CHAPTER 403.  DIVIDENDS

SUBCHAPTER A.  PAYMENT OF DIVIDENDS

Revised Law

Sec. 403.001.  LIMITATION ON DIVIDENDS.  An insurer organized under the laws of this state, including a life, health, fire, marine, or inland marine insurance company, may not pay a dividend except from surplus profits arising from the insurer's business.  (V.T.I.C. Arts. 21.31 (part), 21.32 (part).)

Source Law

Art. 21.31.  It shall not be lawful for any insurance company organized under the laws of this State to make any dividend, except from surplus profits arising from its business… .

Art. 21.32.  No life, health, fire, marine, or inland insurance company, organized under the laws of this state, shall make any dividend except from the surplus profits arising from its business… .

Revisor's Note

(1)  V.T.I.C. Article 21.32 refers to an "inland insurance company." Throughout this chapter, the revised law substitutes references to an "inland marine insurance company" for references to an "inland insurance company" for consistency of terminology within this code.

(2)  V.T.I.C. Articles 21.31 and 21.32 provide that an insurer may not "make any dividend."  The revised law substitutes "pay a dividend" for "make any dividend" because, in context, the phrases are synonymous and "pay a dividend" is more commonly used.

Revised Law

Sec. 403.002.  DIVIDENDS TO POLICYHOLDERS IN COMMERCIAL LINES.  (a)  An insurer may pay to a commercial policyholder or group of commercial policyholders a dividend that covers more than one class or line of commercial business only:

     (1)  after the insurer establishes on an aggregate basis adequate loss reserves for the classes or lines of commercial insurance included within the dividend; and

     (2)  if the insurer has sufficient surplus from which to pay the dividend.

(b)  Not later than the 15th day before an insurer pays a dividend described by Subsection (a), the insurer shall file with the department notice of the insurer's intent to pay the dividend.

(c)  The classes or lines of commercial business for which dividends are authorized under this section include any commercial class or line of commercial business regulated by Title 10.

(d)  An insurer's limitation of a dividend on one or more classes or lines of commercial business to a group of commercial policyholders is not unfair discrimination if the group:

     (1)  has clearly identifiable underwriting characteristics; or

     (2)  is an association or group of business entities engaged in similar undertakings.  (V.T.I.C. Art. 5.41-2.)

Source Law

Art. 5.41-2

Sec. 1.  An insurer may pay to a commercial policyholder or group of commercial policyholders a dividend which covers more than one class or line of commercial business.  This dividend may only be paid to the policyholder or group of policyholders after adequate loss reserves are established on an aggregate basis for the classes or lines of commercial insurance included within the dividend, and the insurer must have sufficient surplus from which to pay the dividend.  An insurer shall file a notice of its intent to pay such dividend with the department at least 15 days prior to the payment of the dividend.

Sec. 2.  Limitation of the payment of a dividend on one or more classes or lines of commercial business to a group of commercial policyholders shall not be unfair discrimination so long as the group has clearly identifiable underwriting characteristics or is an association or group of business entities engaged in similar undertakings.

Sec. 3.  The classes or lines of commercial business for which dividends are authorized under this article include any or all of the commercial classes or lines of commercial business regulated by this chapter.

Revisor's Note

Section 3, V.T.I.C. Article 5.41-2, refers to commercial classes or lines of commercial business regulated by "this chapter," meaning V.T.I.C. Chapter 5.  That chapter has been revised in part in various titles of this code.  The relevant provisions of Chapter 5 that regulate commercial classes and lines of commercial business are revised in Title 10 of this code.  For that reason, the revised law substitutes a reference to "Title 10" for the reference to "this chapter."

[Sections 403.003-403.050 reserved for expansion]

SUBCHAPTER B.  ESTIMATE OF PROFITS

Revised Law

Sec. 403.051.  ESTIMATE OF PROFITS.  An insurer organized under the laws of this state may not include the following in the estimate of the insurer's profits for the purpose of paying dividends under Section 403.001:

     (1)  the reserve on all unexpired risks computed in the manner provided by this code;

     (2)  the amount of all unpaid losses, whether adjusted or unadjusted; and

     (3)  all other debts due and payable, or to become due and payable, by the insurer.  (V.T.I.C. Art. 21.31 (part).)

Source Law

Art. 21.31.  [It shall not be lawful for any insurance company organized under the laws of this State to make any dividend, except from surplus profits arising from its business.]  In estimating such profits, there shall be reserved therefrom the lawful reserve on all unexpired risks and also the amount of all unpaid losses, whether adjusted or unadjusted, and all other debts due and payable, or to become due and payable, by the company… .

