedging transactions on September 1, 1999, shall send to the commissioner a notice containing the statements required by Subsection (a) of this section not later than October 1, 1999. (c) After the notice under Subsection (a) or (b), the insurer may enter into hedging transactions under this article, if as a result of and after giving effect to each hedging transaction: (1) the aggregate statement value of all outstanding options, caps, floors, swaptions, and warrants that are not attached to another financial instrument purchased by the insurer, but not including collars, under this article does not exceed seven and one-half percent of the insurer's assets; (2) the aggregate statement value of all outstanding options, swaptions, warrants, caps, and floors, but not including collars, written by the insurer under this article does not exceed three percent of the insurer's assets; and (3) the aggregate potential exposure of all outstanding collars, swaps, forwards, and futures entered into or acquired by the insurer under this article does not exceed six and one-half percent of the insurer's assets. (d) If a hedging transaction entered into under this section is not in compliance with this article or, if continued, may create a hazardous financial condition to the insurer that affects the insurer's policyholders or creditors or the public, the commissioner may, after notice and an opportunity for a hearing, order the insurer to take action that the commissioner determines is reasonably necessary to: (1) rectify a hazardous financial condition; or (2) prevent an impending hazardous financial condition from occurring.Requirements Relating to Income Generation Transactions Sec. 4. (a) An insurer may enter into an income generation transaction only as provided by this section. (b) An insurer may enter into an income generation transaction only if, as a result of and after giving effect to the transaction, the aggregate statement value of admitted assets that are then subject to call or that generate the cash flows for payments required to be made by the insurer under caps and floors sold by the insurer and then outstanding under this article, plus the statement value of admitted assets underlying derivative instruments then subject to calls sold by the insurer and outstanding under this article, plus the purchase price of assets subject to puts then outstanding under this article, does not exceed 10 percent of the insurer's assets. (c) The transaction must be a sale of: (1) a call option on assets that meets the requirements of Subsection (d); (2) a put option on assets that meets the requirements of Subsection (e); (3) a call option on a derivative instrument, including a swaption that meets the requirements of Subsection (f); or (4) a cap or floor that meets the requirements of Subsection (g). (d) If the transaction is a sale of a call option on assets, the insurer must hold or have a currently exercisable right to acquire the underlying assets during the entire period that the option is outstanding. (e) If the transaction is a sale of a put option on assets, the insurer must hold sufficient cash, cash equivalents, or interests in a short-term investment pool to be able to purchase the underlying assets on exercise of the option during the entire period that the option is outstanding, and must be able to hold the underlying assets in the insurer's portfolio. If the total market value of all put options sold by the insurer exceeds two percent of the insurer's assets, the insurer shall set aside, under a custodial or escrow agreement, cash or cash equivalents that have a market value equal to the amount of the insurer's put option obligations in excess of two percent of the insurer's assets during the entire period the option is outstanding. (f) If the transaction is a sale of a call option on a derivative instrument, including a swaption, the insurer must hold or have a currently exercisable right to acquire assets generating the cash flow necessary to make any payments for which the insurer is liable under the underlying derivative instrument during the entire period that the call option is outstanding, and must be able to enter into the underlying derivative transaction for the insurer's portfolio. (g) If the transaction is a sale of a cap or a floor, the insurer must hold or have a currently exercisable right to acquire assets generating the cash flow necessary to make any payments for which the insurer is liable under the cap or floor during the entire period that the cap or floor is outstanding.Requirements Relating to Replication Transactions Sec. 5. (a) An insurer may enter into a replication transaction only with the prior written approval of the commissioner. To be eligible for approval by the commissioner: (1) the insurer must be otherwise authorized to invest its funds under this chapter in the asset being replicated; and (2) the asset being replicated must be subject to all the provisions and limitations on the making of the transaction specified by this article relating to investments by the insurer as if the transaction constituted a direct investment by the insurer in the replicated asset. (b) The commissioner may adopt rules regarding replication transactions as necessary to implement this section.Trading Requirements Sec. 6. Each derivative instrument must be: (1) traded on a securities exchange; (2) entered into with, or guaranteed by, a business entity; (3) issued or written by, or entered into with, the issuer of the underlying interest on which the derivative instrument is based; or (4) in the case of futures, traded through a broker who is registered as a futures commission merchant under the Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended, or who is exempt from that registration under 17 C.F.R. Rule 30.10, adopted under the Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended.Rules Sec. 7. The commissioner may adopt rules consistent with this article that prescribe reasonable limits, standards, and guidelines with respect to the risk-limiting transactions authorized under this article and plans related to those transactions.Notice to Commissioner Sec. 8. (a) Before engaging in a transaction authorized under this article, an insurer that has a statutory net capital and surplus of less than $10 million shall file a written