CHAPTER 424. INVESTMENTS FOR CERTAIN INSURERS

Statutes > Texas Statutes > INSURANCE CODE > TITLE 4. REGULATION OF SOLVENCY > CHAPTER 424. INVESTMENTS FOR CERTAIN INSURERS

INSURANCE CODE

TITLE 4. REGULATION OF SOLVENCY

SUBTITLE B. RESERVES AND INVESTMENTS

CHAPTER 424. INVESTMENTS FOR CERTAIN INSURERS

SUBCHAPTER A. GENERAL PROVISIONS

Sec. 424.001. DEFINITIONS. In this chapter:

(1) "Insurer" means any insurer organized under the laws of this

state other than an insurer writing life, health, and accident

insurance.

(2) "Minimum capital and surplus" means the minimum amount of

capital stock and minimum amount of surplus required of an

insurer under Section 822.054 or 822.210.

(3) "Securities valuation office" means the Securities Valuation

Office of the National Association of Insurance Commissioners.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.002. INAPPLICABILITY OF CERTAIN LAW. The definition of

"state" assigned by Section 311.005, Government Code, does not

apply to this chapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER B. INVESTMENT OF FUNDS IN EXCESS

OF MINIMUM CAPITAL AND SURPLUS

Sec. 424.051. GENERAL INVESTMENT AUTHORITY SPECIFIED BY LAW. An

insurer may not invest the insurer's funds in excess of minimum

capital and surplus, except that an insurer may invest as

otherwise authorized by this code.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.052. ADDITIONAL GENERAL INVESTMENT AUTHORITY. An

insurer may make investments that are not otherwise authorized by

this chapter or otherwise authorized by this code for the insurer

if:

(1) the investment is not specifically prohibited by law and

does not exceed the limits prescribed by this code;

(2) the amount of a single investment under this section does

not exceed five percent of the insurer's capital and surplus in

excess of the insurer's minimum capital and surplus; and

(3) the aggregate amount of all investments made by the insurer

under this section does not exceed five percent of the insurer's

assets.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.053. LIMITATION AS TO SINGLE ISSUER OR BORROWER. (a)

Notwithstanding Sections 424.051, 424.056-424.071, and 424.074,

the aggregate amount of an insurer's investments in all or any

type of securities, loans, obligations, or evidences of

indebtedness of a single issuer or borrower, other than

investments described by Subsection (c), may not exceed five

percent of the insurer's total assets.

(b) For purposes of this section, a single issuer or borrower

includes:

(1) the issuer's or borrower's majority-owned subsidiaries;

(2) the issuer's or borrower's parent; or

(3) the majority-owned subsidiaries of the issuer's or

borrower's parent.

(1) an authorized investment that:

(A) is a direct obligation of or guaranteed by the full faith

and credit of the United States, this state, or a political

subdivision of this state; or

(B) is insured by an agency of the United States or this state;

(2) an investment described by Section 424.061 or 424.063.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.054. APPLICABILITY OF PERCENTAGE AUTHORIZATIONS AND

LIMITATIONS. (a) The percentage authorizations and limitations

established by Sections 424.051, 424.053-424.071, and 424.074

apply only at the time an investment is originally acquired or a

transaction is entered into and do not apply to the insurer or

the investment or transaction after that time.

(b) An investment, once qualified under a law described by

Subsection (a), remains qualified notwithstanding any

refinancing, restructuring, or modification of the investment,

except that an insurer may not refinance, restructure, or modify

an investment solely to circumvent the requirements or

limitations of a law described by Subsection (a).

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.055. WAIVER BY COMMISSIONER OF QUANTITATIVE

LIMITATIONS. (a) Notwithstanding Sections 424.051,

424.056-424.071, and 424.074, the commissioner may waive a

quantitative limitation on any investment authorized by those

laws 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

insurer if the commissioner denies the waiver;

(4) the excess investment will not have a material adverse

effect on the insurer; and

(5) the size of the investment is reasonable in relation to the

insurer'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.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.056. WRITTEN INVESTMENT PLAN. (a) Each insurer's

board of directors, or, if the insurer does not have a board of

directors, the corresponding authority designated by the

insurer's charter, bylaws, or plan of operation, shall adopt a

written investment plan consistent with the requirements of:

(1) this chapter;

(2) Sections 822.204, 822.209, 861.258, and 862.002; and

(3) other statutes governing investments by the insurer.