Revisor's Note

V.T.I.C. Article 21.31 refers to the "lawful reserve" on unexpired risks.  For clarity, the revised law substitutes a reference to the "reserve … computed in the manner provided by this code" for the reference to the "lawful reserve" because, in this context, a "lawful reserve" is a reserve computed in the manner prescribed by this code.

Revised Law

Sec. 403.052.  ESTIMATE OF PROFITS OF CERTAIN INSURERS.  A life, health, fire, marine, or inland marine insurance company may not include the following in the estimate of the company's profits for the purpose of paying dividends under Section 403.001:

     (1)  the reserve on all unexpired risks computed in the manner provided by this code;

     (2)  the amount of all unpaid losses, whether adjusted or unadjusted;

     (3)  each amount due the company on bonds, mortgages, stocks, or book-accounts on which no part of the principal or interest has been paid during the year preceding the estimate of profits and for which:

          (A)  a suit for foreclosure or collection has not been commenced; or

          (B)  a judgment obtained in a suit for foreclosure or collection has remained unsatisfied for a period of more than two years and no interest has been paid on the judgment; and

     (4)  if no interest has been paid on a judgment described by Subdivision (3)(B), any interest that is due or accrued on the judgment and remains unpaid.  (V.T.I.C. Art. 21.32 (part).)

Source Law

Art. 21.32.  [No life, health, fire, marine, or inland insurance company, organized under the laws of this state, shall make any dividend except from the surplus profits arising from its business.]  In estimating such profits, there shall be reserved therefrom the lawful reserve on all unexpired risks computed in the manner as provided elsewhere in this Code, and also there shall be reserved the amount of all unpaid losses, whether adjusted or unadjusted; all sums due the company on bonds, mortgages, stocks and book-accounts, of which no part of the principal or the interest thereon has been paid during the year preceding such estimate of profits, and upon which suit for foreclosures or collections has not been commenced, or which after judgment has been obtained thereon shall have remained more than two years unsatisfied, and upon which interest shall not have been paid.  In case of any such judgment, the interest due or accrued thereon and remaining unpaid shall also be reserved… .

Revisor's Note

(1)  V.T.I.C. Article 21.32 provides the methodology by which a "life, health, fire, marine, or inland insurance company, organized under the laws of this state" estimates the company's surplus profits for the purpose of paying dividends.  However, V.T.I.C. Article 21.31, revised in relevant part as Section 403.051, provides the methodology by which an "insurance company organized under the laws of this State" estimates surplus profits for the same purpose.  Because a "life, health, fire, marine, or inland insurance company, organized under the laws of this state" referenced in Article 21.32 is also an "insurance company organized under the laws of this state" to which Article 21.31 applies, it is ambiguous whether Article 21.32 is an exception to Article 21.31 for the specified companies or whether both Articles 21.31 and 21.32 apply to those companies.  The revised law is drafted to preserve that ambiguity.

(2)  V.T.I.C. Article 21.32 refers to the "lawful reserve" on unexpired risks "computed in the manner as provided elsewhere in this Code."  The revised law omits the reference to "lawful" for the reason stated in the revisor's note to Section 403.051.

Revised Law

Sec. 403.053.  ACQUIRED EARNED SURPLUS.  (a)  This section applies only to:

     (1)  a stock domestic insurance company authorized to engage in the business of life, accident, or health insurance in this state;

     (2)  a stock foreign or alien life, health, or accident insurance company;

     (3)  a stock insurance company authorized to engage in the business of property, casualty, or fire insurance; and

     (4)  a domestic Lloyd's plan, reciprocal or interinsurance exchange, or title insurance company.

(b)  In determining the amount of "surplus profits arising from the insurer's business" or "earned surplus" for the purpose of paying dividends to shareholders, the insurer may include the acquired earned surplus of an insurance subsidiary acquired by the insurer to the extent that:

     (1)  the inclusion is permitted by an order of the commissioner made in accordance with rules adopted by the commissioner; and

     (2)  the earned surplus of the acquired subsidiary on the date of acquisition that exists on the date of the commissioner's order is not otherwise reflected in the insurer's earned surplus.  (V.T.I.C. Art. 21.32A.)

Source Law

Art. 21.32A.  For the purpose of determining the legality of a dividend to shareholders paid by stock domestic insurance companies authorized to transact life, accident, and health insurance business in Texas, all stock foreign and alien life, health, and accident insurance companies, stock insurance companies authorized to transact property and casualty business and fire insurance business and domestic Lloyds', reciprocals, and title insurance companies under the laws of the State of Texas, the "earned surplus" or "surplus profits arising from the business" of the insurance company may include the acquired "earned surplus" of an insurance subsidiary which has been acquired by the insurance company, to the extent allowed by an order of the commissioner made in accordance with the rules of the board but only to the extent that the "earned surplus" of the acquired subsidiary on the date of acquisition, and in existence on the date of the order, is not otherwise reflected in the "earned surplus" of the insurance company.

