TLC: Insurance Code Proposed Chapters

79C13(3) AJA

CHAPTER 425. RESERVES AND INVESTMENTS FOR LIFE INSURANCE

COMPANIES AND RELATED ENTITIES

SUBCHAPTER A. GENERAL PROVISIONS

Revised Law

Sec. 425.001. SECURITIES IN AMOUNT OF RESERVES REQUIRED. The commissioner, after determining the amount of the reserves required on all of a life insurance company's policies in force, shall ensure that the company has at least that amount in securities of the class and character required by the law of this state, after all debts and claims against the company and the minimum capital required by Chapter 841 or 982, as applicable, have been provided for. (V.T.I.C. Art. 3.32.)

Source Law

Art. 3.32. Having determined the required reserves on all the policies in force, the Board shall see that the company has in securities of the class and character required by the laws of this State the amount of said reserves on all its policies, after all the debts and claims against it and the minimum capital required by this chapter have been provided for.

Revisor's Note

(1) V.T.I.C. Article 3.32 refers to "the Board," meaning the Board of Insurance Commissioners. Under Chapter 499, Acts of the 55th Legislature, Regular Session, 1957, administration of the insurance laws of this state was reorganized and the powers and duties of the Board of Insurance Commissioners were transferred to the State Board of Insurance. Chapter 685, Acts of the 73rd Legislature, Regular Session, 1993, abolished the State Board of Insurance and transferred its functions to the commissioner of insurance and the Texas Department of Insurance. Throughout this chapter, references to either board have been changed appropriately.

(2) V.T.I.C. Article 3.32 refers to "the company," apparently referring back to an insurance company described by former V.T.I.C. Article 3.28, as it existed at the time Article 3.32 was enacted by Chapter 491, Acts of the 52nd Legislature, Regular Session, 1951, which refers to "every company organized under the laws of this State, or authorized to transact business in this State … on the lives or persons of citizens of this State." Accordingly, the revised law substitutes "life insurance company" for "company."

(3) V.T.I.C. Article 3.32 refers to the minimum capital required by "this chapter," meaning V.T.I.C. Chapter 3. The applicable minimum capital requirements formerly provided by Chapter 3 were revised in 2001 in Chapters 841 and 982 of this code, and the revised law is drafted accordingly.

Revised Law

Sec. 425.002. CERTAIN INSURERS: DEPOSIT OF SECURITIES, MONEY, OR PROPERTY IN AMOUNT OF LEGAL RESERVES. (a) Except as provided by Subsection (b), a life insurance company incorporated under the laws of this state may deposit with the department, for the common benefit of all the holders of the company's policies and annuity contracts and in an amount equal to the legal reserve on all the company's outstanding policies and contracts in force, securities of the character in which the law of this state permits the company to invest, or against which the law of this state permits the company to loan, the company's capital, surplus, or reserves.

(b) A life insurance company may not make a new deposit of securities after August 28, 1961, except to the extent expressly required by Section 425.003.

(c) For purposes of this section, securities may be physically delivered to the department without being accompanied by a written transfer of a lien securing the securities. A life insurance company may deposit registered or unregistered United States government securities under this section.

(d) A life insurance company may deposit lawful money of the United States instead of all or part of the securities described by Subsection (a). A company may, for the purposes of the deposit described by Subsection (a), convey to the department in trust the real property in which any part of the company's reserve is lawfully invested. If the company conveys the property, the department shall hold the title to the property in trust until the company deposits with the department securities to take the place of the property, at which time the department shall reconvey the property to the company.

(e) The department may have any securities or real property appraised and valued before the securities or real property may be deposited with or conveyed to the department under this section. The life insurance company shall pay the reasonable expense of the appraisal or valuation.

(f) For purposes of state, county, and municipal taxation, the situs of the deposited securities is the municipality and county in which the life insurance company's charter requires the principal business office of the company making the deposit to be located. (V.T.I.C. Art. 3.16, Secs. 1 (part), 2, 3.)

Source Law

Art. 3.16

Sec. 1. Any life insurance company now or which may hereafter be incorporated under the laws of this State may deposit with the State Board of Insurance for the common benefit of all the holders of its policies and annuity bonds, securities of the kinds in which, by the laws of this State, it is permitted to invest or loan its capital, surplus and/or reserves, equal to the legal reserve on all its outstanding policies in force, … . The physical delivery of such securities to the State Board of Insurance shall be sufficient without being accompanied by a written transfer of any lien securing them. Any such company may deposit lawful money of the United States in lieu of the securities above referred to, or any portion thereof, and may also, for the purposes of such deposit, convey to said State Board of Insurance in trust the real estate in which any portion of its said reserve may be lawfully invested. In such case, the State Board of Insurance shall hold the title thereto in trust until other securities in lieu thereof shall be deposited with it, whereupon it shall reconvey the same to such company. Said State Board of Insurance may cause any such securities or real estate to be appraised and valued prior to their being deposited with or conveyed to it, in trust as aforesaid; the reasonable expense of such appraisement or valuation to be paid by the company. Under the provisions of this Article, registered as well as unregistered United States Government securities may be deposited.

Sec. 2. Notwithstanding the provisions of Section 1, of this Article, no new deposit of securities will be lawful after the effective date of this Section, except to the extent expressly required by Article 3.17.

Sec. 3. For the purpose of state, county, and municipal taxation the situs of securities deposited with the State Board of Insurance shall be in the city and county where the principal business office of such company is fixed by its charter.

Revisor's Note

(1) Section 1, V.T.I.C. Article 3.16, provides that "[a]ny life insurance company now or which may hereafter be incorporated under the laws of this state" may deposit securities in the amount of the company's legal reserves. The revised law substitutes "a life insurance company incorporated under the laws of this state" for the quoted language. Section 311.022, Government Code (Code Construction Act), which applies to the revised law, provides that a statute is presumed to operate prospectively unless expressly made retroactive. Therefore, the law as revised refers to a life insurance company that is incorporated at any time without the necessity of an express reference to companies incorporated in the future.

(2) Section 1, V.T.I.C. Article 3.16, refers to "annuity bonds." Throughout this subchapter, the revised law substitutes "annuity contract" for "annuity bond" for consistency with other provisions of this code and because "annuity contract" is the more accurate term.

(3) Section 1, V.T.I.C. Article 3.16, refers to "securities of the kinds in which" the laws of this state permit a life insurance company to invest. For consistency throughout this chapter, the revised law throughout this chapter substitutes "character" for "kind" in this context.

(4) Section 1, V.T.I.C. Article 3.16, refers to a deposit being equal to "the legal reserve on all [a life insurance company's] outstanding policies in force." Because of the preceding reference in Section 1 to the deposit being for the benefit of "all the holders of [the company's] policies and annuity bonds," it is clear from the context that the amount of the deposit is intended to be equal to the reserves on outstanding policies and on outstanding annuity contracts. The revised law is drafted accordingly.

(5) Section 2, V.T.I.C. Article 3.16, refers to "the effective date of this Section," meaning Section 2, V.T.I.C. Article 3.16. Section 2 was added by Chapter 469, Acts of the 57th Legislature, Regular Session, 1961. That act took effect August 28, 1961. Accordingly, the revised law substitutes "August 28, 1961," for "the effective date of this Section."

(6) Section 3, V.T.I.C. Article 3.16, refers to a "city." The revised law substitutes "municipality" for "city" because that is the term used in the Local Government Code.

Revised Law

Sec. 425.003. CERTAIN INSURERS: REQUIRED DEPOSITS OF SECURITIES; ADDITIONAL DEPOSITS AND WITHDRAWALS. (a) A life insurance company that, before August 28, 1961, issued or assumed the obligations of policies or annuity contracts that were registered as provided by Article 3.18, as that article existed before August 28, 1961, shall have on deposit with the department securities of the character described by Section 425.002 in an amount equal to or greater than the aggregate net value of the company's outstanding registered policies and annuity contracts in force.

(b) To comply with Subsection (a), a life insurance company shall periodically make additional deposits of securities in amounts of not less than $5,000. A company whose deposits exceed the aggregate net value of the company's outstanding registered policies and annuity contracts in force may periodically withdraw the excess in amounts of not less than $5,000. A company may at any time withdraw any of the company's deposited securities by depositing in their place securities of equal value to the securities replaced and of a character authorized by this chapter.

(c) A life insurance company may at any time collect the interest, rents, and other income from the company's securities on deposit.

(d) The net value of each policy or annuity contract subject to this section is the policy's or contract's value according to the standard prescribed by state law when the first premium on the policy or contract is paid, minus the amount of any liens the life insurance company has against the policy or contract not to exceed the policy's or contract's value.

(e) The department shall hold a life insurance company's securities on deposit with the department under this section in trust for the benefit of all holders of the company's outstanding policies and annuity contracts that were registered as provided by Article 3.18, as that article existed before August 28, 1961.

(f) A life insurance company that has outstanding registered policies or annuity contracts in force may not reinsure all or any part of that outstanding business, other than in a company authorized to engage in business in this state. (V.T.I.C. Art. 3.16, Sec. 1 (part); Art. 3.17.)

Source Law

[Art. 3.16]

Sec. 1. [Any life insurance company now or which may hereafter be incorporated under the laws of this State may deposit with the State Board of Insurance for the common benefit of all the holders of its policies and annuity bonds, securities of the kinds in which, by the laws of this State, it is permitted to invest or loan its capital, surplus and/or reserves, equal to the legal reserve on all its outstanding policies in force,] which securities shall be held by said State Board of Insurance in trust for the purpose and objects herein specified… .

Art. 3.17

Sec. 1. Any life insurance company which has heretofore issued or assumed the obligations of policies or annuity bonds which have been registered in the manner at any time authorized by this Chapter, shall at all times hereafter have on deposit with the State Board of Insurance securities of the character described in Article 3.16 in amounts equal to or in excess of the aggregate net value of such outstanding registered policies and annuity bonds in force, and for such purpose new and additional deposits of securities shall be made from time to time and in amounts of not less than Five Thousand Dollars ($5,000). Any such company whose deposits exceed such aggregate net value of its outstanding registered policies and annuity bonds in force may from time to time withdraw such excess by withdrawals of not less than Five Thousand Dollars ($5,000). Any such company may at any time withdraw any of its deposited securities by depositing in their stead others of equal value and of the character authorized by this Chapter, and may collect the interest, rents and other income from its securities on deposit. The net value of every policy or annuity bond subject to this Act shall be its value according to the standard prescribed by the laws of this State, when the first premium thereon has been paid, less the amount of such liens as the company may have against it not in excess of such value.

Sec. 2. The securities of any such company on deposit with the State Board of Insurance shall be held in trust by said board for the benefit of all of the holders of the outstanding policies and annuity bonds of such company which have been registered pursuant to this Chapter.

Sec. 3. No company which has outstanding registered policies or annuity bonds in force shall reinsure its outstanding registered business, or the whole of any one or more of its registered policies or annuity bonds, except in a company or companies incorporated and organized under the laws of this State or having permission to do business in this State.

Revisor's Note

(1) Section 1, V.T.I.C. Article 3.17, refers to policies and annuities that have "heretofore" been issued or assumed and have been registered in the manner that was at any time authorized by "this Chapter," meaning V.T.I.C. Chapter 3. Under V.T.I.C. Article 3.18 as enacted by Chapter 491, Acts of the 52nd Legislature, Regular Session, 1951, certain life insurance policies and annuity contracts were required to be registered with the Board of Insurance Commissioners. Article 3.18 was amended by Chapter 469, Acts of the 57th Legislature, Regular Session, 1961; Section 1, V.T.I.C. Article 3.18, was added to provide that, after the effective date of that section, "no policy or annuity bond shall be registered in the manner heretofore authorized by this Chapter." Chapter 469 took effect August 28, 1961. Accordingly, the revised law substitutes "before August 28, 1961," for "heretofore," and refers to registration as provided by Article 3.18 "as that article existed before August 28, 1961."

(2) Section 1, V.T.I.C. Article 3.17, requires certain life insurance companies to have "at all times hereafter" certain securities on deposit. The revised law omits "at all times" because, absent a limitation on the requirement to have securities on deposit, the requirement applies at all times without an express statement to that effect. In addition, the revised law omits the reference to "hereafter" as unnecessary because Section 311.022, Government Code (Code Construction Act), applicable to the revised law, provides that a statute operates prospectively unless expressly made retrospective.

(3) Section 1, V.T.I.C. Article 3.17, refers to securities "authorized by this Chapter," meaning V.T.I.C. Chapter 3. Although Chapter 3 is revised in several titles throughout this code, the revised law refers to this chapter of the revised law because this chapter revises V.T.I.C. Articles 3.33 and 3.39, which are the applicable provisions of V.T.I.C. Chapter 3 governing authorized securities for a life insurance company.

(4) Section 3, V.T.I.C. Article 3.17, refers to an insurance company "incorporated and organized under the laws of this State" or authorized to engage in business in this state. The revised law omits the quoted language as unnecessary because a company that is authorized to engage in business in this state includes a company that is incorporated and organized under the laws of this state.

Revised Law

Sec. 425.004. RECORDS OF SECURITIES DEPOSITED WITH DEPARTMENT; REPORT OF VALUE. Each life insurance company that is required by Section 425.003 to have securities on deposit with the department shall:

(1) keep records of:

(A) all of the company's outstanding registered policies and annuity contracts in force; and

(B) the net value of those policies and contracts; and

(2) not later than the 15th day after the last day of each calendar month, file with the department a report stating whether the value of the company's securities on deposit is equal to or greater than the aggregate net value of the company's registered policies and annuity contracts outstanding and in force at the end of the preceding calendar month. (V.T.I.C. Art. 3.18, Secs. 2, 3.)

Source Law

Sec. 2. Every life insurance company which is required by this Chapter to have securities on deposit with the State Board of Insurance shall keep records of all of its outstanding registered policies and annuity bonds in force, and of the net value thereof.

Sec. 3. Each life insurance company which is required by this Chapter to have securities on deposit with the State Board of Insurance shall, within fifteen (15) days after the termination of each calendar month, file with said Board a report stating whether or not the value of its securities on deposit is equal to or in excess of the aggregate value of its registered policies and annuity bonds outstanding and in force at the end of such preceding calendar month.

Revisor's Note

(1) Section 2, V.T.I.C. Article 3.18, refers to a life insurance company that is required by "this Chapter," meaning V.T.I.C. Chapter 3, to have securities on deposit. Although Chapter 3 is revised in several titles throughout this code, the revised law refers to Section 425.003 because that section revises Article 3.17, the part of V.T.I.C. Chapter 3 that requires a life insurance company to have securities on deposit.

(2) Section 3, V.T.I.C. Article 3.18, requires a life insurance company to report whether the securities the company has on deposit equal or exceed the "aggregate value" of the company's registered policies and annuity bonds. The revised law substitutes "aggregate net value" for "aggregate value" because it is clear from the context that "net value" in Section 2, Article 3.18, is a reference to "aggregate net value" as used in Section 1, V.T.I.C. Article 3.17, revised in this chapter in Section 425.003, which contains the substantive requirement that a company deposit securities.

Revised Law

Sec. 425.005. DEPARTMENT DUTIES REGARDING DEPOSITED SECURITIES; INSURANCE COMPANY ACCESS. (a) The department shall keep securities deposited by a life insurance company under Sections 425.002 and 425.003 in a secure safe-deposit, fireproof box or vault in the municipality of, or a municipality near the location of, the company's home office.

(b) The life insurance company's officers may, in accordance with reasonable rules adopted by the commissioner, have access to the securities to detach interest coupons, credit payment, and exchange securities as provided by Section 425.003. (V.T.I.C. Art. 3.18, Sec. 4.)

Source Law

Sec. 4. The securities deposited under this Chapter by each company shall be placed and kept by the State Board of Insurance in some secure safe-deposit, fireproof box or vault in the city or town in or near where the home office of the company is located. The officers of the company shall have access to such securities for the purpose of detaching interest coupons and crediting payment and exchanging securities as above provided, under such reasonable rules and regulations as the State Board of Insurance may establish.

Revisor's Note

(1) Section 4, V.T.I.C. Article 3.18, requires certain securities to be "placed and kept" in certain places. The revised law omits the reference to "placed" as unnecessary because a security cannot be "kept" somewhere unless it is first placed there.

(2) Section 4, V.T.I.C. Article 3.18, refers to a "city or town." The revised law substitutes "municipality" for "city or town" for the reason stated in Revisor's Note (6) to Section 425.002.

(3) Section 4, V.T.I.C. Article 3.18, refers to "rules and regulations." Other provisions revised in this chapter refer only to "regulations" with respect to state law. Throughout this chapter, the revised law, as applicable, omits "regulation," or substitutes "rule" for "regulation," because in this context the terms are synonymous and because under Section 311.005(5), Government Code (Code Construction Act), a rule is defined to include a regulation. That definition applies to the revised law.

Revised Law

Sec. 425.006. ADDITIONAL RESERVES REQUIRED: SUBSTANDARD OR EXTRA HAZARDOUS POLICIES. (a) If a life insurance company engaged in business under the laws of this state has written or assumed risks that are substandard or extra hazardous and has charged more for the policies under which those risks are written or assumed than the company's published premium rates, the commissioner shall, in valuing those policies, compute and charge extra reserves on the policies as necessary because of the extra hazard assumed and the extra premium charged.

(b) If the commissioner determines, after notice and hearing, that a particular risk or class of risks is substandard or extra hazardous, a life insurance company may not, after the determination is made, write or assume the particular risk or class of risks unless the company charges an extra premium as necessary because of the extra hazard assumed. (V.T.I.C. Art. 3.29.)

Source Law

Art. 3.29. If any life insurance company doing business under the laws of this State has written or assumed risks that are sub-standard or extra hazardous and has charged therefor more than its published rates of premium, the Board of Insurance Commissioners shall in valuing such policies compute and charge such extra reserves thereon as is warranted by reason of the extra hazard assumed and the extra premium charged. If the Board of Insurance Commissioners shall find, after notice and hearing, that a particular risk or class of risks is sub-standard or extra hazardous, then and in that event no such company shall thereafter write or assume any such risks unless they charge therefor such extra premium as is warranted by reason of the extra hazard assumed.

Revised Law

Sec. 425.007. SUBSCRIPTION TO OR UNDERWRITING PURCHASE OR SALE OF SECURITIES OR PROPERTY PROHIBITED; CONTROL OF DISPOSITION OF PROPERTY. (a) A life insurance company organized under the laws of this state may not:

(1) subscribe to, or participate in, any underwriting of the purchase or sale of securities or property;

(2) enter into a transaction described by Subdivision (1) for a purpose described by Subdivision (1);

(3) sell on account of the company jointly with any other person, firm, or corporation; or

(4) enter into any agreement to withhold from sale any of the company's property.

(b) The disposition of the life insurance company's property must be at all times within the control of the company's board of directors. (V.T.I.C. Art. 3.39a.)

Source Law

Art. 3.39a. No life insurance company organized under the laws of this state shall subscribe to, or participate in, any underwriting of the purchase or sale of securities or property or enter into any such transaction for such purpose, or sell on account of such company jointly with any other person, firm or corporation, nor shall any such company enter into any agreement to withhold from sale any of its property, but the disposition of its property shall be at all times within the control of its Board of Directors.

Revised Law

Sec. 425.008. AUTHORIZED INVESTMENTS FOR FOREIGN COMPANIES. A foreign company shall invest the company's assets in:

(1) securities or property of the same classes in which the law of this state permits a domestic insurance company to invest; or

(2) securities permitted by other law of this state and approved by the commissioner as being of substantially the same grade as securities or property in which a domestic insurance company is permitted to invest. (V.T.I.C. Art. 3.41.)

Source Law

Art. 3.41. The assets of any "foreign company" shall be invested in securities or property of the same classes permitted by the laws of this State as to "domestic" companies or by other laws of this State in other securities approved by the Board of Insurance Commissioners as being of substantially the same grade.

Revised Law

Sec. 425.009. STUDENT LOANS. A foreign or domestic life insurance company may make loans to a student enrolled in an institution of higher education if the principal amount of the loan is insured by:

(1) the federal government under the Higher Education Act of 1965 (Pub. L. No. 89-329), as amended; or

(2) the Texas Guaranteed Student Loan Corporation under Chapter 57, Education Code. (V.T.I.C. Art. 3.41a.)

Source Law

Art. 3.41a. A foreign or domestic life insurance company may make loans to a student enrolled in an institution of higher education provided that the principal amount of the loans is insured by the federal government pursuant to the provisions of the Federal Higher Education Act of 1965, as amended (P.L. 89-329, as amended), or by the Texas Guaranteed Student Loan Corporation, Section 57.01 et seq., Texas Education Code, as added.

Revisor's Note

(End of Subchapter)

Section 1, V.T.I.C. Article 3.18, provides that "[a]fter the effective date of this Section 1, of this Article," meaning Article 3.18, an insurance company may not register a life insurance policy or annuity contract in the manner "heretofore" authorized by V.T.I.C. Chapter 3. The revised law omits this provision as executed. V.T.I.C. Article 3.18 was amended by Chapter 469, Acts of the 57th Legislature, Regular Session, 1961, which added Section 1 to that article. Before the 1961 amendment, Article 3.18 required companies to register certain life insurance policies and annuity contracts with the Board of Insurance Commissioners. The termination of the requirement to register insurance policies and annuity contracts accomplished its purpose when it took effect August 28, 1961, and is thus unnecessary. The omitted law reads:

Art. 3.18

Sec. 1. After the effective date of this Section 1, of this Article, no policy or annuity bond shall be registered in the manner heretofore authorized by this Chapter.

[Sections 425.010-425.050 reserved for expansion]

SUBCHAPTER B. STANDARD VALUATION LAW

Revised Law

Sec. 425.051. SHORT TITLE. This subchapter may be cited as the Standard Valuation Law. (V.T.I.C. Art. 3.28, Sec. 1.)

Source Law

Art. 3.28

Sec. 1. This Article shall be known as the Standard Valuation Law.

Revised Law

Sec. 425.052. DEFINITIONS. (a) In this subchapter, "reserves" means reserve liabilities.

(b) As used in this subchapter:

(1) an "issue year basis" of valuation means a valuation basis under which the interest rate used to determine the minimum valuation standard for the entire duration of the annuity or guaranteed interest contract is the calendar year valuation interest rate for the year of issue or year of purchase of the annuity or guaranteed interest contract; and

(2) a "change in fund basis" of valuation means a valuation basis under which the interest rate used to determine the minimum valuation standard applicable to each change in the fund held under the annuity or guaranteed interest contract is the calendar year valuation interest rate for the year of the change in the fund. (V.T.I.C. Art. 3.28, Secs. 2 (part), 5(c) (part).)

Source Law

Sec. 2. [The State Board of Insurance shall annually value, or cause to be valued, the reserve liabilities] (hereinafter called reserves) … .

[Sec. 5]

(1) …

(vi) … As used in this section, an issue year basis of valuation refers to a valuation basis under which the interest rate used to determine the minimum valuation standard for the entire duration of the annuity or guaranteed interest contract is the calendar year valuation interest rate for the year of issue or year of purchase of the annuity or guaranteed interest contract, and the change in fund basis of valuation refers to a valuation basis under which the interest rate used to determine the minimum valuation standard applicable to each change in the fund held under the annuity or guaranteed interest contract is the calendar year valuation interest rate for the year of the change in the fund.

Revised Law

Sec. 425.053. ANNUAL VALUATION OF RESERVES. (a) The department shall annually value or have valued the reserves for all outstanding life insurance policies and annuity and pure endowment contracts of each life insurance company engaged in business in this state. The department may certify the amount of those reserves, specifying the mortality table or tables, rate or rates of interest, and methods, including the net level premium method or another method, used in computing those reserves.

(b) In computing reserves under Subsection (a), the department may use group methods and approximate averages for fractions of a year or otherwise.

(c) Instead of valuing the reserves as required by Subsection (a) for a foreign or alien company, the department may accept any valuation made by or for the insurance supervisory official of another state or jurisdiction if:

(1) the valuation complies with the minimum standard provided by this subchapter; and

(2) the official accepts as sufficient and valid for all legal purposes a certificate of valuation made by the department that states the valuation was made in a specified manner according to which the aggregate reserves would be at least as large as they would be if computed in the manner prescribed by the law of that state or jurisdiction. (V.T.I.C. Art. 3.28, Sec. 2 (part).)

Source Law

Sec. 2. The State Board of Insurance shall annually value, or cause to be valued, the reserve liabilities … for all outstanding life insurance policies and annuity and pure endowment contracts of every life insurance company doing business in this state, and may certify the amount of any such reserves, specifying the mortality table or tables, rate or rates of interest, and methods (net level premium method or other) used in the calculation of such reserves. In calculating such reserves, the Board may use group methods and approximate averages for fractions of a year or otherwise. In lieu of the valuation of the reserves herein required of any foreign or alien company, the Board may accept any valuation made, or caused to be made, by the insurance supervisory official of any state or other jurisdiction when such valuation complies with the minimum standard herein provided and if the official of such state or jurisdiction accepts as sufficient and valid for all legal purposes the certificate of valuation of the State Board of Insurance when such certificate states the valuation to have been made in a specified manner according to which the aggregate reserves would be at least as large as if they had been computed in the manner prescribed by the law of that state or jurisdiction.

Revised Law

Sec. 425.054. ACTUARIAL OPINION REQUIRED. (a) For purposes of this section, "qualified actuary" means:

(1) a qualified actuary, as that term is defined by Section 802.002; or

(2) a person who, before September 1, 1993, satisfied the requirements of the former State Board of Insurance to submit an opinion under former Section 2A(a)(1), Article 3.28.

(b) In conjunction with the annual statement and in addition to other information required by this subchapter, each life insurance company engaged in business in this state shall annually submit to the department the opinion of a qualified actuary as to whether the reserves and related actuarial items held in support of the policies and contracts specified by commissioner rule:

(1) are computed appropriately;

(2) are based on assumptions that satisfy contractual provisions;

(3) are consistent with prior reported amounts; and

(4) comply with applicable laws of this state.

(c) The commissioner by rule shall specify the requirements of an actuarial opinion under Subsection (b), including any matters considered necessary to the opinion's scope.

(d) The opinion required by this section must:

(1) apply to all of the life insurance company's business in force, including individual and group health insurance plans; and

(2) be in the form and contain the substance specified by commissioner rule and be acceptable to the commissioner.

(e) The commissioner may accept as an opinion required to be submitted under Subsection (b) by a foreign or alien company the opinion filed by that company with the insurance supervisory official of another state if the commissioner determines that the opinion filed in the other state reasonably meets the requirements applicable to a company domiciled in this state.

(f) Except as exempted by or as otherwise provided by commissioner rule, a life insurance company shall include in the opinion required by Subsection (b) an opinion that states whether the reserves and related actuarial items held in support of the policies and contracts specified by commissioner rule adequately provide for the company's obligations under the policies and contracts, including the benefits under and expenses associated with the policies and contracts.

(g) In making the opinion under Subsection (f), the reserves and related actuarial items are considered in light of the assets held by the life insurance company with respect to the reserves and related actuarial items, including:

(1) the investment earnings on the assets; and

(2) the considerations anticipated to be received and retained under the policies and contracts.

(h) The person who certifies the opinion required by Subsection (b) must make the opinion required by Subsection (f).

(i) Rules adopted under this section may exempt life insurance companies that would be exempt from the requirements of this section under the most recently adopted regulation by the National Association of Insurance Commissioners entitled "Model Actuarial Opinion and Memorandum Regulation," or a successor to that regulation, if the commissioner considers the exemption appropriate. (V.T.I.C. Art. 3.28, Secs. 2A(a)(1), (2), (3), (b).)

Source Law

Sec. 2A. (a) General. (1) In conjunction with the annual statement and in addition to other information required by this article, every life insurance company doing business in this state shall annually submit to the State Board of Insurance the opinion of a qualified actuary as to whether the reserves and related actuarial items held in support of the policies and contracts specified by rule of the Board are computed appropriately, are based on assumptions which satisfy contractual provisions, are consistent with prior reported amounts, and comply with applicable laws of this state. The Board by rule shall define the specific requirements of this opinion and shall include any matters deemed to be necessary to the opinion's scope. For purposes of this subdivision, "qualified actuary" has the meaning assigned by Article 1.11(d) of this code. A person who, before September 1, 1993, satisfied the requirements of the Board to submit an opinion under this subdivision may also submit the opinion required by this subdivision.

(2) The opinion required under this section shall apply to all business in force including individual and group health insurance plans, in form and substance as specified by Board rule and acceptable to the commissioner.

(3) In the case of an opinion required to be submitted by a foreign or alien company, the commissioner may accept the opinion filed by that company with the insurance supervisory official of another state if the commissioner determines that the opinion filed in the other state reasonably meets the requirements applicable to a company domiciled in this state.

…

(b) Actuarial Analysis of Reserves and Assets Supporting Such Reserves. Every life insurance company, except as exempted by or pursuant to rule adopted by the Board, shall also annually include in the opinion required by Subsection (a)(1) of this section, an opinion of the same person who certifies to the opinion under Subsection (a)(1) of this section as to whether the reserves and related actuarial items held in support of the policies and contracts specified by Board rule, when considered in light of the assets held by the company with respect to the reserves and related actuarial items, including but not limited to the investment earnings on the assets and the considerations anticipated to be received and retained under the policies and contracts, make adequate provision for the company's obligations under the policies and contracts, including but not limited to the benefits under and expenses associated with the policies and contracts. The rules adopted by the Board under this section may exempt those companies that would be exempted from the requirements stated in this subsection (b) according to the most recently adopted regulation by the National Association of Insurance Commissioners entitled "Model Actuarial Opinion and Memorandum Regulation" or its successor regulation if the Board considers the exemption appropriate.

Revisor's Note

Section 2A(b), V.T.I.C. Article 3.28, refers to "including but not limited to." Other provisions revised in this chapter contain similar language. Throughout this chapter, "but not limited to" is omitted as unnecessary because Section 311.005(13), Government Code (Code Construction Act), and Section 312.011(19), Government Code, provide that "includes" and "including" are terms of enlargement and not of limitation and do not create a presumption that components not expressed are excluded.

Revised Law

Sec. 425.055. SUPPORTING MEMORANDUM FOR ACTUARIAL OPINION. (a) A memorandum that, in form and substance, complies with the commissioner's rules shall be prepared to support each actuarial opinion required by Section 425.054.

(b) The commissioner may engage an actuary or other financial specialist as defined by commissioner rule if:

(1) a life insurance company does not provide a supporting memorandum at the request of the commissioner in the time specified by rule; or

(2) the company provides a supporting memorandum, but the commissioner determines that the supporting memorandum does not meet the standards prescribed by rule or is otherwise unacceptable to the commissioner.

(1) review the actuarial opinion and the basis for the opinion; and

(2) prepare the supporting memorandum.

(d) A life insurance company is responsible for the expense of the actuary or other financial specialist under Subsection (b). (V.T.I.C. Art. 3.28, Secs. 2A(a)(6), (7).)

Source Law

(6) A memorandum, in form and substance in compliance with rules of the State Board of Insurance, shall be prepared to support each opinion.

(7) If an insurance company fails to provide a supporting memorandum at the request of the commissioner within a period specified by rule or the commissioner determines that the supporting memorandum provided by the insurance company fails to meet the standards prescribed by the Board's rules or is otherwise unacceptable to the commissioner, the commissioner may engage an actuary or other financial specialist as defined by Board rule at the expense of the company to review the opinion and the basis for the opinion and prepare such supporting memorandum.

Revised Law

Sec. 425.056. LIMITATION ON LIABILITY FOR ACTUARIAL OPINION. (a) Except in cases of fraud or wilful misconduct or as provided by Subsection (b), a person who certifies an opinion under Section 425.054 is not liable for damages to a person, other than the life insurance company covered by the opinion, for an act, error, omission, decision, or other conduct with respect to the person's opinion.

(b) Subsection (a) does not apply to an administrative penalty imposed under Chapter 84. (V.T.I.C. Art. 3.28, Sec. 2A(a)(4).)

Source Law

(4) A. Except in cases of fraud or wilful misconduct or as provided by Subsection (a)(7)B of this section, a person who certifies to an opinion under this section shall not be liable for damages to a person other than the insurance company covered by the opinion prepared by the certifying person for any act, error, omission, decision, or conduct with respect to the person's opinion.

(B) Subsection (a)7A of this section does not apply to a monetary forfeiture imposed under Section 7, Article 1.10, Insurance Code.

Revisor's Note

(1) Section 2A(a)(4)A, V.T.I.C. Article 3.28, refers to "Subsection (a)(7)B of this section." Section 2A(a)(4)(B), V.T.I.C. Article 3.28, refers to "Subsection (a)7A of this section." Section 2A(a)(7), V.T.I.C. Article 3.28, does not contain a Paragraph (A) or a Paragraph (B). From the context of Section 2A(a)(4), it is clear that the references to "(a)(7)" and "(a)7" are typographic errors, and that the intended reference is "(a)(4)." The revised law is drafted accordingly.

(2) Section 2A(a)(4)(B), V.T.I.C. Article 3.28, refers to "a monetary forfeiture imposed under Section 7, Article 1.10, Insurance Code." Section 2A was enacted by Section 11.101, Chapter 242, Acts of the 72nd Legislature, Regular Session, 1991. Section 1.06 of that act amended Section 7(a)(3), V.T.I.C. Article 1.10, to provide for "a specified monetary forfeiture" not to exceed $25,000 for a violation or failure to comply with the insurance laws of this state. Section 1.07, Chapter 685, Acts of the 73rd Legislature, Regular Session, 1993, amended Section 7(a)(3), V.T.I.C. Article 1.10, by deleting the provision for "a monetary forfeiture" and substituting a reference to "an administrative penalty in accordance with Article 1.10E," revised in 1999 as Chapter 84 of this code. The revised law is drafted accordingly.

Revised Law

Sec. 425.057. DISCIPLINARY ACTION: COMPANY OR PERSON CERTIFYING OPINION. A company or person that certifies an opinion under Section 425.054 and that violates Section 425.054 or 425.055 or rules adopted under those sections is subject to disciplinary action under Chapter 82. (V.T.I.C. Art. 3.28, Sec. 2A(a)(5).)

Source Law

(5) A company or a person who certifies to an opinion under this section and that fails to comply with or violates this section or rules adopted by the Board pursuant to this section is subject to disciplinary action under Section 7, Article 1.10, Insurance Code.

Revisor's Note

Section 2A(a)(5), V.T.I.C. Article 3.28, refers to a company or person that "fails to comply with or violates" Section 2A. The revised law omits the reference to "fails to comply with" as unnecessary because the meaning of that phrase is included in the meaning of "violates."

Revised Law

Sec. 425.058. VALUATION OF POLICY OR CONTRACT: GENERAL RULE. (a) Except as otherwise provided by Section 425.059, 425.060, 425.061, 425.062, or 425.063, the minimum standard for the valuation of an outstanding life insurance policy or annuity or pure endowment contract issued by a life insurance company on or after the date on which Chapter 1105 applies to policies issued by the company, as determined under Section 1105.002(a) or (b), is the commissioners reserve valuation method described by Sections 425.064, 425.065, and 425.068, computed using the table prescribed by this section and with interest at 3-1/2 percent or at the following rate, if applicable:

(1) in the case of a policy or contract issued on or after June 14, 1973, and before August 29, 1977, other than an annuity or pure endowment contract, four percent;

(2) in the case of a single premium life insurance policy issued on or after August 29, 1977, 5-1/2 percent; or

(3) in the case of a life insurance policy issued on or after August 29, 1977, other than a single premium life insurance policy, 4-1/2 percent.

(b) Except as provided by Subsection (c), for an ordinary life insurance policy issued on the standard basis, excluding any disability or accidental death benefits in the policy, the applicable table is the Commissioners 1941 Standard Ordinary Mortality Table, if the policy was issued before the date on which Section 1105.152 would apply to the policy, as determined under Section 1105.152(a) or (b), or the Commissioners 1958 Standard Ordinary Mortality Table, if Section 1105.152 applies to the policy. For a policy that is issued to insure a female risk:

(1) a modified net premium or present value for a policy issued before August 29, 1977, may be computed according to an age not more than three years younger than the insured's actual age; and

(2) a modified net premium or present value for a policy issued on or after August 29, 1977, may be computed according to an age not more than six years younger than the insured's actual age.