(b) The investment plan must:

(1) specify the diversification of the insurer's investments

designed to reduce the risk of large losses, by:

(A) broad categories, 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) type of 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 insurer.

authority shall review the adequacy of the investment plan and

the implementation of the plan.

(d) An insurer shall maintain the insurer's investment plan in

the insurer'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.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.057. INVESTMENT RECORDS. An insurer shall maintain

investment records covering each transaction. The insurer must

be able to demonstrate at all times to the department that the

insurer's investments are within the limitations imposed by the

statutes listed in Section 424.056(a).

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.058. AUTHORIZED INVESTMENTS: FORM OF MINIMUM CAPITAL

AND SURPLUS. An insurer may invest the insurer's funds in excess

of minimum capital and surplus in any manner authorized by

Section 822.204 for investment of the insurer's minimum capital

and surplus.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.059. AUTHORIZED INVESTMENTS: GOVERNMENT OBLIGATIONS.

An insurer may invest the insurer's funds in excess of minimum

capital and surplus in a bond or other evidence of indebtedness

of any state or of Canada or a province of Canada that:

(1) is issued by the authority of law; and

(2) at the time of purchase:

(A) bears interest; and

(B) is not in default as to principal or interest.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.060. AUTHORIZED INVESTMENTS: STOCK OF NATIONAL OR STATE

BANK. (a) An insurer may invest the insurer's funds in excess

of minimum capital and surplus in the stock of:

(1) a national bank; or

(2) a state bank of this state whose deposits are insured by the

Federal Deposit Insurance Corporation.

(b) Notwithstanding Subsection (a)(2):

(1) not more than 35 percent of the total outstanding stock of a

single state bank may be purchased by a single insurer; and

(2) if an insurer has invested the insurer's funds in 35 percent

of a state bank's stock under this section, no other insurer may

invest funds in the bank's remaining stock.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.061. AUTHORIZED INVESTMENTS: DEPOSITS IN CERTAIN

FINANCIAL INSTITUTIONS. (a) Subject to this section, an insurer

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.

savings and loan association, or credit union may 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

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.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.062. AUTHORIZED INVESTMENTS: CERTAIN OBLIGATIONS OF

PARTNERSHIP OR CORPORATION. (a) Except as provided by this

section, an insurer may invest the insurer's funds in excess of

minimum capital and surplus in a stock, bond, debenture, bill of

exchange, evidence of indebtedness, other commercial note or

bill, or security of any partnership or dividend-paying

corporation that:

(1) is incorporated under the laws of the United States, this

state, another state, Canada, or a province of Canada;

(2) is solvent at the time of the investment; and

(3) has not defaulted in the payment of any of the partnership's

or corporation's obligations during the five years preceding the

date of the investment.

(b) Except as provided by Subsection (d), an insurer may invest

the insurer's funds in excess of minimum capital and surplus, and

all reserves required by law, in a stock, bond, or debenture of

any solvent corporation that is incorporated under the laws of

the United States, this state, another state, Canada, or a

province of Canada.

the stock of an oil, manufacturing, or mercantile corporation

unless the corporation has, at the time of the investment:

(1) a net worth of at least $250,000, if the corporation is

organized under the laws of this state; or

(2) a combined capital, surplus, and undivided profits of at

least $2.5 million, if the corporation is not organized under the

laws of this state.

(d) An insurer may not invest the insurer's funds in:

(1) the insurer's own stock or in any stock on account of which

the holders or owners of the stock may be liable for an

assessment other than taxes; or

(2) any stock, bond, or other security issued by a corporation

with respect to which a majority of the stock having voting

powers is directly or indirectly owned by or for the benefit of

an officer or director of the insurer, unless the insurer has

been in continuous operation for at least five years.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.063. AUTHORIZED INVESTMENTS: MUTUAL FUNDS. An insurer

may invest the insurer's funds in excess of minimum capital and

surplus in shares of a mutual fund engaged in business under the

Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.),

as amended, if:

(1) the mutual fund is solvent and has at least $1 million of

net assets as of the date of the mutual fund's latest annual or

more recent certified audited financial statement; and

(2) the amount of the insurer's investment in a single mutual

fund does not exceed 15 percent of the insurer's capital and

surplus.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.064. AUTHORIZED INVESTMENTS: REAL PROPERTY. (a)

Subject to this section, an insurer may invest the insurer's

funds in excess of minimum capital and surplus in real property

to the extent authorized by other provisions of this code.