notice with the commissioner describing the need to engage in the transaction, the lack of acceptable alternatives, and the insurer's plan to engage in the transaction. If the commissioner does not issue an order prohibiting the insurer from engaging in the transaction within 90 days after the date of receipt of the insurer's notice, the insurer may engage in the transaction described in the notice. (b) An insurer with a statutory net capital and surplus less than the minimum amount of capital and surplus required for a new charter and certificate of authority for the same type of insurer may not engage in the transactions authorized under this article. (c) For purposes of this section, net capital and surplus are determined by the most recent financial statement of the insurer required to be filed with the department. Added by Acts 1983, 68th Leg., p. 4025, ch. 627, Sec. 3, eff. June 19, 1983. Amended by Acts 1999, 76th Leg., ch. 1040, Sec. 3, eff. Sept. 1, 1999. Art. 2.10-5. INVESTMENT AUTHORITY.Article repealed effective April 1, 2007 Definitions Sec. 1. In this article: (1) "Business entity" means a corporation, limited liability company, association, partnership, joint stock company, joint venture, mutual fund trust, or other similar form of business organization, whether organized as for-profit or not-for-profit. (2) "Class one money market mutual fund" means a mutual fund that at all times qualifies for investment using the bond class one reserve factor described by the purposes and procedures of the securities valuation office. (3) "Government money market mutual fund" means a money market mutual fund that at all times: (A) invests only in obligations issued, guaranteed, or insured by the United States or collateralized repurchase agreements composed of those obligations; and (B) is qualified for investment without a reserve under the purposes and procedures publication of the securities valuation office or any successor publication. (4) "Money market mutual fund" means a mutual fund that qualifies under 17 C.F.R. Part 270.2a-7, as authorized by the Investment Company Act of 1940 (15 U.S.C. Sections 80a-1 et seq.), as amended. (5) "Obligation" means: (A) a bond, note, debenture, trust certificate (including an equipment certificate), or production payment; (B) a negotiable bank certificate of deposit, bankers' acceptance, credit tenant loan, or other loan secured by financing net leases; or (C) any other evidence of indebtedness for the payment of money or participation certificates or other evidences of an interest in an obligation described by this subdivision, whether constituting a general obligation of the issuer or payable only out of certain revenues or certain funds pledged or otherwise dedicated for payment. (6) "Qualified bank" means a national bank, state bank, or trust company that at all times is adequately capitalized as determined by the standards adopted by the United States banking regulators and that is either regulated by state banking laws or a member of the Federal Reserve System. (7) "Repurchase transaction" means a transaction in which an insurer purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period or on demand. (8) "Reverse repurchase transaction" means a transaction in which an insurer sells securities to a business entity and is obligated to repurchase the securities sold or equivalent securities from the business entity at a specified price, either within a specified period or on demand. (9) "Securities lending transaction" means a transaction in which securities are loaned by an insurer to a business entity that is obligated to return the loaned securities or equivalent securities to the insurer, either within a specified period or on demand. (10) "Securities valuation office" means the Securities Valuation Office of the National Association of Insurance Commissioners.Authority to Invest Sec. 2. An insurer may acquire investments and participate in an investment pool that is qualified under Section 5 of this article and the investments of which are limited to investments authorized for a short-term investment pool under Section 3 of this article or for an authorized investment pool under Section 4 of this article.Short-Term Investment Pools Sec. 3. (a) A short-term investment pool may contain only: (1) except as provided by Subsection (b) of this section, obligations that are rated one or two by the securities valuation office or that have a rating equivalent to a securities valuation office rating of one or two made by a statistical rating organization that is nationally recognized and recognized by the securities valuation office and that have a remaining maturity of: (A) 397 days or less or a put that entitles the holder to receive the principal amount of the obligation and that may be exercised through maturity at specified intervals not exceeding 397 days; or (B) three years or less and a floating interest rate that resets not less frequently than quarterly on the basis of a current short-term index acceptable under Subsection (c) of this section and is not subject to a maximum limit, if the obligations do not have an interest rate that varies inversely to market interest rate changes; (2) government money market mutual funds or class one money market mutual funds; or (3) securities lending, repurchase, and reverse repurchase transactions that meet the requirements imposed under Article 2.10-3 of this code. (b) In the absence of a one or two rating or equivalent rating, the issuer of an obligation under Subsection (a)(1) of this section must have outstanding obligations rated one or two by the securities valuation office or that have a rating equivalent to a securities valuation office rating of one or two made by a nationally recognized statistical rating organization recognized by the securities valuation office. (c) For purposes of this section, a current short-term index is: (1) a federal funds rate; (2) the prime rate; (3) the rate for treasury bills; (4) the London InterBank Offered Rate; or (5) the rate for commercial paper.Authorized Investment Pools Sec. 4. Authorized investment pools are limited to investments that a participating insurer is authorized to acquire by other articles of this code. The insurer's total of proportionate ownership interests in any one authorized investment held