(c) For an ordinary life insurance policy issued on the standard basis, excluding any disability or accidental death benefits in the policy, and to which Subchapter B, Chapter 1105, applies, the applicable table is:

(1) the Commissioners 1980 Standard Ordinary Mortality Table;

(2) at the insurer's option for one or more specified life insurance plans, the Commissioners 1980 Standard Ordinary Mortality Table with Ten-Year Select Mortality Factors; or

(3) any ordinary mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by commissioner rule for use in determining the minimum standard valuation for a policy to which this subdivision applies.

(d) For an industrial life insurance policy issued on the standard basis, excluding any disability or accidental death benefits in the policy, the applicable table is:

(1) the 1941 Standard Industrial Mortality Table, if the policy was issued before the date on which Section 1105.153 would apply to the policy as determined under Section 1105.153(a) or (b); or

(2) if Section 1105.153 applies to the policy:

(A) the Commissioners 1961 Standard Industrial Mortality Table; or

(B) any industrial mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by commissioner rule for use in determining the minimum standard of valuation for a policy to which this subdivision applies.

(e) For an individual annuity or pure endowment contract, excluding any disability or accidental death benefits in the policy, the applicable table is the 1937 Standard Annuity Mortality Table, or at the insurer's option, the Annuity Mortality Table for 1949, Ultimate, or a modification of either table that is approved by the commissioner.

(f) For a group annuity or pure endowment contract, excluding any disability or accidental death benefits in the policy, the applicable table is:

(1) the Group Annuity Mortality Table for 1951;

(2) a modification of that table approved by the commissioner; or

(3) at the insurance company's option, a table or a modification of a table prescribed for an individual annuity or pure endowment contract by Subsection (e).

(g) For total and permanent disability benefits in or supplementary to an ordinary policy or contract, the applicable tables are:

(1) for a policy or contract issued on or after January 1, 1966:

(A) the tables of Period 2 disablement rates and the 1930 to 1950 termination rates of the 1952 Disability Study of the Society of Actuaries, with due regard to the type of benefit; or

(B) any table of disablement rates and termination rates adopted after 1980 by the National Association of Insurance Commissioners that are approved by commissioner rule for use in determining the minimum standard of valuation for a policy to which this subdivision applies;

(2) for a policy or contract issued on or after January 1, 1961, and before January 1, 1966:

(A) a table described by Subdivision (1); or

(B) at the insurance company's option, the Class (3) Disability Table (1926); or

(3) for a policy issued before January 1, 1961, the Class (3) Disability Table (1926).

(h) A table described by Subsection (g) must, for an active life, be combined with a mortality table permitted for computing the reserves for a life insurance policy.

(i) For accidental death benefits in or supplementary to a policy, the applicable table is:

(1) for a policy issued on or after January 1, 1966:

(A) the 1959 Accidental Death Benefits Table; or

(B) any accidental death benefits table adopted after 1980 by the National Association of Insurance Commissioners that is approved by commissioner rule for use in determining the minimum standard of valuation for a policy to which this subdivision applies;

(2) for a policy issued on or after January 1, 1961, and before January 1, 1966:

(A) a table described by Subdivision (1); or

(B) at the insurance company's option, the Inter-Company Double Indemnity Mortality Table; or

(3) for a policy issued before January 1, 1961, the Inter-Company Double Indemnity Mortality Table.

(j) A table described by Subsection (i) must be combined with a mortality table permitted for computing the reserves for a life insurance policy.

(k) For group life insurance, life insurance issued on the substandard basis and other special benefits, the applicable table is a table approved by the commissioner.

(l) Notwithstanding any other law, the minimum reserve requirements applicable to a policy issued under Chapter 1153 are met if, in the aggregate, the reserves are maintained at 100 percent of the 1980 Commissioner's Standard Ordinary Mortality Table, with interest that does not exceed 5.5 percent. This subsection expires September 1, 2013. (V.T.I.C. Art. 3.28, Secs. 3 (part), (a), (b), (c), (d), (e), (f), (g), (h).)

Source Law

Sec. 3. … Except as otherwise provided in Sections 4 and 5 of this article, the minimum standard for the valuation of all such policies and contracts issued on or after the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance) shall be the commissioners reserve valuation methods defined in Sections 6, 7, and 10 of this article, three and one-half per cent (3 1/2%) interest; in the case of policies and contracts, other than annuity and pure endowment contracts, issued on or after June 14, 1973, four per cent (4%) interest for such policies issued prior to August 29, 1977; or five and one-half per cent (5 1/2%) interest for single premium life insurance policies and four and one-half per cent (4 1/2%) interest for all other such policies issued on and after August 29, 1977, and the following tables:

(a) For all ordinary policies of life insurance issued on the standard basis, excluding any disability and accidental death benefits in such policies, the Commissioners 1941 Standard Ordinary Mortality Table for such policies issued prior to the operative date of Section 6 of the Standard Nonforfeiture Law for Life Insurance, as amended, the Commissioners 1958 Standard Ordinary Mortality Table for such policies issued on or after the operative date of Section 6 of the Standard Nonforfeiture Law for Life Insurance, as amended, and prior to the operative date of Section 8 of the Standard Nonforfeiture Law for Life Insurance, as amended, provided that for any category of such policies issued on female risks, all modified net premiums and present values referred to in this Act may be calculated according to an age not more than three years younger than the actual age of the insured for policies issued prior to August 29, 1977 and not more than six years younger than the actual age of the insured for policies issued on and after August 29, 1977; and for such policies issued on or after the operative date of Section 8 of the Standard Nonforfeiture Law for Life Insurance, as amended, (i) the Commissioners 1980 Standard Ordinary Mortality Table, or (ii) at the election of the company for any one or more specified plans of life insurance, the Commissioners 1980 Standard Ordinary Mortality Table with Ten-Year Select Mortality Factors, or (iii) any ordinary mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard valuation for such policies.

(b) For all industrial life insurance policies issued on the standard basis, excluding any disability and accidental death benefits in such policies, the 1941 Standard Industrial Mortality Table for such policies issued prior to the operative date of Section 7 of the Standard Nonforfeiture Law for Life Insurance, as amended, and for such policies issued on or after such operative date, the Commissioners 1961 Standard Industrial Mortality Table or any industrial mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard of valuation for such policies.

(c) For individual annuity and pure endowment contracts, excluding any disability and accidental death benefits in such policies, the 1937 Standard Annuity Mortality Table, or, at the option of the company, the Annuity Mortality Table for 1949, Ultimate, or any modification of either of these tables approved by the State Board of Insurance.

(d) For group annuity and pure endowment contracts, excluding any disability and accidental death benefits in such policies, the Group Annuity Mortality Table for 1951, any modification of such table approved by the State Board of Insurance, or, at the option of the company, any of the tables or modifications of tables specified for individual annuity and pure endowment contracts.

(e) For total and permanent disability benefits in or supplementary to ordinary policies or contracts, for policies or contracts issued on or after January 1, 1966, the tables of Period 2 disablement rates and the 1930 to 1950 termination rates of the 1952 Disability Study of the Society of Actuaries, with due regard to the type of benefit, or any tables of disablement rates and termination rates adopted after 1980 by the National Association of Insurance Commissioners that are approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard of valuation for such policies; for policies or contracts issued on or after January 1, 1961, and prior to January 1, 1966, either such tables or, at the option of the company, the Class (3) Disability Table (1926); and for policies issued prior to January 1, 1961, the Class (3) Disability Table (1926). Any such table shall, for active lives, be combined with a mortality table permitted for calculating the reserves for life insurance policies.

(f) For accidental death benefits in or supplementary to policies, for policies issued on or after January 1, 1966, the 1959 Accidental Death Benefits Table or any accidental death benefits table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard of valuation for such policies; for policies issued on or after January 1, 1961, and prior to January 1, 1966, either such table or, at the option of the company, the Inter-Company Double Indemnity Mortality Table; and for policies issued prior to January 1, 1961, the Inter-Company Double Indemnity Mortality Table. Either table shall be combined with a mortality table permitted for calculating the reserves for life insurance policies.

(g) For group life insurance, life insurance issued on the substandard basis and other special benefits, such tables as may be approved by the State Board of Insurance.

(h) Notwithstanding any other law, the minimum reserve requirements applicable to a policy issued under Article 3.53 of this code are met if, in aggregate, the reserves are maintained at 100 percent of the 1980 Commissioner's Standard Ordinary Mortality Table, with interest not to exceed 5.5 percent. This subsection expires September 1, 2013.

Revisor's Note

(1) Section 3, V.T.I.C. Article 3.28, provides for the minimum standard for the valuation of all life insurance policies and contracts "issued on or after the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance)." Similar references to "the operative date" of V.T.I.C. Article 3.44a appear throughout the source law for this subchapter.

V.T.I.C. Article 3.44a was codified as Chapter 1105 of this code by Chapter 1419, Acts of the 77th Legislature, Regular Session, 2001. Section 13, V.T.I.C. Article 3.44a, which defined the "operative date" of that article, is codified as Section 1105.002 of this code. Section 1105.002 omits the reference to "the operative date" of the law and substitutes a clear statement of the law's applicability to certain policies. In accordance with Chapter 1105, the revised law in this subchapter, for purposes of describing the policies and contracts to which a particular minimum standard of valuation applies, omits references to "the operative date" and substitutes language consistent with Section 1105.002.

(2) Section 3(a), V.T.I.C. Article 3.28, provides for the use of a specified mortality table for computing the valuation of all life insurance policies and contracts "issued prior to the operative date of Section 6 of the Standard Nonforfeiture Law for Life Insurance, as amended" (V.T.I.C. Article 3.44a) and for the use of a different table for life insurance policies "issued on or after the operative date of Section 6 of the Standard Nonforfeiture Law for Life Insurance, as amended." Section 3(a) contains similar references to "the operative date of Section 8 of the Standard Nonforfeiture Law for Life Insurance, as amended." Section 3(b), V.T.I.C. Article 3.28, refers to policies issued "prior to the operative date of Section 7 of the Standard Nonforfeiture Law for Life Insurance, as amended," and to policies issued "on or after such operative date."

As stated in Revisor's Note (1) to this section, V.T.I.C. Article 3.44a was codified as Chapter 1105 of this code. Section 6, Article 3.44a, is codified as Section 1105.152 of this code; Section 7, Article 3.44a, is codified as Section 1105.153 of this code; Section 8, Article 3.44a, is codified as Subchapter B, Chapter 1105 of this code. Each of those provisions omits the reference to "the operative date" of the law and substitutes a clear statement of the law's applicability to certain policies. In accordance with Chapter 1105, the revised law in this subchapter, for purposes of prescribing the mortality table used in computing the valuation of certain policies, omits references to "the operative date" and substitutes language consistent with Chapter 1105.

Throughout this chapter, the revised law omits references to "as amended" with respect to state statutes because under Section 311.027, Government Code (Code Construction Act), applicable to the revised law, unless expressly provided otherwise, a reference to a statute applies to all reenactments, revisions, and amendments of the statute.

Revised Law

Sec. 425.059. VALUATION OF CERTAIN ANNUITIES AND PURE ENDOWMENT CONTRACTS. (a) This section applies to an individual annuity or pure endowment contract issued on or after January 1, 1979, and an annuity or pure endowment purchased on or after January 1, 1979, under a group annuity or pure endowment contract. This section also applies to an annuity or pure endowment contract issued by an insurer after the date specified in a written notice:

(1) that was filed with the State Board of Insurance after June 14, 1973, but before January 1, 1979; and

(2) under which the insurance company filing the notice elected to comply before January 1, 1979, with former Section 4, Article 3.28, with respect to individual or group annuities and pure endowment contracts as specified by the company in the notice.

(b) Except as provided by Section 425.060, 425.061, 425.062, or 425.063, the minimum standard for the valuation of an individual or group annuity or pure endowment contract, excluding any disability or accidental death benefits in the contract, is the commissioners reserve valuation method described by Sections 425.064 and 425.065, computed using the table prescribed by this section and with interest at the following interest rate, as applicable:

(1) for an individual annuity or pure endowment contract issued before August 29, 1977, other than an individual single premium immediate annuity contract, four percent;

(2) for an individual single premium immediate annuity contract issued before August 29, 1977, six percent;

(3) for an individual annuity or pure endowment contract issued on or after August 29, 1977, other than an individual single premium immediate annuity contract or an individual single premium deferred annuity or pure endowment contract, 4-1/2 percent;

(4) for an individual single premium immediate annuity contract issued on or after August 29, 1977, 7-1/2 percent;

(5) for an individual single premium deferred annuity or pure endowment contract issued on or after August 29, 1977, 5-1/2 percent;

(6) for an annuity or pure endowment purchased before August 29, 1977, under a group annuity or pure endowment contract, six percent; or

(7) for an annuity or pure endowment purchased on or after August 29, 1977, under a group annuity or pure endowment contract, 7-1/2 percent.

(1) the 1971 Individual Annuity Mortality Table; or

(2) a modification of that table approved by the commissioner.

(d) For an individual annuity or pure endowment contract issued on or after August 29, 1977, including an individual single premium immediate annuity contract, the applicable table is:

(1) the 1971 Individual Annuity Mortality Table;

(2) an individual annuity mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by the commissioner by rule for use in determining the minimum standard of valuation for a specified type of contract to which this subsection applies; or

(3) a modification of one of those tables approved by the commissioner.

(e) For an annuity or pure endowment purchased before August 29, 1977, under a group annuity or pure endowment contract, the applicable table is:

(1) the 1971 Group Annuity Mortality Table; or

(2) a modification of that table approved by the commissioner.

(f) For an annuity or pure endowment purchased on or after August 29, 1977, under a group annuity or pure endowment contract, the applicable table is:

(1) the 1971 Group Annuity Mortality Table;

(2) a group annuity mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by the commissioner by rule for use in determining the minimum standard of valuation for an annuity or pure endowment to which this subsection applies; or

(3) a modification of one of those tables approved by the commissioner. (V.T.I.C. Art. 3.28, Sec. 4.)

Source Law

Sec. 4. Except as provided in Section 5 of this article, the minimum standard for the valuation of all individual annuity and pure endowment contracts issued on or after the operative date of this Section 4, as defined herein, and for all annuities and pure endowments purchased on or after such operative date under group annuity and pure endowment contracts shall be the commissioners reserve valuation methods defined in Sections 6 and 7 of this article and the following tables and interest rates:

(a) For individual annuity and pure endowment contracts issued prior to August 29, 1977, excluding any disability and accidental death benefits in such contracts, the 1971 Individual Annuity Mortality Table, or any modification of this table approved by the State Board of Insurance, and six per cent (6%) interest for single premium immediate annuity contracts, and four per cent (4%) interest for all other individual annuity and pure endowment contracts.

(b) For individual single premium immediate annuity contracts issued on or after August 29, 1977, excluding any disability and accidental death benefits in such contracts, the 1971 Individual Annuity Mortality Table or any individual annuity mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard of valuation for such contracts, or any modification of these tables approved by the State Board of Insurance, and seven and one-half per cent (7 1/2%) interest.

(c) For individual annuity and pure endowment contracts issued on or after August 29, 1977, other than single premium immediate annuity contracts, excluding any disability and accidental death benefits in such contracts, the 1971 Individual Annuity Mortality Table or any individual annuity mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard of valuation for such contracts, or any modification of these tables approved by the State Board of Insurance, and five and one-half per cent (5 1/2%) interest for single premium deferred annuity and pure endowment contracts and four and one-half per cent (4 1/2%) interest for all other such individual annuity and pure endowment contracts.

(d) For all annuities and pure endowments purchased prior to August 29, 1977, under group annuity and pure endowment contracts, excluding any disability and accidental death benefits purchased under such contracts, the 1971 Group Annuity Mortality Table, or any modification of this table approved by the State Board of Insurance, and six per cent (6%) interest.

(e) For all annuities and pure endowments purchased on or after August 29, 1977, under group annuity and pure endowment contracts, excluding any disability and accidental death benefits purchased under such contracts, the 1971 Group Annuity Mortality Table or any group annuity mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the State Board of Insurance for use in determining the minimum standard of valuation for such annuities and pure endowments, or any modification of these tables approved by the State Board of Insurance, and seven and one-half per cent (7 1/2%) interest.

After June 14, 1973, any company may file with the State Board of Insurance a written notice of its election to comply with the provisions of this section after a specified date before January 1, 1979, which shall be the operative date of this section for such company; provided, a company may elect a different operative date for individual annuity and pure endowment contracts from that elected for group annuity and pure endowment contracts. If a company makes no such election, the operative date of this section for such company shall be January 1, 1979.

Revised Law

Sec. 425.060. APPLICABILITY OF CALENDAR YEAR STATUTORY VALUATION INTEREST RATES. The calendar year statutory valuation interest rates as defined by Sections 425.061, 425.062, and 425.063 are the interest rates used in determining the minimum standard for the valuation of:

(1) a life insurance policy to which Subchapter B, Chapter 1105, applies;

(2) an individual annuity or pure endowment contract issued on or after January 1, 1982;

(3) an annuity or pure endowment purchased on or after January 1, 1982, under a group annuity or pure endowment contract; or

(4) the net increase, if any, in a calendar year after January 1, 1982, in amounts held under a guaranteed interest contract. (V.T.I.C. Art. 3.28, Sec. 5(a).)

Source Law

Sec. 5. (a) Applicability of This Section

(1) The calendar year statutory valuation interest rates as defined in this Section shall be the interest rates used in determining the minimum standard for valuation of:

(A) all life insurance policies issued in a particular calendar year on or after the operative date of Section 8 of the Standard Nonforfeiture Law for Life Insurance;

(B) all individual annuity and pure endowment contracts issued in a particular calendar year on or after January 1, 1982;

(C) all annuities and pure endowments purchased in a particular calendar year on or after January 1, 1982, under group annuity and pure endowment contracts; and

(D) the net increase, if any, in a particular calendar year after January 1, 1982, in amounts held under guaranteed interest contracts.

Revised Law

Sec. 425.061. COMPUTATION OF CALENDAR YEAR STATUTORY VALUATION INTEREST RATE: GENERAL RULE. (a) For purposes of Subsection (b):

(1) R1 is the lesser of R or .09;

(2) R2 is the greater of R or .09;

(3) R is the reference interest rate determined under Section 425.063; and

(4) W is the weighting factor determined under Section 425.062.

(b) The calendar year statutory valuation interest rate ("I") is determined as provided by this section, with the results rounded to the nearest one-quarter of one percent:

(1) for life insurance:

I = .03 + W(R1 - .03) + (W/2)(R2 - .09); and

(2) for a single premium immediate annuity or annuity benefits involving life contingencies arising from another annuity with a cash settlement option or from a guaranteed interest contract with a cash settlement option, or for an annuity or guaranteed interest contract without a cash settlement option, or for an annuity or guaranteed interest contract with a cash settlement option that is valued on a change in fund basis:

I = .03 + W(R - .03).

(c) For an annuity or guaranteed interest contract with a cash settlement option that is valued on an issue year basis, other than an annuity or contract described by Subsection (b)(2):

(1) the formula prescribed by Subsection (b)(1) applies to an annuity or guaranteed interest contract with a guarantee duration determined under Section 425.062(f) greater than 10 years; and

(2) the formula prescribed by Subsection (b)(2) applies to an annuity or guaranteed interest contract with a guarantee duration determined under Section 425.062(f) of 10 years or less.

(d) Notwithstanding Subsections (b) and (c), if the calendar year statutory valuation interest rate for a life insurance policy issued in a calendar year as determined under Subsection (b) or (c), as applicable, would differ from the corresponding actual rate for similar policies issued in the preceding calendar year by less than one-half of one percent, the calendar year statutory valuation interest rate for the policy is the corresponding actual rate for the preceding calendar year. For purposes of this subsection, the calendar year statutory valuation interest rate for a life insurance policy issued in a calendar year is determined for 1980 using the reference interest rate defined for 1979, and is determined for each subsequent calendar year regardless of whether Subchapter B, Chapter 1105, applies to the policy. (V.T.I.C. Art. 3.28, Sec. 5(b).)

Source Law

(b) Calendar Year Statutory Valuation Interest Rates

(1) The calendar year statutory valuation interest rates, "I," shall be determined as follows and the results rounded to the nearer one-fourth of one per cent (1/4 of 1%):

(A) For life insurance,

I = .03 + W(R1 - .03) + W/2(R2 - .09).

(B) For single premium immediate annuities and for annuity benefits involving life contingencies arising from other annuities with cash settlement options and from guaranteed interest contracts with cash settlement options,

I = .03 + W(R - .03)

where R1 is the lesser of R and .09,

R2 is the greater of R and .09,

R is the reference interest rate defined in this section, and

W is the weighting factor defined in this section.

(C) For other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, valued on an issue year basis, except as stated in Paragraph (B) of Subdivision (1) of Subsection (b) of this section, the formula for life insurance stated in Paragraph (A) of Subdivision (1) of Subsection (b) of this section shall apply to annuities and guaranteed interest contracts with guarantee durations in excess of 10 years and the formula for single premium immediate annuities stated in Paragraph (B) of Subdivision (1) of Subsection (b) of this section shall apply to annuities and guaranteed interest contracts with guarantee duration of 10 years or less.

(D) For other annuities with no cash settlement options and for guaranteed interest contracts with no cash settlement options, the formula for single premium immediate annuities stated in Paragraph (B) of Subdivision (1) of Subsection (b) of this section shall apply.

(E) For other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, valued on a change in fund basis, the formula for single premium immediate annuities stated in Paragraph (B) of Subdivision (1) of Subsection (b) of this section shall apply.

(2) However, if the calendar year statutory valuation interest rate for any life insurance policies issued in any calendar year determined without reference to this sentence differs from the corresponding actual rate for similar policies issued in the immediately preceding calendar year by less than one-half of one per cent (1/2 of 1%), the calendar year statutory valuation interest rate for such life insurance policies shall be equal to the corresponding actual rate for the immediately preceding calendar year. For purposes of applying the immediately preceding sentence, the calendar year statutory valuation interest rate for life insurance policies issued in a calendar year shall be determined for 1980 (using the reference interest rate defined for 1979) and shall be determined for each subsequent calendar year regardless of when Section 8 of the Standard Nonforfeiture Law for Life Insurance becomes operative.

Revisor's Note

Section 5(b)(2), V.T.I.C. Article 3.28, refers to the "immediately preceding calendar year." Similar provisions elsewhere in the source law for this chapter contain similar references. Throughout this chapter, the revised law omits "immediately" as unnecessary. The "preceding" means the "immediately preceding."

Revised Law

Sec. 425.062. WEIGHTING FACTORS. (a) This section prescribes the weighting factors referred to in the formulas prescribed by Section 425.061.

(b) The weighting factor for a life insurance policy is determined by the following table:

	Guarantee Duration (Years)	Weighting Factor
	10 or less	.50
	More than 10, but not more than 20	.45
	More than 20	.35

(c) For purposes of Subsection (b), the guarantee duration is the maximum number of years the life insurance can remain in force on a basis guaranteed in the policy or under options to convert to life insurance plans with premium rates or nonforfeiture values, or both, that are guaranteed in the original policy.

(d) The weighting factor for a single premium immediate annuity or for annuity benefits involving life contingencies arising from another annuity with a cash settlement option or from a guaranteed interest contract with a cash settlement option is .80.

(e) The weighting factor for an annuity or a guaranteed interest contract, other than an annuity or contract to which Subsection (d) applies, is determined by the following tables:

(1) For an annuity or guaranteed interest contract that is valued on an issue year basis:

Guarantee Duration (Years)	Weighting Factor for Plan Type
	A	B	C
5 or less:	.80	.60	.50
More than 5, but not more
than 10:	.75	.60	.50
More than 10, but not more
than 20:	.65	.50	.45
More than 20:	.45	.35	.35

(2) For an annuity or guaranteed interest contract that is valued on a change in fund basis, the factors prescribed by Subdivision (1) increased by:

Plan Type

A B C

.15 .25 .05

(3) For an annuity or guaranteed interest contract that is valued on an issue year basis that does not guarantee interest on considerations received more than one year after issue or purchase, other than an annuity or contract that does not have a cash settlement option, or an annuity or guaranteed interest contract that is valued on a change in fund basis that does not guarantee interest rates on considerations received more than 12 months after the valuation date, the factors prescribed by Subdivision (1) or determined under Subdivision (2), as appropriate, increased by:

Plan Type

A B C

.05 .05 .05

(f) For purposes of Subsection (e):

(1) for an annuity or guaranteed interest contract with a cash settlement option, the guarantee duration is the number of years for which the contract guarantees interest rates greater than the calendar year statutory valuation interest rate for life insurance policies with guarantee duration greater than 20 years; and

(2) for an annuity or guaranteed interest contract without a cash settlement option, the guarantee duration is the number of years from the issue or purchase date to the date annuity benefits are scheduled to begin.

(g) For purposes of Subsection (e):

(1) a policy is a "Plan Type A" policy if:

(A) the policyholder may withdraw funds at any time, but only:

(i) with an adjustment to reflect changes in interest rates or asset values after the insurance company receives the funds;

(ii) without an adjustment described by Subparagraph (i), provided that the withdrawal is in installments over five years or more; or

(iii) as an immediate life annuity; or

(B) the policyholder is not permitted to withdraw funds at any time;

(2) a policy is a "Plan Type B" policy if:

(A) before the expiration of the interest rate guarantee:

(i) the policyholder may withdraw funds, but only:

(a) with an adjustment to reflect changes in interest rates or asset values after the insurance company receives the funds; or

(b) without an adjustment described by Subsubparagraph (a), provided that the withdrawal is in installments over five years or more; or

(ii) the policyholder is not permitted to withdraw funds; and

(B) on the expiration of the interest rate guarantee, the policyholder may withdraw funds in a single sum or in installments over less than five years, without an adjustment described by Paragraph (A)(i); and

(3) a policy is a "Plan Type C" policy if the policyholder may withdraw funds before the expiration of the interest rate guarantee in a single sum or in installments over less than five years:

(A) without an adjustment to reflect changes in interest rates or asset values after the insurance company receives the funds; or

(B) subject only to a fixed surrender charge that is a percentage of the fund stipulated in the contract.

(h) An insurance company may elect to value an annuity or guaranteed interest contract with a cash settlement option on an issue year basis or on a change in fund basis. A company must value an annuity or guaranteed interest contract without a cash settlement option on an issue year basis. (V.T.I.C. Art. 3.28, Sec. 5(c) (part).)

Source Law

(1) The weighting factors referred to in the formulas stated above are given in the following tables:

(A) Weighting Factors for Life Insurance:

	Guarantee Duration (Years)	Weighting Factors
	10 or less	.50
	More than 10, but not more than 20	.45
	More than 20	.35

For life insurance, the guarantee duration is the maximum number of years the life insurance can remain in force on a basis guaranteed in the policy or under options to convert to plans of life insurance with premium rates or nonforfeiture values or both which are guaranteed in the original policy;

(B) Weighting factor for single premium immediate annuities and for annuity benefits involving life contingencies arising from other annuities with cash settlement options and guaranteed interest contracts with cash settlement options:

.80

(C) Weighting factors for other annuities and for guaranteed interest contracts, except as stated in Paragraph (B) of Subdivision (1) of Subsection (c) of this section, shall be as specified in tables (i), (ii), and (iii) below, according to the rules and definitions in (iv), (v), and (vi) below:

(i) For annuities and guaranteed interest contracts valued on an issue year basis:

Guarantee Duration	Weighting Factor for
(Years)	Plan Type
	A	B	C
5 or less:	.80	.60	.50
More than 5, but not more
than 10:	.75	.60	.50
More than 10, but not more
than 20:	.65	.50	.45
More than 20:	.45	.35	.35
	Plan Type
	A	B	C

(ii) For annuities and guaranteed interest contracts valued on a change in fund basis, the factors shown in (i) above increased

by:	.15	.25	.05
	Plan Type
	A	B	C

(iii) For annuities and guaranteed interest contracts valued on an issue year basis (other than those with no cash settlement options) which do not guarantee interest on considerations received more than one year after issue or purchase and for annuities and guaranteed interest contracts valued on a change in fund basis which do not guarantee interest rates on considerations received more than 12 months beyond the valuation date, the factors shown in (i) or derived in (ii) increased

by:

.05

(iv) For other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, the guarantee duration is the number of years for which the contract guarantees interest rates in excess of the calendar year statutory valuation interest rate for life insurance policies with guarantee duration in excess of 20 years. For other annuities with no cash settlement options and for guaranteed interest contracts with no cash settlement options, the guarantee duration is the number of years from the date of issue or date of purchase to the date annuity benefits are scheduled to commence.

(v) Plan type as used in the above tables (i), (ii), and (iii) is defined as follows:

Plan Type A: At any time policyholder may withdraw funds only (1) with an adjustment to reflect changes in interest rates or asset values since receipt of funds by the insurance company, or (2) without such adjustment but in installments over five years or more, or (3) as an immediate life annuity, or (4) no withdrawal permitted.

Plan Type B: Before expiration of the interest rate guarantee, the policyholder may withdraw funds only (1) with an adjustment to reflect changes in interest rates or asset values since receipt of the funds by the insurance company, or (2) without such adjustment but in installments over five years or more, or (3) no withdrawal permitted. At the end of interest rate guarantee, funds may be withdrawn without such adjustment in a single sum or installments over less than five years.

Plan Type C: Policyholder may withdraw funds before expiration of interest rate guarantee in a single sum or installments over less than five years either (1) without adjustment to reflect changes in interest rates or asset values since receipt of the funds by the insurance company, or (2) subject only to a fixed surrender charge stipulated in the contract as a percentage of the fund.

(vi) A company may elect to value guaranteed interest contracts with cash settlement options and annuities with cash settlement options on either an issue year basis or on a change in fund basis. Guaranteed interest contracts with no cash settlement options and other annuities with no cash settlement options must be valued on an issue year basis… .

Revised Law

Sec. 425.063. REFERENCE INTEREST RATE. (a) In this section, "Moody's Corporate Bond Yield Average" means the Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(b) Except as provided by Subsection (g), the reference interest rate for purposes of Section 425.061 is determined as provided by Subsections (c)-(f).

(c) The reference interest rate for a life insurance policy is the lesser of the average over a period of 36 months or the average over a period of 12 months, ending on June 30 of the calendar year preceding the year of issue, of the Moody's Corporate Bond Yield Average.

(d) The reference interest rate is the average over a period of 12 months, ending on June 30 of the calendar year of issue or year of purchase, of the Moody's Corporate Bond Yield Average for:

(1) a single premium immediate annuity or annuity benefits involving life contingencies arising from another annuity with a cash settlement option or from a guaranteed interest contract with a cash settlement option;

(2) an annuity or guaranteed interest contract with a cash settlement option, other than an annuity or contract described by Subdivision (1), that is valued on an issue year basis and has a guarantee duration as determined under Section 425.062(f) of 10 years or less; or

(3) an annuity or guaranteed interest contract without a cash settlement option.

(e) The reference interest rate is the lesser of the average over a period of 36 months or the average over a period of 12 months, ending on June 30 of the calendar year of issue or purchase, of the Moody's Corporate Bond Yield Average for an annuity or guaranteed interest contract with a cash settlement option, other than an annuity or contract described by Subsection (d)(1), that is valued on an issue year basis and has a guarantee duration as determined under Section 425.062(f) greater than 10 years.

(f) The reference interest rate is the average over a period of 12 months, ending on June 30 of the calendar year of the change in the fund, of the Moody's Corporate Bond Yield Average, for an annuity or guaranteed interest contract with a cash settlement option, other than an annuity or contract described by Subsection (d)(1), that is valued on a change in fund basis.

(g) At least annually, the commissioner shall:

(1) determine whether the reference interest rates prescribed by Subsections (c), (d), (e), and (f) continue to be a reasonably accurate approximation of the average yield achieved from purchases in the United States in publicly quoted markets of investment grade fixed term and fixed interest corporate obligations for the periods referenced in Subsection (c), (d), (e), or (f), as applicable; and

(2) if the commissioner determines that a reference interest rate prescribed by Subsection (c), (d), (e), or (f) is not a reasonably accurate approximation of the average yield described by Subdivision (1), adopt rules in the manner prescribed by Chapters 2001 and 2002, Government Code, to prescribe an alternative method of determining a reference interest rate, as appropriate, that is a reasonably accurate approximation of that average yield. (V.T.I.C. Art. 3.28, Secs. 5(d), (e).)

Source Law

(d) Reference Interest Rate

(1) Except as provided in Subsection (e) of this section, the reference interest rate referred to in Subsection (b) of this section shall be defined as follows:

(A) For all life insurance, the lesser of the average over a period of 36 months and the average over a period of 12 months, ending on June 30 of the calendar year next preceding the year of issue, of Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(B) For single premium immediate annuities and for annuity benefits involving life contingencies arising from other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, the average over a period of 12 months, ending on June 30 of the calendar year of issue or year of purchase, of Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(C) For other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, valued on a year of issue basis, except as stated in Paragraph (B) of Subdivision (1) of Subsection (d) of this section, with guarantee duration in excess of 10 years, the lesser of the average over a period of 36 months and the average over a period of 12 months, ending on June 30 of the calendar year of issue or purchase, of Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(D) For other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, valued on a year of issue basis, except as stated in Paragraph (B) of Subdivision (1) of Subsection (d) of this section, with guarantee duration of 10 years or less, the average over a period of 12 months, ending on June 30 of the calendar year of issue or purchase, of Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(E) For other annuities with no cash settlement options and for guaranteed interest contracts with no cash settlement options, the average over a period of 12 months, ending on June 30 of the calendar year of issue or purchase, of Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(F) For other annuities with cash settlement options and guaranteed interest contracts with cash settlement options, valued on a change in fund basis, except as stated in Paragraph (B) of Subdivision (1) of Subsection (d) of this section, the average over a period of 12 months, ending on June 30 of the calendar year of the change in the fund, of Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published by Moody's Investors Service, Inc.

(e) State Board of Insurance Promulgation of Definitions of Reference Interest Rate

The State Board of Insurance shall, not less than annually, determine whether the definition of reference interest rates as specified in Subsection (d) of this section continues to be a reasonably accurate approximation of the average yield achieved from purchases in the United States in publicly quoted markets of investment grade fixed term and fixed interest corporate obligations for the times specified in such subsection and shall, if it determines that such definition is no longer such reasonably accurate approximation, promulgate rules in the manner specified in the Administrative Procedure and Texas Register Act, as amended (Article 6252-13a, Vernon's Texas Civil Statutes), to adopt such alternative methods as are appropriate to achieve such purpose.

Revisor's Note

Section 5(e), V.T.I.C. Article 3.28, refers to "the Administrative Procedure and Texas Register Act, as amended (Article 6252-13a, Vernon's Texas Civil Statutes)." Article 6252-13a was codified in 1993 as Chapters 2001 and 2002, Government Code. The revised law is drafted accordingly.

Revised Law

Sec. 425.064. COMMISSIONERS RESERVE VALUATION METHOD. (a) Except as otherwise provided by Sections 425.065 and 425.068 and subject to Subsection (b), for the life insurance and endowment benefits of a policy that provides for a uniform amount of insurance and that requires the payment of uniform premiums, the reserve according to the commissioners reserve valuation method is the difference, if greater than zero, of the present value on the date of valuation of those future guaranteed benefits, minus the present value on that date of any future modified net premiums for a policy described by this subsection. The modified net premiums for a policy described by this subsection are a uniform percentage of the respective contract premiums for those benefits, so that the present value on the policy's issue date of all the modified net premiums is equal to the sum of:

(1) the present value on that date of those benefits; and

(2) the difference, if greater than zero, between:

(A) a net level annual premium equal to the present value on the policy's issue date of the benefits provided for after the first policy year, divided by the present value on the policy's issue date of an annuity of one per year, payable on the first policy anniversary and on each subsequent policy anniversary on which a premium becomes due; and

(B) a net one-year term premium for the benefits provided for in the first policy year.

(b) A net level annual premium under Subsection (a)(2)(A) may not exceed the net level annual premium on the 19-year premium whole life plan for insurance of the same amount at an age that is one year older than the age on the policy's issue date.