(b) An insurer with admitted assets of more than $500 million

may own investment real property other than real property

authorized by another provision of this code, or participations

in that other investment real property, if the property is

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 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).

real property and improvements, or in any interest in real

property and improvements, may not exceed five percent of the

insurer's admitted assets in excess of $500 million. The total

amount invested by an insurer in investment real property and

improvements may not exceed 15 percent of the insurer's admitted

assets in excess of $500 million.

(d) Except as provided by Section 862.002, an insurer 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, single or multiunit family dwellings.

(e) The investment authority granted by this section is in

addition to and separate from the investment authority granted by

Section 862.002, except that an insurer may not invest in any

real property that, when added to properties acquired by the

insurer under Section 862.002, would exceed the limitations

prescribed by that section.

(f) An insurer's admitted assets are determined from the

insurer's annual statements that are made as of the December 31

that precedes the date of the determination and are filed with

the department as required by law. The value of any investment

made under this section is subject to the appraisal requirement

of Section 862.002.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.065. ACTING AS REAL ESTATE BROKER OR SALESPERSON

PROHIBITED. An insurer defined in Section 822.001 or 822.201 or

another insurer specifically made subject to Sections 424.051,

424.053-424.071, and 424.074 may not engage in the business of a

broker or salesperson as defined by Chapter 1101, Occupations

Code, except that the insurer may hold, improve, maintain,

manage, rent, lease, sell, exchange, or convey any of the real

property interests legally owned as investments under this code.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.066. AUTHORIZED INVESTMENTS: OBLIGATIONS SECURED BY

REAL PROPERTY LOANS. (a) Subject to this section, an insurer

may invest the insurer's funds in excess of minimum capital and

surplus in a bond, note, or evidence of indebtedness, or a

participation in a bond, 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 or in any

state, commonwealth, territory, or possession of 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 insurer or one or more

wholly owned subsidiaries of the insurer 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 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 real property 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 only to the extent the obligation is insured or

guaranteed by:

(A) this state;

(B) the United States;

Housing Act (12 U.S.C. Section 1701 et seq.), as amended; or

(D) any other agency or instrumentality of the United States.

leasehold estate in real property and improvements located on the

property may not 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 and improvements located on the property must be

payable in equal monthly, quarterly, semiannual, or annual

payments of principal plus accrued interest to the date of the

principal payment.

(e) An insurer's investment in a single obligation under this

section may not exceed 10 percent of the insurer's capital and

surplus. An insurer's aggregate investments under this section

may not exceed 30 percent of the insurer's assets.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.067. AUTHORIZED INVESTMENTS: TRANSPORTATION EQUIPMENT.

An insurer may invest the insurer's funds in excess of minimum

capital and surplus in:

(1) an adequately secured equipment trust obligation,

certificate, or other instrument evidencing an interest in

transportation equipment wholly or partly located in the United

States; and

(2) a right to receive determined portions of rental, purchase,

or other fixed obligatory payments for the use or purchase of the

equipment.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.068. AUTHORIZED INVESTMENTS: INVESTMENT IN FOREIGN

JURISDICTION. (a) In addition to the investments in Canada

authorized by Sections 424.051, 424.058-424.071, and 424.074 and

subject to this section, an insurer may invest the insurer's

funds in excess of minimum capital and surplus in an investment

in a foreign commonwealth, territory, or possession of the United

States, a foreign country other than Canada, or a foreign

security originating in one of those commonwealths, territories,

possessions, or countries, if:

(1) the investment is similar to investments the insurer is

authorized by Sections 424.051, 424.058-424.071, and 424.074 to

make within the United States or Canada; and

(2) if a debt obligation, the investment is rated one or two by

the securities valuation office.

(b) The aggregate amount of an insurer's investments under

Sections 424.051, 424.058-424.071, and 424.074 in a single

foreign jurisdiction may not exceed:

(1) as to a foreign jurisdiction that is given a sovereign debt

rating of one by the securities valuation office, 10 percent of

the insurer's admitted assets; or

(2) as to any other foreign jurisdiction, five percent of the

insurer's admitted assets.

exceed the sum of:

(1) the amounts authorized by Section 424.073; and

(2) 20 percent of the insurer's assets.

