INSURANCE CODE - NOT CODIFIED
CHAPTER 2. INCORPORATION OF INSURANCE COMPANIES
Art. 2.10. Investment of Funds in Excess of Minimum Capital and
Minimum Surplus
(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
(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
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
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
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
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.