(c) This subsection applies only to a life insurance policy issued on or after January 1, 1985, for which the contract premium for the first policy year exceeds the contract premium for the second year, for which a comparable additional benefit is not provided in the first year for the excess premium, and that provides an endowment benefit, a cash surrender value, or a combination of an endowment benefit and cash surrender value, in an amount greater than the excess premium. For purposes of this subsection, the "assumed ending date" is the first policy anniversary on which the sum of any endowment benefit and any cash surrender value available on that date is greater than the excess premium. The reserve according to the commissioners reserve valuation method for a policy to which this subsection applies as of any policy anniversary occurring on or before the assumed ending date is, except as otherwise provided by Section 425.068, the greater of:

(1) the reserve as of the policy anniversary computed as prescribed by Subsection (a); or

(2) the reserve as of the policy anniversary computed as prescribed by Subsection (a) but with:

(A) the value prescribed by Subsection (a)(2)(A) reduced by 15 percent of the amount of the excess first-year premium;

(B) each present value of a benefit or premium determined without reference to a premium or benefit provided under the policy after the assumed ending date;

(D) the cash surrender value provided on the assumed ending date considered to be an endowment benefit.

(d) In making the comparison required by Subsection (c), the mortality tables and interest bases described by Sections 425.058, 425.061, 425.062, and 425.063 must be used.

(e) Reserves according to the commissioners reserve valuation method for the following policies, contracts, and benefits must be computed by a method consistent with the principles of this section:

(1) a life insurance policy that provides for a varying amount of insurance or that requires the payment of varying premiums;

(2) a group annuity or pure endowment contract purchased under a retirement or deferred compensation plan established or maintained by an employer, including a partnership or sole proprietorship, by an employee organization, or by both, other than a plan providing individual retirement accounts or individual retirement annuities under Section 408, Internal Revenue Code of 1986, and that section's subsequent amendments;

(3) disability or accidental death benefits in a policy or contract; and

(4) all other benefits, other than life insurance and endowment benefits in a life insurance policy or benefits provided by any other annuity or pure endowment contract. (V.T.I.C. Art. 3.28, Sec. 6.)

Source Law

Sec. 6. Except as otherwise provided in Sections 7 and 10 of this article, reserves according to the commissioners reserve valuation method, for the life insurance and endowment benefits of policies providing for a uniform amount of insurance and requiring the payment of uniform premiums shall be the excess, if any, of the present value, at the date of valuation, of such future guaranteed benefits provided for by such policies, over the then present value of any future modified net premiums therefor. The modified net premiums for any such policy shall be such uniform percentage of the respective contract premiums for such benefits that the present value, at the date of issue of the policy, of all such modified net premiums shall be equal to the sum of the then present value of such benefits provided for by the policy and the excess of (a) over (b), as follows:

(a) A net level annual premium equal to the present value, at the date of issue, of such benefits provided for after the first policy year, divided by the present value, at the date of issue, of an annuity of one per annum payable on the first and each subsequent anniversary of such policy on which a premium falls due; provided, however, that such net level annual premium shall not exceed the net level annual premium on the nineteen year premium whole life plan for insurance of the same amount at an age one year higher than the age at issue of such policy.

(b) A net one year term premium for such benefits provided for in the first policy year.

Provided that for any life insurance policy issued on or after January 1, 1985, for which the contract premium in the first policy year exceeds that of the second year and for which no comparable additional benefit is provided in the first year for such excess and which provides an endowment benefit or a cash surrender value or a combination thereof in an amount greater than such excess premium, the reserve according to the commissioners reserve valuation method as of any policy anniversary occurring on or before the assumed ending date defined herein as the first policy anniversary on which the sum of any endowment benefit and any cash surrender value then available is greater than such excess premium shall, except as otherwise provided in Section 10 of this article, be the greater of the reserve as of such policy anniversary calculated as previously described in this Section 6 and the reserve as of such policy anniversary calculated as previously described in this Section 6 but with (i) the value defined in Subsection (a) of Section 6 of this article being reduced by fifteen per cent (15%) of the amount of such excess first year premium, (ii) all present values of benefits and premiums being determined without reference to premiums or benefits provided for by the policy after the assumed ending date, (iii) the policy being assumed to mature on such date as an endowment, and (iv) the cash surrender value provided on such date being considered as an endowment benefit. In making the above comparison the mortality and interest bases stated in Sections 3 and 5 of this article shall be used.

Reserves according to the commissioners reserve valuation method for: (1) life insurance policies providing for a varying amount of insurance or requiring the payment of varying premiums; (2) group annuity and pure endowment contracts purchased under a retirement plan or plan of deferred compensation, established or maintained by an employer (including a partnership or sole proprietorship) or by an employee organization, or by both, other than a plan providing individual retirement accounts or individual retirement annuities under Section 408 of the Internal Revenue Code, as now or hereafter amended; (3) disability and accidental death benefits in all policies and contracts; and (4) all other benefits, except life insurance and endowment benefits in life insurance policies and benefits provided by all other annuity and pure endowment contracts; shall be calculated by a method consistent with the principles of the preceding paragraphs of this section.

Revised Law

Sec. 425.065. COMMISSIONERS ANNUITY RESERVE VALUATION METHOD. (a) This section applies to an annuity or pure endowment contract other than a group annuity or pure endowment contract purchased under a retirement or deferred compensation plan established or maintained by an employer, including a partnership or sole proprietorship, by an employee organization, or by both, other than a plan providing individual retirement accounts or individual retirement annuities under Section 408, Internal Revenue Code of 1986, and that section's subsequent amendments.

(b) Reserves according to the commissioners annuity reserve method for benefits under an annuity or pure endowment contract, excluding any disability or accidental death benefits in the contract, are the greatest of the respective excesses of the present values on the valuation date of the future guaranteed benefits under the contract at the end of each respective contract year, including guaranteed nonforfeiture benefits, minus the present value on the valuation date of any future valuation considerations derived from future gross considerations that are required by the contract terms and that become payable before the end of the respective contract year. The future guaranteed benefits must be determined by using the mortality table, if any, and the interest rate or rates specified in the contract for determining guaranteed benefits. The valuation considerations are the portions of the respective gross considerations applied under the contract terms to determine nonforfeiture values. (V.T.I.C. Art. 3.28, Sec. 7.)

Source Law

Sec. 7. This section shall apply to all annuity and pure endowment contracts other than group annuity and pure endowment contracts purchased under a retirement plan or plan of deferred compensation, established or maintained by an employer (including a partnership or sole proprietorship) or by an employee organization, or by both, other than a plan providing individual retirement accounts or individual retirement annuities under Section 408 of the Internal Revenue Code, as now or hereafter amended.

Reserves according to the commissioners annuity reserve method for benefits under annuity or pure endowment contracts, excluding any disability and accidental death benefits in such contracts, shall be the greatest of the respective excesses of the present values, at the date of valuation, of the future guaranteed benefits, including guaranteed nonforfeiture benefits, provided for by such contracts at the end of each respective contract year, over the present value, at the date of valuation, of any future valuation considerations derived from future gross considerations, required by the terms of such contract, that become payable prior to the end of such respective contract year. The future guaranteed benefits shall be determined by using the mortality table, if any, and the interest rate or rates specified in such contracts for determining guaranteed benefits. The valuation considerations are the portions of the respective gross considerations applied under the terms of such contracts to determine nonforfeiture values.

Revised Law

Sec. 425.066. MINIMUM AGGREGATE RESERVES. (a) An insurance company's aggregate reserves for all life insurance policies, excluding disability or accidental death benefits, issued by the company on or after the date on which Chapter 1105 applies to policies issued by the company, as determined under Section 1105.002(a) or (b), may not be less than the aggregate reserves computed in accordance with the methods prescribed by Sections 425.064, 425.065, 425.068, and 425.069 and the mortality table or tables and interest rate or rates used in computing nonforfeiture benefits for those policies.

(b) The aggregate reserves of an insurance company to which this section applies for all policies, contracts, and benefits may not be less than the aggregate reserves determined to be necessary to issue a favorable opinion under Section 425.054. (V.T.I.C. Art. 3.28, Secs. 8, 8A.)

Source Law

Sec. 8. In no event shall a company's aggregate reserves for all life insurance policies, excluding disability and accidental death benefits, issued on or after the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance), be less than the aggregate reserves calculated in accordance with the methods set forth in Sections 6, 7, 10, and 11 and the mortality table or tables and rate or rates of interest used in calculating nonforfeiture benefits for such policies.

Sec. 8A. In no event shall aggregate reserves of a company covered by Section 8 of this article for all policies, contracts, and benefits be less than the aggregate reserves determined to be necessary to render the opinion required by Section 2A of this article.

Revisor's Note

Section 8A, V.T.I.C. Article 3.28, refers to the aggregate reserves necessary to render "the opinion" required by Section 2A, V.T.I.C. Article 3.28, revised in relevant part in this chapter as Section 425.054. That section requires a life insurance company to submit to the Texas Department of Insurance the opinion of an actuary regarding, in part, whether the company's reserves comply with applicable laws of this state. Throughout this subchapter, the revised law substitutes references to "a favorable opinion" for references to "the opinion" in this context for clarity because the opinion submitted under Section 2A could be a negative opinion, and it is clear from the context of Section 8A that the quoted reference is intended to refer to aggregate reserves necessary for a favorable opinion.

Revised Law

Sec. 425.067. OPTIONAL RESERVE COMPUTATIONS. (a) Reserves for a policy or contract issued by a life insurance company before the date on which Chapter 1105 would apply to the policy or contract, as determined under Section 1105.002(a) or (b), may be computed, at the company's option, according to any standard that produces greater aggregate reserves for all those policies and contracts than the minimum reserves required by the laws applicable to those policies and contracts immediately before that date.

(b) Reserves for any category, as established by the commissioner, of policies, contracts, or benefits issued by a life insurance company on or after the date on which Chapter 1105 applies to policies, contracts, or benefits issued by the company, as determined under Section 1105.002(a) or (b), may be computed, at the company's option, according to any standard that produces greater aggregate reserves for the category than the minimum aggregate reserves computed according to the standard provided by this subchapter, but the interest rate or rates used for those policies and contracts, other than annuity and pure endowment contracts, may not be higher than the corresponding interest rate or rates used in computing any nonforfeiture benefits provided in those policies or contracts.

(c) An insurance company that has adopted a standard of valuation that produces greater minimum aggregate reserves than the aggregate reserves computed according to the standard provided by this subchapter may, with the commissioner's approval, adopt any lower standard of valuation that produces aggregate reserves at least equal to the minimum aggregate reserves computed according to the standard provided by this subchapter.

(d) For purposes of this section, the holding of additional reserves previously determined to be necessary to issue a favorable opinion under Section 425.054 may not be considered to be the adoption of a higher standard of valuation. (V.T.I.C. Art. 3.28, Secs. 9, 9A.)

Source Law

Sec. 9. Reserves for all policies and contracts issued prior to the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance) may be calculated, at the option of the company, according to any standards which produce greater aggregate reserves for all such policies and contracts than the minimum reserves required by the laws in effect immediately prior to such date.

Reserves for any category of policies, contracts or benefits as established by the State Board of Insurance, issued on or after the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance), may be calculated, at the option of the company, according to any standards which produce greater aggregate reserves for such category than those calculated according to the minimum standard herein provided, but the rate or rates of interest used for policies and contracts, other than annuity and pure endowment contracts, shall not be higher than the corresponding rate or rates of interest used in calculating any nonforfeiture benefits provided therein.

Any such company which at any time shall have adopted any standard of valuation producing greater aggregate reserves than those calculated according to the minimum standard herein provided may, with the approval of the State Board of Insurance, adopt any lower standard of valuation, but not lower than the minimum herein provided.

Sec. 9A. For the purposes of Section 9 of this article, the holding of additional reserves previously determined to be necessary to render the opinion required by Section 2A of this article shall not be deemed to be the adoption of a higher standard of valuation.

Revised Law

Sec. 425.068. RESERVE COMPUTATION: GROSS PREMIUM CHARGED LESS THAN VALUATION NET PREMIUM. (a) If in a contract year the gross premium charged by a life insurance company on a policy or contract is less than the valuation net premium for the policy or contract computed by the method used in computing the reserve on the policy or contract but using the minimum valuation mortality standards and interest rate, the minimum reserve required for the policy or contract is the greater of:

(1) the reserve computed according to the mortality table, interest rate, and method actually used for the policy or contract; or

(2) the reserve computed by the method actually used for the policy or contract but using the minimum valuation mortality standards and interest rate and replacing the valuation net premium with the actual gross premium in each contract year for which the valuation net premium exceeds the actual gross premium.

(b) The minimum valuation mortality standards and interest rate under Subsection (a) are the standards and rate provided by Sections 425.058, 425.061, 425.062, and 425.063.

(c) This subsection applies only to a life insurance policy issued on or after January 1, 1985, for which the gross premium for the first policy year exceeds the gross premium for the second policy year, for which a comparable additional benefit is not provided in the first year for the excess premium, and that provides an endowment benefit, a cash surrender value, or a combination of an endowment benefit and cash surrender value, in an amount greater than the excess premium. For a policy to which this subsection applies, Subsections (a) and (b) shall be applied as if the method actually used in computing the reserve for the policy were the method described in Section 425.064, ignoring Section 425.064(c). The minimum reserve at each policy anniversary is the greater of:

(1) the minimum reserve computed in accordance with Section 425.064, including Section 425.064(c); or

(2) the minimum reserve computed in accordance with this section. (V.T.I.C. Art. 3.28, Sec. 10.)

Source Law

Sec. 10. If in any contract year the gross premium charged by any life insurance company on any policy or contract is less than the valuation net premium for the policy or contract calculated by the method used in calculating the reserve thereon but using the minimum valuation standards of mortality and rate of interest, the minimum reserve required for such policy or contract shall be the greater of either the reserve calculated according to the mortality table, rate of interest, and method actually used for such policy or contract, or the reserve calculated by the method actually used for such policy or contract but using the minimum valuation standards of mortality and rate of interest and replacing the valuation net premium by the actual gross premium in each contract year for which the valuation net premium exceeds the actual gross premium. The minimum valuation standards of mortality and rate of interest referred to in this section are those standards stated in Sections 3 and 5 of this article.

Provided that for any life insurance policy issued on or after January 1, 1985, for which the gross premium in the first policy year exceeds that of the second year and for which no comparable additional benefit is provided in the first year for such excess and which provides an endowment benefit or a cash surrender value or a combination thereof in an amount greater than such excess premium, the foregoing provisions of this Section 10 shall be applied as if the method actually used in calculating the reserve for such policy were the method described in Section 6 of this article, ignoring the second paragraph of Section 6. The minimum reserve at each policy anniversary of such a policy shall be the greater of the minimum reserve calculated in accordance with Section 6, including the second paragraph of that section, and the minimum reserve calculated in accordance with this Section 10.

Revised Law

Sec. 425.069. RESERVE COMPUTATION: INDETERMINATE PREMIUM PLANS AND CERTAIN OTHER PLANS. (a) For a life insurance plan that provides for future premium determination, the amounts of which are to be determined by the insurance company based on estimates of future experience, or a life insurance plan or annuity for which the minimum reserves cannot be determined by the methods described by Sections 425.064, 425.065, and 425.068, the reserves held must:

(1) be appropriate in relation to the benefits and the pattern of premiums for the plan; and

(2) be computed by a method that is consistent with the principles of this subchapter, as determined by commissioner rule.

(b) Notwithstanding any other provision of state law, the commissioner must affirmatively approve a policy, contract, or certificate that provides life insurance under a plan described by Subsection (a) before the policy, contract, or certificate may be marketed, issued, delivered, or used in this state. (V.T.I.C. Art. 3.28, Sec. 11.)

Source Law

Sec. 11. In the case of any plan of life insurance which provides for future premium determination, the amounts of which are to be determined by the insurance company based on then estimates of future experience, or in the case of any plan of life insurance or annuity which is of such a nature that the minimum reserves cannot be determined by the methods described in Sections 6, 7, and 10 of this article, the reserves which are held under any such plan must:

(a) be appropriate in relation to the benefits and the pattern of premiums for that plan, and

(b) be computed by a method which is consistent with the principles of this Standard Valuation Law, as determined by regulations promulgated by the State Board of Insurance.

Notwithstanding any other provision in the laws of this state, any policy, contract, or certificate providing life insurance under any such plan must be affirmatively approved by the State Board of Insurance before it can be marketed, issued, delivered, or used in this state.

Revisor's Note

Section 11, V.T.I.C. Article 3.28, refers to "then" estimates of future experience. The revised law omits the reference to "then" as unnecessary because it does not add to the clear meaning of the law. Similar changes have been made throughout this chapter.

Revised Law

Sec. 425.070. COMPUTATION OF RESERVE FOR CERTAIN POLICIES BY CALENDAR YEAR OF ISSUE. (a) The reserve for a policy or contract issued by a life insurance company before the date on which Chapter 1105 would apply to the policy or contract, as determined under Section 1105.002(a) or (b), must be computed in accordance with the terms of the policy or contract and this section.

(b) For a policy issued before January 1, 1910, the computation must be based on the American Experience Table of Mortality and 4-1/2 percent annual interest.

(1) the Actuaries or Combined Experience Table of Mortality and four percent annual interest, if the interest rate guaranteed in the policy is four percent annually or higher; or

(2) the American Experience Table of Mortality and the lower rate specified in the policy, if the policy was issued on a reserve basis of an interest rate lower than four percent annually.

(d) For a policy issued on or after January 1, 1948, the computation must be based on the mortality table and interest rate specified in the policy, provided that:

(1) the specified interest rate may not exceed 3-1/2 percent annually;

(2) the specified table for a policy, other than an industrial life insurance policy, is the American Experience Table of Mortality, the American Men Ultimate Table of Mortality, the Commissioners 1941 Standard Ordinary Mortality Table, or, for a policy issued after December 31, 1959, the Commissioners 1958 Standard Ordinary Mortality Table; and

(3) the specified table for an industrial life insurance policy is the American Experience Table of Mortality, the Standard Industrial Mortality Table, the Sub-Standard Industrial Mortality Table, the 1941 Standard Industrial Mortality Table, or the 1941 Sub-Standard Industrial Mortality Table, or, for a policy issued after December 31, 1963, the Commissioners 1961 Standard Industrial Mortality Table.

(e) For a policy, other than an industrial life insurance policy, issued after December 31, 1959, to insure a female risk, the computation must be based on any mortality table and interest rate permitted under Subsection (d) and specified in the policy but may, at the insurance company's option, be based on an age not more than three years younger than the insured's actual age.

(f) Except as otherwise provided by Section 425.059 for coverage purchased under a group annuity or pure endowment contract to which that section applies, for a policy issued on a substandard risk, an annuity contract, or a contract or policy for disability benefits or accidental death benefits, the computation must be based on the standards and methods adopted by the insurance company and approved by the commissioner.

(g) For a group insurance policy issued before May 15, 1947, the computation must be based on the American Men Ultimate Table of Mortality with interest at the rate of three percent or 3-1/2 percent annually as provided by the policy. The reserve value of a group insurance policy issued on or after May 15, 1947, and before January 1, 1961, must be computed on the basis of either the American Men Ultimate Table of Mortality or the Commissioners 1941 Standard Ordinary Mortality Table with interest at a rate not to exceed 3-1/2 percent annually as provided by the policy. For a group insurance policy issued on or after January 1, 1961, the computation must be based on an interest rate not to exceed 3-1/2 percent annually and the mortality table adopted by the insurance company with the commissioner's approval. (V.T.I.C. Art. 3.28, Secs. 3 (part), 12.)

Source Law

Sec. 3. The minimum standard for the valuation of all such policies and contracts issued prior to the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance) shall be that provided in Section 12 of this article… .

Sec. 12. This section shall apply only to those policies and contracts issued prior to the operative date of Article 3.44a (the Standard Nonforfeiture Law for Life Insurance). The reserve liability of all such policies and contracts shall be computed in accordance with their terms and the following rules:

(a) As respects policies issued prior to the first day of January, 1910, the computation shall be on the basis of the American Experience Table of Mortality and four and one-half per cent (4 1/2%) interest per annum.

(b) As respects policies issued after the 31st day of December, 1909, and prior to January 1, 1948, the computation shall be on the basis of the Actuaries or Combined Experience Table of Mortality with four per cent (4%) interest per annum, if the interest rate guaranteed in the policy is four per cent (4%) per annum or higher. If any such policies were issued upon a reserve basis of an interest rate lower than four per cent (4%) per annum, then the computation shall be made on the basis of the American Experience Table of Mortality with interest at such lower specified rate.

(c) As respects policies issued after the 31st day of December, 1947, the computation shall be on the basis of the mortality table and interest rate specified in the respective policies, provided that (A) the specified rate of interest shall not exceed three and one-half per cent (3 1/2%) per annum; (B) the specified table for policies other than policies of industrial life insurance shall be the American Experience Table of Mortality, the American Men Ultimate Table of Mortality, the Commissioners 1941 Standard Ordinary Mortality Table, or, as respects policies issued after the 31st day of December, 1959, the Commissioners 1958 Standard Ordinary Mortality Table; and (C) the specified table for policies of industrial life insurance shall be the American Experience Table of Mortality, the Standard Industrial Mortality Table, the Sub-Standard Industrial Mortality Table, the 1941 Standard Industrial Mortality Table, or the 1941 Sub-Standard Industrial Mortality Table, or, as respects policies issued after the 31st day of December, 1963, the Commissioners 1961 Standard Industrial Mortality Table.

(d) As respects policies on female risks issued after the 31st day of December, 1959, other than policies of industrial life insurance, computation shall be based on any mortality table and rate of interest permitted under Subsection (c) of Section 12 of this article and specified in the respective policies but may at the option of the company be based on an age not more than three (3) years younger than the actual age of the insured.

(e) Except as otherwise provided in Section 4 of this article with respect to coverages purchased on or after the operative date of such subsection under group annuity and pure endowment contracts, as respects policies issued on substandard risks and annuity contracts and contracts or policies for disability benefits and accidental death benefits, the computation shall be on the basis of the standards and methods adopted by the respective companies and approved by the State Board of Insurance.

(f) The reserve values of all policies of group insurance issued prior to May 15, 1947, shall be computed upon the basis of the American Men Ultimate Table of Mortality with interest at the rate of three per cent (3%) or three and one-half per cent (3 1/2%) per annum as provided in such policies. The reserve values of all policies of group insurance issued on and subsequent to May 15, 1947, and prior to January 1, 1961, shall be computed upon the basis of either the American Men Ultimate Table of Mortality or the Commissioners 1941 Standard Ordinary Mortality Table with interest at a rate not in excess of three and one-half per cent (3 1/2%) per annum as provided in such policies. The reserve values of all policies of group insurance issued on and subsequent to January 1, 1961, shall be computed on the basis of an interest rate not exceeding three and one-half per cent (3 1/2%) per annum and such mortality table as shall be adopted by the company with the approval of the State Board of Insurance.

Revisor's Note

(End of Subchapter)

(1) Section 13, V.T.I.C. Article 3.28, repeals all laws in conflict with that article. This revision omits that provision as unnecessary because, under general rules of statutory construction, a statute automatically has the effect of repealing prior conflicting enactments. The provision is, of course, ineffective to repeal subsequent legislation. The omitted law reads:

Sec. 13. All acts and parts of acts inconsistent with the provisions of this article are hereby repealed.

(2) V.T.I.C. Article 3.31 provides that if a "foreign insurance company shall fail to file the certificate authorized by the preceding article" (meaning former V.T.I.C. Article 3.30), the company shall "forthwith . . . file with the Board of Insurance Commissioners full detailed lists of its policies and securities" and is "liable for all charges and expenses" because of the company's failure to file the certificate.

As enacted as part of the Insurance Code in 1951, V.T.I.C. Article 3.30 provided that the Board of Insurance Commissioners could accept from a foreign insurance company a certificate as to "the computation of reserve liability made by the insurance commissioner of the state under whose authority [the] life insurance company was organized." V.T.I.C. Article 3.30 was repealed by Chapter 434, Acts of the 58th Legislature, Regular Session, 1963. That act also enacted the Standard Valuation Law (V.T.I.C. Article 3.28), revised as this subchapter. Section 2, V.T.I.C. Article 3.28, revised in relevant part as Section 425.053(c), permits the State Board of Insurance, as to a "foreign or alien company," to accept "any valuation made, or caused to be made, by the insurance supervisory official of any state or other jurisdiction" of the company's reserves. Unlike former V.T.I.C. Article 3.30, Section 2, V.T.I.C. Article 3.28, does not expressly require the foreign or alien insurer to provide a certificate from the insurance supervisory official of the other jurisdiction.

Accordingly, the revised law omits V.T.I.C. Article 3.31 as obsolete. The omitted provision reads:

Art. 3.31. If any such foreign insurance company shall fail to file the certificate authorized by the preceding article, it shall be required forthwith to file with the Board of Insurance Commissioners full detailed lists of its policies and securities and shall be liable for all charges and expenses consequent upon its failure so to file such certificate.

[Sections 425.071-425.100 reserved for expansion]

SUBCHAPTER C. AUTHORIZED INVESTMENTS AND TRANSACTIONS FOR CAPITAL STOCK LIFE, HEALTH, AND ACCIDENT INSURERS

Revised Law

Sec. 425.101. DEFINITIONS. In this subchapter:

(1) "Assets" means the statutory accounting admitted assets of an insurance company. The term includes lawful money of the United States, whether in the form of cash or demand deposits in solvent banks, savings and loan associations, credit unions, and branches of those entities, organized under the laws of the United States or a state of the United States, if held in accordance with the laws or regulations applicable to those entities. The term does not include the company's separate accounts that are subject to Chapter 1152.

(2) "Securities valuation office" means the Securities Valuation Office of the National Association of Insurance Commissioners. (V.T.I.C. Art. 3.33, Sec. 7(a); New.)

Source Law

Sec. 7. (a) The term "assets" as used in this article shall mean the statutory accounting admitted assets of the insurer, including lawful money of the United States, whether in the form of cash or demand deposits in solvent banks, savings and loan associations, and credit unions and branches thereof, organized under the laws of the United States of America or its states, when held in accordance with the laws or regulations applicable to such entities, less the insurer's separate accounts that are subject to Part III of Article 3.39, Article 3.72, Article 3.73, and Article 3.75 of this code.

Revisor's Note

(1) Section 7, V.T.I.C. Article 3.33, and other provisions of that article refer to an "insurer." Section 1, V.T.I.C. Article 3.33, revised in this chapter as Section 425.103, specifies the types of domestic insurance companies and other insurance companies governed by Article 3.33, revised as this subchapter. For consistency with the terminology used in Section 425.102 and in Chapter 841 of this code, the revised law throughout this subchapter substitutes "insurance company" for "insurer."

(2) Section 7(a), V.T.I.C. Article 3.33, refers to an "insurer's separate accounts that are subject to Part III of Article 3.39, Article 3.72, Article 3.73, and Article 3.75." As added by Chapter 181, Acts of the 59th Legislature, Regular Session, 1965, Part III, V.T.I.C. Article 3.39, provided for domestic life insurance companies to establish separate accounts for amounts paid to the company in connection with a pension, retirement, or profit-sharing plan with variable benefits. As enacted by Chapter 210, Acts of the 60th Legislature, Regular Session, 1967, V.T.I.C. Article 3.72 provided for insurance companies to issue variable annuity contracts; Section 7 of that article required an insurance company to establish one or more separate accounts for variable annuity contracts. As enacted by Chapter 529, Acts of the 62nd Legislature, Regular Session, 1971, V.T.I.C. Article 3.73 provided for insurance companies to issue variable life insurance contracts and variable annuities; Section 2 of that article permitted an insurance company to establish one or more separate accounts for those contracts and annuities.

Part III, V.T.I.C. Article 3.39, and V.T.I.C. Articles 3.72 and 3.73 were repealed by Chapter 648, Acts of the 68th Legislature, Regular Session, 1983. That act also added V.T.I.C. Article 3.75, revised in this code as Chapter 1152, which provides for variable annuity contracts and variable life insurance policies, and permitted separate accounts for those contracts and policies. Section 9(b), V.T.I.C. Article 3.75 was revised in 2001 in this code as Section 1152.001(c). That section provides that a separate account established under one of the repealed articles is considered to be established under Chapter 1152 of this code. Accordingly, the revised law omits the references to former Part III, V.T.I.C. Article 3.39, and former V.T.I.C. Articles 3.72 and 3.73 as unnecessary.

(3) The revised law adds the definition of "securities valuation office" for drafting convenience and to eliminate frequent, unnecessary repetition of the substance of the definition.

Revised Law

Sec. 425.102. INAPPLICABILITY OF CERTAIN LAW. The definition of "state" assigned by Section 311.005, Government Code, does not apply to this subchapter. (New.)

Revisor's Note

Section 311.005(7), Government Code (Code Construction Act), defines "state" to include a district, commonwealth, territory, and insular possession of the United States. That definition generally applies to the revised law. However, it is clear that in V.T.I.C. Article 3.33, revised as this subchapter, the term "state" has a narrower meaning, because Section 4(n), revised in this chapter as Section 425.151, permits an insurer to invest in "commonwealths, territories, or possessions of the United States," but provides additional limitations on those investments that are not provided for investments in states and districts of the United States. The revised law provides that the Code Construction Act definition does not apply in this subchapter to ensure that no substantive change is made by the revision of the phrase "state of the United States" in the context of this subchapter.

Revised Law

Sec. 425.103. APPLICABILITY OF SUBCHAPTER. (a) This subchapter and rules adopted to interpret and implement this subchapter apply to all domestic insurance companies as defined in Section 841.001 and to other insurance companies specifically made subject to this subchapter, including a stipulated premium company that elects under Section 884.311 to be governed by this subchapter.

(b) Subchapter D does not apply to an insurance company to which this subchapter applies.

(c) This subchapter does not limit or restrict investments in or transactions with or within subsidiaries and affiliates made under Chapter 823. (V.T.I.C. Art. 3.33, Sec. 1 (part).)

Source Law

Art. 3.33

Sec. 1. This article and the rules promulgated to interpret and implement it shall apply to all domestic insurance companies as defined in Section 841.001 of this code and other insurers specifically made subject to the provisions hereof, including a stipulated premium insurance company electing to be governed by this article under Section 884.311 of this code. Articles 3.39, 3.40, and 3.40-1 of this code shall not be applicable to such companies, but … . This article shall not limit or restrict the investments in or transactions with or within subsidiaries and affiliates which are made pursuant to the authority of the Texas Insurance Holding Company System Regulatory Act (Chapter 823, Insurance Code).

Revisor's Note

Section 1, V.T.I.C. Article 3.33, refers to a "stipulated premium insurance company," meaning a company operating under Chapter 884 of this code. The term most frequently used to describe those entities is "stipulated premium company." For consistent use of terminology in this code, the revised law substitutes "stipulated premium company" for "stipulated premium insurance company."

Revised Law

Sec. 425.104. PURPOSE. The purpose of this subchapter is to protect and further the interests of insureds, insurance companies, creditors, and the public by providing standards for development and administration of plans for investment of insurance companies' assets. (V.T.I.C. Art. 3.33, Sec. 2.)

Source Law

Sec. 2. The purpose of this article is to protect and further the interests of insureds, insurers, creditors, and the public by providing standards for the development and administration of plans for the investment of the assets of insurers.

Revised Law

Sec. 425.105. WRITTEN INVESTMENT PLAN. (a) Each insurance company's board of directors or, if the company does not have a board of directors, the corresponding authority designated by the company's charter, bylaws, or plan of operation, shall adopt a written investment plan consistent with this subchapter.

(b) The investment plan must:

(1) specify the diversification of the insurance company's investments, so as to reduce the risk of large losses, by:

(A) broad categories, such as bonds and real property loans;

(B) kinds, such as government obligations, obligations of business entities, mortgage-backed securities, and real property loans on office, retail, industrial, or residential properties;

(D) maturity;

(E) industry; and

(F) geographical areas, as to both domestic and foreign investments;

(2) balance 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 company.

(c) At least annually, the board of directors or corresponding authority shall review the adequacy of the investment plan and the implementation of the plan.

(d) An insurance company shall maintain the company's investment plan in the company's principal office and provide the plan to the commissioner or the commissioner's designee on request. The commissioner or the commissioner's designee shall maintain the plan as a privileged and confidential document. The plan is not subject to public disclosure. (V.T.I.C. Art. 3.33, Secs. 3(a), (b) (part).)

Source Law

Sec. 3. (a) The board of directors of each insurer or corresponding authority designated by the charter, bylaws, or plan of operations of an insurer which has no board of directors shall:

(1) adopt a written investment plan consistent with the provisions of this article which:

(A) specifies the diversification of the insurer's investments, so as to reduce the risk of large losses, by:

(i) broad categories (such as bonds and real estate loans),

(ii) kinds (such as obligations of governments, or business entities, mortgage-backed securities, and real estate loans on office, retail, industrial or residential properties),

(iii) quality,

(iv) maturity,

(v) industry, and

(vi) geographical areas (as to both domestic and foreign investments);

(B) balances safety of principal with yield and growth;

(D) is appropriate considering the capital and surplus and the business conducted by the insurer;

(2) at least annually, review the adequacy of such investment plan and the implementation thereof.

(b) The insurer shall maintain the investment plan in its principal office and shall provide same to the commissioner or his designee upon request, and such plans shall be maintained as a privileged and confidential document by the Commissioner of Insurance or his designee and it shall not be subject to public disclosure. …

Revisor's Note

Section 3(b), V.T.I.C. Article 3.33, refers to the "Commissioner of Insurance." Section 31.001 of this code defines "commissioner" for purposes of this code and the other insurance laws of this state to mean the commissioner of insurance. Throughout this chapter, the revised law is drafted accordingly.

Revised Law

Sec. 425.106. INVESTMENT RECORDS; DEMONSTRATION OF COMPLIANCE. An insurance company shall maintain investment records covering each transaction. The company must be able to demonstrate at all times that the company's investments are within the limitations imposed by this subchapter. (V.T.I.C. Art. 3.33, Sec. 3(b) (part).)

Source Law

(b) … The insurer shall maintain investment records covering each transaction. At all times, the insurer shall be able to demonstrate that its investments are within the limitations prescribed in this article.

Revised Law

Sec. 425.107. COMMUNITY INVESTMENT REPORT. (a) The department shall, after consulting with the insurance industry of this state and the office of public insurance counsel, develop a report of insurance industry community investments in this state.

(b) The commissioner may request, and an insurance company shall provide, information necessary to complete the report required by this section.

(c) The department shall provide the report required by this section to the legislature not later than December 1 of each even-numbered year. (V.T.I.C. Art. 3.33, Sec. 3A.)

Source Law

Sec. 3A. (a) The Texas Department of Insurance shall, after consultation with the insurance industry of this state and the Office of Public Insurance Counsel, develop a report of insurance industry community investments in Texas.

(b) The commissioner may request and insurance companies shall provide information necessary to complete the requirements of Subsection (a).

(c) The report established under Subsection (a) shall be provided to the Texas Legislature no later than December 1 of each even-numbered year.

Revisor's Note

Section 3A(a), V.T.I.C. Article 3.33, refers to the "Texas Department of Insurance." Section 31.001 of this code defines "department" for purposes of this code and the other insurance laws of this state to mean the Texas Department of Insurance. The revised law is drafted accordingly.

Revised Law

Sec. 425.108. AUTHORIZED INVESTMENTS AND TRANSACTIONS IN GENERAL. (a) Subject to the limitations and restrictions imposed by this subchapter, and, unless otherwise specified, based on the insurance company's capital, surplus, and admitted assets as reported in the company's most recently filed statutory financial statement, the investments and transactions described by this subchapter and Subchapter F, Chapter 823, are authorized investments and transactions for a company subject to this subchapter.

(b) An insurance company may not make an investment or enter into a transaction that is not authorized by this subchapter or Subchapter F, Chapter 823. (V.T.I.C. Art. 3.33, Sec. 4 (part).)

Source Law

Sec. 4. Subject to the limitations and restrictions herein contained and, unless otherwise specified, based upon the insurer's capital, surplus and admitted assets as reported in the most recently filed statutory financial statement, the investments and transactions described in the following subsections, and in Section 6, Article 21.49-1, and none other, are authorized for the insurers subject hereto:

…

Revised Law

Sec. 425.109. AUTHORIZED INVESTMENTS: GOVERNMENT OBLIGATIONS. (a) An insurance company may invest in:

(1) a bond, evidence of indebtedness, or other obligation of the United States;

(2) a bond, evidence of indebtedness, or other obligation guaranteed as to principal and interest by the full faith and credit of the United States;

(3) a bond, evidence of indebtedness, or other obligation of an agency or instrumentality of the United States government; and

(4) subject to Subsections (b) and (c), a bond, evidence of indebtedness, or other obligation of a governmental unit in the United States, Canada, or any province or municipality of Canada, or of an instrumentality of one of those governmental units.