Revisor's Note

(1)  V.T.I.C. Article 21.32A refers to domestic "Lloyds'" and "reciprocals." For consistency of terminology within this code, the revised law substitutes a reference to a "Lloyd's plan" for the reference to "Lloyds'," and substitutes a reference to a "reciprocal or interinsurance exchange" for the reference to "reciprocals."

(2)  V.T.I.C. Article 21.32A refers to the "board," meaning the State Board of Insurance.  Subsequent references in this chapter are to 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 the Board of Insurance Commissioners or the State Board of Insurance have been changed appropriately.

[Sections 403.054-403.100 reserved for expansion]

SUBCHAPTER C.  PENALTIES

Revised Law

Sec. 403.101.  PENALTIES.  (a)  The department may revoke the charter of an insurer that pays a dividend in violation of Sections 403.001 and 403.051.  If the department revokes an insurer's charter under this subsection, the department shall immediately revoke the insurer's certificate of authority.

(b)  Not later than the 10th day before the date on which the department intends to revoke an insurer's certificate of authority under this section, the department shall give the insurer written notice of the department's intent.  The notice must include the specific reasons for the revocation.  (V.T.I.C. Art. 21.31 (part).)

Source Law

Art. 21.31.  [It shall not be lawful for any insurance company organized under the laws of this State to make any dividend, except from surplus profits arising from its business… .]  Any dividends made contrary to any provision of this article shall subject the company making them to a forfeiture of its charter; and the Board shall forthwith revoke its certificate of authority.  The Board shall give such company at least ten (10) days' notice in writing of its intention to revoke such certificate, stating specifically the reasons why it intends to revoke same.

Revisor's Note

(1)  V.T.I.C. Article 21.31 states that dividends made contrary to any provision of this chapter "subject the company making them to a forfeiture of its charter" and "the Board shall forthwith revoke its certificate of authority."  The revised law clarifies that the Texas Department of Insurance shall revoke an insurer's certificate of authority if the department revokes the insurer's charter under this section.

(2)  V.T.I.C. Article 21.31 requires the Texas Department of Insurance to revoke an insurer's certificate of authority "forthwith" in certain circumstances.  The revised law substitutes "immediately" for "forthwith" because the terms have the same meaning in this context and "immediately" is more modern.

Revised Law

Sec. 403.102.  PENALTIES FOR CERTAIN INSURERS.  The department may revoke the charter of a life, health, fire, marine, or inland marine insurance company that pays a dividend in violation of Sections 403.001 and 403.052.  If the department revokes a company's charter under this section, the department shall immediately revoke the company's certificate of authority.  (V.T.I.C. Art. 21.32 (part).)

Source Law

Art. 21.32.  [No life, health, fire, marine, or inland insurance company, organized under the laws of this state, shall make any dividend except from the surplus profits arising from its business… .]  Any dividend made contrary to any provision of this Article shall subject the company making it to a forfeiture of its charter, and the Board shall forthwith revoke its certificate of authority.

Revisor's Note

(1)  V.T.I.C. Article 21.32 specifies certain penalties for a "life, health, fire, marine, or inland insurance company, organized under the laws of this state" that pays a dividend in violation of Article 21.32.  V.T.I.C. Article 21.31, revised in relevant part as Section 403.101, provides the same penalties for an "insurance company organized under the laws of this State" that pays a dividend in violation of Article 21.31, but further requires that the Texas Department of Insurance provide notice to the insurer before imposing the penalties.  Because a "life, health, fire, marine, or inland insurance company, organized under the laws of this state" referenced in Article 21.32 is also an "insurance company organized under the laws of this state" to which Article 21.31 applies, it is ambiguous whether Article 21.32 is an exception to Article 21.31 for the companies to which Article 21.32 applies, or whether both Articles 21.31 and 21.32 apply to those companies.  The revised law is drafted to preserve that ambiguity.

(2)  V.T.I.C. Article 21.32 states that a dividend made contrary to any provision of this chapter "subject the company making it to a forfeiture of its charter" and "the Board shall forthwith revoke its certificate of authority."  The revised law clarifies that the Texas Department of Insurance shall revoke a specified insurance company's certificate of authority only if the department revokes the company's charter.

(3)  V.T.I.C. Article 21.32 requires the department to revoke a specified insurance company's certificate of authority "forthwith" in certain circumstances.  For the reason stated in Revisor's Note (2) to Section 403.101, the revised law substitutes "immediately" for "forthwith."