(d) The combined total of the amount of investments made under

this section, the amount of similar investments made within the

United States and Canada, and any amounts of investments

authorized by Section 424.073 may not exceed any limitation

prescribed by Sections 424.051, 424.058-424.071, and 424.074.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.069. AUTHORIZED INVESTMENTS: CERTAIN LOANS. An

insurer may invest the insurer's funds in excess of minimum

capital and surplus in a loan on the pledge of any mortgage,

stock, bond, or other evidence of indebtedness acceptable as an

investment under Sections 424.051, 424.053-424.071, and 424.074,

if the current value of the mortgage, stock, bond, or other

evidence of indebtedness is at least 25 percent more than the

amount of the loan.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.070. AUTHORIZED INVESTMENTS: OBLIGATIONS OF LOCAL

GOVERNMENTAL ENTITIES. (a) Subject to this section, an insurer

may invest the insurer's funds in excess of minimum capital and

surplus in a bond or other interest-bearing evidence of

indebtedness of a:

(1) county or subdivision of a county;

(2) municipality;

(3) road district;

(4) turnpike district or authority;

(5) water district;

(6) school district;

(7) sanitary or navigation district; or

(8) municipally owned revenue water system, sewer system, or

electric utility company with respect to which the municipality

has appropriated, pledged, or otherwise provided for special

revenues to meet the principal and interest payments of the bond

or other evidence of indebtedness.

(b) A bond or other evidence of indebtedness of a navigation

district is an authorized investment under this section only if:

(1) the navigation district is located wholly or partly in a

county that has a population of at least 100,000; and

(2) the interest due on the bond or other evidence of

indebtedness has never been in default.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.071. AUTHORIZED INVESTMENTS: THE UNIVERSITY OF TEXAS.

An insurer may invest the insurer's funds in excess of minimum

capital and surplus in an interest-bearing note or bond of The

University of Texas issued under the laws of this state.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.072. AUTHORIZED INVESTMENTS: BONDS ISSUED, ASSUMED, OR

GUARANTEED IN INTERNATIONAL MARKET. An insurer may invest the

insurer's funds in excess of minimum capital and surplus in bonds

issued, assumed, or guaranteed by any of the following

international financial institutions in which the United States

is a member:

(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; or

(5) the International Finance Corporation.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.073. AUTHORIZED INVESTMENTS: INSURER ENGAGED IN

BUSINESS IN FOREIGN COUNTRY. (a) Subject to this section, an

insurer authorized by the law of a foreign country to engage in a

line of insurance in which the insurer is authorized to engage in

this state may invest in foreign securities originating in the

foreign country of the same kind as the domestic securities

originating in the United States in which the insurer is

authorized to invest under Sections 424.051, 424.053-424.071, and

424.074.

(b) The aggregate amount of an insurer's investments made under

this section in a single country may not exceed by more than 10

percent at any time the lesser of:

(1) the amount of funds required by the law of the foreign

country to be maintained in securities originating in that

country; or

(2) the amount of total unearned premium reserves, reinsurance

reserves, loss reserves, and any other liabilities required by

the law of this state to be carried by the insurer that are

directly attributable to the particular insurance policies or

contracts on residents or property located in the foreign

country.

foreign security originating in a foreign country with respect to

which the president of the United States or other federal

authority has refused to exercise the authority to issue

guarantees on projects in the country to citizens or corporations

of the United States against loss by reason of inconvertibility

of currency, expropriation, confiscation, war, revolution, or

insurrection because the foreign country has failed to enter into

arrangements for the security of American property as required by

the president or other federal authority for the issuance of

those guarantees.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.074. OTHER SPECIFICALLY AUTHORIZED INVESTMENTS. An

insurer may invest the insurer's funds in excess of minimum

capital and surplus in:

(1) a savings account as authorized by Chapter 65, Finance Code;

(2) a bond or other indebtedness as authorized by Sections

435.045 and 435.046, Government Code;

(3) a bond issued under Subchapter B, Chapter 1505, Government

Code;

(4) a bond as authorized by Subchapter B, Chapter 284,

Transportation Code;

(5) a municipal bond issued under Sections 51.038 and 51.039,

Water Code;

(6) an insured account or evidence of indebtedness as authorized

by Section 1, Chapter 160, General Laws, Acts of the 43rd

Legislature, Regular Session, 1933 (Article 842a, Vernon's Texas

Civil Statutes);