(b) An insurance company may not invest in a bond, evidence of indebtedness, or other obligation under Subsection (a)(4) if the governmental unit or instrumentality is in default in the payment of principal of or interest on any of the governmental unit's or instrumentality's obligations.

(c) An insurance company's investments in the obligations of a single governmental unit or instrumentality under Subsection (a)(4) may not exceed 20 percent of the company's capital and surplus. (V.T.I.C. Art. 3.33, Secs. 4(a), (b).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(a) United States Government Bonds. Bonds, evidences of indebtedness or obligations of the United States of America, or bonds, evidences of indebtedness or obligations guaranteed as to principal and interest by the full faith and credit of the United States of America, and bonds, evidences of indebtedness, or obligations of agencies and instrumentalities of the government of the United States of America;

(b) Other Governmental Bonds. Bonds, evidences of indebtedness or obligations of governmental units in the United States, Canada, or any province or city of Canada, and of the instrumentalities of such governmental units; provided:

(1) such governmental unit or instrumentality is not in default in the payment of principal or interest in any of its obligations; and

(2) investments in the obligations of any one governmental unit or instrumentality may not exceed 20 percent of the insurer's capital and surplus;

Revisor's Note

Section 4(b), V.T.I.C. Article 3.33, refers to a "city." The revised law substitutes "municipality" for "city" for the reason stated in Revisor's Note (6) to Section 425.002.

Revised Law

Sec. 425.110. AUTHORIZED INVESTMENTS: OBLIGATIONS OF AND OTHER INVESTMENTS IN BUSINESS ENTITIES. (a) In this section:

(1) "Business entity" includes a sole proprietorship, corporation, association, general or limited partnership, limited liability company, joint-stock company, joint venture, trust, or another form of business organization, regardless of whether organized for profit, that is organized under the laws of the United States, another state, Canada, or any district, province, or territory of Canada.

(2) "Counterparty exposure amount" has the meaning assigned by Section 425.125.

(b) Subject to this section, an insurance company may invest in an obligation, including a bond or evidence of indebtedness, a participation in a bond or evidence of indebtedness, or an asset-backed security, that is issued, assumed, guaranteed, or insured by a business entity.

(c) An insurance company's investments in the obligations or counterparty exposure amounts of a single business entity rated by the securities valuation office may not exceed 20 percent of the company's statutory capital and surplus.

(d) An insurance company may not invest in an obligation, counterparty exposure amount, or preferred stock of a business entity if, after making the investment:

(1) the aggregate amount of those investments then held by the company that are rated 3, 4, 5, or 6 by the securities valuation office would exceed 20 percent of the company's assets;

(2) the aggregate amount of those investments then held by the company that are rated 4, 5, or 6 by the securities valuation office would exceed 10 percent of the company's assets;

(3) the aggregate amount of those investments then held by the company that are rated 5 or 6 by the securities valuation office would exceed three percent of the company's assets; or

(4) the aggregate amount of those investments then held by the company that are rated 6 by the securities valuation office would exceed one percent of the company's assets.

(e) If an insurance company attains or exceeds the limit of a rating category referred to in Subsection (d), the company is not precluded from acquiring investments in other rating categories subject to the specific and multiple category limits applicable to those investments.

(f) Notwithstanding Subsections (c)-(e), an insurance company may invest in an additional obligation of a business entity in which the company holds one or more obligations if the investment is made to protect an investment previously made in that business entity. Obligations invested in under this subsection may not exceed one-half percent of the company's assets.

(g) This section does not prohibit an insurance company from investing in an obligation as a result of a restructuring of an already held obligation or preferred stock that is rated 3, 4, 5, or 6 by the securities valuation office.

(h) An insurance company shall include all counterparty exposure amounts in determining compliance with the limitations of this section. (V.T.I.C. Art. 3.33, Secs. 4(c), (u)(5).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(c) Obligations of Business Entities. Obligations, including bonds or evidences of indebtedness, or participations in those bonds or evidences of indebtedness, or asset-backed securities, that are issued, assumed, guaranteed, or insured by any business entity, including a sole proprietorship, a corporation, an association, a general or limited partnership, a limited liability company, a joint-stock company, a joint venture, a trust, or any other form of business organization, whether for-profit or not-for-profit, that is organized under the laws of the United States, another state, Canada, or any state, district, province, or territory of Canada, subject to all conditions set forth below:

(1) an insurer may acquire obligations or counterparty exposure amounts, as defined in Subsection (u), in any one business entity rated by the Securities Valuation Office of the National Association of Insurance Commissioners, but not to exceed 20 percent of the insurer's statutory capital and surplus;

(2) an insurer shall not acquire an obligation, counterparty exposure amount or preferred stock of any business entity if, after giving effect to the investment:

(A) the aggregate amount of such investments then held by the insurer that are rated 3, 4, 5 or 6 by the Securities Valuation Office of the National Association of Insurance Commissioners would exceed 20 percent of its assets;

(B) the aggregate amount of such investments then held by the insurer that are rated 4, 5, or 6 by the Securities Valuation Office would exceed 10 percent of its assets;

(C) the aggregate amount of such investments then held by the insurer that are rated 5 or 6 by the Securities Valuation Office would exceed three percent of its assets; or

(D) the aggregate amount of such investments then held by the insurer that are rated 6 by the Securities Valuation Office would exceed one percent of its assets.

If an insurer attains or exceeds the limit of any one rating category referred to in this subsection, the insurer shall not be precluded from acquiring investments in other rating categories subject to the specific and multiple category limits applicable to those investments;

(3) notwithstanding the foregoing, an insurer may acquire an obligation of a business entity in which the insurer already holds one or more obligations if the obligation is acquired in order to protect an investment previously made in that business entity, but obligations so acquired may not exceed one-half percent of the insurer's assets; and

(4) this subsection does not prohibit an insurer from acquiring an obligation as a result of a restructuring of an already held obligation or preferred stock that is rated 3, 4, 5 or 6 by the Securities Valuation Office;

(u) …

(5) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of Subsection (c).

Revisor's Note

Section 4(c), V.T.I.C. Article 3.33, refers to "any state, district, province, or territory of Canada." The revised law omits the reference to a "state" of Canada because that country does not have "states."

Revised Law

Sec. 425.111. AUTHORIZED INVESTMENTS: BONDS ISSUED, ASSUMED, OR GUARANTEED IN INTERNATIONAL MARKET. (a) Subject to this section, an insurance company may invest in bonds issued, assumed, or guaranteed by:

(1) the Inter-American Development Bank;

(2) the International Bank for Reconstruction and Development (the World Bank);

(3) the Asian Development Bank;

(4) the State of Israel;

(5) the African Development Bank; and

(6) the International Finance Corporation.

(b) An insurance company's investments in the bonds of a single entity under this section may not exceed 20 percent of the company's capital and surplus.

(c) The aggregate of all investments made by an insurance company under this section may not exceed 20 percent of the company's assets. (V.T.I.C. Art. 3.33, Sec. 4(d).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(d) International Market. Bonds issued, assumed, or guaranteed by the Interamerican Development Bank, the International Bank for Reconstruction and Development (the World Bank), the Asian Development Bank, the State of Israel, the African Development Bank, and the International Finance Corporation; provided:

(1) investments in the bonds of any one of the entities specified above may not exceed 20 percent of the insurer's capital and surplus; and

(2) the aggregate of all investments made under this subsection may not exceed 20 percent of the insurer's assets;

Revised Law

Sec. 425.112. AUTHORIZED INVESTMENTS: POLICY LOANS. An insurance company may invest in loans on the security of the company's own policies in an amount that does not exceed the amount of the reserve values of those policies. (V.T.I.C. Art. 3.33, Sec. 4(e).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(e) Policy Loans. Loans upon the security of the insurer's own policies not in excess of the amount of the reserve values thereof;

Revised Law

Sec. 425.113. AUTHORIZED INVESTMENTS: DEPOSITS IN CERTAIN FINANCIAL INSTITUTIONS. (a) Subject to this section, an insurance company may invest in any type of savings deposit, time deposit, certificate of deposit, NOW account, or money market account in a solvent bank, savings and loan association, or credit union that is organized under the laws of the United States or a state, or in a branch of one of those financial institutions.

(b) An investment under this section must be made in accordance with the laws or regulations applicable to the bank, savings and loan association, or credit union.

(c) The amount of an insurance company's deposits in a single bank, savings and loan association, or credit union may not exceed the greater of:

(1) 20 percent of the company's capital and surplus;

(2) the amount of federal or state deposit insurance coverage that applies to the deposits; or

(3) 10 percent of the amount of capital, surplus, and undivided profits of the financial institution receiving the deposits. (V.T.I.C. Art. 3.33, Sec. 4(f).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(f) Time and Savings Deposits. 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, and credit unions and branches thereof, organized under the laws of the United States of America or its states, when made in accordance with the laws or regulations applicable to such entities; provided the amount of the deposits in any one bank, savings and loan association, or credit union will not exceed the greater of:

(1) 20 percent of the insurer's capital and surplus;

(2) the amount of federal or state deposit insurance coverage pertaining to such deposit; or

(3) 10 percent of the amount of capital, surplus, and undivided profits of the entity receiving such deposits;

Revisor's Note

Section 4(f), V.T.I.C. Article 3.33, refers to any "type or form" of deposit in a financial institution. The revised law omits the reference to "form" because, in this context, the term is included in the meaning of "type."

Revised Law

Sec. 425.114. AUTHORIZED INVESTMENTS: INSURANCE COMPANY INVESTMENT POOLS. (a) In this section, "affiliate" means, with respect to a person, another person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person.

(b) Subject to Subsections (c)-(g), an insurance company may acquire investments in an investment pool that invests only in:

(1) obligations that have a rating by the securities valuation office of one or two, or an equivalent rating issued by a nationally recognized statistical rating organization recognized by the securities valuation office, or that are issued by an issuer with outstanding obligations that have a securities valuation office one or two rating or an equivalent rating described by this subdivision, and that:

(A) have a remaining maturity of 397 days or less or a put that:

(i) entitles the holder to receive the principal amount of the obligation; and

(ii) may be exercised through maturity at specified intervals not exceeding 397 days; or

(B) have a remaining maturity of three years or less and a floating interest rate that resets at least quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London InterBank Offered Rate, or commercial paper) 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) securities lending, repurchase, and reverse repurchase transactions that meet the requirements of Section 425.121 and any applicable department rules;

(3) money market funds as authorized by Section 425.123, except that a short-term investment pool may not acquire investments in a single business entity that exceed 10 percent of the total assets of the pool; or

(4) investments that an insurance company may make under this subchapter, if:

(A) the company's proportionate interest in the amount invested in those investments does not exceed the limits of this subchapter; and

(B) the aggregate amount of the company's investments in all investment pools under this subdivision does not exceed 25 percent of the company's assets.

(c) An insurance company may not acquire an investment in an investment pool under Subsection (b) if, after making the investment, the aggregate amount of the company's investments in all investment pools would exceed 35 percent of the company's assets.

(d) For an investment in an investment pool to be qualified under this section, the pool may not:

(1) acquire securities issued, assumed, guaranteed, or insured by an investing insurer or an affiliate of the investing insurance company; or

(2) borrow or incur an indebtedness for borrowed money, except for securities lending and reverse repurchase transactions.

(e) For an investment pool to be qualified under this section:

(1) the pool manager must:

(A) be organized under the laws of the United States or a state and designated as the pool manager in a pooling agreement; or

(B) be:

(i) the investing insurance company, an affiliated insurance company, a business entity affiliated with the investing company, a custodian bank, a business entity registered under the Investment Advisors Act of 1940 (15 U.S.C. Section 80b-1 et seq.), as amended;

(ii) in the case of a reciprocal or interinsurance exchange, the exchange's attorney-in-fact; or

(iii) in the case of a United States branch of an alien insurance company, the United States manager or an affiliate or subsidiary of the United States manager;

(2) the pool manager or an entity designated by the pool manager of the type described by Subdivision (1)(B) must maintain:

(A) detailed accounting records showing:

(i) the cash receipts and disbursements reflecting each participant's proportionate investment in the pool; and

(ii) a complete description of all the pool's underlying assets, including the amount, interest rate, maturity date, if any, and other appropriate designations; and

(B) other records that, on a daily basis, allow a third party to verify each participant's investments in the pool; and

(3) the assets of the pool must be held in one or more accounts, in the name or on behalf of the pool, at the principal office of the pool manager or under a custody agreement or trust agreement with a custodian bank, provided that the agreement:

(A) states and recognizes the claims and rights of each participant;

(B) acknowledges that the pool's underlying assets are held solely for the benefit of each participant in proportion to the aggregate amount of the participant's investments in the pool; and

(C) contains an agreement that the pool's underlying assets may not be commingled with the general assets of the custodian bank or any other person.

(f) The pooling agreement for each investment pool must be in writing and must provide that:

(1) 100 percent of the interests in the pool must be held at all times by the insurance company, the company's subsidiaries or affiliates, or, in the case of a United States branch of an alien insurance company, the affiliates or subsidiaries of the United States manager, and any unaffiliated insurance company;

(2) the pool's underlying assets may not be commingled with the general assets of the pool manager or any other person;

(3) in proportion to the aggregate amount of each pool participant's interest in the pool:

(A) each participant owns an undivided interest in the pool's underlying assets; and

(B) the pool's underlying assets are held solely for the benefit of each participant;

(4) a participant, or, in the event of the participant's insolvency, bankruptcy, or receivership, the participant's trustee, receiver, conservator, or other successor in interest, may withdraw all or part of the participant's investment from the pool under the terms of the pooling agreement;

(5) a withdrawal may be made on demand without penalty or other assessment on any business day, and settlement of funds must occur within a reasonable and customary period after the withdrawal, except that:

(A) in the case of publicly traded securities, the settlement period may not exceed five business days; and

(B) in the case of securities and investments other than publicly traded securities, the settlement period may not exceed 10 business days;

(6) the amount of a distribution under Subdivision (5) must be computed after subtracting all the pool's applicable fees and expenses;

(7) the pool manager shall distribute to a participant, at the manager's discretion:

(A) in cash, an amount that represents the fair market value of the participant's pro rata share of each of the pool's underlying assets;

(B) in kind, an amount that represents a pro rata share of each underlying asset; or

(C) in a combination of cash and in kind distributions, an amount that represents a pro rata share in each underlying asset; and

(8) the pool manager shall make the records of the pool available for inspection by the commissioner.

(g) An investment in an investment pool is not considered to be an affiliate transaction under Subchapter C, Chapter 823, but each pooling agreement is subject to the standards of Section 823.101 and the reporting requirements of Section 823.052. (V.T.I.C. Art. 3.33, Sec. 4(g).)

Source Law

(g) Insurer Investment Pools. For the purposes of this Subsection (g), the following definition shall apply:

(A) "Affiliate" means, as to any person, another person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person.

(1) An insurer may acquire investments in investment pools that:

(A) invest only in:

(i) obligations that are rated 1 or 2 by the Securities Valuation Office or have an equivalent of a Securities Valuation Office 1 or 2 rating (or, in the absence of a 1 or 2 rating or equivalent rating, the issuer has outstanding obligations with a Securities Valuation Office 1 or 2 or equivalent rating) by a nationally recognized statistical rating organization recognized by the Securities Valuation Office and have:

(a) a remaining maturity of 397 days or less or a put that entitles the holder to receive the principal amount of the obligation which put may be exercised through maturity at specified intervals not exceeding 397 days; or

(b) a remaining maturity of three years or less and a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London InterBank Offered Rate (LIBOR) or commercial paper) and is subject to no maximum limit, if the obligations do not have an interest rate that varies inversely to market interest rate changes;

(ii) securities lending, repurchase and reverse repurchase transactions that meet the requirements of Subsection (q) and any applicable regulations of the department; or

(iii) money market mutual funds as authorized in Subsection (s); provided that this short-term investment pool shall not acquire investments in any one business entity that exceed 10 percent of the total assets of the investment pool;

(B) invest only in investments which an insurer may acquire under this article, if the insurer's proportionate interest in the amount invested in these investments does not exceed the applicable limits of this article, and the aggregate amount of all investments in such other investment pools may not exceed 25 percent of the insurer's assets.

(2) An insurer shall not acquire an investment in an investment pool under this subsection if after giving effect to the investment, the aggregate amount of investments in all investment pools then held by the insurer would exceed 35 percent of its assets.

(3) For an investment in an investment pool to be qualified under this article, the investment pool shall not:

(A) acquire securities issued, assumed, guaranteed or insured by the insurer or an affiliate of the insurer;

(B) borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions.

(4) For an investment pool to be qualified under this article:

(A) the manager of the investment pool shall:

(i) be organized under the laws of the United States or a state and designated as the pool manager in a pooling agreement;

(ii) be the insurer, an affiliated insurer, a business entity affiliated with the insurer, a custodian bank, a business entity registered under the Investment Advisors Act of 1940 (15 U.S.C. Section 80a-1 et seq.), as amended, or, in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-fact or, in the case of a United States branch of an alien insurer, its United States manager or affiliates or subsidiaries of its United States manager;

(B) the pool manager or an entity designated by the pool manager of the type set forth in (4)(A)(ii) shall maintain detailed accounting records setting forth:

(i) the cash receipts and disbursements reflecting each participant's proportionate investment in the investment pool;

(ii) a complete description of all underlying assets of the investment pool (including amount, interest rate, maturity date (if any) and other appropriate designations); and

(iii) other records which, on a daily basis, allow third parties to verify each participant's investments in the investment pool;

(C) the assets of the investment pool shall be held in one or more accounts, in the name or on behalf of the investment pool, either (i) under a custody agreement or trust agreement with a custodian bank or (ii) at the principal office of the pool manager. The applicable agreement shall:

(i) state and recognize the claims and rights of each participant;

(ii) 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

(iii) contain an agreement that the underlying assets of the investment pool shall not be commingled with the general assets of the custodian bank or any other person.

(5) The pooling agreement for each investment pool shall be in writing and shall provide that:

(A) the insurer, its subsidiaries, affiliates or, in the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States manager, and any unaffiliated insurer shall, at all times, hold 100 percent of the interests in the investment pool;

(B) the underlying assets of the investment pool shall not be commingled with the general assets of the pool manager or any other person;

(i) each participant owns an undivided interest in the underlying assets or the investment pool; and

(ii) the underlying assets of the investment pool are held solely for the benefit of each participant;

(D) a participant, or, in the event of the 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 investment pool under the terms of the pooling agreement;

(E) withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds shall occur within a reasonable and customary period thereafter provided: (i) in the case of publicly traded securities, settlement shall not exceed five business days, and (ii) in the case of all other securities and investments, settlement shall not exceed 10 business days. Distributions under this paragraph shall be calculated in each case net of all then applicable fees and expenses of the investment pool. The pooling agreement shall provide that the pool manager shall distribute to a participant, at the discretion of the pool manager:

(i) in cash, the then fair market value of the participant's pro rata share of each underlying asset of the investment pool;

(ii) in kind, a pro rata share of each underlying asset; or

(iii) in a combination of cash and in kind distributions, a pro rata share in each underlying asset; and

(F) the pool manager shall make the records of the investment pool available for inspection by the commissioner.

(6) An investment in an investment pool shall not be deemed to be an affiliate transaction under Section 4, Article 21.49-1, of this code; however each pooling agreement shall be subject to the standards of Section 4(a), Article 21.49-1, of this code and the reporting requirements of Section 3(b), Article 21.49-1, of this code.

Revisor's Note

(1) Section 4(g)(4)(A)(ii), V.T.I.C. Article 3.33, refers to the "Investment Advisors Act of 1940 (15 U.S.C. Section 80a-1 et seq.)." The revised law corrects the cite for that act to reflect that the act begins at 15 U.S.C. Section 80b-1.

(2) Section 4(g)(4)(A)(ii), V.T.I.C. Article 3.33, refers to a "reciprocal insurer or interinsurance exchange," meaning entities organized under Chapter 942 of this code. The most commonly used term for those entities is "reciprocal or interinsurance exchange." For consistent use of terminology in this code, the revised law substitutes "reciprocal or interinsurance exchange" for "reciprocal insurer or interinsurance exchange."

(3) Section 4(g)(1)(A)(iii), V.T.I.C. Article 3.33, refers to "money market mutual funds." The revised law substitutes "money market funds" for "money market mutual funds" for the reason stated in the revisor's note to Section 425.123.

(4) Section 4(g)(5)(C)(i), V.T.I.C. Article 3.33, provides that "in proportion to the aggregate amount of each pool participant's interest in the investment pool[,] … each participant owns an undivided interest in the underlying assets or the investment pool." It is clear that the "or" between "underlying assets" and "the investment pool" is a typographical error and should read "of." To say that "in proportion to a participant's interest in an investment pool, the participant owns an interest in the pool" merely states the obvious. Additionally, Section 4(g)(5)(E), V.T.I.C. Article 3.33, clearly provides for distribution to a pool participant of the participant's pro rata share of the pool's underlying assets. Finally, similar language is found in Section 5(g)(3), V.T.I.C. Article 2.10-5 (revised in relevant part as Section 424.111(3) of this code, which applies to investments by various types of insurers; that section provides that "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."

Revised Law

Sec. 425.115. AUTHORIZED INVESTMENTS: EQUITY INTERESTS. (a) In this section, "business entity" means a real estate investment trust, corporation, limited liability company, association, limited partnership, joint venture, mutual fund, trust, joint tenancy, or other similar form of business organization, regardless of whether organized for profit.

(b) Subject to this section, an insurance company may invest in an equity interest, including common stock, an equity investment in an investment company other than a money market fund described by Section 425.123, a real estate investment trust, a limited partnership interest, a warrant, another right to acquire an equity interest that is created by the person that owns or would issue the equity in which the interest is acquired, and an equity interest in a business entity that is organized under the laws of the United States, a state of the United States, Canada, or a province or territory of Canada.

(c) If a market value from a generally recognized source is not available for an equity interest, the business entity or other investment in which the interest is acquired must be subject to:

(1) an annual audit by an independent certified public accountant; or

(2) another method of valuation acceptable to the commissioner.

(d) An insurance company may not invest in a partnership as a general partner except through an investment subsidiary.

(e) An insurance company's investments under this section in a single business entity, other than a money market fund described by Section 425.123, may not exceed 15 percent of the company's capital and surplus.

(f) The aggregate amount of an insurance company's investments under this section may not exceed 25 percent of the company's assets. (V.T.I.C. Art. 3.33, Sec. 4(h).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(h) Equity Interests. Equity interests including common stock, equity investment in an investment company (other than a money market mutual fund as defined in Subsection (s) of this section), real estate investment trust, limited partnership interests, warrants or other rights to acquire equity interests that are created by the person that owns or would issue the equity to be acquired, and equity interests in any business entity that is organized under the laws of the United States, any of its states, Canada or any province or territory of Canada provided:

(1) if no market value from a generally recognized source is available for the equity interest, the business entity or other investment shall be subject to an annual audit by an independent certified public accountant or subject to another method of valuation acceptable to the commissioner; and

(2) an insurer shall not be permitted to invest in a partnership, as a general partner, except through an investment subsidiary;

(3) such investments in any one business entity other than a money market fund defined in Subsection (s) may not exceed 15 percent of the insurer's capital and surplus;

(4) the aggregate amount of all investments made under this subsection may not exceed 25 percent of the insurer's assets.

For purposes of this subsection, a business entity shall mean a real estate investment trust, corporation, limited liability company, association, limited partnership, joint venture, mutual fund, trust, joint tenancy or other similar form of business organization, whether organized for profit or not-for-profit.

Revisor's Note

Section 4(h), V.T.I.C. Article 3.33, refers to "a money market mutual fund." The revised law substitutes "money market fund" for "money market mutual fund" for the reason stated in the revisor's note to Section 425.123.

Revised Law

Sec. 425.116. AUTHORIZED INVESTMENTS: PREFERRED STOCK. (a) Subject to this section, an insurance company may invest in preferred stock of a business entity, as defined by Section 425.110.

(b) An insurance company may invest in preferred stock only if:

(1) the stock is rated by the securities valuation office; and

(2) the sum of the company's aggregate investment in preferred stock rated 3, 4, 5, or 6 and the company's investments under Section 425.110(d) does not exceed the limitations specified by Section 425.110(d).

(c) An insurance company's investments in the preferred stock of a single business entity may not exceed 20 percent of the company's capital and surplus.

(d) The aggregate amount of an insurance company's investments in preferred stock as to which there is not a sinking fund for the redemption and retirement of the stock that meets the standards established by the National Association of Insurance Commissioners may not exceed 10 percent of the company's assets.

(e) The aggregate amount of an insurance company's investments under this section may not exceed 40 percent of the company's assets. (V.T.I.C. Art. 3.33, Sec. 4(i).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(i) Preferred Stock. Preferred stock of business entities as described in Subsection (c) of this section; provided:

(1) investments in the preferred stock of any one business entity will not exceed 20 percent of the insurer's capital and surplus;

(2) the preferred stock is rated by the Securities Valuation Office, and the aggregate investment in preferred stock rated 3, 4, 5, or 6, when added to the investments under Subsection (c)(2) do not result in the combined total of such investments exceeding the limitations specified in Subsection (c)(2);

(3) in the aggregate not more than 10 percent of the insurer's assets may be invested in preferred stock, the redemption and retirement of which is not provided for by a sinking fund meeting the standards established by the National Association of Insurance Commissioners; and

(4) the aggregate of all investments made under this subsection may not exceed 40 percent of the insurer's assets;

Revised Law

Sec. 425.117. AUTHORIZED INVESTMENTS: COLLATERAL LOANS. (a) Subject to this section, an insurance company may invest in a collateral loan secured by:

(1) a first lien on an asset; or

(2) a valid and perfected first security interest in an asset.

(b) The amount of a loan invested in under this section may not exceed 80 percent of the value of the collateral asset at any time during the duration of the loan.

(c) The asset used as collateral for a loan under this section must be an asset, other than real property described by Section 425.119, in which the insurance company is authorized by this subchapter to directly invest. (V.T.I.C. Art. 3.33, Sec. 4(j).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(j) Collateral Loans. Collateral loans secured by a first lien upon or a valid and perfected first security interest in an asset; provided:

(1) the amount of any such collateral loan will not exceed 80 percent of the value of the collateral asset at any time during the duration of the loan; and

(2) the asset used as collateral would be authorized for direct investment by the insurer under other provisions of this Section 4, except real property in Subsection (l);

Revisor's Note

Section 4(j)(2), V.T.I.C. Article 3.33, refers to an asset that would be authorized for direct investment by an insurance company "under other provisions of this Section 4." The revised law substitutes a reference to an investment authorized by "this subchapter." Although this subchapter includes provisions derived from other sections of Article 3.33, the only provisions included in this subchapter that authorize investments by insurance companies were derived from Section 4.

Revised Law

Sec. 425.118. AUTHORIZED INVESTMENTS: OBLIGATIONS SECURED BY REAL PROPERTY LOANS. (a) Subject to this section, an insurance company may invest in a note, an evidence of indebtedness, or a participation in a note or evidence of indebtedness that is secured by a valid first lien on real property or a leasehold estate in real property located in the United States.

(b) The amount of an obligation secured by a first lien on real property or a leasehold estate in real property may exceed 90 percent of the value of the real property or leasehold estate only if:

(1) the amount does not exceed 100 percent of the value of the real property or leasehold estate and the insurance company or one or more wholly owned subsidiaries of the company owns, in the aggregate, a 10 percent or greater equity interest in the real property or leasehold estate;

(2) the amount does not exceed 95 percent of the value of the real property or leasehold estate and:

(A) the property contains only a dwelling designed exclusively for occupancy by not more than four families for residential purposes; and

(B) the portion of the unpaid balance of the obligation that exceeds 90 percent of the value of the property or leasehold estate is guaranteed or insured by a mortgage guaranty insurer authorized to engage in business in this state; or

(3) the amount exceeds 90 percent of the value of the real property or leasehold estate only to the extent the obligation is insured or guaranteed by:

(A) the United States;

(B) the Federal Housing Administration under the National Housing Act (12 U.S.C. Section 1701 et seq.), as amended; or

(c) The term of an obligation secured by a first lien on a leasehold estate in real property may not, as of the date the obligation is acquired, exceed a period equal to four-fifths of the unexpired term of the leasehold estate, and the obligation must fully amortize during that period. The term of the leasehold estate may not expire sooner than the 10th anniversary of the expiration date of the term of the obligation.

(d) An obligation secured by a first lien on a leasehold estate in real property must be payable in one or more installments of an amount or amounts sufficient to ensure that, at any time after the expiration of two-thirds of the original term of the obligation, the principal balance on the obligation is not greater than the principal balance would have been if the obligation had been amortized over the original term of the obligation in equal monthly, quarterly, semiannual, or annual payments of principal and interest.

(e) If any part of the value of buildings is to be included in the value of real property or a leasehold estate in real property to secure an obligation under this section:

(1) the buildings must be covered by adequate property insurance, including fire and extended coverage insurance, issued by:

(A) an insurer authorized to engage in business in this state; or

(B) an insurer recognized as acceptable to issue that coverage by the insurance regulatory official of the state in which the real property is located;

(2) the amount of insurance provided by one or more policies may not be less than the lesser of:

(A) the unpaid balance of the obligation; or

(B) the insurable value of the buildings; and

(3) the loss clause under each policy must be payable to the insurance company as the company's interest may appear.

(f) To the extent that a note, evidence of indebtedness, or participation in a note or evidence of indebtedness under this section represents an equity interest in the underlying real property:

(1) the value of that equity interest must be determined at the time the note, evidence of indebtedness, or participation is executed; and

(2) the portion of the obligation that represents an equity interest in the property must be designated as an investment subject to Section 425.119(c).

(g) An insurance company's investment in a single obligation under this section may not exceed 25 percent of the company's capital and surplus.

(h) An insurance company may purchase a first lien on real property after the origination of the lien if:

(1) the first lien is insured by a mortgagee's title policy issued to the original mortgagee that contains a provision that inures the policy to the use and benefit of the owners of the evidence of indebtedness indicated in the policy and to any subsequent owners of that evidence of indebtedness; and

(2) the company maintains evidence of an assignment or other transfer of the first lien on real property to the company.

(i) For purposes of Subsection (h)(2), an assignment or other transfer to the insurance company that is duly recorded in the county in which the real property is located is presumed to create legal ownership of the first lien by the company. (V.T.I.C. Art. 3.33, Sec. 4(k).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(k) Real Estate Loans. 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; provided:

(1) the amount of any such obligation secured by a first lien upon real property or leasehold estate therein shall not exceed 90 percent of the value of such real property or leasehold estate therein, but the amount of such obligation:

(A) may exceed 90 percent but shall not exceed 100 percent of the value of such real property or leasehold estate therein if the insurer or one or more wholly owned subsidiaries of the insurer owns in the aggregate a 10 percent or greater equity interest in such real property or leasehold estate therein;

(B) may be 95 percent of the value of such real property or leasehold estate therein 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 90 percent of such value is guaranteed or insured by a mortgage insurance company qualified to do business in the State of Texas; or

(C) may be greater than 90 percent of the value of such real property or leasehold estate therein to the extent the obligation is insured or guaranteed by the United States of America, the Federal Housing Administration pursuant to the National Housing Act of 1934, as amended (12 U.S.C. Section 1701 et seq.), or the State of Texas; and

(2) the term of an obligation secured by a first lien upon a leasehold estate in real property shall not exceed a period equal to four-fifths of the then unexpired term of such leasehold estate; provided the unexpired term of the leasehold estate must extend at least 10 years beyond the term of the obligation, and each obligation shall be payable in an installment or installments of sufficient amount or amounts so that at any time after the expiration of two-thirds of the original loan term, the principal balance will be no greater than the principal balance would have been if the loan had been amortized over the original loan term in equal monthly, quarterly, semiannual, or annual payments of principal and interest, it being required that under any method of repayment such obligation will fully amortize during a period of time not exceeding four-fifths of the then unexpired term of the security leasehold estate; and

(3) if any part of the value of buildings is to be included in the value of such real property or leasehold estate therein to secure the obligations provided for in this subsection, such buildings shall be covered by adequate property insurance, including but not limited to fire and extended coverage insurance issued by a company authorized to transact business in the State of Texas or by a company recognized as acceptable for such purpose by the insurance regulatory official of the state in which such real estate is located, and the amount of insurance granted in the policy or policies shall be not less than the unpaid balance of the obligation or the insurable value of such buildings, whichever is the lesser; the loss clause shall be payable to the insurer as its interest may appear; and

(4) to the extent any note, evidence of indebtedness, or participation therein under this subsection represents an equity interest in the underlying real property, the value of such equity interest shall be determined at the time of execution of such note, evidence of indebtedness, or participation therein and that portion shall be designated as an investment subject to the provisions of Subsection (l)(2) of this section; and

(5) the amount of any one such obligation may not exceed 25 percent of the insurer's capital and surplus; and

(6) a first lien on real property may be purchased after its origination if the first lien is insured by a mortgagee's title policy issued to the original mortgagee that contains a provision that inures the policy to the use and benefit of the owners of the evidence of debt indicated in the policy and to any subsequent owners of that evidence of debt, and if the insurer maintains evidence of assignments or other transfers of the first lien on real property to the insurer. An assignment or other transfer to the insurer, duly recorded in the county in which the real property is located, shall be presumed to create legal ownership of the first lien by the insurer;

Revisor's Note

Section 4(k)(1)(B), V.T.I.C. Article 3.33, refers to a "mortgage insurance company" that is "qualified" to engage in business. The revised law substitutes "mortgage guaranty insurer" for "mortgage insurance company" for consistency with the terminology used in V.T.I.C. Article 21.50, revised in this code as Chapter 3502, which regulates mortgage guaranty insurance. The revised law also substitutes "authorized" for "qualified" because "certificate of authority" is the term used throughout this code in relation to an entity's authority to engage in business.

Revised Law

Sec. 425.119. AUTHORIZED INVESTMENTS: REAL PROPERTY. (a) Subject to this section, an insurance company may invest in a real property fee simple or leasehold estate located in the United States.

(b) An insurance company may invest in home and branch office real property or a participation in home or branch office real property. At least 30 percent of the available space in a building used as a home or branch office must be occupied for the business purposes of the company and the company's affiliates. A company's aggregate investment in home and branch office real property may not exceed 20 percent of the company's assets.

(c) An insurance company may invest in real property other than home and branch office real property or participations in home and branch office real property. A company's investment under this subsection in a single piece of property or in an interest in a single piece of property, including improvements, fixtures, and equipment relating to the property, may not exceed five percent of the company's assets.

(d) Investment real property held under Subsection (b) or (c) must be materially enhanced in value by:

(1) the construction of durable, permanent-type buildings and other improvements that cost an amount at least equal to the cost of the real property, excluding buildings and improvements at the time the real property is acquired; or

(2) the construction, commenced before the second anniversary of the date the real property is acquired, of buildings and improvements described by Subdivision (1).

(e) The admissible asset value of each investment in real property under Subsection (b) or (c) is subject to review and approval by the commissioner. The commissioner may, at the time the investment is made or any time the insurance company is being examined, have the investment appraised by an appraiser appointed by the commissioner. The company shall pay the reasonable expense of the appraisal. The expense of the appraisal is considered to be a part of the expense of examination of the company unless the company applies for the appraisal to be made. A company may not increase the valuation of real property described by Subsection (b) or (c) unless:

(1) the company applies for the increase in valuation; and

(2) the commissioner approves the increase.

(f) Except as provided by Subsection (g), an insurance company may not own, develop, or hold an equity interest in any residential property or subdivision, single or multiunit family dwelling property, or undeveloped real property to subdivide for or develop residential or single or multiunit family dwellings.

(g) An insurance company may invest in other real property acquired:

(1) in good faith to secure a loan previously contracted for, or for money due;

(2) in satisfaction of a debt previously contracted for in the course of the company's dealings; or

(3) by purchase at a sale under a judgment or decree of a court or under a mortgage or other lien held by the company.