by an authorized investment pool, and direct investments in the same authorized investment, may not exceed the limit provided by the applicable authorizing article. In addition to that limitation, an insurer is also subject to the overall limitations contained in Section 6(c) of this article.Qualifications for an Investment Pool Sec. 5. (a) To be qualified, an investment pool must comply with the requirements established under this section. (b) The investment pool may not: (1) acquire securities issued, assumed, guaranteed, or insured by the investing insurer or an affiliate of the investing insurer; (2) borrow or incur an indebtedness for borrowed money, except for securities lending and reverse repurchase transactions that meet the requirements of this article; or (3) permit the aggregate value of securities then loaned or sold to, purchased from, or invested in any one business entity under this section to exceed 10 percent of the total assets of the investment pool. (c) The investment pool shall have a written pooling agreement. (d) The pooling agreement must designate a pool manager. The pool manager must be organized under the laws of the United States or a state and must be: (1) the investing insurer, an affiliated insurer, or a business entity affiliated with the insurer; (2) a qualified bank; (3) a business entity registered under the Investment Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.), as amended; (4) if a reciprocal insurer or interinsurance exchange, its attorney-in-fact; or (5) if a United States branch of an alien insurer, its United States manager or an affiliate or subsidiary of its United States manager. (e) The pool manager shall compile and maintain: (1) detailed accounting records that set forth: (A) the cash receipts and disbursements reflecting each pool participant's proportionate investment in the investment pool; and (B) a complete description of all underlying assets of the investment pool, including the amount, interest rate, and maturity date, if any, of each of those assets and other appropriate designations; and (2) other records that, on a daily basis, allow third parties to verify each pool participant's investment in the investment pool. (f) The pool manager shall maintain the assets of the investment pool in one or more accounts, in the name of or on behalf of the investment pool, under a custody agreement with a qualified bank. The custody agreement must: (1) state and recognize the claims and rights of each participant; (2) acknowledge that the underlying assets of the investment pool are held solely for the benefit of each participant in proportion to the aggregate amount of its investments in the investment pool; and (3) contain an agreement that the underlying assets of the investment pool may not be commingled with the general assets of the custodian qualified bank or any other person. (g) The pooling agreement for the investment pool must also provide that: (1) 100 percent of the ownership interests in the investment pool must at all times be held by: (A) an insurer and its affiliated insurers; (B) in the case of an investment pool investing solely in investments permitted under Section 3 of this article, the insurer and its subsidiaries and affiliates or any pension or profit-sharing plan of the insurer, its subsidiaries, and affiliates; or (C) in the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States manager; (2) the underlying assets of the investment pool may not be commingled with the general assets of the pool manager or any other person; (3) each participant owns an undivided interest in the underlying assets of the investment pool in proportion to the aggregate amount of each pool participant's interest in the investment pool and the underlying assets of the investment pool are held solely for the benefit of each participant; and (4) a pool participant or, in the event of the pool participant's insolvency, bankruptcy, or receivership, its trustee, receiver, conservator, or other successor-in-interest may withdraw all or any portion of its investment from the pool under the terms of the pooling agreement.Additional Requirements; Limitations Sec. 6. (a) An investment pool must be a business entity. (b) A transaction between the pool and a participant in the pool is not subject to Section 4, Article 21.49-1 of this code, except that, before entering into a pool, an insurer subject to Article 21.49-1 of this code shall file the notice required under Section 4(d)(2), Article 21.49-1 of this code. Investment activities of the pool and transactions between pools and participants shall be reported annually in the registration statement required by Section 3, Article 21.49-1 of this code. (c) An insurer shall not acquire an investment in an investment pool under this section if, as a result of and after giving effect to that investment, the aggregate amount of investments then held by the insurer under this article: (1) in any one investment pool would exceed 10 percent of its admitted assets; (2) in all investment pools investing in investments permitted under Section 4 of this article would exceed 25 percent of its admitted assets; or (3) in all investment pools would exceed 35 percent of its admitted assets. (d) A pool participant must be able to make withdrawals on demand without penalty or other assessment on any business day, and settlement of funds must occur within a reasonable and customary period after a withdrawal not to exceed five business days. (e) The pooling agreement must provide that the pool manager shall make a distribution to a pool participant, at the discretion of the pool manager: (1) in cash the fair market value at the time of the distribution of the participant's pro rata share of each underlying asset of the investment pool; (2) in kind a pro rata share of each underlying asset; or (3) in a combination of cash and in-kind distributions a pro rata share in each underlying asset. (f) A distribution under Subsection (e) of this section is computed in each case after subtracting all applicable fees and expenses of the investment pool. (g) The pool manager must make the records of the investment pool available for inspection by the commissioner. Added by Acts 1997, 75th Leg., ch. 130, Sec. 1, eff. Sept. 1, 1997.
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