(7) an insured or guaranteed obligation as authorized by Chapter

230, Acts of the 49th Legislature, Regular Session, 1945 (Article

842a-1, Vernon's Texas Civil Statutes);

(8) a bond issued under Section 1, Chapter 1, page 427, General

Laws, Acts of the 46th Legislature, Regular Session, 1939

(Article 1269k-1, Vernon's Texas Civil Statutes);

(9) a bond as authorized by Section 24, Chapter 110, Acts of the

51st Legislature, Regular Session, 1949 (Article 8280-133,

Vernon's Texas Civil Statutes);

(10) a bond as authorized by Section 19, Chapter 340, Acts of

the 51st Legislature, Regular Session, 1949 (Article 8280-137,

Vernon's Texas Civil Statutes);

(11) a bond as authorized by Section 10, Chapter 398, Acts of

the 51st Legislature, Regular Session, 1949 (Article 8280-138,

Vernon's Texas Civil Statutes);

(12) a bond as authorized by Section 18, Chapter 465, Acts of

the 51st Legislature, Regular Session, 1949 (Article 8280-139,

Vernon's Texas Civil Statutes); or

(13) another investment specifically authorized by law.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER C. INVESTMENT POOLS

Sec. 424.101. DEFINITIONS. In this subchapter:

(1) "Business entity" means an association, corporation, joint

stock company, joint venture, limited liability company, mutual

fund trust, partnership, or other similar form of business

organization, regardless of whether organized for profit.

(2) "Obligation" means:

(A) a bond, note, debenture, trust certificate, including an

equipment certificate, or production payment;

(B) a negotiable bank certificate of deposit, bankers'

acceptance, credit tenant loan, or other loan secured by

financing net leases; or

or participation certificates or other evidences of an interest

in an obligation otherwise described by this subdivision, whether

constituting a general obligation of the issuer or payable only

out of certain revenues or certain funds pledged or otherwise

dedicated for payment.

(3) "Qualified bank" means a national bank, state bank, or trust

company that:

(A) is at all times adequately capitalized as determined by the

standards adopted by the United States banking regulators; and

(B) is either a member of the Federal Reserve System or

regulated by state banking laws.

(4) "Repurchase transaction," "reverse repurchase transaction,"

and "securities lending transaction" have the meanings assigned

by Section 424.151.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.102. AUTHORITY TO INVEST IN POOL. An insurer may

acquire investments and participate in an investment pool that is

qualified under Section 424.103(b) and the investments of which

are limited to investments authorized for:

(1) a short-term investment pool under Section 424.104; or

(2) an authorized investment pool under Section 424.107.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.103. INVESTMENT POOL REQUIREMENTS AND QUALIFICATIONS.

(a) An investment pool must be a business entity.

(b) To be qualified, an investment pool must:

(1) have a written pooling agreement and a pool manager that

comply with the requirements of this subchapter; and

(2) comply with Subsection (c).

(1) acquire securities issued, assumed, guaranteed, or insured

by the investing insurer or an affiliate of the investing

insurer;

(2) borrow or incur indebtedness for borrowed money, except for

securities lending and reverse repurchase transactions that meet

the requirements of this subchapter; or

(3) permit the aggregate value of securities loaned or sold to,

purchased from, or invested in a single business entity at the

time of the loan, sale, purchase, or investment to exceed 10

percent of the pool's total assets.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.104. AUTHORIZED INVESTMENTS FOR SHORT-TERM INVESTMENT

POOL. A short-term investment pool may contain only:

(1) obligations described by Section 424.105;

(2) money market funds described by Section 424.106; or

(3) repurchase, reverse repurchase, and securities lending

transactions that meet the requirements of Subchapter D.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.105. SHORT-TERM INVESTMENT POOL: CERTAIN SHORT-TERM

OBLIGATIONS. (a) Obligations contained in a short-term

investment pool must meet the requirements of this section.

(b) The obligations must:

(1) 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

(2) be issued by an issuer with outstanding obligations that

have a rating described by Subdivision (1).

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

(A) entitles the holder to receive the principal amount of the

obligation; and

(B) may be exercised through maturity at specified intervals not

exceeding 397 days; or

(2) 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 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.