(h) Regardless of the manner in which an insurance company acquires real property under this section, on the sale of the property, the company may retain indefinitely the fee title to the mineral estate or any portion of the mineral estate. (V.T.I.C. Art. 3.33, Sec. 4(l).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(l) Real Estate. Real property fee simple or leasehold estates located within the United States of America, as follows:

(1) home and branch office 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 the acquisition of such real property; provided:

(A) at least 30 percent of the available space in such building shall be occupied for the business purposes of the insurer and its affiliates; and

(B) the aggregate investment in such home and branch offices shall not exceed 20 percent of the insurer's assets; and

(2) other investment 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; provided that such investment in any one piece of property or interest therein, including the improvements, fixtures, and equipment pertaining thereto may not exceed five percent of the insurer's assets; provided, 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 acquisitions as provided in Subdivision (4) below, and such ownership, development, or equity interests shall be specifically prohibited;

(3) the admissible asset value of each such investment in the properties acquired under Subdivisions (1) and (2) of this subsection shall be subject to review and approval by the Commissioner of Insurance. The commissioner shall have discretion at the time such investment is made or any time when an examination of the company is being made to cause any such investment to be appraised by an appraiser, appointed by the commissioner, and the reasonable expense of such appraisal shall be paid by such insurance company and shall be deemed to be a part of the expense of examination of such company; if the appraisal is made upon application of the company, the expense of such appraisal shall not be considered a part of the expense of examination of such company; no insurance company may hereafter make any write-up in the valuation of any of the properties described in Subdivision (1) or (2) of this subsection unless and until it makes application therefor and such increase in valuation shall be approved by the commissioner; and

(4) other real property acquired:

(A) in good faith by way of security for loans previously contracted or money due; or

(B) in satisfaction of debts previously contracted for in the course of its dealings; or

(5) regardless of the mode of acquisition specified herein, upon sale of any such real property, the fee title to the mineral estate or any portion thereof may be retained by the insurance company indefinitely;

Revisor's Note

Section 4(l)(3), V.T.I.C. Article 3.33, refers to a "write-up" in the valuation of an asset and to "such increase" in valuation. The revised law substitutes "increase" for "write-up" because, in context, the terms are synonymous and "increase" is the more modern term.

Revised Law

Sec. 425.120. AUTHORIZED INVESTMENTS: OIL, GAS, AND MINERALS. (a) In this section:

(1) "Producing" means producing oil, gas, or other minerals in paying quantities. A well that has been shut in is considered to be producing oil, gas, or other minerals in paying quantities if shut-in royalties are being paid.

(2) "Production payment" means a right to oil, gas, or other minerals in place or as produced that entitles the owner of the right to a specified fraction of production until the owner receives a specified amount of money, or a specified number of units of oil, gas, or other minerals.

(3) "Royalty" or "overriding royalty" means a right to oil, gas, and other minerals in place or as produced that entitles the owner of the right to a specified fraction of production without limitation to a specified amount of money or a specified number of units of oil, gas, or other minerals.

(b) Subject to this section, in addition to and without limitation on the purposes for which real property may be acquired, secured, held, or retained under other provisions of this subchapter, an insurance company may secure, hold, retain, and convey production payments, producing royalties, and producing overriding royalties, or participations in production payments, producing royalties, or producing overriding royalties as an investment for the production of income.

(c) An insurance company may not carry an asset described by Subsection (b) in an amount that exceeds 90 percent of the appraised value of the asset.

(d) A single investment under this section may not exceed 10 percent of the amount of the insurance company's capital and surplus that exceeds the statutory minimum capital and surplus applicable to the company.

(e) The aggregate amount of an insurance company's investments under this section may not exceed 10 percent of the company's assets as of December 31 preceding the date of the investment. (V.T.I.C. Art. 3.33, Sec. 4(m).)

Source Law

(m) Oil, Gas, and Minerals. In addition to and without limitation on the purposes for which real property may be acquired, secured, held, or retained pursuant to other provisions of this section, every such insurance company may secure, hold, retain, and convey production payments, producing royalties and producing overriding royalties, or participations therein as an investment for the production of income; provided:

(1) in no event may such company carry such assets in an amount in excess of 90 percent of the appraised value thereof; and

(2) no one investment under this subsection may exceed 10 percent of the insurer's capital and surplus in excess of statutory minimum capital and surplus applicable to that insurer, and the aggregate of all such investments may not exceed 10 percent of the insurer's assets as of December 31st next preceding the date of such investment; and

(3) for the purposes of this subsection, the following definitions apply:

(A) a production payment is defined to mean a right to oil, gas, or other minerals in place or as produced that entitles its owner to a specified fraction of production until a specified sum of money, or a specified number of units of oil, gas, or other minerals, has been received;

(B) a royalty and an overriding royalty are each defined to mean a right to oil, gas, and other minerals in place or as produced that entitles the owner to a specified fraction of production without limitation to a specified sum of money or a specified number of units of oil, gas, or other minerals;

(C) "producing" is defined to mean producing oil, gas, or other minerals in paying quantities, provided that it shall be deemed that oil, gas, or other minerals are being produced in paying quantities if a well has been "shut in" and "shut-in royalties" are being paid;

Revised Law

Sec. 425.121. AUTHORIZED INVESTMENTS: SECURITIES LENDING, REPURCHASE, REVERSE REPURCHASE, AND DOLLAR ROLL TRANSACTIONS. (a) In this section:

(1) "Dollar roll transaction" means two simultaneous transactions with settlement dates not more than 96 days apart, in one of which an insurance company sells to a business entity, and in the other of which the company is obligated to purchase from the same business entity, substantially similar securities that are:

(A) mortgage-backed securities issued, assumed, or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a successor to one of those organizations; or

(B) other mortgage-backed securities referred to in 15 U.S.C. Section 77r-1, as amended.

(2) "Repurchase transaction" means a transaction in which an insurance company purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the company at a specified price, either within a specified period or on demand.

(3) "Reverse repurchase transaction" means a transaction in which an insurance company 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 an insurance company lends securities to a business entity that is obligated to return the loaned securities or equivalent securities to the company, either within a specified period or on demand.

(b) Subject to this section, an insurance company may engage in securities lending, repurchase, reverse repurchase, and dollar roll transactions.

(c) An insurance company must enter into a written agreement for each transaction under this section, other than a dollar roll transaction. The agreement must require that the transaction terminate on or before the first anniversary of the transaction's inception.

(d) With respect to cash received in a transaction under this section, an insurance company shall:

(1) invest the cash in accordance with this subchapter and in a manner that recognizes the liquidity needs of the transaction; or

(2) use the cash for the company's general corporate purposes.

(e) While a transaction under this section is outstanding, the insurance company or the company's agent or custodian shall maintain, as to acceptable collateral received in the transaction, either physically or through the book-entry system of the Federal Reserve, Depository Trust Company, Participants Trust Company, or another securities depository approved by the commissioner:

(1) possession of the collateral;

(2) a perfected security interest in the collateral; or

(3) in the case of a jurisdiction outside of the United States, title to, or rights of a secured creditor to, the collateral.

(f) The limitations of Sections 425.110 and 425.157(b) do not apply to the business entity counterparty exposure created by a transaction under this section. An insurance company may not enter into a transaction under this section if, as a result of and after making the transaction:

(1) the aggregate amount of securities loaned or sold to or purchased from any one business entity counterparty under this section would exceed five percent of the company's assets; or

(2) the aggregate amount of all securities loaned or sold to or purchased from all business entities under this section would exceed 40 percent of the company's assets.

(g) For purposes of Subsection (f)(1), 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.

(h) The amount of collateral required for securities lending, repurchase, and reverse repurchase transactions is the amount required under the Purposes and Procedures Manual of the securities valuation office or a successor publication. (V.T.I.C. Art. 3.33, Secs. 4(q)(a), (b), (c), (d), (e).)

Source Law

(q) Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions. (a) For purposes of this Subsection (q), the following definitions shall apply:

(1) "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 of time or upon demand.

(2) "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 of time or upon demand.

(3) "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 of time or upon demand.

(4) "Dollar roll transaction" means two simultaneous transactions with settlement dates no more than 96 days apart so that in one transaction an insurer sells to a business entity, and in the other transaction 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 respective successors; and

(B) other mortgage-backed securities referred to in Section 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. Section 77r-1), as amended.

(b) An insurer may engage in securities lending, repurchase, reverse repurchase and dollar roll transactions as set forth herein. The insurer shall enter into a written agreement for all transactions, except dollar roll transactions, that shall require each transaction terminate no more than one year from its inception.

(c) Cash received in a transaction under this section shall be invested in accordance with this article and in a manner that recognizes the liquidity needs of the transaction or used by the insurer for its general corporate purposes. For so long as the transaction remains outstanding, the insurer, its agent or custodian shall maintain, as to acceptable collateral received in a transaction under this subsection, 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; and

(d) The limitations of Section 4(c) and Section 5(a) shall not apply to the business entity counterparty exposure created by transactions under this section. An insurer shall not enter into a transaction under this subsection if, as a result of and after giving effect to the transaction:

(1) the aggregate amount of securities then loaned, sold to, or purchased from, any one business entity counterparty under this subsection would exceed 5 percent of its assets. In calculating the amount sold to or purchased from a business entity counterparty under repurchase or reverse repurchase transactions, effect may be given to netting provisions under a master written agreement; or

(2) the aggregate amount of all securities then loaned, sold to or purchased from all business entities under this subsection would exceed 40 percent of its assets.

(e) The amount of collateral required for securities lending, repurchase and reverse repurchase transactions is the amount required pursuant to the provisions of the Purposes and Procedures of the Securities Valuation Office or such successor publication.

Revisor's Note

(1) Section 4(q)(a)(4)(B), V.T.I.C. Article 3.33, refers to "Section 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. Section 77r-1)." The revised law omits the reference to "Section 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984" as unnecessary because it is simply a cite to the provisions in which 15 U.S.C. Section 77r-1 was originally enacted and does not add any meaning to the substance of the law.

(2) Section 4(q)(e), V.T.I.C. Article 3.33, refers to "the Purposes and Procedures of the Securities Valuation Office or such successor publication." Other provisions of Section 4, V.T.I.C. Article 3.33, contain similar references. Throughout this subchapter, the revised law substitutes "Purposes and Procedures Manual" for "Purposes and Procedures" because that is the correct name of that publication.

(3) Section 4(q)(f), V.T.I.C. Article 3.33, provides that V.T.I.C. Article 3.39-1 does not apply to a transaction authorized by Section 4(q), V.T.I.C. Article 3.33. V.T.I.C. Article 3.39-1 was repealed by Chapter 556, Acts of the 75th Legislature, Regular Session, 1997. V.T.I.C. Article 3.39-1 permitted an insurance company to enter into repurchase agreements, subject to the limitations prescribed by that article. Chapter 556, Acts of the 75th Legislature, Regular Session, 1997, also added Subsection (q), revised as this section, to Section 4, V.T.I.C. Article 3.33. Because Section 4(q), V.T.I.C. Article 3.33, effectively supersedes V.T.I.C. Article 3.39-1, the revised law omits Section 4(q)(f) as unnecessary. The omitted law reads:

(f) Article 3.39-1 shall not apply to transactions authorized by this Subsection (q).

Revised Law

Sec. 425.122. AUTHORIZED INVESTMENTS: PREMIUM LOANS. (a) Subject to Subsection (b), an insurance company may make loans to finance the payment of premiums for the company's own insurance policies or annuity contracts.

(b) The amount of a loan under this section may not exceed the sum of:

(1) the available cash value of the insurance policy or annuity contract for which the premium loan is made; and

(2) the amount of any escrowed commissions payable relating to the insurance policy or annuity contract. (V.T.I.C. Art. 3.33, Sec. 4(r).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(r) Premium Loans. Loans to finance the payment of premiums for the insurer's own insurance policies or annuity contracts; provided that the amount of any such loan does not exceed the sum of: (i) the available cash value of such insurance policy or annuity contract; and (ii) the amount of any escrowed commissions payable relating to such insurance policy or annuity contract for which the premium loan is made; and

Revised Law

Sec. 425.123. AUTHORIZED INVESTMENTS: MONEY MARKET FUNDS. (a) An insurance company may invest in a money market fund as described by 17 C.F.R. Section 270.2a-7 under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), that is:

(1) a government money market fund that:

(A) invests only in obligations issued, guaranteed, or insured by the United States government or collateralized repurchase agreements composed of these obligations; and

(B) qualifies for investment without a reserve under the Purposes and Procedures Manual of the securities valuation office or a successor publication; or

(2) a class one money market fund that qualifies for investment using the bond class one reserve factor described by the Purposes and Procedures Manual of the securities valuation office or a successor publication.

(b) For purposes of complying with Section 425.115, a money market fund that qualifies for listing in the categories prescribed by Subsection (a) must conform to the Purposes and Procedures Manual of the securities valuation office or a successor publication. (V.T.I.C. Art. 3.33, Sec. 4(s).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(s) Money Market Funds. (1) Money market mutual funds as defined by 17 CFR 270.2a-7 under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) that may be either of the following:

(A) government money market mutual fund which is a money market mutual fund that:

(i) invests only in obligations issued, guaranteed or insured by the federal government of the United States or collateralized repurchase agreements composed of these obligations; and

(ii) qualifies for investment without a reserve under the Purposes and Procedures of the Securities Valuation Office or any successor publication; or

(B) class one money market mutual fund which is a money market mutual fund that qualifies for investment using the bond class one reserve factor under the Purposes and Procedures of the Securities Valuation Office or any successor publication.

(2) For purposes of complying with Subsection (h) of this section, money market funds qualifying for listing within these categories must conform to the Purposes and Procedures of the Securities Valuation Office or such successor publication;

Revisor's Note

Section 4(s)(1), V.T.I.C. Article 3.33, refers to "[m]oney market mutual funds as defined by 17 CFR 270.2a-7 under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)." Section 270.2a-7 does not define or use the term "money market mutual fund," but does prescribe requirements for a registered investment company that holds itself out as a "money market fund." Therefore, the revised law substitutes "money market fund" for "money market mutual fund."

Revised Law

Sec. 425.124. AUTHORIZED INVESTMENTS: RISK CONTROL TRANSACTIONS. Subject to Sections 425.126-425.132, an insurance company may use derivative instruments, as defined by Section 425.125, to engage in hedging transactions, replication transactions, and income generation transactions, as those terms are defined by Section 425.125. (V.T.I.C. Art. 3.33, Sec. 4(u) (part).)

Source Law

(u) Risk Control Transactions. An insurer may use derivative instruments to engage in hedging transactions, replication transactions and income generation transactions as set forth herein.

…

Revisor's Note

Section 4(u)(11), V.T.I.C. Article 3.33, provides that V.T.I.C. Article 3.39-2 does not apply to a transaction authorized by Section 4(u), V.T.I.C. Article 3.33. V.T.I.C. Article 3.39-2 was repealed by Chapter 556, Acts of the 75th Legislature, Regular Session, 1997. V.T.I.C. Article 3.39-2 permitted an insurance company to enter into risk-limiting transactions, including put and call options and interest rate futures contracts, subject to the limitations prescribed by that article. Chapter 556, Acts of the 75th Legislature, Regular Session, 1997, also added Subsection (u), revised as this section and Sections 425.110(h) and 425.125-425.132, to Section 4, V.T.I.C. Article 3.33. Because Section 4(u), V.T.I.C. Article 3.33, effectively supersedes V.T.I.C. Article 3.39-2, the revised law omits Section 4(u)(11) as unnecessary. The omitted law reads:

(11) Article 3.39-2 shall not apply to transactions authorized by this Subsection (u).

Revised Law

Sec. 425.125. RISK CONTROL TRANSACTIONS: DEFINITIONS. In Sections 425.124-425.132:

(1) "Acceptable collateral" means cash, cash equivalents, letters of credit, and direct obligations, or securities that are fully guaranteed as to principal and interest by the United States government.

(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, regardless of whether organized for profit.

(3) "Cap" means an agreement obligating the seller 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 that is 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 a money market fund described by Section 425.123. For purposes of this subdivision, an investment or security is:

(A) short-term if it has a remaining term to maturity of one year or less; and

(B) highly rated if it has:

(i) a rating of "P-1" by Moody's Investors Service, Inc.;

(ii) a rating of "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 not entered into under a written master agreement that provides for netting of payments owed by the respective parties, 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 zero, if the liquidation of the derivative instrument would not result in a final cash payment to the insurance company; or

(ii) for an over-the-counter derivative instrument entered into under a written master agreement that provides for netting of payments owed by the respective parties, and for which the counterparty's domiciliary jurisdiction is within the United States or a jurisdiction outside the United States that is listed in the Purposes and Procedures Manual of the securities valuation office as eligible for netting, the greater of zero or the net sum payable to the company in connection with all derivative instruments subject to the written master agreement on the liquidation of the instruments in the event of the counterparty's default under the master agreement, if there is no condition precedent to the counterparty's obligation to make the payment and if there is no setoff of amounts payable under another instrument or agreement.

(B) For purposes of this subdivision, market value or the net sum payable, as applicable, must be determined at the end of the most recent quarter of the insurance company's fiscal year and must be reduced by the market value of acceptable collateral held by the company or a custodian on the company's behalf.

(7) "Derivative instrument":

(A) means an agreement, option, or instrument, or a series or combinations of agreements, options, or instruments:

(i) to make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or to make a cash settlement instead of making or taking delivery of, or assuming or relinquishing, a specified amount of an underlying instrument; or

(ii) 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;

(B) includes an option, a warrant not otherwise permitted to be held by the insurance company under this subchapter, a cap, a floor, a collar, a swap, a swaption, a forward, a future, any other substantially similar agreement, option, or instrument, and a series or combination of those agreements, options, or instruments; and

(C) does not include a collateralized mortgage obligation, another asset-backed security, a principal-protected structured security, a floating rate security, an instrument that a company would otherwise be authorized to invest in or receive under a provision of this subchapter other than Sections 425.124-425.132, or a debt obligation of the company.

(8) "Derivative transaction" means a transaction involving 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 obligating the seller to make payments to the buyer, each of which is based on the amount by which a predetermined number that is sometimes called the floor rate or floor 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 to effect a cash settlement, based on the actual or expected price, level, performance, or value of those interests. The term does not include a future, a spot transaction effected within a customary settlement period, a when-issued purchase, or another similar cash market transaction.

(11) "Future" means an agreement traded on a futures exchange to make or take delivery of one or more underlying interests, or to effect a cash settlement based on the actual or expected price, level, performance, or value of those 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 Commodity Futures Trading Commission or a successor to that agency.

(13) "Hedging transaction" means a derivative transaction entered into and maintained to manage, with respect to an asset, liability, or portfolio of assets or liabilities, that an insurance company has acquired or incurred or anticipates acquiring or incurring:

(A) the risk of a change in value, yield, price, cash flow, or quantity; or

(B) the currency exchange rate risk.

(14) "Income generation transaction" means a derivative transaction entered into to generate income. The term does not include 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, the most recent quotation from a generally recognized source, or if a generally recognized source does not exist, the price determined under the terms of the instrument or in good faith by the insurance company, as can be reasonably demonstrated to the commissioner on request, plus the amount of accrued but unpaid income on the security or instrument to the extent that amount is not included in the price as of the date the security or instrument is valued.

(16) "Option" means an agreement giving the buyer the right to buy or receive, referred to as a "call option," to sell or deliver, referred to as a "put option," to enter into, extend, or terminate, or to 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 in a manner 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 a swap, collar, or forward, one-half of one percent multiplied by the notional amount multiplied by the square root of the remaining years to maturity.

(19) "Qualified clearinghouse" means a clearinghouse that:

(A) is subject to the rules of a securities exchange or a futures exchange; and

(B) provides clearing services, including acting as a counterparty to each of the parties to a transaction in a manner that eliminates the parties' credit risk to each other.

(20) "Replication transaction" means a derivative transaction or a combination of derivative transactions effected separately or in conjunction with cash market investments included in the insurance company's investment portfolio to replicate the risks and returns of another authorized transaction, investment, or instrument, or to operate as a substitute for cash market transactions. The term does not include 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 system; or

(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 an asset, liability, or other interest underlying a derivative instrument or a combination of those assets, liabilities, or other interests. The term includes a security, currency, rate, index, commodity, or derivative instrument.

(25) "Warrant" means an instrument that gives the holder the right to purchase or sell the underlying interest at a given price and time or at a series of prices and times outlined in the warrant agreement. (V.T.I.C. Art. 3.33, Sec. 4(u)(1).)

Source Law

(1) For the purposes of this Subsection (u), the following definitions shall apply:

(A) "Acceptable collateral" means cash, cash equivalents, letters or credit and direct obligations, or securities that are fully guaranteed as to principal and interest by, the government of the United States.

(B) "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.

(C) "Cap" means an agreement obligating the seller 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.

(D) "Cash equivalents" means short-term, highly rated, highly liquid and readily marketable investments or securities, which includes money market funds as defined in Subsection (s). For purposes of this definition:

(i) "short-term" means investments with a remaining term to maturity of one year or less; and

(ii) "highly rated" means an investment rated "P-1" by Moody's Investors Service, Inc., or "A-1" by the Standard and Poor's Division of the McGraw Hill Companies, Inc., or its equivalent rating by a nationally recognized statistical rating organization recognized by the Securities Valuation Office.

(E) "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.

(F) "Counterparty exposure amount" means:

(i) for an over-the-counter derivative instrument not entered into pursuant to a written master agreement which 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;

(ii) for over-the-counter derivative instruments entered into pursuant to a written master agreement which provides for netting of payments owed by the respective parties, and the domiciliary jurisdiction of the counterparty is either within the United States, or if not within the United States, is within a foreign (not United States) jurisdiction listed in the Purposes and Procedures Manual of the Securities Valuation Office as eligible for netting, the greater of zero or the net sum payable to the insurer in connection with all derivative instruments subject to the written master agreement upon their liquidation in the event of default by the counterparty pursuant to the master agreement (assuming no conditions precedent to the obligations of the counterparty to make such a payment and assuming no setoff of amounts payable pursuant to any other instrument or agreement);

(iii) for purposes of this definition, market value or the net sum payable, as the case may be, shall be determined at the end of the most recent quarter of the insurer's fiscal year and shall be reduced by the market value of acceptable collateral held by the insurer or a custodian on the insurer's behalf.

(G) "Derivative instrument" means any agreement, option or instrument, or any series or combinations thereof:

(i) to make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or to make a cash settlement in lieu thereof; or

(ii) that have a price, performance, value or cash flow based primarily upon the actual or expected price, yield, level, performance, value or cash flow of one or more underlying interests.

Derivative instruments include options, warrants not otherwise permitted to be held by the insurer under this article, caps, floors, collars, swaps, swaptions, forwards, futures and any other agreements, options or instruments substantially similar thereto, or any series or combinations thereof.

Derivative instruments do not include collateralized mortgage obligations, other asset-backed securities, principal-protected structured securities, floating rate securities, or instruments which an insurer is otherwise permitted to invest in or receive under this article other than under this subsection, and any debt obligations of the insurer.

(H) "Derivative transaction" means a transaction involving the use of one or more derivative instruments. Dollar roll transactions, repurchase transactions, reverse repurchase transactions and securities lending transactions shall not be included as derivative transactions for purposes of this subsection.

(I) "Floor" means an agreement obligating the seller to make payments to the buyer 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.

(J) "Forward" means an agreement (other than a future) 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 such underlying interests, but shall not mean or include spot transactions effected within customary settlement periods, when-issued purchases or other similar cash market transactions.

(K) "Future" means an agreement, 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.

(L) "Futures exchange" means a foreign or domestic exchange, contract market or board of trade on which trading in futures is conducted and, in the United States, which has been authorized for such trading by the Commodities Futures Trading Commission or any successor thereof.

(M) "Hedging transaction" means a derivative transaction which is entered into and maintained to manage:

(i) the risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities (or a portfolio of assets and/or liabilities) which the insurer has acquired or incurred or anticipates acquiring or incurring; or

(ii) the currency exchange rate risk related to assets or liabilities (or a portfolio of assets and/or liabilities) which an insurer has acquired or incurred or anticipates acquiring or incurring.

(N) "Income generation transaction" means a derivative transaction which is entered into to generate income. A derivative transaction which is entered into as a hedging transaction or a replication transaction shall not be considered an income generation transaction.

(O) "Market value" means the price for the security or derivative instrument obtained from a generally recognized source or the most recent quotation from such a source or, to the extent no generally recognized source exists, the price for the security or derivative instrument as determined pursuant to the terms of the instrument or in good faith by the insurer as can be reasonably demonstrated to the Commissioner upon request, plus accrued but unpaid income thereon to the extent not included in the price as of the date.

(P) "Option" means an agreement giving the buyer the right to buy or receive (a "call option"), sell or deliver (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.

(Q) "Over-the-counter derivative instrument" means a derivative instrument entered into with a business entity, other than through a securities exchange, futures exchange, or cleared through a qualified clearinghouse.

(R) "Potential exposure" means:

(i) as to a futures position, the amount of initial margin required for that position; or

(ii) as to swaps, collars and forwards, one-half percent times the notional amount times the square root of the remaining years to maturity.

(S) "Qualified clearinghouse" means a clearinghouse subject to the rules of a securities exchange or a futures exchange, which provides clearing services, including acting as a counterparty to each of the parties to a transaction such that the parties no longer have credit risk to each other.

(T) "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 in order to replicate the risks and returns of another authorized transaction, investment or instrument and/or operate as a substitute for cash market transactions. A derivative transaction entered into by the insurer as a hedging transaction shall not be considered a replication transaction.

(U) "Securities exchange" means:

(i) 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 78 et seq.), as amended;

(ii) Private Offerings Resales and Trading through Automated Linkages (PORTAL); or

(iii) a designated offshore securities market as defined in Securities Exchange Commission Regulation S, 17 C.F.R. Part 230, as amended.

(V) "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.

(W) "Swaption" means an option to purchase or sell a swap at a given price and time or at a series of prices and times. A swaption does not mean a swap with an embedded option.

(X) "Underlying interest" means the assets, liabilities or other interests, or a combination thereof, underlying a derivative instrument, such as any one or more securities, currencies, rates, indices, commodities or derivatives instruments.

(Y) "Warrant" means an instrument that gives the holder the right to purchase or sell the underlying interest at a given price and time or at a series of prices and times outlined in the warrant agreement.

Revisor's Note

(1) Section 4(u)(1)(A), V.T.I.C. Article 3.33, in part defines "acceptable collateral" as "cash, cash equivalents, letters or credit and direct obligations." From the context, it is clear that "letters or credit" is a typographical error, and that the statute was intended to say "letters of credit." The revised law is drafted accordingly.

(2) Section 4(u)(1)(U)(i), V.T.I.C. Article 3.33, refers to the Securities Exchange Act of 1934 (15 U.S.C. Section 78 et seq.), as amended. The revised law corrects the citation for that act to reflect that the act begins at 15 U.S.C. Section 78a.

(3) Section 4(u)(1)(U)(iii), V.T.I.C. Article 3.33, refers to a designated offshore securities market as defined in "Securities Exchange Commission Regulation S, 17 C.F.R. Part 230, as amended." For the reader's convenience, the revised law substitutes for the quoted language a more specific reference to 17 C.F.R. Section 230.902, which contains the definition of "designated offshore securities market."

Revised Law

Sec. 425.126. RISK CONTROL TRANSACTIONS: DERIVATIVE USE PLAN. (a) Before an insurance company enters into a derivative transaction, the company's board of directors must approve a derivative use plan as part of the investment plan required by Section 425.105.

(b) 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 or the assets or liabilities being replicated; and

(3) require compliance with internal control procedures. (V.T.I.C. Art. 3.33, Sec. 4(u)(2).)

Source Law

(2) Prior to entering into any derivative transaction, the board of directors of the insurer shall approve a derivative use plan, as part of the investment plan required in Section 3 of this article, that:

(A) describes investment objectives and risk constraints, such as counterparty exposure amounts;

(B) defines permissible transactions identifying the risks to be hedged, the assets or liabilities being replicated; and

Revised Law

Sec. 425.127. RISK CONTROL TRANSACTIONS: INTERNAL CONTROL PROCEDURES. An insurance company that enters into a derivative transaction shall establish written internal control procedures that provide for:

(1) a quarterly report to the board of directors that reviews:

(A) each derivative transaction 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 have been effective;

(3) a system of regular reports, at least monthly, to 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;

(D) the counterparty exposure amount for each over-the-counter derivative transaction;

(4) a written authorization that identifies the responsibilities and limitations of authority of each person 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;

(D) for an over-the-counter derivative transaction, the name of the counterparty and the counterparty exposure amount; and

(E) for an exchange-traded derivative instrument, the name of the exchange and the name of the firm that handled the transaction. (V.T.I.C. Art. 3.33, Sec. 4(u)(3).)

Source Law

(3) The insurer shall establish written internal control procedures that provide for:

(A) a quarterly report to the board of directors that reviews:

(i) all derivative transactions entered into, outstanding or closed out;

(ii) the results and effectiveness of the derivatives program; and

(iii) the credit risk exposure to each counterparty for over-the-counter derivative transactions based upon the counterparty exposure amount;

(B) a system for determining whether hedging or replication strategies utilized have been effective;

(i) a description of all the derivative transactions entered into, outstanding or closed out during the period since the last report;

(ii) the purpose of each outstanding derivative transaction;

(iii) a performance review of the derivative instrument program; and

(iv) the counterparty exposure amount for over-the-counter derivative transactions;

(D) written authorizations that identify the responsibilities and limitations of authority of persons authorized to effect and maintain derivative transactions;

(E) documentation appropriate for each transaction including:

(i) the purpose of the transaction;

(ii) the assets or liabilities to which the transaction relates;

(iii) the specific derivative instrument used in the transaction;

(iv) for over-the-counter derivative instrument transactions, the name of the counterparty and the counterparty exposure amount; and

(v) for exchange-traded derivative instruments, the name of the exchange and the name of the firm that handled the transaction.

Revisor's Note

Section 4(u)(3)(E)(iv), V.T.I.C. Article 3.33, refers to "over-the-counter derivative instrument transactions." For consistent use of the terminology, the revised law substitutes "over-the-counter derivative transaction" for "over-the-counter derivative instrument transactions."

Revised Law

Sec. 425.128. RISK CONTROL TRANSACTIONS: OVERSIGHT BY COMMISSIONER. (a) An insurance company must be able to demonstrate to the commissioner on request the intended hedging characteristics and continuing effectiveness of a derivative transaction or combination of transactions through:

(1) cash flow testing;

(2) duration analysis; or

(3) other appropriate analysis.

(b) Ten days before entering into an initial hedging transaction, an insurance company shall notify the commissioner in writing that:

(1) the company's board of directors has adopted an investment plan that authorizes hedging transactions; and

(2) each hedging transaction will comply with Sections 425.124-425.132.

(c) After providing the notice under Subsection (b), the insurance company may enter into a hedging transaction under Section 425.124 if as a result of and after making the transaction:

(1) the aggregate statement value of all outstanding options other than collars, and of all caps, floors, swaptions, and warrants under Sections 425.124-425.132 not attached to another financial instrument purchased by the company does not exceed 7.5 percent of the company's assets;

(2) the aggregate statement value of all outstanding options other than collars, and of all caps, floors, swaptions, and warrants written by the company under Sections 425.124-425.132 does not exceed three percent of the company's assets; and

(3) the aggregate potential exposure of all outstanding collars, swaps, forwards, and futures entered into or acquired by the company under Sections 425.124-425.132 does not exceed 6.5 percent of the company's assets.

(d) If the hedging transaction does not comply with Sections 425.124-425.132 or, if continuing the transaction may create a hazardous financial condition for the insurance company that affects the company's policyholders or creditors or the public, the commissioner may, after notice and an opportunity for a hearing, order the company to take action reasonably necessary to:

(1) remedy a hazardous financial condition; or

(2) prevent an impending hazardous financial condition from occurring. (V.T.I.C. Art. 3.33, Secs. 4(u)(4), 4(u)(6)(a) (part), (b).)

Source Law

(4) An insurer shall be able to demonstrate to the commissioner, upon request, the intended hedging characteristics and ongoing effectiveness of the derivative transaction or combination of transactions through cash flow testing, duration analysis or other appropriate analysis.

(6)(a) Ten days prior to entering into the initial hedging transaction, the insurer shall notify the commissioner in writing that: (i) the insurer's board of directors has adopted an investment plan which authorizes hedging transactions, and (ii) all hedging transactions will comply with this Subsection (u)… . Thereafter, an insurer may enter into hedging transactions under this subsection, if as a result of and after giving effect to each such transaction:

(A) the aggregate statement value of all outstanding options (other than collars), caps, floors, swaptions and warrants (not attached to another financial instrument purchased by the insurer) pursuant to this subsection does not exceed 7.5 percent of its assets;

(B) the aggregate statement value of all outstanding options (other than collars), swaptions, warrants, caps and floors written by the insurer pursuant to this subsection does not exceed three percent of its assets; and

(C) the aggregate potential exposure of all outstanding collars, swaps, forwards and futures entered into or acquired by the insurer pursuant to this subsection does not exceed 6.5 percent of its assets.

(b) Whenever the derivative transactions entered into under this Subsection (u)(6), are not in compliance with this Subsection (u) or, if continued, may now or subsequently, create a hazardous financial condition to the insurer which affects its policyholders, creditors or the general public, the commissioner may, after notice and an opportunity for a hearing, order the insurer to take such action as may be reasonably necessary to (i) rectify a hazardous financial condition, or (ii) to prevent an impending hazardous financial condition from occurring.

Revisor's Note

(1) Section 4(u)(6)(a), V.T.I.C. Article 3.33, requires insurance companies that are "already" entering into hedging transactions to notify the commissioner of insurance "within 30 days of the effective date of this Subsection (u)." Subsection (u) was added to Section 4, V.T.I.C. Article 3.33, by Chapter 556, Acts of the 75th Legislature, Regular Session, 1997, and took effect September 1, 1997. The revised law omits the requirement for companies "already" engaged in hedging transactions as executed. The omitted law reads:

(a) … Insurers already engaged in hedging transactions shall notify the commissioner as set forth in the preceding sentence within 30 days of the effective date of this Subsection (u)… .

(2) Section 4(u)(6)(b), V.T.I.C. Article 3.33, refers to hedging transactions that "may now or subsequently, create a hazardous financial condition." The revised law omits "now or subsequently" as unnecessary. A reference to a hedging transaction that "may create" a hazardous financial condition is not limited to a hazardous financial condition at the present time.

Revised Law

Sec. 425.129. RISK CONTROL TRANSACTIONS: LIMITATIONS ON INCOME GENERATION TRANSACTIONS. An insurance company may enter into an income generation transaction only if:

(1) as a result of and after making the transaction, the sum of the following amounts does not exceed 10 percent of the company's assets:

(A) the aggregate statement value of admitted assets that at the time of the transaction are subject to call or that generate the cash flows for payments the company is required to make under caps and floors sold by the company and that at the time of the transaction are outstanding under Sections 425.124-425.132;

(B) the statement value of admitted assets underlying derivative instruments that at the time of the transaction are subject to calls sold by the company and outstanding under those sections; and

(C) the purchase price of assets subject to puts that at the time of the transaction are outstanding under those sections; and

(2) the transaction is one of the following types, is covered in the manner specified by this subdivision, and meets the other requirements of this subdivision:

(A) a sale of a call option on assets, if during the entire period the option is outstanding, the company holds, or has a currently exercisable right to acquire, the underlying assets;

(B) a sale of a put option on assets, if:

(i) during the entire period the option is outstanding, the company holds sufficient cash, cash equivalents, or interests in a short-term investment pool to purchase the underlying assets on exercise of the option;

(ii) the company has the ability to hold the underlying assets in the company's portfolio; and

(iii) during the entire period the option is outstanding, when the total market value of all put options sold by the company exceeds two percent of the company's assets, the company sets aside, under a custodial or escrow agreement, cash or cash equivalents that have a market value equal to the amount of the company's put option obligations in excess of two percent of the company's assets;

(i) during the entire period the call option is outstanding, the company holds, or has a currently exercisable right to acquire, assets generating the cash flow to make any payment for which the company is liable under the underlying derivative instrument; and

(ii) the company has the ability to enter into the underlying derivative transaction for the company's portfolio; and

(D) a sale of a cap or floor, if during the entire period the cap or floor is outstanding, the company holds, or has a currently exercisable right to acquire, assets generating the cash flow to make any payment for which the company is liable under the cap or floor. (V.T.I.C. Art. 3.33, Sec. 4(u)(7).)

