Session of 2000
Effective: July 1, 2000
HOUSE BILL No. 2652
An Act concerning insurance; relating to life
insurance company investments; financial
futures contracts; amending K.S.A. 1999 Supp.
40-2b25 and repealing the existing
section.
Be it enacted by the Legislature of the State of Kansas:
Section 1. K.S.A. 1999 Supp.
40-2b25 is hereby amended to read as
follows: 40-2b25. (a) Any life insurance company heretofore or
hereafter
organized under any law of this state may use financial instruments
under
this section to engage in hedging transactions and certain income
gen-
eration transactions or as these terms may be further defined in
regula-
tions promulgated by the commissioner. The life insurance company
shall
be able to demonstrate to the commissioner the intended hedging
char-
acteristics and the ongoing effectiveness of the financial
instrument trans-
action or combination of the transactions through cash flow testing
or
other appropriate analysis.
(b) As used in this section:
(1) "Cap" means an agreement obligating
the seller to make pay-
ments to the buyer, each payment based on the amount by which a
ref-
erence price or level or the performance or value of one or more
under-
lying interest exceeds a predetermined number, sometimes called
the
strike rate or price.
(2) "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.
(3) "Counterparty" means the business
entity with which a life in-
surance company enters into financial instrument
transactions.
(4) "Crediting basis amount" means the
amount of interest credited
to an insured's account value for the percentage of change on an
under-
lying index.
(3) (5)
(A) "Financial instrument" means an agreement, option, in-
strument or any series or combination 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) which has a price, performance,
value or cash flow based primarily
upon the actual or expected price, level, performance, value or
cash flow
of one or more underlying interests.
(B) Financial instruments include
options, warrants, caps, floors, col-
lars, swaps, forwards, future and any other agreements, options or
instru-
ments substantially similar thereto, or any series or combination
thereof.
(4)
(6) "Financial instrument transaction" means a
transaction in-
volving the use of one or more financial instruments.
(5) (7) "Floor"
means an agreement obligating the seller to make
payments to the buyer in which each payment is based on the
amount
that a predetermined number, sometimes called the floor rate or
price,
exceeds a reference price, level, performance or value of one or
more
underlying interests.
(6) (8) "Forward"
means an agreement (other than a future) 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.
(7) (9) "Future"
means an agreement traded on a qualified 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.
(8) (10) "Hedging
transaction" means a financial instrument trans-
action which is entered into and maintained to reduce:
(A) The risk of a change in the value,
yield, price, cash flow or quan-
tity of assets or liabilities which the insurer has acquired or
incurred or
anticipates acquiring or incurring; or
(B) the currency exchange-rate risk or
the degree of exposure as to
assets or liabilities which an insurer has acquired or incurred or
anticipates
acquiring or incurring.
(9) (11) "Income
generation transaction" means a financial instru-
ment transaction involving the writing of covered call options
which is
intended to generate income or enhance return.
(10)
(12) "Option" means an agreement giving the buyer the
right to
buy or receive, sell or deliver, enter into, extend or terminate,
or effect
a cash settlement based on the actual or expected price, level,
perform-
ance or value of one or more underlying interests.
(11)
(13) "Potential exposure" means:
(A) As to a futures position, the amount
of the initial margin required
for that position; or
(B) as to swaps, collars and forwards,
.5% times the notional amount
times the square root of the remaining years to maturity.
(14) "SVO" means the securities
valuation office of the national as-
sociation of insurance commissioners or any successor office
established
by the national association of insurance commissioners.
(12) (15) "Swap"
means an agreement to exchange for net payments
at one or more times based on the actual or expected price, level,
per-
formance or value of one or more underlying interests.
(16) "Underlying index" means the
index, market or financial futures
contract used to determine the crediting basis amount.
(13)
(17) "Underlying interest" means the assets, other
interests, or
a combination thereof, underlying a financial instrument, such as
any one
or more securities, currencies, rates, indices, commodities or
financial
instruments.