(d) For purposes of this section, a current short-term index is:

(1) a federal funds rate;

(2) the prime rate;

(3) the rate for treasury bills;

(4) the London InterBank Offered Rate; or

(5) the rate for commercial paper.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.106. SHORT-TERM INVESTMENT POOL: CERTAIN MONEY MARKET

FUNDS. A short-term investment pool may contain 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.),

as amended, that is:

(1) a government money market fund that at all times:

(A) invests only in obligations issued, guaranteed, or insured

by the United States or collateralized repurchase agreements

composed of those obligations; and

(B) 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 at all times qualifies

for investment using the bond class one reserve factor described

by the Purposes and Procedures Manual of the securities valuation

office.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.107. AUTHORIZED INVESTMENTS FOR AUTHORIZED INVESTMENT

POOL; LIMITATION. (a) An authorized investment pool may contain

only investments that a participating insurer is authorized to

acquire by provisions of this code other than this subchapter.

(b) The insurer's total of proportionate ownership interests in

a single authorized investment held by an authorized investment

pool and the insurer's direct investments in that authorized

investment may not exceed the limit prescribed by the applicable

authorizing provision.

an insurer is subject to the limitations described by Section

424.108.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.108. GENERAL INSURER INVESTMENT LIMITATIONS. An

insurer may not acquire an investment in an investment pool if,

as a result of and after making the investment, the aggregate

amount of investments held by the insurer under this subchapter

at the time of the investment:

(1) in a single investment pool would exceed 10 percent of the

insurer's admitted assets;

(2) in all investment pools investing in investments authorized

under Section 424.107 would exceed 25 percent of the insurer's

admitted assets; or

(3) in all investment pools would exceed 35 percent of the

insurer's admitted assets.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.109. DESIGNATION OF POOL MANAGER; QUALIFICATIONS. (a)

The pooling agreement for an investment pool must designate a

pool manager.

(b) The pool manager must be organized under the laws of the

United States or a state and must be:

(1) the investing insurer, an affiliated insurer, or a business

entity affiliated with the insurer;

(2) a qualified bank;

(3) a business entity registered under the Investment Advisers

Act of 1940 (15 U.S.C. Section 80b-1 et seq.), as amended;

(4) the attorney-in-fact of a reciprocal or interinsurance

exchange; or

(5) the United States manager or an affiliate or subsidiary of

the United States manager of a United States branch of an alien

insurer.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.110. POOL MANAGER TO MAINTAIN ASSETS; CUSTODY

AGREEMENT. (a) The pool manager shall maintain the assets of

the investment pool in one or more accounts, in the name of or on

behalf of the pool, under a custody agreement with a qualified

bank.

(b) The custody agreement must:

(1) state and recognize the claims and rights of each

participant;

(2) acknowledge that the investment 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

(3) contain an agreement that the pool's underlying assets may

not be commingled with the general assets of the custodian

qualified bank or any other person.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.111. POOLING AGREEMENT PROVISIONS. The pooling

agreement for an investment pool must provide that:

(1) 100 percent of the ownership interests in the pool must at

all times be held by:

(A) an insurer and the insurer's affiliated insurers;

(B) for a pool investing solely in investments authorized under

Section 424.104, the insurer and the insurer's subsidiaries and

affiliates or any pension or profit-sharing plan of the insurer

and the insurer's subsidiaries and affiliates; or

or affiliates of the insurer's United States manager;

(2) the pool's underlying assets are held solely for the benefit

of each participant and may not be commingled with the general

assets of the pool manager or any other person;

(3) each participant owns an undivided interest in the pool's

underlying assets in proportion to the aggregate amount of the

participant's interest in the pool; and

(4) a pool participant or, if a pool participant is insolvent,

bankrupt, or in receivership, the participant's trustee,

receiver, conservator, or other successor-in-interest may

withdraw all or any portion of the participant's investment from

the pool under the terms of the pooling agreement.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.112. WITHDRAWALS AND DISTRIBUTIONS. (a) A pool

participant must be able to make withdrawals on demand without

penalty or other assessment on any business day, and settlement

of funds must occur within a reasonable and customary period that

does not exceed five business days after a withdrawal.