Source Law

(7) An insurer may only enter into an income generation transaction if:

(A) 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 subsection, plus the statement value of admitted assets underlying derivative instruments then subject to calls sold by the insurer and outstanding under this subsection, plus the purchase price of assets subject to puts then outstanding under this subsection does not exceed 10 percent of its assets; and

(B) the transaction is one of the following types, is covered in the manner specified below and meets the other requirements specified below:

(i) sales of call options on assets, provided that the insurer holds or has a currently exercisable right to acquire the underlying assets during the entire period that the option is outstanding;

(ii) sales of put options on assets, provided that the insurer holds sufficient cash, cash equivalents or interests in a short-term investment pool to purchase the underlying assets upon exercise during the entire period that the option is outstanding, and has the ability to hold the underlying assets in its 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 pursuant to a custodial or escrow agreement cash or cash equivalents having a market value equal to the amount of its put option obligations in excess of two percent of the insurer's assets during the entire period the option is outstanding;

(iii) sales of call options on derivative instruments (including swaptions), provided that the insurer holds or has a currently exercisable right to acquire assets generating the cash flow to make any payments for which the insurer is liable pursuant to the underlying derivative instruments during the entire period that the call options are outstanding and has the ability to enter into the underlying derivative transactions for its portfolio; and

(iv) sales of caps and floors, provided that the insurer holds or has a currently exercisable right to acquire assets generating the cash flow to make any payments for which the insurer is liable pursuant to the caps and floors during the entire period that the caps and floors are outstanding.

Revised Law

Sec. 425.130. RISK CONTROL TRANSACTIONS: LIMITATIONS ON REPLICATION TRANSACTIONS. (a) An insurance company may enter into a replication transaction only with the prior written approval of the commissioner, and only if:

(1) the company would otherwise be authorized to invest the company's funds under this subchapter in the asset being replicated; and

(2) the asset being replicated is subject to all the provisions of this subchapter relating to the making of investments by the company in that type of asset as if the transaction constituted a direct investment by the company in the replicated asset.

(b) The commissioner may adopt fair and reasonable rules regarding replication transactions to implement this section. (V.T.I.C. Art. 3.33, Sec. 4(u)(8).)

Source Law

(8)(a) An insurer may enter into replication transactions only with prior written approval from the Commissioner, provided that:

(A) the insurer would otherwise be authorized to invest its funds under this article in the asset being replicated; and

(B) the asset being replicated is subject to all the provisions and limitations on the making thereof specified in this article with respect 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 such rules and regulations regarding replication transactions as may be fair and reasonable to implement this Subsection (u)(8).

Revisor's Note

Section 4(u)(8)(a)(B), V.T.I.C. Article 3.33, refers to "provisions and limitations" of that article. The revised law omits the reference to "limitations" because the meaning of that term is included in the meaning of "provisions."

Revised Law

Sec. 425.131. RISK CONTROL TRANSACTIONS: TRADING REQUIREMENTS. For purposes of Sections 425.124-425.132, 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 that is:

(A) registered as a futures commission merchant under the Commodity Exchange Act (7 U.S.C. Section 1 et seq.); or

(B) exempt from that registration under 17 C.F.R. Section 30.10, adopted under the Commodity Exchange Act. (V.T.I.C. Art. 3.33, Sec. 4(u)(10).)

Source Law

(10) Each derivative instrument shall be:

(A) traded on a securities exchange;

(B) entered into with, or guaranteed by, a business entity;

(C) issued or written by or entered into with the issuer of the underlying interest on which the derivative instrument is based; or

(D) in the case of futures, traded through a broker which is registered as a futures commission merchant under the Commodity Exchange Act or which has received exemptive relief from such registration under Rule 30.10 promulgated under the Commodity Exchange Act.

Revised Law

Sec. 425.132. RISK CONTROL TRANSACTIONS: OFFSETTING TRANSACTIONS. (a) Subject to this section, an insurance company may purchase or sell one or more derivative instruments to wholly or partly offset a derivative instrument previously purchased or sold, without regard to the quantitative limitations of Sections 425.124-425.131.

(b) An offsetting transaction under this section must use the same type of derivative instrument as the derivative instrument being offset. (V.T.I.C. Art. 3.33, Sec. 4(u)(9).)

Source Law

(9) An insurer may purchase or sell one or more derivative instruments to offset, in whole or in part, any derivative instrument previously purchased or sold, as the case may be, without regard to the quantitative limitations of this subsection, provided that such offsetting transaction utilizes the same type of derivative instrument as the derivative instrument being offset.

[Sections 425.133-425.150 reserved for expansion]

Revised Law

Sec. 425.151. AUTHORIZED INVESTMENTS: FOREIGN COUNTRIES AND UNITED STATES TERRITORIES. (a) In addition to the investments within Canada authorized by this subchapter and subject to this section, an insurance company may make investments within another foreign country or a commonwealth, territory, or possession of the United States.

(b) An investment made under this section must be substantially the same type as an investment authorized to be made within the United States or Canada by this subchapter.

(c) The sum of the amount of investments made under this section and the amount of similar investments made within the United States and Canada may not exceed any limitation imposed by Sections 425.109-425.121, 425.124-425.132, and 425.152.

(d) The aggregate amount of an insurance company's investments under this section may not exceed the sum of:

(1) the amount of the company's reserves attributable to insurance business in force in foreign countries, if any, and any additional investments required by a foreign country as a condition of engaging in business in that country; and

(2) 20 percent of the company's assets.

(e) An insurance company may not invest more than 10 percent of the company's assets in investments denominated in foreign currency that are not hedged under Sections 425.124-425.132. (V.T.I.C. Art. 3.33, Sec. 4(n).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(n) Foreign Countries and United States Territories. In addition to the investments in Canada authorized in other subsections of this section, investments in other foreign countries or in commonwealths, territories, or possessions of the United States; provided:

(1) such investments are substantially the same types as those authorized for investment within the United States of America or Canada by other provisions of this section; and

(2) such investments when added to the amount of similar investments made within the United States and Canada do not result in the combined total of such investments exceeding the limitations specified in Subsections (a) through (m), (o), (q) and (u) of this section; and

(3) such investments may not exceed the sum of:

(A) the amount of insurer's reserves attributable to the insurance business in force in foreign countries, if any, and any additional investments required by any foreign country as a condition to doing business therein; and

(B) 20 percent of the insurer's assets of which no more than 10 percent of the insurer's assets may be investments denominated in foreign currency that are not hedged pursuant to the provisions of Subsection (u);

Revised Law

Sec. 425.152. AUTHORIZED INVESTMENTS: INVESTMENTS NOT OTHERWISE SPECIFIED OR PROHIBITED; INVESTMENTS AUTHORIZED BY OTHER LAW. (a) Subject to this section, an insurance company may make an investment that is not otherwise authorized by this subchapter and that is not specifically prohibited by statute, including any portion of an investment that exceeds the limits imposed by Sections 425.109-425.121, 425.124-425.132, and 425.151.

(b) If any aggregate or individual investment limitation imposed by Sections 425.109-425.121, 425.124-425.132, and 425.151 is exceeded, the excess portion of the investment is considered to be an investment under Subsection (a).

(d) The amount of a single investment made by an insurance company under Subsection (a) may not exceed 10 percent of the company's capital and surplus in excess of the statutory minimum capital and surplus applicable to that company.

(e) The aggregate amount of an insurance company's investments under Subsection (a) may not exceed the lesser of:

(1) five percent of the company's assets; or

(2) the amount of the company's capital and surplus that exceeds the amount of statutory minimum capital and surplus applicable to that company.

(f) An insurance company may invest in any investment authorized for an insurance company that is subject to this subchapter by a provision of this code other than this subchapter or by another law of this state. (V.T.I.C. Art. 3.33, Secs. 4(o), (p) (part).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

(o) Investments Not Otherwise Specified. Investments which are not otherwise authorized by this article and which are not specifically prohibited by statute, including that portion of any investments which may exceed the limits specified in Subsections (a) through (n), (q) and (u) of this section; provided:

(1) if any aggregate or individual specified investment limitation in Subsections (a) through (n), (q) and (u) of this section is exceeded, then the excess portion of such investment shall be an investment under this subsection; and

(2) the burden of establishing the value of such investments shall be upon the insurer; and

(3) the amount of any one such investment may not exceed 10 percent of the insurer's capital and surplus in excess of the statutory minimum capital and surplus applicable to that insurer; and

(4) the aggregate of all investments made under this subsection may not exceed the lesser of either five percent of the insurer's assets or the insurer's capital and surplus in excess of the statutory minimum capital and surplus applicable to that insurer;

(p) Other Authorized Investments. Those other investments as follows:

…

(2) any other investment which may be authorized by other provisions of this code or by other laws of this state for the insurers which are subject to this article.

Revised Law

Sec. 425.153. AUTHORIZED INVESTMENTS: CERTAIN PREVIOUSLY AUTHORIZED INVESTMENTS. (a) An insurance company may continue to hold an investment held by the company on January 1, 1986, that does not conform to the requirements of the investments authorized by Sections 425.109-425.120, 425.151, and 425.152 if the investment was legally authorized at the time the investment was made or acquired or that the company was authorized to hold immediately before January 1, 1986.

(b) An investment described by Subsection (a) is considered an authorized investment of the insurance company. A company shall dispose of the investment at the investment's maturity date, if any, or within the time prescribed by the law under which the investment was acquired, if any.

(c) This section does not alter the legal or accounting status of an investment described by Subsection (a). (V.T.I.C. Art. 3.33, Sec. 4(p) (part).)

Source Law

[Sec. 4. … the investments and transactions described in the following subsections … are authorized for the insurers subject hereto:]

[(p) Other Authorized Investments. Those other investments as follows:]

(1) any investment held by an insurer on the effective date of this Act, which was legally authorized at the time it was made or acquired or which the insurer was authorized to hold or possess immediately prior to such effective date, but which does not conform to the requirements of the investments authorized in Subsections (a) through (o) of this section, may continue to be held by and considered as an authorized asset or transaction of the insurer; provided the investment or transaction is disposed of at its maturity date, if any, or within the time prescribed by the law under which it was acquired, if any; and provided further, in no event shall the provisions of this subdivision alter the legal or accounting status of such asset; and

…

Revisor's Note

(1) Section 4(p)(1), V.T.I.C. Article 3.33, refers to investments "held by an insurer on the effective date of this Act." Section 4(p) was enacted as part of the original enactment of Article 3.33 by Chapter 36, Acts of the 69th Legislature, Regular Session, 1985. The effective date of that act was January 1, 1986. Accordingly, the revised law substitutes "January 1, 1986," for "the effective date of this Act."

(2) Section 4(p)(1), V.T.I.C. Article 3.33, refers to an insurance company's authorization to "hold or possess" certain investments. The revised law omits the reference to "possess" as unnecessary because the meaning of that term is included in the meaning of "hold."

Revised Law

Sec. 425.154. APPLICABILITY OF PERCENTAGE AUTHORIZATIONS AND LIMITATIONS. The percentage authorizations and limitations established by this subchapter apply only at the time an investment is originally acquired or a transaction is entered into and do not apply to the insurance company or the investment or transaction after that time, except as provided by Section 425.155. (V.T.I.C. Art. 3.33, Sec. 4(t) (part).)

Source Law

(t) The percentage authorizations and limitations set forth in any or all of the provisions of this Article 3.33 shall apply only at the time of the original acquisition of an investment or at the time a transaction is entered into and shall not be applicable to the insurer or such investment or transaction thereafter except as provided in Subsection (w) of this section. …

Revised Law

Sec. 425.155. QUALIFICATION OF INVESTMENTS. (a) The qualification or disqualification of an investment under one section of this subchapter does not prevent the investment from qualifying, wholly or partly, under another section of this subchapter. An investment authorized by more than one section may be held under the authorizing section elected by the insurance company.

(b) An investment or transaction qualified under any section of this subchapter at the time the insurance company acquired the investment or entered into the transaction continues to be qualified under that section.

(c) An insurance company may elect to transfer at any time the qualification of an investment, wholly or partly, to the authority of any section of this subchapter under which the investment qualifies at the time of the transfer, regardless of whether the investment originally qualified under that section.

(d) An investment, once qualified under this subchapter, remains qualified notwithstanding any refinancing, restructuring, or modification of the investment, except that an insurance company may not refinance, restructure, or modify an investment to circumvent the requirements of this subchapter. (V.T.I.C. Art. 3.33, Secs. 4(t) (part), (w).)

Source Law

(t) … In addition, any investment, once qualified under any subsection of this section, shall remain qualified notwithstanding any refinancing, restructuring or modification of such investment provided that, the insurer shall not engage in any such refinancing, restructuring or modification of any investment for the purpose of circumventing the requirements or limitations of this article.

(w) Qualification of Investments. The qualification or disqualification of an investment under one subsection of this section does not prevent its qualification in whole or in part under another subsection, and an investment authorized by more than one subsection may be held under whichever authorizing subsection the insurer elects. An investment or transaction qualified under any subsection at the time it was acquired or entered into by the insurer shall continue to be qualified under that subsection. An investment, in whole or in part, may be transferred from time to time, at the election of the insurer, to the authority of any subsection under which it then qualifies, whether or not it originally qualified thereunder.

Revisor's Note

Section 4(t), V.T.I.C. Article 3.33, refers to the "requirements or limitations" of that article. The revised law omits the reference to "limitations" because, in context, the meaning of that term is included within the meaning of "requirements."

Revised Law

Sec. 425.156. DISTRIBUTIONS, REINSURANCE, AND MERGER. (a) This subchapter does not prohibit an insurance company from acquiring additional obligations, securities, or other assets received as a dividend or as a distribution of assets.

(b) This subchapter does not apply to securities, obligations, or other assets accepted incident to the workout, adjustment, restructuring, or similar realization of any kind of previously authorized investment or transaction if the insurance company's board of directors or a committee appointed by the board of directors determines that acceptance of the securities, obligations, or other assets is in the company's best interests.

(c) This subchapter does not apply to assets acquired under a lawful agreement of bulk reinsurance, merger, or consolidation if the assets were legal and authorized investments for the ceding, merged, or consolidated insurance company.

(d) An obligation, security, or other asset acquired as permitted by this section is not required to be qualified under any other section of this subchapter. (V.T.I.C. Art. 3.33, Sec. 4(v).)

Source Law

(v) Distributions, Reinsurance, and Merger. No provision of this article prohibits the acquisition by an insurer of additional obligations, securities, or other assets if received as a dividend or as a distribution of assets, nor does this article apply to securities, obligations, or other assets accepted incident to the workout, adjustment, restructuring or similar realization of any kind of investment or transaction when deemed by the insurer's board of directors or by a committee appointed by the board of directors to be in the best interests of the insurer, if the investment or transaction had previously been authorized, nor does this article apply to assets acquired pursuant to a lawful agreement of bulk reinsurance, merger, or consolidation if such assets constituted legal and authorized investments for the ceding, merged or consolidated company. No obligation, security or other asset acquired as permitted by this subsection need be qualified under any other subsection of this article.

Revised Law

Sec. 425.157. AGGREGATE DIVERSIFICATION REQUIREMENTS. (a) This section takes precedence over Sections 425.109-425.120, 425.122-425.153, and 425.155.

(b) An insurance company's investments 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 and the majority-owned subsidiaries of the issuer's or borrower's parent, may not, in the aggregate, exceed five percent of the company's assets. This subsection does not apply to:

(1) authorized investments that are:

(A) direct obligations of, or guaranteed by the full faith and credit of, the United States, this state, or a political subdivision of this state; or

(B) insured by an agency of the United States or this state; or

(2) an investment provided for by Section 425.112 or 425.113.

(c) Except as otherwise provided by this subsection, an insurance company's aggregate investment in real property under Sections 425.119, 425.120, 425.152, and 425.153 may not exceed 33-1/3 percent of the company's assets. If a company acquires real property under Section 425.119(g) and that acquisition causes the company's aggregate real estate investment to exceed the limitation imposed by this subsection, the company shall, on or before the 10th anniversary of the date the real property is acquired, dispose of a sufficient amount of real property to comply with the applicable limitation. A company that does not dispose of excess real property as required by this subsection may not admit as an asset the value of the real property that exceeds the applicable limitation.

(d) If an insurance company's real property acquisitions exceed the limitation imposed by Subsection (c), the company may not acquire additional real property under Section 425.119(b) or (c) or 425.120, 425.152, or 425.153 until the company disposes of the excess real property as specified by Subsection (c). (V.T.I.C. Art. 3.33, Sec. 5.)

Source Law

Sec. 5. The following provisions govern and take precedence over each and every provision of Section 4, except Subsections (q), (t) and (v):

(a) Investment in all or any types of securities, loans, obligations, or evidences of indebtedness of a single issuer or borrower (which shall include such issuer's or borrower's majority-owned subsidiaries or parent or the majority-owned subsidiaries of such parent), other than those authorized investments that are either direct obligations of or guaranteed by the full faith and credit of the United States of America, the State of Texas, or a political subdivision thereof or are insured by an agency of the United States of America or the State of Texas shall not in the aggregate exceed five percent of the insurer's assets except for those investments provided for in Subsections (e) and (f) of Section 4 of this article; and

(b) The aggregate investment in real property authorized by Subsections (l), (m), (o), and (p) of Section 4 may not exceed 33-1/3 percent of the insurer's assets; provided, in the event an insurer acquires real property under Subdivision (4) of Subsection (l) of Section 4 and such acquisition causes such aggregate real estate to exceed the limitation set forth herein, the insurer shall either dispose of sufficient excess real property to come within such limitations within 10 years of such acquisition or it may not thereafter admit as an asset the value of the real property in excess of such limitation; should an insurer's real property acquisitions exceed such 33-1/3 percent limitation, no additional real property acquisitions under Subdivisions (1) and (2) of Subsection (l), and Subsections (m), (o), and (p) of Section 4 of this article are authorized until such excess is removed.

Revised Law

Sec. 425.158. WAIVER BY COMMISSIONER OF QUANTITATIVE LIMITATIONS. (a) The commissioner may waive a quantitative limitation on any investment authorized by Sections 425.109-425.132 and 425.151-425.156 if:

(1) the insurer seeks the waiver before making the investment;

(2) a hearing is held to determine whether the waiver should be granted;

(3) the applicant seeking the waiver establishes that unreasonable or unnecessary loss or harm will result to the company if the commissioner denies the waiver;

(4) the excess investment will not have a material adverse effect on the company; and

(5) the size of the investment is reasonable in relation to the company's assets, capital, surplus, and liabilities.

(b) The commissioner's waiver must be in writing and may treat the resulting excess investment as a nonadmitted asset. (V.T.I.C. Art. 3.33, Sec. 6.)

Source Law

Sec. 6. The quantitative limitations respecting any investment authorized in Section 4 may be waived by prior written approval of the commissioner; provided:

(a) A hearing is held to determine whether approval should be granted;

(b) The applicant seeking prior approval establishes that unreasonable or unnecessary loss or harm to the insurer will result if approval is withheld;

(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 excess investment as an asset not admitted.

Revisor's Note

Section 6, V.T.I.C. Article 3.33, states that the commissioner of insurance may waive the quantitative limitations for certain investments under that article by prior written approval if certain listed conditions are met, including a condition that "[the] commissioner's prior authorization may treat the resulting excessive investment as an asset not admitted." It is clear from the context that the quoted language is not a condition for granting prior written approval, but rather is a separate grant of authority to the commissioner that results from granting that approval. The revised law is drafted accordingly.

Revised Law

Sec. 425.159. ACCOUNTING PROVISIONS. (a) Each insurance company shall maintain reasonable, adequate, and accurate evidence of the company's ownership of the company's assets and investments.

(b) An insurance company shall evidence the company's ownership of governmental or corporate securities as provided by Sections 423.101, 423.102, 423.104(a), 423.105, 423.106, 423.107, and 423.108.

(c) An insurance company shall hold investments, other than investments made as a participation in a partnership or joint venture, only in the company's own name or as otherwise provided by Chapter 423. (V.T.I.C. Art. 3.33, Secs. 7(b), (c), (d).)

Source Law

(b) Each insurer shall maintain reasonable, adequate, and accurate evidence of its ownership of its assets and investments.

(c) The ownership of governmental or corporate securities shall be evidenced as provided for in Article 21.39-B, Section 4, of this code.

(d) Other than investments made as a participation in a partnership or joint venture, or as otherwise provided in Article 21.39-B of this code, investments shall be held solely in the name of the insurer.

Revisor's Note

Section 7(c), V.T.I.C. Article 3.33, provides that an insurance company's ownership of governmental or corporate securities must "be evidenced as provided for in Article 21.39-B, Section 4, of this code." V.T.I.C. Article 21.39-B was enacted by Chapter 198, Acts of the 64th Legislature, Regular Session, 1975, and originally consisted of only Sections 1-3. Section 4, providing the manner in which a domestic insurance company must evidence the company's ownership of securities, was added by Chapter 267, Acts of the 68th Legislature, Regular Session, 1983. Amendments to Article 21.39-B by Chapter 1436, Acts of the 76th Legislature, Regular Session, 1999, added a new Section 2 and renumbered the subsequent sections, so that Section 4 became Section 5, revised in this code as Sections 423.101, 423.102, 423.104(a), 423.105, 423.106, 423.107, and 423.108. The revised law is drafted accordingly.

Revised Law

Sec. 425.160. INVESTMENTS OF CEDING INSURERS. (a) Subject to this section, if a domestic insurance company assumes and reinsures the business of and takes over the assets of another domestic insurance company or a foreign company, all assets or investments of the ceding company that were authorized as proper assets or investments for the funds of that company and taken over by the assuming company are considered valid assets or investments of the assuming company under the laws of this state.

(b) The commissioner must approve assets or investments described by Subsection (a) and the terms on which those assets or investments are taken over. The commissioner may require the assuming insurance company to reasonably dispose of any of those assets or investments that do not otherwise meet the requirements of this subchapter within a period that will minimize any financial loss or other hardship caused by disposing of the asset or investment. (V.T.I.C. Art. 3.33, Sec. 8.)

Source Law

Sec. 8. In any case in which a domestic insurance company shall assume and reinsure the business and take over the assets of another insurance company, either domestic or foreign, all assets or investments of such reinsured company that were authorized as proper assets or investments for the funds of such reinsured company, and which are taken over by such domestic company, shall be considered as valid assets or investments of such reinsuring domestic company under the laws of this state; provided such assets or investments are approved by the Commissioner of Insurance of this state, and the same are taken over on terms satisfactory to said commissioner, and upon the condition that the commissioner shall have the power to require the reinsuring domestic company to reasonably dispose of any of such assets or investments as do not otherwise meet the requirements of this article within such time schedule as will minimize any financial loss or other hardship by the disposition of such asset or investment.

Revisor's Note

Section 8, V.T.I.C. Article 3.33, refers to a "reinsured insurer" and a "reinsuring insurer." For consistent use of terminology in this code, throughout this chapter, the revised law substitutes "ceding company" for "reinsured insurer" and "assuming company" for "reinsuring insurer."

Revised Law

Sec. 425.161. ACTING AS REAL ESTATE BROKER OR SALESPERSON PROHIBITED. A domestic insurance company or another insurance company specifically made subject to this subchapter may not engage in the business of a broker or salesperson as defined by Chapter 1101, Occupations Code, except that the company may hold, improve, maintain, manage, rent, lease, sell, exchange, or convey any of the real property interests owned as investments under Sections 425.109-425.132 and 425.151-425.153. (V.T.I.C. Art. 3.33, Sec. 10.)

Source Law

Sec. 10. Domestic companies as defined in Section 5 of Article 3.01 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 salesman as defined by The Real Estate License Act, as amended (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 owned as investments under Section 4 of this article.

Revisor's Note

Section 10, V.T.I.C. Article 3.33, refers to "a real estate broker or a real estate salesman as defined by The Real Estate License Act, as amended (Article 6573a, Vernon's Texas Civil Statutes)." That statute was codified in 2001 as Chapter 1101, Occupations Code. Section 1101.002, Occupations Code, defines the terms "broker" and "salesperson" rather than "real estate broker" and "real estate salesman." The revised law is drafted accordingly.

Revised Law

Sec. 425.162. RULES. The commissioner may adopt rules, minimum standards, or limitations that are fair and reasonable as appropriate to supplement and implement this subchapter. (V.T.I.C. Art. 3.33, Sec. 9.)

Source Law

Sec. 9. The State Board of Insurance may adopt such rules, regulations, minimum standards, or limitations which are fair and reasonable as may be appropriate for the augmentation and implementation of this article.

[Sections 425.163-425.200 reserved for expansion]

SUBCHAPTER D. AUTHORIZED INVESTMENTS AND TRANSACTIONS FOR OTHER LIFE, HEALTH, AND ACCIDENT INSURERS

Revised Law

Sec. 425.201. DEFINITION. In this subchapter, "contingency funds" means an insurer's contingency funds over and above the amount of the insurer's policy reserves. (New.)

Revisor's Note

The revised law adds the definition of "contingency funds" for drafting convenience and to eliminate frequent, unnecessary repetition of the substance of the definition.

Revised Law

Sec. 425.202. APPLICABILITY OF SUBCHAPTER. This subchapter applies only to an insurer organized under Chapter 881, 884, 885, 886, 887, or 2551, except as specifically provided by those chapters. (V.T.I.C. Art. 3.33, Sec. 1 (part).)

Source Law

Sec. 1. … [Articles 3.39, 3.40, and 3.40-1 of this code shall not be applicable to such companies, but] such articles shall continue to be applicable to insurance companies chartered under Chapters 9, 881, 884, 885, 886, and 887 of this code, except as otherwise specifically provided in those chapters… .

Revisor's Note

Section 1, V.T.I.C. Article 3.33, provides that V.T.I.C. Articles 3.39, 3.40, and 3.40-1 "continue to be applicable" to certain specified insurers. When the Insurance Code was originally enacted in 1951, Articles 3.39 and 3.40 governed the investments of life insurance companies and related insurers. Article 3.40-1 was enacted in 1967 by Chapter 660, Acts of the 60th Legislature, Regular Session, to provide additional investment authority for the insurers to which Articles 3.39 and 3.40 applied. Article 3.33, the substance of which is revised as Subchapter C of this chapter, was enacted in 1985 to regulate the investments of many types of insurance companies, the investments of which were formerly regulated under Articles 3.39, 3.40, and 3.40-1. However, the referenced statement in Section 1, Article 3.33, clarifies that certain insurers, the investments of which were regulated under Articles 3.39, 3.40, and 3.40-1 before the enactment of Article 3.33, continue to be governed by Articles 3.39, 3.40, and 3.40-1 despite the enactment of Article 3.33. The revised law is drafted to preserve that statement of applicability.

Revised Law

Sec. 425.203. LIMITATION ON FUNDS AND OTHER ASSETS. (a) An insurer may not use the insurer's funds to make an investment or loan that is not authorized by this subchapter.

(b) An insurer may not secure, hold, or convey real property except as authorized by this subchapter. (V.T.I.C. Art. 3.39, Parts I (part), II (part); Art. 3.40 (part).)

Source Law

Art. 3.39

PART I. AUTHORIZED INVESTMENTS

A life insurance company organized under the laws of this state [may invest its several funds,] identified as follows, [in the following securities, respectively, and] none other:

…

PART II. AUTHORIZED LOANS

A life insurance company organized under the laws of this state [may loan its several funds] identified as follows, [taking as collateral security for the payment of such loans the securities named below, and] none other.

…

Art. 3.40. Every such insurance company may secure, hold and convey real property only for the following purposes and in the following manner:

…

Revisor's Note

V.T.I.C. Article 3.39 refers to a "life insurance company," and V.T.I.C. Article 3.40 refers to "such insurance company." However, Section 1, V.T.I.C. Article 3.33, which is revised in relevant part as Section 425.202, provides that the law revised as this subchapter applies to a number of entities that are not "life insurance companies" as that term is defined by Section 841.001 of this code. Accordingly, throughout this subchapter, the revised law substitutes "insurer" for "life insurance company" or "insurance company."

Revised Law

Sec. 425.204. APPROVAL OF INVESTMENTS AND LOANS REQUIRED. (a) An insurer may not make an investment unless the investment has been authorized by the insurer's board of directors or by a committee responsible for supervising investments.

(b) An insurer may not make a loan other than a policy loan unless the loan has been authorized by the insurer's board of directors or by a committee responsible for supervising loans. (V.T.I.C. Art. 3.39, Part I, Sec. F, Para. 2; Part II, Sec. A, Para. 7.)

Source Law

[Part I]

[F]

2. Investments to Be Approved by Board of Directors. No investment shall be made by any such insurance company, unless the same shall first have been authorized by the Board of Directors or by a committee charged with the duty of supervising such investments.

[Part II]

[A]

7. Loans to Be Authorized by Board of Directors. No loan, except policy loans, shall be made by any such insurance company unless the same shall first have been authorized by the Board of Directors or by a committee charged with the duty of supervising such loans.

Revised Law

Sec. 425.205. AUTHORIZED INVESTMENTS FOR ALL FUNDS: GOVERNMENT BONDS. (a) Subject to this section, an insurer may invest any of the insurer's funds and accumulations in:

(1) a bond, treasury bill, note, or certificate of indebtedness of the United States or any other obligation or security fully guaranteed as to principal and interest by the full faith and credit of the United States;

(2) a bond of Canada or a province or municipality of Canada;

(3) a bond of a state, county, or municipality of the United States;

(4) a bond or interest-bearing warrant issued by a county, municipality, school district, or other subdivision that is:

(A) organized under the laws of a state of the United States; and

(B) authorized to issue the bond or warrant under the constitution and laws of that state;

(5) a bond or interest-bearing warrant issued by an educational institution that is:

(A) organized under the laws of a state of the United States; and

(B) authorized to issue the bond or warrant under the constitution and laws of that state;

(6) a bond or warrant, including a revenue or special obligation, of an educational institution located in a state of the United States;

(7) a bond or warrant payable from designated revenues of a municipality, county, drainage district, road district, or other civil administration, agency, authority, instrumentality, or subdivision that is:

(A) organized under the laws of a state of the United States; and

(B) authorized to issue the bond or warrant under the constitution and laws of that state;

(8) a paving certificate or other certificate or evidence of indebtedness issued by a municipality in a state of the United States and secured by a first lien on real estate; and

(9) a bond issued under the Farm Credit Act of 1971 (12 U.S.C. Section 2001 et seq.) that is issued against and secured by promissory notes or obligations, the payment of which is secured by mortgage, deed of trust, or other valid lien on unencumbered real property located in this state.

(b) An insurer may invest in a bond or warrant described by Subsection (a)(4) or (5) only if the issuer of the bond or warrant has made legal provision to impose a tax to meet the obligation.

(c) An insurer may invest in a bond or warrant described by Subsection (a)(6) only if the special revenue or income to meet the principal and interest payments as they accrue on the obligation has been appropriated, pledged, or otherwise provided by the educational institution.

(d) An insurer may invest in a bond or warrant described by Subsection (a)(7) only if special revenue or income to meet the principal and interest payments as they accrue on the obligation has been appropriated, pledged, or otherwise provided by the municipality or other entity. (V.T.I.C. Art. 3.39, Part I (part), Sec. A, Paras. 1, 2, 3, 4, 5, 6, 7, 8, 9.)

Source Law

Part I. [A life insurance company organized under the laws of this state] may invest its several funds, [identified as follows,] in the following securities, respectively, and … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS

1. U.S. Bonds and Obligations Guaranteed by the United States. The bonds, treasury bills, notes and certificates of indebtedness of the United States or any other obligation or security fully guaranteed as to principal and interest by the full faith and credit of the United States.

2. Canadian Bonds. The bonds of the Dominion of Canada or any province or city of the Dominion of Canada.

3. State, County and City Bonds. The bonds of any state, county, or city of the United States.

4. County, City and School District Bonds. Any bonds or interest-bearing warrants issued by authority of law by any county, city, town, school district or other municipality or subdivision, which is now or hereafter may be constituted or organized under the laws of any state in the United States, and which is authorized to issue such bonds and warrants under the Constitution and laws of the state in which it is situated; provided legal provision has been made by a tax to meet said obligations.

5. Bonds of Educational Institutions. Any bonds or interest-bearing warrants issued by authority of law by any educational institution which is now or hereafter may be constituted or organized under the laws of any state in the United States, and which is authorized to issue such bonds and warrants under the Constitution and laws of the state in which it is situated; provided legal provision has been made by a tax to meet said obligations.

6. Revenue Bonds, etc., of Educational Institutions. The bonds and warrants, including revenue and special obligations, of any educational institution located in any state in the United States when special revenue or income to meet the principal and interest payments as they accrue upon such obligations shall have been appropriated, pledged or otherwise provided by such educational institution.

7. Bonds and Warrants of Municipally Owned Systems. The bonds and warrants payable from designated revenues of any city, county, drainage district, road district, town, township, village or other civil administration, agency, authority, instrumentality, or subdivision which is now or hereafter may be constituted or organized under the laws of any state in the United States, and which is authorized to issue such bonds and warrants under the Constitution and laws of the state in which it is situated; provided special revenue or income to meet the principal and interest payments as they accrue upon such obligations shall have been appropriated, pledged or otherwise provided by such municipality.

8. Paving Certificates. Any paving certificates or other certificates or evidence of indebtedness issued by any city in any state in the United States and secured by a first lien on real estate.

9. Bonds Issued Under Federal Farm Loan Act. Bonds issued under and by virtue of the Federal Farm Loan Act approved July 17, 1916 (12 U.S.C.A. Sec. 641 et seq.), when such bonds are issued against and secured by promissory notes, or obligations, the payment of which is secured by mortgage, deed of trust, or other valid lien upon unencumbered real estate situated in this state.

Revisor's Note

(1) Paragraphs 2, 3, 4, 7, and 8, Section A, Part I, V.T.I.C. Article 3.39, refer to a "city." Paragraphs 4 and 7 refer to a "town" and Paragraph 7 refers to a "township" and a "village." The revised law substitutes the term "municipality" for "city," "town," "township," and "village" for the reason stated in Revisor's Note (6) to Section 425.002.

(2) Paragraphs 4, 5, and 7, Section A, Part I, V.T.I.C. Article 3.39, refer to political subdivisions, educational institutions, and other entities that are "now or hereafter may be constituted or organized" under state law. The revised law omits "now or hereafter may be" for the reason stated in Revisor's Note (1) to Section 425.002. The reference to "constituted" is omitted from the revised law because "constituted" is included in the meaning of "organized."

(3) Paragraph 9, Section A, Part I, V.T.I.C. Article 3.39, refers to "the Federal Farm Loan Act approved July 17, 1916 (12 U.S.C.A. Sec. 641 et seq.)." That act was repealed by the Farm Credit Act of 1971 (Pub. L. No. 92-181), which is codified as 12 U.S.C. Section 2001 et seq. Section 5.26(a) of Pub. L. No. 92-181 provided in part that "[a]ll references in other legislation, State or Federal, … to the Acts repealed hereby, shall be deemed to refer to comparable provisions of this Act." The revised law is drafted accordingly.

Revised Law

Sec. 425.206. AUTHORIZED INVESTMENTS FOR ALL FUNDS: CORPORATE BONDS, NOTES, AND DEBENTURES. (a) Subject to Subsection (e), an insurer may invest any of the insurer's funds and accumulations in a first mortgage bond or first lien note on real or personal property of:

(1) a solvent corporation that has not defaulted in the payment of any debt during the five years preceding the investment;

(2) a solvent corporation that has not been in existence for five consecutive years but whose first mortgage bonds or first lien notes on real or personal property are fully guaranteed by a solvent corporation that has not defaulted in the payment of any debt during the five years preceding the investment;

(3) a solvent corporation that has not been in existence for five consecutive years but whose first mortgage bonds or first lien notes on real or personal property are secured by leases or other contracts executed by a solvent corporation that has not defaulted in the payment of any debt during the five years preceding the investment, if the required rentals or other required payments under the leases or other contracts are sufficient in all circumstances to pay interest and principal when due on the bonds or notes; or

(4) a solvent corporation that has not been in existence for five consecutive years preceding the investment, if:

(A) the corporation has succeeded to the business and assets and has assumed the liabilities of another corporation; and

(B) neither the successor corporation or the corporation succeeded has defaulted in the payment of any debt during the five years preceding the investment.

(b) Subject to Subsection (e), an insurer may invest any of the insurer's funds and accumulations in a note or debenture of a corporation with a net worth of at least $5 million if:

(1) a prior lien in excess of 10 percent of the net worth of the corporation does not exist against the real or personal property of the corporation at the time the note or debenture is issued; and

(2) under the provisions of the indenture providing for the issuance of the note or debenture, a prior lien that exceeds 10 percent of the net worth of the corporation cannot be created against the real or personal property of the corporation at the time the note or debenture is issued.