(14)
(18) "Warrants" means an option to purchase or sell the
under-
lying securities or investments at a given price and time or at a
series of
prices and times outlined in the warrant agreement. Warrants may
be
issued alone or in connection with the sale of other securities, as
part of
a merger or recapitalization agreement, or to facilitate
divestiture of the
securities of another corporation.
(c) A life insurance company may enter
into financial instrument
transactions for the purpose of hedging except that the transaction
shall
not cause any of the following limits to be exceeded:
(1) The aggregate statement value of
options, caps, floors and war-
rants not attached to any other security or investment purchase in
hedging
transactions may not exceed 110% of the excess of such insurer's
capital
and surplus as shown on the company's last annual or quarterly
report
filed with the commissioner of insurance over the minimum
requirements
of a new stock or mutual company to qualify for a certificate of
authority
to write the kind of insurance which the insurer is authorized to
write;
(2) the aggregate statement value of
options, caps and floors written
in hedging transactions may not exceed 3% of the life insurance
com-
pany's admitted assets; and
(3) the aggregate potential exposure of
collars, swaps, forwards and
futures used in hedging transactions may not exceed 5% of the life
in-
surance company's admitted assets.
(d) A life insurance company may enter
into the following types of
income generation transactions if:
(1) Selling covered call options on
noncallable fixed income securities
or financial instruments based on fixed income securities, but the
aggre-
gate statement value of assets subject to call during the complete
term of
the call options sold, plus the face value of fixed income
securities un-
derlying any financial instrument subject to call, may not exceed
10% of
the life insurance company's admitted assets; and
(2) selling covered call options on
equity securities, if the life insur-
ance company holds in its portfolio the equity securities subject
to call
during the complete term of the call option sold.
(e) The limitations set forth in
subsection (c) regarding financial in-
strument transactions for the purpose of hedging and in
subsection (d)
regarding income generation transactions shall not apply to any
invest-
ments made by a life insurance company where such investments
are used
only to hedge the crediting basis amount an insured receives on
a partic-
ular insurance policy which is determined by an underlying
index, pro-
vided, however, that such investments shall not in the aggregate
amount
exceed 10% of the life insurance company's admitted assets as
shown on
the company's last annual or quarterly report, without the prior
written
approval of the commissioner of insurance. All investments made
pursuant
to this subsection shall only be made with counterparties that
have a
rating designated as "1" by the national association of
insurance com-
missioners (NAIC) in its most recently published valuations of
securities
manual or supplement thereto, or its equivalent rating by a
nationally
recognized statistical rating organization recognized by the
SVO.
(e) (f) Upon
request of the life insurance company, the commissioner
may approve additional transactions involving the use of financial
instru-
ments in excess of the limits of subsection (c) or for other risk
manage-
ment purposes, excluding replication transactions, pursuant to
regulations
promulgated by the commissioner.
(f) (g) For the
purposes of this section, the value or amount of an
investment acquired or held under this section, unless otherwise
specified
in this code, shall be the value at which assets of an insurer are
required
to be reported for statutory accounting purposes as determined in
ac-
cordance with procedures prescribed in published accounting and
valu-
ation standards of the national association of insurance
commissioners
(NAIC), including the purposes and procedures of the securities
valuation
office, the valuation of securities manual, the accounting
practices and
procedures manual, the annual statement instructions or any
successor
valuation procedures officially adopted by the NAIC.
(g) (h) Prior to
engaging in transactions in financial instruments, an
insurer shall develop and adequately document policies and
procedures
regarding investment strategies and objectives, recordkeeping needs
and
reporting matters. Such policies and procedures shall address
authorized
investments, investment limitations, authorization and approval
proce-
dures, accounting and reporting procedures and controls and shall
pro-
vide for review of activity in financial instruments by the
insurer's board
of directors or such board's designee.
Recordkeeping systems must be sufficiently
detailed to permit internal
auditors and insurance department examiners to determine whether
op-
erating personnel have acted in accordance with established
policies and
procedures, as provided in this section. Insurer records must
identify for
each transaction the related financial instruments contracts.
Sec. 2. K.S.A. 1999 Supp.
40-2b25 is hereby repealed.
Sec. 3. This act shall
take effect and be in force from and after its
publication in the statute book.