(b) The pooling agreement must provide that the pool manager

shall make a distribution to a pool participant, at the manager's

discretion:

(1) in cash in an amount equal to the fair market value at the

time of the distribution of the participant's pro rata share of

each of the pool's underlying assets;

(2) in kind in an amount equal to a pro rata share of each

underlying asset; or

(3) in a combination of cash and in-kind distributions in an

amount equal to a pro rata share of each underlying asset.

subtracting all the investment pool's applicable fees and

expenses.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.113. INVESTMENT POOL RECORDS. The pool manager shall

compile and maintain:

(1) detailed accounting records that show:

(A) the cash receipts and disbursements reflecting each pool

participant's proportionate investment in the investment pool;

and

(B) a complete description of all the pool's underlying assets,

including the amount, interest rate, and maturity date, if any,

of each of those assets and other appropriate designations; and

(2) other records that, on a daily basis, allow third parties to

verify each participant's investment in the pool.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.114. INSPECTION OF RECORDS. The pool manager shall

make records of the investment pool available for inspection by

the commissioner.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.115. REPORTS OF TRANSACTIONS BETWEEN POOL AND

PARTICIPANT. (a) A transaction between an investment pool and a

pool participant is not subject to Subchapter C, Chapter 823,

except that before entering into a pool, an insurer subject to

Chapter 823 shall give the commissioner the written notice

required under Section 823.103.

(b) The investment pool's investment activities and the

transactions between the pool and a pool participant must be

reported in the registration statement required by Subchapter B,

Chapter 823.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER D. DOLLAR ROLL, REPURCHASE, REVERSE REPURCHASE,

AND SECURITIES LENDING TRANSACTIONS

Sec. 424.151. DEFINITIONS. In this subchapter:

(1) "Dollar roll transaction" means two simultaneous

transactions with settlement dates not more than 96 days apart,

in one of which an insurer sells to a business entity, and in the

other of which the insurer 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 et seq., as amended.

(2) "Repurchase transaction" means a transaction in which an

insurer purchases securities from a business entity that is

obligated to repurchase the purchased securities or equivalent

securities from the insurer at a specified price, either within a

specified period or on demand.

(3) "Reverse repurchase transaction" means a transaction in

which an insurer sells securities to a business entity and is

obligated to repurchase the sold securities or equivalent

securities from the business entity at a specified price, either

within a specified period or on demand.

(4) "Securities lending transaction" means a transaction in

which an insurer lends securities to a business entity that is

obligated to return the loaned securities or equivalent

securities to the insurer, either within a specified period or on

demand.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.152. TRANSACTIONS AUTHORIZED. An insurer may engage in

dollar roll, repurchase, reverse repurchase, and securities

lending transactions as provided by this subchapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.153. PERIOD OF TRANSACTION. An insurer must enter into

a written agreement for each transaction under this subchapter,

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.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.154. CASH REQUIREMENTS. With respect to cash received

in a transaction under this subchapter, an insurer 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 insurer's general corporate purposes.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.155. COLLATERAL REQUIREMENTS. (a) While a transaction

under this subchapter is outstanding, the insurer or the

insurer'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 the rights of a secured creditor to, the collateral.

(b) The amount of collateral required for repurchase, reverse

repurchase, and securities lending transactions is the amount

required under the Purposes and Procedures Manual of the

securities valuation office or a successor publication.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.156. PERCENTAGE LIMITATIONS. (a) An insurer may not

enter into a transaction under this subchapter if, as a result of

and after making the transaction, the aggregate amount of

securities loaned or sold to or purchased from:

(1) a single business entity counterparty under this subchapter

would exceed five percent of the insurer's assets; or

(2) all business entities under this subchapter would exceed 40

percent of the insurer's assets.

(b) 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.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.157. RULES. The commissioner may adopt reasonable

rules and issue reasonable orders as necessary to implement this

subchapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER E. RISK CONTROL TRANSACTIONS

Sec. 424.201. DEFINITIONS. In this subchapter:

(1) "Acceptable collateral" means:

(A) cash;

(B) cash equivalents;

(D) securities that are fully guaranteed as to principal and

interest by the United States.

(2) "Business entity" includes an association, bank,

corporation, joint stock company, joint tenancy, joint venture,

limited liability company, mutual fund, partnership, sole

proprietorship, trust, 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

424.106. 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 a cap, floor, or option and to make payments as the seller of

a different cap, floor, or option.

(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

insurer; 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 foreign 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 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 insurer's fiscal year and must be

reduced by the market value of acceptable collateral held by the

insurer or a custodian on the insurer's behalf.