(c) Subject to Subsection (e), an insurer may invest any of the insurer's funds and accumulations in a note or debenture of a solvent corporation that has not been in existence for five consecutive years if:

(1) a prior lien does not exist against the real or personal property of the corporation at the time the note or debenture is issued;

(2) under the provisions of the indenture providing for the issuance of the note or debenture, a prior lien cannot be created against the real or personal property of the corporation at the time the note or debenture is issued; and

(3) the note or debenture is:

(A) secured by a lease or other contract executed by a solvent corporation that has a net worth of at least $5 million and has not defaulted in the payment of any debt during the five years preceding the investment, if the required rentals or other required payments under the lease or other contract are sufficient in all circumstances to pay interest and principal when due on the bond or note; or

(B) fully guaranteed by a corporation described by Paragraph (A).

(d) Subject to Subsection (e), an insurer may invest any of the insurer's funds and accumulations in a bond, bill of exchange, or other commercial note or bill of:

(1) a solvent corporation that has not defaulted in the payment of any debt during the five years preceding the investment; or

(2) a solvent corporation that has not been in existence for the five years preceding the investment, if:

(A) the corporation has succeeded to the business and assets and has assumed the liabilities of another corporation;

(B) neither the successor corporation or the corporation succeeded has defaulted in the payment of any debt during the five years preceding the investment;

(D) the corporation does not have long-term indebtedness that exceeds the corporation's net worth, as evidenced by the corporation's latest published financial statements or other financial data available to the public.

(e) The amount of an insurer's investments in the bonds, notes, debentures, or other obligations of any one corporation may not exceed five percent of the insurer's admitted assets. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 10.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, and none other:

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

10. Corporate First Mortgage Bonds, Notes and Debentures. (1) First mortgage bonds or first lien notes on real estate or personal property: (a) of any solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment; or (b) of any solvent corporation which has not been in existence for five (5) consecutive years but whose first mortgage bonds or first lien notes on real estate or personal property are fully guaranteed by a solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment; or (c) of any solvent corporation which has not been in existence for five (5) consecutive years but whose first mortgage bonds or first lien notes on real estate or personal property are secured by leases or other contracts executed by a solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment, the required rentals or other required payments under which leases or other contracts are sufficient in any and every circumstance to pay interest and principal when due on such bonds or notes; or (d) of any solvent corporation which has not been in existence for five (5) consecutive years next preceding such investment, provided such corporation has succeeded to the business and assets and has assumed the liabilities of another corporation, and which corporation and the corporation so succeeded have not defaulted in the payment of any debt within five (5) years next preceding such investment; or

(2) in the notes or debentures of any such corporation with a net worth of not less than Five Million Dollars ($5,000,000) where no prior lien exists in excess of 10 percent of the net worth of such corporation, and, under the provisions of the indenture providing for the issuance of such notes or debentures, no such prior lien can be created in excess of 10 percent of the net worth of such corporation, against the real or personal property of such corporation at the time the notes or debentures were issued; or (3) in the notes or debentures of any solvent corporation which has not been in existence for five (5) consecutive years where no prior lien exists, and, under the provisions of the indenture providing for the issuance of such notes or debentures, no such prior lien can be created against the real or personal property of such corporation at the time the notes or debentures were issued, but whose notes or debentures are secured by leases or other contracts executed by a solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment and has a net worth of at least Five Million Dollars ($5,000,000), the required rentals or other required payments under which leases or other contracts are sufficient in any and every circumstance to pay interest and principal when due on such bonds or notes, or whose notes or debentures are fully guaranteed by any such corporation; or (4) in the bonds, bills of exchange, or other commercial notes or bills of any solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment, or of any solvent corporation which has not been in existence for five (5) consecutive years next preceding such investment, provided such corporation has succeeded to the business and assets and has assumed the liabilities of another corporation, and which corporation and the corporation so succeeded have not defaulted in the payment of any debt within five (5) years next preceding such investment, and which corporation has a net worth of not less than Fifty Million Dollars ($50,000,000) and has no long-term indebtedness in excess of its net worth, as evidenced by its latest published financial statements or other financial data available to the public; but in no event shall the amount of such investment in the bonds, notes, debentures, or other obligations of any one such corporation exceed five percent (5%) of the admitted assets of the insurance company making such investment.

Revised Law

Sec. 425.207. AUTHORIZED INVESTMENTS FOR ALL FUNDS: SHARES OF SAVINGS AND LOAN ASSOCIATIONS. (a) Subject to this section, an insurer may invest any of the insurer's funds and accumulations in a share, stock, share or savings account, or investment certificate of a savings and loan association engaged in business in this state that is qualified to participate in insurance issued by the Federal Deposit Insurance Corporation.

(b) An insurer's investment in a savings and loan association may not exceed 20 percent of the savings and loan association's total assets. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 11.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

11. Shares of Savings and Loan Associations. The shares, stock, share accounts or savings accounts, and investment certificates of Savings and Loan Associations doing business in this state where such association has qualified for participation in insurance issued by the Federal Savings and Loan Insurance Corporation; no such investment shall exceed twenty per cent (20%) of the total assets of any such Individual Savings and Loan Association.

Revisor's Note

Paragraph 11, Section A, Part I, V.T.I.C. Article 3.39, refers to a savings and loan association that "qualified for participation in insurance issued by the Federal Savings and Loan Insurance Corporation." The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Pub. L. No. 101-73) abolished the Federal Savings and Loan Insurance Corporation and provided for the insurance of the deposits of savings and loan associations by the Federal Deposit Insurance Corporation. The revised law is drafted accordingly.

Revised Law

Sec. 425.208. AUTHORIZED INVESTMENTS FOR ALL FUNDS: BANK AND BANK HOLDING COMPANY STOCKS. (a) Subject to this section, an insurer may invest any of the insurer's funds and accumulations in:

(1) the stock of a state or national bank that is a member of the Federal Deposit Insurance Corporation; and

(2) the stock of a bank holding company as defined by the Bank Holding Company Act of 1956 (12 U.S.C. Section 1841 et seq.), as amended by the Bank Holding Company Act Amendments of 1970 (12 U.S.C. Section 1841 et seq. and Section 1971 et seq.).

(b) An insurer's investment in the stock of a bank or bank holding company may not exceed:

(1) 20 percent of the total outstanding shares of the stock of the bank or bank holding company; or

(2) 10 percent of the insurer's admitted assets. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 12.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

12. Bank and Bank Holding Company Stocks. The stock of banks, either state or national, that are members of the Federal Deposit Insurance Corporation and the stock of bank holding companies as defined in the Bank Holding Company Act of 1956 (12 U.S.C.A. 1841 et seq.) as amended by the Bank Holding Company Act Amendments of 1970 (12 U.S.C.A. 1841 et seq., 1971 et seq.) enacted by the United States Congress; no such investment shall exceed twenty per cent (20%) of the total outstanding shares of the stock of any such bank or bank holding company and in no event shall the amount of investment in any such stock exceed ten per cent (10%) of the admitted assets of the insurance company making such investment.

Revised Law

Sec. 425.209. AUTHORIZED INVESTMENTS FOR ALL FUNDS: DEBENTURES OF PUBLIC UTILITY CORPORATIONS. (a) Subject to this section, an insurer may invest any of the insurer's funds and accumulations in:

(1) a debenture of a solvent public utility corporation that:

(A) has not defaulted in the payment of any debt during the five years preceding the investment; and

(B) has not failed in any one of the five years preceding the investment to have earned, after taxes, including income taxes, and after deducting proper charges for replacements, depreciation, and obsolescence, an amount applicable to interest on the corporation's outstanding indebtedness equal to at least two times the amount of interest due for that year, or, in the case of issuance of new debentures, the earnings applicable to interest are equal to at least two times the amount of annual interest on the corporation's obligations after giving effect to the new financing; or

(2) a debenture of a solvent public utility corporation that has not been in existence for the five years preceding the investment, if:

(A) the corporation has succeeded to the business and assets and has assumed the liabilities of another public utility corporation;

(B) neither the successor corporation or the corporation succeeded has defaulted in the payment of any debt during the five years preceding the investment; and

(C) neither the successor corporation or the corporation succeeded have failed in any one of the five years preceding the investment to have earned, after taxes, including income taxes, and after deducting proper charges for replacements, depreciation, and obsolescence, an amount applicable to interest on the corporation's outstanding indebtedness equal to at least two times the amount of interest due for that year, or in the case of issuance of new debentures, the earnings applicable to interest are equal to at least two times the amount of annual interest on the corporation's obligations after giving effect to the new financing.

(b) The amount of an insurer's investment in debentures under this section may not exceed five percent of the insurer's admitted assets. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 13.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

13. Debentures of Public Utility Corporations. The debentures of any solvent public utility corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment, or of any solvent public utility corporation which has not been in existence for five (5) consecutive years next preceding such investment provided such corporation has succeeded to the business and assets and has assumed the liabilities of another such corporation, and which public utility corporation and public utility corporation so succeeded have not defaulted in the payment of any debt within five (5) years next preceding such investment; provided further, that such public utility corporation shall not have failed in any one of the five (5) years next preceding such investment to have earned, after taxes, including income taxes, and after deducting proper charges for replacements, depreciation and obsolescence, a sum applicable to interest on its outstanding indebtedness equal at least to two times the amount of interest due for that year, or where, in the case of issuance of new debentures, such earnings applicable to interest are equal to at least two times the amount of annual interest on such public utility corporation's obligations after giving effect to such new financing; or, in the case of a public utility corporation which has not been in existence for five (5) consecutive years next preceding such investment but has succeeded to the business and assets and has assumed the liabilities of another such corporation, and which public utility corporation and the public utility corporation so succeeded have not failed in any one of the five (5) years next preceding such investment to have earned, after taxes, including income taxes, and after deducting proper charges for replacements, depreciation and obsolescence, a sum applicable to interest on the outstanding indebtedness equal to at least two times the amount of interest due for that year, to where in the case of issuance of new debentures such earnings applicable to interest are equal to at least two times the amount of annual interest on such public utility corporation's obligations after giving effect to such new financing; but in no event shall the amount of such investment in debentures under this Subdivision exceed five per cent (5%) of the admitted assets of the insurance company making the investment.

Revised Law

Sec. 425.210. AUTHORIZED INVESTMENTS FOR ALL FUNDS: PREFERRED STOCK OF PUBLIC UTILITY CORPORATIONS. (a) Subject to this section, an insurer may invest any of the insurer's funds and accumulations in:

(1) preferred stock of a solvent public utility corporation, the bonds and debentures of which are authorized investments for the insurer, and that:

(A) has not defaulted in the payment of any debt during the five years preceding the investment; and

(B) has not failed in any one of the five years preceding the investment to have earned an amount applicable to the dividends on the preferred stock equal to at least three times the amount of dividends due in that year, or, in the case of issuance of new preferred stock, the earnings applicable to dividends are equal to at least three times the amount of the annual dividend requirements after giving effect to the new financing; or

(2) a solvent public utility corporation, the bonds and debentures of which are authorized investments for the insurer, and that has not been in existence for the five years preceding the investment, if:

(A) the corporation has succeeded to the business and assets and has assumed the liabilities of another public utility corporation;

(B) neither the successor corporation or the corporation succeeded has defaulted in the payment of any debt during the five years preceding the investment; and

(C) neither the successor corporation or the corporation succeeded have failed in any one of the five years preceding the investment to have earned an amount applicable to the dividends on the preferred stock equal to at least three times the amount of dividends due in that year, or, in the case of issuance of new preferred stock, the earnings applicable to dividends are equal to at least three times the amount of the annual dividend requirements after giving effect to the new financing.

(b) Preferred stock purchased under this section must be of an issue entitled to first claim on the net earnings of the public utility corporation, after deducting the amount necessary to service any outstanding bonds and debentures.

(c) The amount of an insurer's investment in preferred stock under this section may not exceed 2-1/2 percent of the insurer's admitted assets. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 14.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

14. Preferred Stock of Public Utility Corporations. The preferred stock of any solvent public utility corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment, or of any solvent public utility corporation which has not been in existence for five (5) consecutive years next preceding such investment provided such corporation has succeeded to the business and assets and has assumed the liabilities of another corporation, and which public utility corporation and the public utility corporation so succeeded have not defaulted in the payment of any debt within five (5) years next preceding such investment; provided further, that such public utility corporation shall not have failed in any one of the five (5) years next preceding such investment to have earned a sum applicable to dividends on such preferred stock equal to at least three times the amount of dividends due in that year, or, in the case of issuance of new preferred stock such earnings applicable to dividends are equal at least to three times the amount of the annual dividend requirements after giving effect to such new financing, and where the bonds and debentures are eligible investments for such insurance company; or, in the case of a public utility corporation which has not been in existence for five (5) consecutive years next preceding such investment, but has succeeded to the business and assets and has assumed the liabilities of another such corporation, and which public utility corporation and the public utility corporation so succeeded have not failed in any one of the five (5) years next preceding such investment to have earned a sum applicable to the dividends on such preferred stock equal to at least three times the amount of dividends due in that year, or, in the case of issuance of new preferred stock, such earnings applicable to dividends are equal at least to three times the amount of the annual dividend requirements after giving effect to such new financing, and where the bonds and debentures are eligible investments for such insurance company; provided that any preferred stock so purchased shall be of an issue which is entitled to first claim upon the net earnings of such public utility corporation after deducting such sum as may be necessary to service any outstanding bonds and debentures, but in no event shall the amount of such investment in preferred stock under this Subdivision exceed two and one-half per cent (2 1/2%) of the admitted assets of the insurance company making the investment.

Revised Law

Sec. 425.211. AUTHORIZED INVESTMENTS FOR ALL FUNDS: BONDS ISSUED, ASSUMED, OR GUARANTEED IN INTERNATIONAL MARKET. An insurer may invest any of the insurer's funds and accumulations in bonds issued, assumed, or guaranteed by:

(1) the Inter-American Development Bank;

(2) the International Bank for Reconstruction and Development (the World Bank);

(3) the African Development Bank;

(4) the Asian Development Bank;

(5) the International Finance Corporation; and

(6) the State of Israel. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 15A.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

15A. Other Bonds. A company may also invest its funds and accumulations in:

(1) bonds issued, assumed, or guaranteed by 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; and

(2) bonds issued, assumed, or guaranteed by the State of Israel.

Revised Law

Sec. 425.212. AUTHORIZED INVESTMENTS FOR ALL FUNDS: SECURITIES OR INVESTMENTS AUTHORIZED OR DESCRIBED BY SPECIFIC STATUTORY PROVISION. An insurer may invest any of the insurer's funds and accumulations in a security or investment authorized or described by:

(1) Section 65.013, Finance Code;

(2) Sections 435.041-435.047, Government Code;

(3) Subchapter B, Chapter 1505, Government Code;

(4) Chapter 284, Transportation Code;

(5) Section 51.039 or 60.104, Water Code;

(6) Chapter 160, General Laws, Acts of the 43rd Legislature, Regular Session, 1933 (Article 842a, Vernon's Texas Civil Statutes);

(7) Chapter 230, Acts of the 49th Legislature, Regular Session, 1945 (Article 842a-1, Vernon's Texas Civil Statutes);

(8) Chapter 110, Acts of the 51st Legislature, Regular Session, 1949 (Article 8280-133, Vernon's Texas Civil Statutes);

(9) Chapter 340, Acts of the 51st Legislature, Regular Session, 1949 (Article 8280-137, Vernon's Texas Civil Statutes);

(10) Chapter 398, Acts of the 51st Legislature, Regular Session, 1949 (Article 8280-138, Vernon's Texas Civil Statutes); or

(11) Chapter 465, Acts of the 51st Legislature, Regular Session, 1949 (Article 8280-139, Vernon's Texas Civil Statutes). (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 16.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

16. Securities Authorized by Special Acts of the Legislature. Securities authorized under Articles: 842a; 842a-1; 881a-24; 1187a; 5890c; 6795b-1; 7880-19a; 8247a; 8280-133; 8280-134; 8280-137; 8280-138; and 8280-139 of the Revised Civil Statutes of Texas.

Revisor's Note

(1) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to securities "authorized under" Articles 842a and 842a-1, Revised Civil Statutes of Texas, meaning, respectively, Chapter 160, General Laws, Acts of the 43rd Legislature, Regular Session, 1933, and Chapter 230, Acts of the 49th Legislature, Regular Session, 1945. Those articles do not authorize the issuance of securities but provide that certain obligations issued or guaranteed by the United States, specific federal agencies, or the State of Texas are legal and authorized investments for, among other entities, insurers. Accordingly, the revised law refers to securities "described by" those articles.

(2) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to "[s]ecurities authorized under" Article 881a-24, Revised Civil Statutes of Texas, meaning Section 25, Chapter 61, General Laws, Acts of the 41st Legislature, 2nd Called Session, 1929. Article 881a-24 provided that an insurer, among other entities, could invest the insurer's funds in share accounts of savings and loan associations and that those investments by insurers were eligible for tax-reducing purposes under Article 7064. Article 881a-24 was repealed by Chapter 113, Acts of the 58th Legislature, Regular Session, 1963. That act enacted the Texas Savings and Loan Act (Article 852a, Vernon's Texas Civil Statutes). The relevant portion of Article 881a-24 became Section 6.14, Texas Savings and Loan Act, and was codified in 1997 as Section 65.013, Finance Code. The revised law is drafted accordingly. The revised law also adds a reference to "investments" under Section 65.013, Finance Code, because share accounts, referred to in Chapter 65, Finance Code, as "savings accounts," are not "securities."

(3) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to Article 1187a, Revised Civil Statutes of Texas, meaning Chapter 231, General Laws, Acts of the 43rd Legislature, Regular Session, 1933. That statute was codified in 1999 as Subchapter B, Chapter 1505, Government Code. The revised law is drafted accordingly.

(4) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to Article 5890c, Revised Civil Statutes of Texas, meaning Chapter 3, page 494, General Laws, Acts of the 46th Legislature, Regular Session, 1939. Article 5890c provided that bonds issued by the Texas National Guard Armory Board were legal and authorized investments for insurers, among other entities. Article 5890c was repealed by Chapter 112, Acts of the 58th Legislature, Regular Session, 1963, and by Chapter 690, Acts of the 59th Legislature, Regular Session, 1965. The 1965 act enacted Article 5767, Revised Statutes, relating to the Texas National Guard Armory Board. Section 6(8), Article 5767, contained language similar to Article 5890c. Article 5767 was repealed by Chapter 186, Acts of the 60th Legislature, Regular Session, 1967. That act enacted Title 97A, Revised Statutes, relating to the Texas National Guard Armory Board. Part of that title, Article 5931-5(8), contained language similar to that in Section 6(8), Article 5767. Article 5931-5(8) was codified in 1987 as Sections 435.041-435.047, Government Code. The revised law is drafted accordingly.

(5) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to Article 6795b-1, Revised Civil Statutes of Texas, meaning Chapter 304, Acts of the 50th Legislature, Regular Session, 1947. That article was codified in 1995 as Chapter 284, Transportation Code. The revised law is drafted accordingly.

(6) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to Article 7880-19a, Revised Civil Statutes of Texas, meaning Chapter 25, General Laws, Acts of the 39th Legislature, Regular Session, 1925. The relevant portion of that article was codified in 1971 as Section 51.039, Water Code. The revised law is drafted accordingly.

(7) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to Article 8247a, Revised Civil Statutes of Texas, meaning Chapter 111, Acts of the 43rd Legislature, 1st Called Session, 1933. The relevant portion of that article was codified in 1971 as Section 60.104, Water Code. The revised law is drafted accordingly.

(8) Paragraph 16, Section A, Part I, V.T.I.C. Article 3.39, refers to Article 8280-134, Revised Civil Statutes of Texas, meaning Chapter 159, Acts of the 51st Legislature, Regular Session, 1949. That article created the Lower Nueces River Water Supply District and authorized the district to issue obligations. Chapter 844, Acts of the 69th Legislature, Regular Session, 1985, dissolved the district and required payment of all outstanding district obligations. On dissolution of the district, Article 8280-134 was repealed. Accordingly, the revised law omits the reference to Article 8280-134.

Revised Law

Sec. 425.213. AUTHORIZED INVESTMENTS FOR ALL FUNDS: OTHER SECURITIES SPECIFICALLY AUTHORIZED BY LAW. An insurer may invest any of the insurer's funds and accumulations in:

(1) an adequately secured equipment trust obligation or certificate or another adequately secured instrument evidencing:

(A) an interest in transportation equipment that is located wholly or partly within the United States; and

(B) a right to receive determined portions of rental, purchase, or other fixed obligatory payments for the use or purchase of the transportation equipment; and

(2) any other security as specifically authorized by law. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 17.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

17. Other Securities Specifically Authorized by Law. (1) Equipment trust obligations or certificates that are adequately secured or other adequately secured instruments evidencing an interest in transportation equipment that is 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

(2) Such other securities as are now or may hereafter be specifically authorized by law.

Revisor's Note

Paragraph 17(2), Section A, Part I, V.T.I.C. Article 3.39, refers to "securities as are now or may hereafter be specifically authorized by law." The revised law omits "as are now or may hereafter be" for the reason stated in Revisor's Note (1) to Section 425.002.

Revised Law

Sec. 425.214. AUTHORIZED INVESTMENTS FOR ALL FUNDS: LOANS SECURED BY REAL PROPERTY. (a) Subject to this section, an insurer may loan any of the insurer's funds and accumulations and take as collateral a first lien on real property to which the title is valid.

(b) The amount of a loan secured by a first lien on real property may exceed 75 percent of the property value only if:

(1) the amount does not exceed 90 percent of the property value and the property contains only a dwelling designed exclusively for occupancy by not more than four families for residential purposes; or

(2) the amount does not exceed 95 percent of the property value and:

(A) the property contains only a dwelling designed exclusively for occupancy by not more than four families for residential purposes; and

(B) the portion of the unpaid balance of the loan that exceeds 80 percent of the property value is guaranteed or insured by a mortgage guaranty insurer authorized to engage in business in this state.

(d) The aggregate amount of an insurer's loans secured by first liens on real property to any one corporation, company, partnership, individual, or any affiliated person or group may not exceed 10 percent of the insurer's admitted assets. The amount of any single loan secured by a first lien on real property may not exceed five percent of the insurer's admitted assets.

(e) The limitations imposed by Subsections (b)-(d) do not apply to a first lien on real property if the commissioner finds that:

(1) the making or acquiring of the lien is beneficial to and protects the interest of the insurer; and

(2) no substantial damage to the insurer's policyholders and creditors appears probable from the taking or acquiring of the lien.

(f) Subject to Subsections (g)-(j), an insurer may loan any of the insurer's funds and accumulations and take as collateral a first lien on a leasehold estate in:

(1) real property to which the title is valid; and

(2) improvements located on the property to which the title is valid.

(g) The term of a loan secured by first lien on a leasehold estate in real property may not, as of the date the loan is made, exceed a period equal to four-fifths of the unexpired term of the leasehold estate. The term of the leasehold estate may not expire sooner than the 10th anniversary of the expiration of the term of the loan.

(h) A loan secured by a first lien on a leasehold estate in real property must be payable in equal monthly, quarterly, semiannual, or annual installments on principal and interest during a period not to exceed four-fifths of the unexpired term, as of the date the loan is made, of the leasehold estate.

(i) The restrictions imposed by this section on the value of the real property securing a loan compared to the amount of the loan, and on the duration of a loan secured by a leasehold estate in real property, do not apply to a loan if:

(1) the entire amount of the indebtedness is insured or guaranteed in any manner by:

(A) the United States;

(B) the Federal Housing Administration under the National Housing Act (12 U.S.C. Section 1701 et seq.), as amended; or

(2) the difference between the entire amount of the indebtedness and the portion of the loan insured or guaranteed by an entity described by Subdivision (1) does not exceed the amount of a loan permitted by the applicable restriction.

(j) If any part of the value of buildings is to be included in the value of real property or leasehold estate in real property to attain the minimum authorized value of the security for a loan under this section:

(1) the buildings must be insured against loss by fire by:

(A) an insurer authorized to engage in business in the state in which the real property is located; or

(B) a company recognized as acceptable for that purpose by the insurance regulatory official of the state in which the real property is located;

(2) the amount of insurance coverage may not be less than 50 percent of the value of the buildings, except that the insurance coverage is not required to exceed the outstanding balance owed to the insurer if the outstanding balance of the loan is less than 50 percent of the value of the buildings; and

(3) the loss clause under the insurance must be payable to the insurer. (V.T.I.C. Art. 3.39, Part II (part), Sec. A, Paras. 1, 2, 6, 8.)

Source Law

[Part II. A life insurance company organized under the laws of this state] may loan its several funds [identified as follows,] taking as collateral security for the payment of such loans the securities named below, and [none other.]

A. ANY OF ITS FUNDS ACCUMULATIONS

Such company may loan any of its funds and accumulations on the following securities:

1. First Liens Upon Real Estate. First liens upon real estate, the title to which is valid and provided the amount of the loan does not exceed: (a) seventy-five (75%) per cent of the value of such real estate; or (b) ninety (90%) per cent of the value of such real estate if it contains only a dwelling designed exclusively for occupancy by not more than four families for residential purposes; or (c) ninety-five (95%) per cent of the value of such real estate 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 loan which is in excess of an amount equal to eighty (80%) per cent of such value is guaranteed or insured by a mortgage insurance company qualified to do business in the State of Texas; provided, however, that loans in excess of seventy-five (75%) per cent of the value of such real estate authorized under (b) or (c) hereof shall not be originated by such company; provided, however, that the aggregate amount of loans secured by first liens on real estate to any one corporation, company, partnership, individual, or any affiliated person or group may not exceed ten (10%) per cent of the admitted assets of such insurer, and provided further that the amount of any such single loan secured by a first lien on real estate may not exceed five (5%) per cent of the admitted assets of the insurer. The limitation provided by this subsection shall not apply to any first lien on real estate where the Commissioner of Insurance finds that: (1) the making or acquiring of such lien is beneficial to and protects the interest of the insurer and (2) no substantial damage to the policyholders and creditors of such insurer appears probable from the taking or acquiring of such lien.

2. First Liens Upon Leasehold Estates. First liens upon leasehold estates in real property and improvements situated thereon, the title to which is valid; provided that the duration of any loan upon such leasehold estates shall not exceed a period equal to four-fifths (4/5) of the then unexpired term of such leasehold estate, provided the unexpired term of the leasehold estate must extend at least ten (10) years beyond the term of the loan, and any such loan shall be payable only in equal monthly, quarterly, semi-annual or annual installments, on principal and interest during a period not exceeding four-fifths (4/5) of the then unexpired term of such leasehold estate.

6. Restrictions as to Value of Real Estate Removed Where Loans Insured by the United States. The foregoing restrictions as to the value of the real estate security compared to the amount loaned thereon and as to the duration of such loans shall not be applied to loans if the entire amount of the indebtedness is insured or guaranteed in any manner by the United States, the Federal Housing Administration pursuant to the National Housing Act of 1934, as amended (12 U.S.C.A. Sec. 1701 et seq.), or by the State of Texas, or, if not wholly insured or guaranteed, the difference between the entire amount of the indebtedness and that portion thereof insured or guaranteed by the United States, the Federal Housing Administration pursuant to the National Housing Act of 1934, as amended, or by the State of Texas, would not exceed the amount of loan permissible under said restrictions.

8. Insurance Requirements. If any part of the value of buildings is required to be included in the value of such real estate to attain the minimum authorized value of the security, such buildings shall be insured against loss by fire in a company authorized to transact business in the state in which such real estate is located, or in a company recognized as acceptable for such purpose by the insurance regulatory official of the state in which such real estate is located, which insurance shall be in an amount of at least fifty per cent (50%) of the value of such buildings; provided, that the insurance coverage need not exceed the outstanding balance owed to the lending company when the outstanding balance falls below fifty per cent (50%) of the value of the buildings. The loss clause shall be payable to such company.

Revisor's Note

Paragraph 1, Section A, Part II, V.T.I.C. Article 3.39, refers to a "mortgage insurance company" that is "qualified" to engage in business. The revised law substitutes "mortgage guaranty insurer" for "mortgage insurance company" and "authorized" for "qualified" for the reasons stated in the revisor's note to Section 425.118.

Revised Law

Sec. 425.215. AUTHORIZED INVESTMENTS FOR ALL FUNDS: LOANS SECURED BY CERTAIN COLLATERAL SECURED BY REAL PROPERTY. An insurer may loan any of the insurer's funds and accumulations and take as collateral an obligation secured by a first lien on real property or a leasehold estate that is eligible to secure a loan under Section 425.214. (V.T.I.C. Art. 3.39, Part II, Sec. A, Para. 3.)

Source Law

[Part II. A life insurance company organized under the laws of this state may loan its several funds identified as follows, taking as collateral security for the payment of such loans the securities named below, and none other.

A. ANY OF ITS FUNDS ACCUMULATIONS

Such company may loan any of its funds and accumulations on the following securities:]

3. Collateral Securities. Upon any obligation secured collaterally by any such first liens on real estate or leasehold estates.

Revised Law

Sec. 425.216. AUTHORIZED INVESTMENTS FOR ALL FUNDS: POLICY LOANS. (a) Subject to Subsection (b), an insurer may loan any of the insurer's funds and accumulations and take as collateral an insurance policy issued by the insurer.

(b) A loan on a policy under this section may not exceed the reserve value of the policy. (V.T.I.C. Art. 3.39, Part II, Sec. A, Para. 4.)

Source Law

A. ANY OF ITS FUNDS ACCUMULATIONS

Such company may loan any of its funds and accumulations on the following securities:]

4. Policy Loans. Security of Its Own Policies. No loan on any policy shall exceed the reserve values thereof.

Revised Law

Sec. 425.217. AUTHORIZED INVESTMENTS FOR ALL FUNDS: LOANS SECURED BY CERTAIN SECURITIES. An insurer may loan any of the insurer's funds and accumulations and take as collateral for the loan any security described by Sections 425.205-425.213 and 425.218 in which the insurer may invest any of the insurer's funds and accumulations. (V.T.I.C. Art. 3.39, Part II, Sec. A, Para. 5.)

Source Law

A. ANY OF ITS FUNDS ACCUMULATIONS

Such company may loan any of its funds and accumulations on the following securities:]

5. Other Securities. It may loan any of its funds and accumulations, taking as collateral to secure the payment of such loan, any of the securities named or referred to in Part 1 of this Article 3.39 above in which it may invest any of its funds and accumulations.

Revised Law

Sec. 425.218. AUTHORIZED INVESTMENTS FOR ALL FUNDS: SECURITIES NOT OTHERWISE SPECIFIED. (a) Notwithstanding any express or implied prohibitions, and subject to this section, an insurer may invest any of the insurer's funds and accumulations in an investment that does not otherwise qualify under any other provision of this chapter.

(b) The amount of any one investment by an insurer under this section may not exceed one percent of the insurer's admitted assets.

(1) five percent of the insurer's admitted assets; or

(2) the amount of the insurer's capital and surplus in excess of $200,000 as shown on the last annual statement filed by the insurer with the department before the date the investment is acquired.

(d) Except as provided by another law of this state, this section does not authorize an insurer to invest any of the insurer's funds or accumulations in real property. (V.T.I.C. Art. 3.39, Part I, Sec. A, Para. 15.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively, … .

A. ANY OF ITS FUNDS AND ACCUMULATIONS]

15. Securities Not Otherwise Specified. Notwithstanding any expressed or implied prohibitions, a life insurance company may, after the effective date of this amendment, invest any of its funds and accumulations in investments which do not otherwise qualify under any other provision of Chapter 3 of the Insurance Code; provided, however, that the amount of any one such investment under this Section shall not exceed one per cent (1%) of the admitted assets of any such life insurance company; and provided further, that the investments authorized by this Section shall not exceed the lesser of (a) five per cent (5%) of its admitted assets, or (b) the amount of its capital and surplus in excess of Two Hundred Thousand Dollars ($200,000) as shown on its last annual statement preceding the date of the acquisition of such investment as filed with the State Board of Insurance.

Nothing herein shall be construed or applied so as to authorize any life insurance company to invest any of its funds or accumulations in real property unless already authorized to do so by this Act or some other existing law of the State of Texas… .

Revisor's Note

(1) Paragraph 15, Section A, Part I, V.T.I.C. Article 3.39, provides that a life insurance company may, "after the effective date of this amendment," invest any of its funds in investments that do not otherwise qualify under another provision of V.T.I.C. Chapter 3. The revised law omits "after the effective date of this amendment" as unnecessary because the quoted language means that the law is to apply prospectively. Under Section 311.022, Government Code (Code Construction Act), which applies to the revised law, a statute is presumed to operate prospectively unless expressly made retroactive.

(2) Paragraph 15, Section A, Part I, V.T.I.C. Article 3.39, refers to "investments which do not otherwise qualify under any other provision of Chapter 3 of the Insurance Code." V.T.I.C. Chapter 3 is revised in many chapters of this code. The relevant provisions of V.T.I.C. Chapter 3--those that regulate the investments of life insurers--are revised in this chapter. The revised law is drafted accordingly.

Revised Law

Sec. 425.219. AUTHORIZED INVESTMENTS FOR POLICY RESERVES AND SURPLUS: BONDS OF CERTAIN WATER CONTROL AND IMPROVEMENT DISTRICTS. An insurer may invest the insurer's policy reserves and surplus over and above the insurer's capital in municipal bonds issued under Section 51.039, Water Code. (V.T.I.C. Art. 3.39, Part I, Sec. B.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively,] … .

B. POLICY RESERVES AND SURPLUS

1. Specified Municipal Bonds. It may invest its policy reserves and surplus over and above its capital in "Municipal Bonds" issued under and by virtue of Chapter 280, Acts 1929, 41st Legislature.

Revisor's Note

Section B, Part I, V.T.I.C. Article 3.39, refers to "Chapter 280, Acts 1929, 41st Legislature." Section 18 of that act (originally classified as Article 7880-19a, Vernon's Texas Civil Statutes), which provided for the issuance of bonds by water control and improvement districts that are operating as municipal districts, was codified in 1971 as Section 51.039, Water Code. The revised law is drafted accordingly.

Revised Law

Sec. 425.220. AUTHORIZED INVESTMENTS FOR CAPITAL, SURPLUS, AND CONTINGENCY FUNDS: CAPITAL STOCK, BONDS, AND OTHER CORPORATE OBLIGATIONS. (a) Subject to this section and Section 425.226, an insurer may invest the insurer's capital, surplus, and contingency funds in the capital stock, bonds, bills of exchange, or other commercial notes or bills and securities of:

(1) a solvent corporation that has not defaulted in the payment of any debt during the five years preceding the investment; or

(2) a solvent corporation that has not been in existence for the five years preceding the investment, if:

(A) the corporation has succeeded to the business and assets and has assumed the liabilities of another corporation; and

(B) neither the successor corporation nor the corporation succeeded has defaulted in the payment of any debt during the five years preceding the investment.

(b) An insurer may not invest in the stock of:

(1) a manufacturing corporation with a net worth of less than $25,000; or

(2) an oil corporation with a net worth of less than $500,000.

(c) Except as provided by Subsection (d), an insurer's investment in the insurer's own capital stock or in the stock of a single corporation may not be in an amount exceeding 10 percent of the amount of the insurer's capital, surplus, and contingency funds.

(d) An insurer may own, and the insurer may invest not more than 25 percent of the insurer's capital, surplus, and contingency funds in, the capital stock of a single fire and casualty insurance company if that investment gives the insurer a majority of the outstanding stock of the fire and casualty insurance company.

(e) In addition to the investments authorized by this section and subject to Section 425.226, an insurer may invest in the capital stock, bonds, and other obligations of one or more solvent corporations that portion of the insurer's surplus funds that exceeds the greater of:

(1) 10 percent of the insurer's admitted assets, as determined from the insurer's latest annual statement on file with the department; or

(2) the minimum capital and surplus requirements for incorporating a life insurance company under Chapter 841. (V.T.I.C. Art. 3.39, Part I, Sec. C, Paras. 1, 3.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively,] … .

C. CAPITAL, SURPLUS AND CONTINGENCY FUNDS

OVER AND ABOVE POLICY RESERVES

It may invest its capital, surplus and contingency funds over and above the amount of its policy reserves in the following securities:

1. Capital Stock, Bonds, and Other Obligations of Corporations. The capital stock, bonds, bills of exchange, or other commercial notes or bills and securities of any solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment, or of any solvent corporation which has not been in existence for five (5) consecutive years next preceding such investment, provided such corporation has succeeded to the business and assets and has assumed the liabilities of another corporation, and which corporation and the corporation so succeeded have not defaulted in the payment of any debt within five (5) years next preceding such investment.