(7) "Derivative instrument":

(A) means an agreement, option, or instrument, or a series or

combination 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

interest; 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 insurer 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

another asset-backed security, a principal-protected structured

security, a floating rate security, an instrument that an insurer

would otherwise be authorized to invest in or receive under a

provision of this subchapter other than this subdivision, or a

debt obligation of the insurer.

(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

price or floor rate exceeds a reference level, performance,

price, 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 level,

performance, price, or value of those interests. The term does

not include a future or 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 level,

performance, price, 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 insurer

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

insurer, 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 level, performance, price, spread, 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

insurer'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

C.F.R. Section 230.902, as amended.

(22) "Swap" means an agreement to exchange or to net payments at

one or more times based on the actual or expected price, yield,

level, performance, or value of one or more underlying interests.

(23) "Swaption" means an option to purchase or sell a swap at a

given price and time or at a series of prices and times. The

term does not include a swap with an embedded option.

(24) "Underlying interest" means an asset, liability, or other

interest underlying a derivative instrument or a combination of

those assets, liabilities, or interests. The term includes a

security, currency, rate, index, commodity, or derivative

instrument.

(25) "Warrant" means an instrument under which the holder has

the right to purchase or sell the underlying interest at a given

price and time or at a series of prices and times stated in the

warrant.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.202. RISK CONTROL TRANSACTIONS AUTHORIZED. (a) Except

as provided by Subsection (b), an insurer may engage in a risk

control transaction authorized by this subchapter to:

(1) protect the insurer's assets against the risk of changing

asset values or interest rates;

(2) reduce risk; and

(3) generate income.

(b) An insurer with a statutory net capital and surplus as

determined by the insurer's most recent financial statement

required to be filed with the department that is less than the

minimum amount of capital and surplus required for a new charter

and certificate of authority for the same type of insurer may not

engage in a transaction authorized under this subchapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.203. NOTICE OF INTENT TO ENGAGE IN RISK CONTROL

TRANSACTIONS REQUIRED. (a) Before an insurer with a statutory

net capital and surplus of less than $10 million engages in a

transaction authorized under this subchapter, the insurer shall

file a written notice with the commissioner describing:

(1) the need to engage in the transaction;

(2) the lack of acceptable alternatives; and

(3) the insurer's plan to engage in the transaction.

(b) If the commissioner does not issue an order prohibiting an

insurer who files a notice under Subsection (a) from engaging in

the transaction on or before the 90th day after the date the

commissioner receives the notice, the insurer may engage in the

transaction described in the notice.

surplus are determined by the insurer's most recent financial

statement required to be filed with the department.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.204. TRADING REQUIREMENTS FOR DERIVATIVE INSTRUMENTS.

Each derivative instrument must be:

(1) traded on a securities exchange;

(2) entered into with, or guaranteed by, a business entity;

(3) issued or written by, or entered into with, the issuer of

the underlying interest on which the derivative instrument is

based; or

(4) in the case of futures, traded through a broker who is:

(A) registered as a futures commission merchant under the

Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended;

(B) exempt from that registration under 17 C.F.R. Section 30.10,

adopted under the Commodity Exchange Act (7 U.S.C. Section 1 et

seq.), as amended.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.205. DERIVATIVE USE PLAN. (a) Before an insurer

enters into a derivative transaction, the insurer's board of

directors must approve a derivative use plan as part of the

insurer's investment plan otherwise required by law.

(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 and the assets or liabilities being replicated; and

(3) require compliance with the insurer's internal control

procedures established under Section 424.206.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.206. INTERNAL CONTROL PROCEDURES. An insurer that

enters into a derivative transaction shall establish written

internal control procedures that require:

(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

over-the-counter derivative transactions based on the

counterparty exposure amount;

(2) a system for determining whether hedging or replication

strategies used by the insurer have been effective;

(3) a system of reports, at least as frequent as monthly, to the

insurer's management, that include:

(A) a description of each derivative transaction entered into,

outstanding, or closed out during the period since the last

report;

(B) the purpose of each outstanding derivative transaction;

and

(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.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 424.207. ABILITY TO DEMONSTRATE HEDGING CHARACTERISTICS AND

EFFECTIVENESS. An insurer must be able to demonstrate to the

commissioner on request the intended hedging characteristics a

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CHAPTER 424. INVESTMENTS FOR CERTAIN INSURERS