3. Limitation of Investments. It may not invest in its own capital stock nor in the stock of any one corporation to any extent more than ten per cent (10%) of the amount of its own capital, surplus, and contingent funds, nor in the stock of any manufacturing corporation with a net worth of less than Twenty-Five Thousand Dollars ($25,000), nor in the stock of any oil corporation with a net worth of less than Five Hundred Thousand Dollars ($500,000); provided, however, that it may own and invest not more than twenty-five per cent (25%) of its capital, surplus and contingency funds in the capital stock of one fire and casualty insurance company, provided such investment gives it a majority of the outstanding stock of such fire and casualty insurance company; and provided further, it may additionally invest that portion of its surplus funds which is in excess of the greater amount of either (a) ten per cent (10%) of its admitted assets as determined from its latest annual statement on file with the State Board of Insurance or (b) the minimum capital and surplus requirements for incorporating a life insurance company under Chapter 3 of the Insurance Code, as amended, as it may be amended, in the capital stock, bonds and other obligations of any one or more solvent corporations.

Revisor's Note

(1) Paragraphs 1 and 3, Section C, Part I, V.T.I.C. Article 3.39, provide that an insurer may invest its capital, surplus, and contingency funds in capital stock, bonds, and other corporate obligations, subject to limitations in those paragraphs. Paragraph 4, Section F, Part I, V.T.I.C. Article 3.39, which is revised in this chapter as Section 425.226, contains an additional limitation on investment of those funds in corporate obligations. For the reader's convenience, the revised law includes a reference to the limitations in Section 425.226.

(2) Paragraph 3, Section C, Part I, V.T.I.C. Article 3.39, refers to "the minimum capital and surplus requirements for incorporating a life insurance company under Chapter 3 of the Insurance Code, as amended." The relevant requirements from V.T.I.C. Chapter 3 are revised in Chapter 841 of this code, and the revised law is drafted accordingly. The revised law omits the reference to "as amended" for the reason stated in Revisor's Note (2) to Section 425.058.

Revised Law

Sec. 425.221. AUTHORIZED INVESTMENTS FOR CAPITAL, SURPLUS, AND CONTINGENCY FUNDS: BONDS OR NOTES OF EDUCATIONAL OR RELIGIOUS CORPORATIONS. Subject to Section 425.226, an insurer may invest the insurer's capital, surplus, and contingency funds in a bond or note of an educational or religious corporation that has provided for the payment of a sufficient amount of the first weekly or monthly revenues of the corporation to an interest and sinking fund account in a bank or trust company as an independent paying agent. (V.T.I.C. Art. 3.39, Part I, Sec. C, Para. 2.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively,] … .

[C. CAPITAL, SURPLUS AND CONTINGENCY FUNDS

OVER AND ABOVE POLICY RESERVES

It may invest its capital, surplus and contingency funds over and above the amount of its policy reserves in the following securities:]

2. Bonds or Notes of Educational or Religious Corporations. The bonds or notes of any educational or religious corporation where provision has been made for the payment of a sufficient amount of the first weekly or monthly revenues thereof to an interest and sinking fund account in a bank or trust company as an independent paying agent.

Revisor's Note

Paragraph 2, Section C, Part I, V.T.I.C. Article 3.39, provides that an insurer may invest its capital, surplus, and contingency funds in bonds or notes of educational or religious corporations. The revised law includes a reference to the limitations in Section 425.226 for the reason stated in Revisor's Note (1) to Section 425.220.

Revised Law

Sec. 425.222. AUTHORIZED INVESTMENTS FOR CAPITAL, SURPLUS, AND CONTINGENCY FUNDS: LIFE INCOME INTERESTS IN QUALIFIED TRUSTS. (a) Subject to this section, an insurer may invest the insurer's capital, surplus, and contingency funds in a life income interest in a qualified irrevocable express testamentary trust.

(b) For purposes of this section, a trust is a qualified trust if:

(1) each fee simple recipient of any part of the corpus of the trust:

(A) is a public charity, church, educational institution, or a scientific institution;

(B) is located in this state; and

(2) the corpus of the trust is wholly or partly composed of interests in real estate, stocks, bonds, debentures, and other securities of an aggregate total value of at least $5 million; and

(3) the corpus of the trust produces annual income of at least $100,000.

(d) Before an insurer may acquire a life income interest in a qualified trust, the insurer must present evidence satisfactory to the commissioner that shows:

(1) the interest is subject to transfer and is recognized as transferable;

(2) the interest is capable of reasonable valuation;

(3) a market for the sale of the interest exists; and

(4) the interest is supported by life insurance in:

(A) an amount not less than the admitted value of the interest; and

(B) a form approved by the commissioner.

(e) In valuing a life income interest in a qualified trust on the insurer's books, the insurer may value the interest only on the basis of the lesser of:

(1) the recognized market established in accordance with Subsection (d)(3); or

(2) the ratio that the fractional life income interest in the income of the trust bears to the total market value of the properties held by the trust that are of a type of property an insurer may lawfully acquire under the investment statutes of this state. (V.T.I.C. Art. 3.39, Part I, Sec. C, Para. 4.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively,] … .

[C. CAPITAL, SURPLUS AND CONTINGENCY FUNDS OVER AND ABOVE POLICY RESERVES

It may invest its capital, surplus and contingency funds over and above the amount of its policy reserves in the following securities:]

4. Certain Life Income Interests. (a) Life income interest in an irrevocable express testamentary trust that has as the fee simple recipient of all the corpus of the trust one or more Texas public charities, Texas churches, Texas educational institutions or Texas scientific institutions; provided each recipient is recognized by the Internal Revenue Service of the United States as exempt from payment of income taxes and provided further that (1) the corpus of any such trust is in whole or in part composed of interests in real estate, stocks, bonds, debentures and other securities of an aggregate total value of not less than $5,000,000; and (2) the corpus of any such trust produces annual income of not less than $100,000.

(b) No life insurance company's interest in any such trust shall exceed ten per cent (10%) of its admitted assets.

(c) Before such interest shall be acquired, satisfactory evidence shall be presented to the Commissioner of Insurance as follows:

(1) That the interest is subject to and recognized as transferable,

(2) That the interest is capable of reasonable valuation,

(3) That a market for sale of such interest exists,

(4) That the life income interest is supported by life insurance in an amount not less than its admitted value and in form approved by the Commissioner of Insurance.

(d) In valuing such interest on its books, the life insurance company shall value the interest only on the basis of the lesser of, (1) the recognized market established in accordance with Section (c)(3) above, or (2) the ratio that such fractional life income interest in the income of the trust bears to the total market value of the properties held by the trust that are of the type of property a life insurance company can lawfully acquire under the investment statutes of the State of Texas.

Revised Law

Sec. 425.223. AUTHORIZED INVESTMENTS FOR CAPITAL, SURPLUS, AND CONTINGENCY FUNDS: CAPITAL STOCK OF REINSURER. (a) Subject to Subsection (b), an insurer may invest the insurer's capital, surplus, and contingency funds in not more than 20 percent of the capital stock of any other insurance company organized under Chapter 841 whose principal business is the reinsurance, either wholly or partly, of risks ceded to that insurer by other life insurance companies.

(b) The aggregate amount of an insurer's investments under this section may not exceed 10 percent of the insurer's capital, surplus, and contingency funds.

(c) The investment authorized by this section may be made by purchase of stock issued and outstanding or by subscription to and payment for the increase in the capital stock of the reinsurer. (V.T.I.C. Art. 3.39, Part I, Sec. D.)

Source Law

[Part I. A life insurance company organized under the laws of this state may invest its several funds, identified as follows, in the following securities, respectively,] … .

D. CAPITAL, SURPLUS AND CONTINGENCY FUNDS NOT TO EXCEED 10%

1. Capital Stock of Other Insurance Corporations. It may invest not to exceed ten per cent (10%) of its capital, surplus, and contingency funds, in not more than twenty per cent (20%) of the capital stock of any other insurance company, now or hereafter organized under this Chapter, whose principal business is the reinsurance, either partially or wholly, of risks ceded to it by other life insurance companies. The investment herein authorized may be made by purchase of stock then issued and outstanding or by subscription to and payment for the increase in the capital stock of such reinsurance corporation.

Revisor's Note

Paragraph 1, Section D, Part I, V.T.I.C. Article 3.39, refers to an "insurance company … organized under this Chapter," meaning V.T.I.C. Chapter 3. The revised law refers to Chapter 841 of this code for the reason stated in Revisor's Note (2) to Section 425.220.

Revised Law

Sec. 425.224. AUTHORIZED INVESTMENTS FOR CAPITAL, SURPLUS, AND CONTINGENCY FUNDS: LOANS SECURED BY CORPORATE STOCK. (a) Subject to this section, an insurer may loan the insurer's capital, surplus, and contingency funds and take as collateral the capital stock, bonds, bills of exchange, or other commercial notes or bills or the securities of:

(1) a solvent corporation that has not defaulted in the payment of any debt during the five years preceding the investment; or

(2) a solvent corporation that has not been in existence for the five years preceding the investment, if:

(A) the corporation has succeeded to the business and assets and has assumed the liabilities of another corporation; and

(B) neither the successor corporation nor the corporation succeeded has defaulted in the payment of any debt during the five years preceding the investment.

(b) Subject to this section, an insurer may loan the insurer's capital, surplus, and contingency funds and take as collateral the bonds or notes of an educational or religious corporation that has provided for the payment of a sufficient amount of the first weekly or monthly revenues of the corporation to an interest and sinking fund account in a bank or trust company as an independent paying agent.

(c) The market value of the stock, bills of exchange, other commercial notes or bills, or securities must be at all times during the continuance of the loan at least 50 percent more than the amount loaned on the securities or obligations.

(d) An insurer may not take as collateral for any loan:

(1) the insurer's capital stock;

(2) the stock of a single corporation in an amount that exceeds 10 percent of the amount of the insurer's own capital, surplus, and contingency funds;

(3) the stock of a manufacturing corporation with a net worth of less than $25,000;

(4) the stock of an oil corporation with a net worth of less than $500,000; or

(5) any stock, the holder or owner of which, is or may become liable for any assessment other than taxes. (V.T.I.C. Art. 3.39, Part II, Sec. B.)

Source Law

B. CAPITAL, SURPLUS AND CONTINGENCY FUNDS OVER AND ABOVE POLICY RESERVES

1. Capital Stock, Bonds, and Other Obligations of Solvent Corporations, and Educational or Religious Corporations. It may loan its capital, surplus, and contingency funds, or any part thereof over and above the amount of its policy reserves, taking as security therefor the capital stock, bonds, bills of exchange, or other commercial notes or bills and the securities of any solvent corporation which has not defaulted in the payment of any debt within five (5) years next preceding such investment; or of any solvent corporation which has not been in existence for five (5) consecutive years next preceding such investment, provided such corporation has succeeded to the business and assets and has assumed the liabilities of another corporation, and which corporation and the corporation so succeeded have not defaulted in the payment of any debt within five (5) years next preceding such investment; or in the bonds or notes of any Educational or Religious Corporation where provision has been made for the payment of a sufficient amount of the first weekly or monthly revenues thereof to an interest and sinking fund account in a bank or trust company as an independent paying agent; provided, the market value of such stock, bills of exchange, or other commercial notes or bills and securities shall be at all times during the continuance of such loan at least fifty per cent (50%) more than the sum loaned thereon; provided that it shall not take as collateral security for any loan its own capital stock, nor shall it take as collateral security for any loan the stock of any one corporation to any extent more than ten per cent (10%) of the amount of its own capital, surplus, and contingency funds, nor shall it take as collateral security for any loan the stock of any manufacturing corporation with a net worth of less than Twenty-Five Thousand Dollars ($25,000), nor the stock of any oil corporation with a net worth of less than Five Hundred Thousand Dollars ($500,000); and provided further, that it shall not take as collateral security for any such loan any stock on account of which the holder or owner thereof may in any event be or become liable to any assessment except for taxes.

Revised Law

Sec. 425.225. INVESTMENT IN FOREIGN SECURITIES. (a) An insurer authorized to engage in business in a foreign country may invest in securities of that country that are the same kind of securities as those in the United States in which an insurer is authorized by this subchapter to invest.

(b) The aggregate amount of an insurer's investments under this section may not exceed the amount of the insurer's reserves on the business in force in the foreign country. (V.T.I.C. Art. 3.39, Part I, Sec. F, Para. 1.)

Source Law

F. GENERAL

1. Investment in Foreign Securities. Any such company legally authorized to transact business in a foreign country may invest in the same kind of securities of said country as hereinbefore authorized in the United States of America for an aggregate amount not exceeding the reserve on the business in force in said country.

Revisor's Note

Paragraph 1, Section F, Part I, V.T.I.C. Article 3.39, refers to an insurer that is "legally authorized to transact business in a foreign country." The revised law omits "legally" as unnecessary. A company that is "authorized" to transact business in a foreign country is "legally authorized" to do so.

Revised Law

Sec. 425.226. INVESTMENT IN STOCK SUBJECT TO ASSESSMENT PROHIBITED. An insurer may not invest any of the insurer's funds in a stock, the holder or owner of which is or may become liable for any assessment other than taxes. (V.T.I.C. Art. 3.39, Part I, Sec. F, Para. 4.)

Source Law

4. Not to Invest in Stock Subject to Assessment. No such insurance company shall invest any of its funds in any stock on account of which the holder or owner thereof may in any event be or become liable to any assessment except for taxes.

Revised Law

Sec. 425.227. CERTAIN INVESTMENT POWERS NOT A RESTRICTION. The investment powers granted by Sections 425.207 and 425.208 may not be construed as restricting the powers granted by Sections 425.220 and 425.221. (V.T.I.C. Art. 3.39, Part I, Sec. F, Para. 5.)

Source Law

5. Certain Investment Privileges Are Cumulative. The investment powers conferred by Paragraphs Nos. 11 and 12, Section A, are in addition to those conferred by Paragraphs Nos. 1, 2 and 3, Section C, and are not to be construed as restricting the powers already granted by said Paragraphs Nos. 1, 2 and 3 of Section C and Paragraphs Nos. 11 and 12, Section A, and the powers conferred herein are cumulative with respect to Paragraphs Nos. 1, 2 and 3, Section C, and the powers conferred therein.

Revisor's Note

Paragraph 5, Section F, Part I, V.T.I.C. Article 3.39, provides that the "investment powers conferred by Paragraphs Nos. 11 and 12, Section A, are in addition to those conferred by Paragraphs Nos. 1, 2 and 3, Section C," and that "the powers conferred herein are cumulative with respect to Paragraphs Nos. 1, 2 and 3, Section C, and the powers conferred therein." The revised law omits the quoted language as unnecessary. An accepted general principle of statutory construction requires a statute to be given cumulative effect with other statutes unless it provides otherwise or unless the statutes are in conflict. The general principle applies to this revision.

Revised Law

Sec. 425.228. INVESTMENTS OF CEDING INSURER. (a) Subject to this section, if a domestic insurer assumes the business and takes over the assets of another domestic or a foreign insurer, all investments of the ceding insurer that were authorized, when made, by the laws of the state in which the ceding insurer was organized as proper securities for investment of the funds of an insurer and that are taken over by the assuming insurer are considered to be valid securities of the assuming insurer under the laws of this state.

(b) The commissioner must approve investments described by Subsection (a) and the terms on which those investments are taken over. The commissioner may require the assuming insurer to dispose of any of the investments on notice the commissioner considers reasonable. (V.T.I.C. Art. 3.39, Part I, Sec. F, Para. 3.)

Source Law

3. Investments of Companies Reinsured. In any case in which a life insurance company organized under the laws of this state shall reinsure the business and take over the assets of another life insurance company, either domestic or foreign, all investments of such reinsured company that were authorized, when made, by the laws of the state in which it was organized, as proper securities for investment of the funds of a life insurance company, and which are taken over by such reinsuring company, shall be considered as valid securities of such reinsuring company under the laws of this state, provided such investments are approved by the Board of Insurance Commissioners of this state, and the same are taken over on terms satisfactory to said Board; and upon the condition that the Board of Insurance Commissioners shall have the power to require the reinsuring company to dispose of such investments upon such notice as it may deem reasonable.

Revised Law

Sec. 425.229. AUTHORIZED INVESTMENTS: REAL ESTATE FOR INSURER'S OFFICES. (a) Subject to this section, an insurer may secure, hold, and convey the following real property:

(1) one building site and office building for the insurer's accommodation in the transaction of the insurer's business and for lease;

(2) branch office buildings in this state and elsewhere within the United States in which the insurer is authorized to engage in business as necessary for the insurer's convenient accommodation in the transaction of the insurer's business and for lease; and

(3) parking facilities adjacent to or in the vicinity of each office building owned by the insurer as reasonably necessary for the insurer and the building tenants.

(b) An office building described by Subsection (a)(1) may be on ground on which the insurer owns a lease the term of which expires not sooner than the 50th anniversary of the date the insurer acquires the lease. The insurer must own, or be entitled to the use of, all the improvements on the leased ground. The value of the improvements must be at least equal to the value of the ground and at least 20 times the annual average ground rentals payable under the lease. The office building must have an annual average net rental of at least twice the annual ground rental. The insurer must be liable for and shall pay all state and local taxes imposed against the ground and improvements. For purposes of taxation, the ground and improvements are considered to be real property owned by the insurer. The commissioner must approve the acquisition of an office building on leased ground before the insurer makes the investment.

(c) The insurer must use at least 50 percent of the space in each branch office building under Subsection (a)(2) that is available for occupancy for business purposes for the transaction of the insurer's business and not for lease to others.

(d) An insurer may make an investment under Subsection (a)(2) or (3) only in a municipality that has a population of 15,000 or more.

(e) An insurer may not make an investment under this section if, after making the investment, the insurer's aggregate investments under this section would exceed 33-1/3 percent of the insurer's admitted assets as of December 31 preceding the date of the investment, except that an insurer's aggregate investments under this section may be increased to an amount not to exceed 50 percent of the insurer's admitted assets if the commissioner approves the investment in advance, and the investment may be further increased if the additional increase is paid for only from surplus funds and is not included as an admitted asset of the insurer.

(f) The value of each investment under this section is subject to the approval of the commissioner. The commissioner may, at the time the investment is made or any time when an examination of the insurer is being made, have an investment under this section appraised by an appraiser appointed or approved by the commissioner. The insurer shall pay the reasonable expense of the appraisal. The expense of the appraisal is considered to be an expense of the examination of the insurer. An insurer may not make any increase in the valuation of real property described by Subsection (a) unless the increase in valuation is approved by the commissioner, subject to the conditions imposed by Subsection (e). (V.T.I.C. Art. 3.40 (part).)

Source Law

Art. 3.40. Every such insurance company may secure, hold and convey real property only for the following purposes and in the following manner:

1(a). One building site and office building for its accommodation in the transaction of its business and for lease and rental; and such office building may be on ground on which the company owns a lease having not less than fifty (50) years to run from the date of its acquisition by the company, provided that the company shall own, or be entitled to the use of, all the improvements thereon, and that the value of such improvements shall at least equal the value of the ground, and shall be not less than twenty (20) times the annual average ground rentals payable under such lease; and provided such office building shall have an annual average net rental of at least twice such annual ground rental; and provided further, that such company shall be liable for and shall pay all state and local taxes levied and assessed against such ground and the improvements thereon, which for the purposes of taxation shall be deemed real estate owned by the company. Provided that an acquisition of such an office building on leased ground shall be approved by the State Board of Insurance before such investment.

Branch office buildings in the State of Texas and elsewhere within the United States wherein such company is authorized to do business as shall be requisite for its convenient accommodation in the transaction of its business and for lease and rental and also parking facilities adjacent to or in the vicinity of each office building owned by such insurance company as shall be reasonably requisite for such insurance company and tenants of the buildings; however, at least fifty per cent (50%) of the space in each such branch office building which is available for occupancy for business purposes shall be used by such insurance company for the transaction of its business and not for lease and rental to others; provided, however, that such investments in the properties described in this paragraph shall only be made in towns or cities having a population of fifteen thousand (15,000) or more according to the last Federal Census.

1(b). No such company shall make any investment in the properties described in Subdivision 1(a) above if, after making such investment, the total investment of the company in such properties is in excess of thirty-three and one-third per cent (33 1/3%) of its admitted assets as of December 31st next preceding the date of such investment; provided, however, that such investment may be increased to as much as fifty per cent (50%) of the company's admitted assets upon advance approval by the State Board of Insurance; provided further, that such investment may be further increased if the amount of such additional increase is paid for only from surplus funds and is not included as an admitted asset of the company.

1(c). The value of each such investment in the properties described in Subdivision 1(a) shall be subject to the approval by the State Board of Insurance; and the Board may, in its discretion, at the time such investment is made or any time when an examination of the company is being made, cause any such investment to be appraised by an appraiser appointed or approved by the Board, and the reasonable expense of such appraisal shall be paid by such insurance company and shall be deemed to be a part of the expense of examination of such company. No such insurance company may hereafter make any increase in the valuation of any of the properties described in Subdivision 1(a) unless and until such increased valuation shall be likewise approved by the Board, subject to the limitations and conditions set out in Subdivision 1(b);

…

Revisor's Note

(1) Section 1(a), V.T.I.C. Article 3.40, refers to securing and holding an office building "for lease and rental." The revised law omits the reference to "rental" as unnecessary because the meaning of that term is included in the meaning of "lease."

(2) Section 1(a), V.T.I.C. Article 3.40, refers to taxes "levied and assessed" against ground and improvements used as an insurer's office building. Such taxes would be ad valorem taxes subject to Title 1, Tax Code. The revised law substitutes "imposed" for "levied and assessed" because "impose" is the term generally used in Title 1, Tax Code, and includes both the levy and assessment of an ad valorem tax.

(3) Section 1(a), V.T.I.C. Article 3.40, refers to "towns or cities." The revised law substitutes "municipality" for "town or city" for the reason stated in Revisor's Note (6) to Section 425.002.

(4) Section 1(a), V.T.I.C. Article 3.40, describes a population number that is to be determined according to "the last Federal Census." The revised law omits the reference to the federal census as unnecessary. Section 311.005(3), Government Code (Code Construction Act), defines "population" as population according to the most recent federal decennial census. That definition applies to the revised law.

(5) Section 1(c), V.T.I.C. Article 3.40, refers to the "limitations and conditions" of Section 1(b) of that article. The revised law omits the reference to "limitations" as unnecessary because the meaning of that term is included in the meaning of "conditions."

Revised Law

Sec. 425.230. AUTHORIZED INVESTMENTS: OIL, GAS, AND MINERALS. (a) In this section and Section 425.231:

(b) Subject to this section, in addition to and without limitation on the purposes for which real property may be acquired, secured, held, or retained under Section 425.229 or 425.231, an insurer may secure, hold, retain, and convey production payments, producing royalties, and producing overriding royalties as an investment for the production of income.

(c) The aggregate amount of an insurer's investments under this section, plus the aggregate amount of the insurer's investments in home office and branch office properties under Section 425.229, may not exceed the total amount permitted by and is subject to all of the limitations imposed by Sections 425.229(e) and (f). For purposes of this subsection, an investment in production payments, producing royalties, or producing overriding royalties is considered to be an investment in property described by Section 425.229.

(d) For the purposes of Section 425.229(f), the commissioner may establish a value of a production payment, producing royalty, or producing overriding royalty as the maximum amount that the insurer purchasing the production payment, producing royalty, or producing overriding royalty could loan against a first lien on the production payment, producing royalty, or producing overriding royalty under Sections 425.214(f)-(h).

(e) An insurer may not make an investment in production payments, producing royalties, or producing overriding royalties solely for the production of income if, after making the investment, the insurer's total investment at cost in the production payments, producing royalties, or producing overriding royalties would exceed 10 percent of the insurer's admitted assets as of December 31 preceding the date of the investment.

(f) If production in paying quantities from a royalty interest or overriding royalty interest held by an insurer ends, the insurer shall sell and dispose of the royalty or overriding royalty not later than the second anniversary of the date the production ends, unless:

(1) production in paying quantities has resumed; or

(2) the insurer obtains from the commissioner a certificate stating that the insurer's interests will suffer materially by the forced sale of the interest.

(g) The commissioner shall state in a certificate under Subsection (f)(2) the amount of time by which the period for sale is extended under that subsection. (V.T.I.C. Art. 3.40 (part).)

Source Law

Art. 3.40… .

In addition to, and without limitation on, the purposes for which real property may be acquired, secured, held or retained pursuant to other provisions of this Article, every such insurance company may secure, hold, retain and convey production payments, producing royalties and producing overriding royalties as an investment for the production of income; provided, however, that the total amount of all such investments in production payments, producing royalties and producing overriding royalties plus the total amount of investments in home office and branch office properties under Subdivision 1(a) of this Article shall not exceed the total amount permitted by and shall be subject to all of the limitations and restrictions of Subdivisions 1(b) and 1(c) of this Article and for this purpose all investments in production payments, producing royalties and producing overriding royalties pursuant to the provisions of this paragraph shall be deemed to be "properties described in Subdivision 1(a)" of this Article; and provided further, that in valuing each such production payment, producing royalty and producing overriding royalty for the purposes of Subdivision 1(c) of this Article the State Board of Insurance may establish such value as being the maximum amount which the company purchasing such production payment, producing royalty and producing overriding royalty could loan against a first lien on such production payment, producing royalty and producing overriding royalty under the provisions of Part II, Section A, Subsection 2 of Article 3.39 of the Insurance Code; and provided further, no such company shall make any investment in such production payments, producing royalties and producing overriding royalties solely as an investment for the production of income if, after making such investment, the total investment of the company at cost in such production payments, producing royalties and producing overriding royalties is in excess of ten per cent (10%) of its admitted assets as of December 31st next preceding the date of such investment. For the purposes of this paragraph, a production payment is defined to mean a right to oil, gas or other minerals in place or as produced that entitles its owner to a specified fraction of production until a specified sum of money, or a specified number of units of oil, gas or other minerals, has been received; a royalty and an overriding royalty are each defined to mean a right to oil, gas and other minerals in place or as produced that entitles the owner to a specified fraction of production without limitation to a specified sum of money, or a specified number of units of oil, gas or other minerals; "producing" is defined to mean producing oil, gas or other minerals in paying quantities, provided that it shall be deemed that oil, gas or other minerals are being produced in paying quantities if a well has been "shut in" and "shut in royalties" are being paid. In the event production in paying quantities should cease from any such royalty interest or overriding royalty interest held by any insurance company, such royalty or overriding royalty shall be sold and disposed of within two (2) years after such production shall have ceased, unless production in paying quantities shall have been resumed, or unless such Insurance Company shall have procured a certificate from the Board that its interests will suffer materially by the forced sale thereof; in which event the sale may be extended to such time as the Board shall direct in such certificate.

Revisor's Note

V.T.I.C. Article 3.40 refers to "the limitations and restrictions" of Sections 1(b) and (c) of that article. The revised law omits the reference to "restrictions" as unnecessary because the meaning of that term is included in the meaning of "limitations."

Revised Law

Sec. 425.231. AUTHORIZED INVESTMENTS: REAL PROPERTY ACQUIRED UNDER CERTAIN CIRCUMSTANCES. (a) Subject to this section, an insurer may secure, hold, and convey the following real property:

(1) real property acquired in good faith as security for a loan previously contracted or for money due;

(2) real property conveyed to the insurer to satisfy a debt previously contracted in the course of the insurer's dealings; and

(3) real property purchased at a sale under a judgment, court decree, or mortgage or other lien held by the insurer.

(b) An insurer shall sell and dispose of all property described by Subsection (a) that is not necessary for the insurer's accommodation in the convenient transaction of the insurer's business, other than an interest in minerals or royalties reserved on the sale of land acquired under Subsection (a) or an interest in producing royalties or producing overriding royalties otherwise acquired, not later than the fifth anniversary of:

(1) the date the insurer acquires title to the property; or

(2) the date the property ceases to be necessary for the accommodation of the insurer's business.

(c) An insurer may hold property acquired under Subsection (a) for a period longer than that specified by Subsection (b) if the insurer obtains a certificate from the commissioner stating that the insurer's interests will suffer materially by the forced sale of the property. The commissioner shall state in the certificate the amount of time by which the period for sale is extended under this subsection. (V.T.I.C. Art. 3.40 (part).)

Source Law

Art. 3.40. Every such insurance company may secure, hold and convey real property only for the following purposes and in the following manner:

…

2. Such as have been acquired in good faith by way of security for loans previously contracted or for moneys due;

3. Such as have been conveyed to it in the satisfaction of debts previously contracted in the course of its dealings;

4. Such as have been purchased at sales under judgment or decrees of court, or mortgage or other liens held by such companies.

5. All such real property specified in Subdivisions 2, 3, and 4 of this Article which shall not be necessary for its accommodation in the convenient transactions of its business, except interests in minerals and royalties reserved upon the sale of land acquired under such Subdivisions 2, 3, and 4 hereof, and further excepting interests in producing royalties and producing overriding royalties otherwise acquired, shall be sold and disposed of within five (5) years after the company shall have acquired title to the same, or within five (5) years after the same shall have ceased to be necessary for the accommodation of its business. It shall not hold such property for a longer period, unless it shall procure a certificate from the Board that its interests will suffer materially by the forced sale thereof; in which event the time for the sale may be extended to such time as the Board shall direct in such certificate.

…

Revised Law

Sec. 425.232. AUTHORIZED INVESTMENTS: IMPROVED INCOME-PRODUCING REAL PROPERTY. (a) In this section, "improved income-producing real property" includes all commercial and industrial real property, a substantial portion of which has been materially enhanced in value by the construction of durable, permanent-type buildings and other improvements costing an amount at least equal to the value of the real property, excluding the buildings and improvements, that is held or acquired by purchase, lease, or otherwise for the production of income. The term does not include agricultural, horticultural, farm and ranch, or residential property, or single or multiunit family dwelling property.

(b) Notwithstanding Sections 425.229, 425.230, and 425.231, subject to this section, a domestic insurer may:

(1) invest any of the insurer's funds and accumulations in improved income-producing real property or any interest in improved income-producing real property; and

(2) hold, improve, maintain, manage, lease, sell, or convey improved income-producing real property or an interest in improved income-producing real property.

(c) The aggregate amount of an insurer's investments in all income-producing real property, including improvements, may not exceed 15 percent of the insurer's admitted assets. The amount of an insurer's investment in a single piece of improved income-producing real property, including improvements, may not exceed five percent of the insurer's admitted assets. For purposes of this subsection, an insurer's admitted assets are determined from the insurer's annual statement as of the preceding December 31 and filed with the department as required by law. Section 425.229(f) applies to the value of any investment made under this section.

(d) The investment authority granted by this section is in addition to that granted by Sections 425.229, 425.230, and 425.231, except that an insurer may not make an investment in improved income-producing real property that, when added to the insurer's investments under Section 425.229, would exceed the limitations imposed by Section 425.229(e).

(e) This section does not permit an insurer to purchase undeveloped real property for the purpose of development or subdivision. (V.T.I.C. Art. 3.40-1, Secs. 1, 3.)

Source Law

Art. 3.40-1

Sec. 1. Notwithstanding any provision or limitation of Article 3.40 of this Code, any life insurance company organized under the laws of this state may invest any of its funds and accumulations in improved income producing real estate or any interest therein, and may hold, improve, maintain, manage, lease, sell or convey such property or interest therein, subject to the following terms, conditions and limitations:

(1) The term "improved income producing real estate" as used in this Article shall include all commercial and industrial real property, a substantial portion of which has been materially enhanced in value by the construction of durable, permanent-type buildings and other improvements costing an amount at least equal to the value of such real estate exclusive of building and improvements, as may be held or acquired by purchase or lease, or otherwise, for the production of income, excepting any agricultural, horticultural, farm and ranch property, residential property, single or multiunit family dwelling property, which is expressly excluded.

(2) The total amount invested by any such company in all such income producing property and improvements thereof shall not exceed fifteen per centum of its admitted assets, provided, however, that the amount invested in any one such property and its improvements shall not exceed five per centum of its admitted assets. The admitted assets of the company at any time shall be determined from its annual statement made as of the last preceding December 31 and filed with the State Board of Insurance as required by law. The value of any investment made under this Article shall be subject to Subdivision 1(c) of Article 3.40 of this Code.

(3) The investment authority granted by this Article 3.40-1 is in addition to and separate and apart from that granted by Article 3.40 of this Code, provided, however, that no such company shall make any investment in the properties described in this Article 3.40-1 which when added to those described in subdivision 1(a) of Article 3.40 of this Code would be in excess of the limitations provided by subdivision 1(b) of Article 3.40 of this Code.

Sec. 3. Nothing contained in this Article shall permit such a life insurance company to purchase undeveloped real estate for the purpose of development or subdivision.

Revisor's Note

(1) Section 1, V.T.I.C. Article 3.40-1, refers to any "provision or limitation" of V.T.I.C. Article 3.40. The revised law omits the reference to "limitation" for the reason stated in the revisor's note to Section 425.130.

(2) Section 2, V.T.I.C. Article 3.40-1, provides that improved income-producing real estate owned by a life insurance company will not "be classified as 'Texas Securities.'" The revised law omits this provision as obsolete and unnecessary. Former V.T.I.C. Article 3.33, which required life insurance companies to invest a specific portion of their assets in "Texas securities," was repealed by Chapter 332, Acts of the 58th Legislature, Regular Session, 1963. The omitted law reads:

Sec. 2. The property owned by such life insurance company pursuant to this Article shall not be classified as "Texas Securities".

(3) Section 4, V.T.I.C. Article 3.40-1, limits the amount of a life insurance company's investments in improved income-producing real estate "during the first seven years after the effective date of this Act." The revised law omits this provision as expired. Article 3.40-1 was enacted by Chapter 660, Acts of the 60th Legislature, Regular Session, 1967, and took effect August 28, 1967. The omitted law reads:

Sec. 4. No life insurance company may invest more than one per centum of its admitted assets in income producing real estate in any one year during the first seven years after the effective date of this Act, provided, however, if a life insurance company invests less than one per centum of its admitted assets in income producing real estate during any one year such life insurance company may thereafter, at any time, invest the difference between the percentage of admitted assets invested and one per centum of admitted assets and such percentage shall be in addition to and cumulative of the amount of income producing real estate in which such life insurance company may invest in any particular year hereunder.

Revisor's Note

(End of Subchapter)

Section E, Part I, V.T.I.C. Article 3.39, prescribes authorized investments, at the time of incorporation, for the capital and surplus of stock life insurance companies "organized under Article 3.02 of this Code" and of mutual life insurance companies "organized under Article 11.01 of this Code." Section E also contains provisions relating to the investment of those companies' capital and surplus after incorporation. The revised law omits Section E as unnecessary. As to stock life insurance companies, Section E duplicates requirements of Sections 841.054(c) (capital and surplus requirements on incorporation) and 841.201 of this code (investment of capital and surplus after a charter is granted) (both sections were formerly part of V.T.I.C. Article 3.02). As to mutual life insurance companies, Section E duplicates Section 882.055 of this code (surplus requirements on incorporation) and Sections 882.301 and 882.304 of this code (investment of surplus after a charter is granted) (all three sections were formerly part of V.T.I.C. Article 11.01). The omitted law reads:

E. MINIMUM CAPITAL AND SURPLUS

1. Requirement as to Investment of Minimum Capital and Surplus. Notwithstanding other provisions of this Article 3.39 of this Code, the capital and surplus of a company hereafter organized under Article 3.02 of this Code and the free surplus of a company hereafter organized under Article 11.01 of this Code shall, at the time of incorporation, consist only of lawful money of the United States, or bonds of the United States, or of this state, or of any county or incorporated municipality thereof, or government insured mortgage loans which are otherwise authorized by this Chapter, and shall not include any real estate; provided, however, that fifty per cent (50%) of the minimum capital may be invested in first mortgage real estate loans; and the minimum capital of a company hereafter organized under said Article 3.02 and the minimum free surplus of a company hereafter organized under said Article 11.01 at all times shall be maintained in cash or in the same classes of investments. After the granting of charter the surplus in excess of such One Hundred Thousand Dollars ($100,000) may be invested as otherwise provided in this Code for Stock Companies.


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