Article 2a.--INVESTMENTS BY OTHER THAN LIFE INSURANCE COMPANIES
40-2a24.Financial futures contracts; definitions; use for hedgingpurposes; definitions.(a) Any insurance company other than life organized under any law of thisstate may use financial instruments under this section to engage in hedgingtransactions and certain income generation transactions or as these terms maybe further defined in regulations promulgated by the commissioner. Theinsurance company shall be able to demonstrate to the commissioner the intendedhedging characteristics and the ongoing effectiveness of the financialinstrument transaction or combination of the transactions through cash flowtesting or other appropriate analysis.
(b) As used in this section:
(1) "Cap" means an agreement obligating the seller to make payments to thebuyer, each payment based on the amount by which a reference price or level orthe performance or value of one or more underlying interest exceeds apredetermined number, sometimes called the strike rate or price.
(2) "Collar" means an agreement to receive payments as the buyer of anoption, cap or floor and to make payments as the seller of a different option,cap or floor.
(3) (A) "Financial instrument" means an agreement, option, instrument orany series or combination thereof:
(i) To make or take delivery of, or assume or relinquish, a specifiedamount of one or more underlying interests, or to make a cash settlement inlieu thereof; or
(ii) which has a price, performance, value or cash flow based primarilyupon the actual or expected price, level, performance, value or cash flow ofone or more underlying interests.
(B) Financial instruments include options, warrants, caps, floors,collars, swaps, forwards, future and any other agreements, options orinstruments substantially similar thereto, or any series or combinationthereof.
(4) "Financial instrument transaction" means a transaction involving theuse of one or more financial instruments.
(5) "Floor" means an agreement obligating the seller to make payments tothe buyer in which each payment is based on the amount that a predeterminednumber, sometimes called the floor rate or price, exceeds a reference price,level, performance or value of one or more underlying interests.
(6) "Forward" means an agreement (other than a future) to make or takedelivery of, or effect a cash settlement based on the actual or expected price,level, performance or value of one or more underlying interests.
(7) "Future" means an agreement traded on a qualified exchange, to make ortake delivery of, or effect a cash settlement based on the actual or expectedprice, level, performance or value of one or more underlying interests.
(8) "Hedging transaction" means a financial instrument transaction whichis entered into and maintained to reduce:
(A) The risk of a change in the value, yield, price, cash flow or quantityof assets or liabilities which the insurer has acquired or incurred oranticipates acquiring or incurring; or
(B) the currency exchange-rate risk or the degree of exposure as to assetsor liabilities which an insurer has acquired or incurred or anticipatesacquiring or incurring.
(9) "Income generation transaction" means a financial instrumenttransaction involving the writing of the covered call options which is intendedto generate income or enhance return.
(10) "Option" means an agreement giving the buyer the right to buy orreceive, sell or deliver, enter into, extend or terminate, or effect a cashsettlement based on the actual or expected price, level, performance or valueof one or more underlying interests.
(11) "Potential exposure" means:
(A) As to a futures position, the amount of the initial margin requiredfor that position; or
(B) as to swaps' collars and forwards, .5% times the notional amount timesthe square root of the remaining years of maturity.
(12) "Swap" means an agreement to exchange for net payments at one or moretimes based on the actual or expected price, level, performance or value of oneor more underlying interests.
(13) "Underlying interest" means the assets, other interests, or acombination thereof, underlying a financial instrument, such as any one or moresecurities, currencies, rates, indices, commodities or financial instruments.
(14) "Warrants" means an option to purchase or sell the underlyingsecurities or investments at a given price and time or at a series of pricesand times outlined in the warrant agreement. Warrants may be issued alone orin connection with the sale of other securities, as part of a merger orrecapitalization agreement, or to facilitate divestiture of the securities ofanother corporation.
(c) An insurance company may enter into financial instrument transactionsfor the purpose of hedging except that the transaction shall not cause any ofthe following limits to be exceeded:
(1) The aggregate statement value of options, caps, floors and warrantsnot attached to any other security or investment purchase in hedgingtransactions may not exceed 110% of the excess of such insurer's capital andsurplus as shown on the company's last annual or quarterly report filed withthe commissioner of insurance over the minimum requirements of a new stock ormutual company to qualify for a certificate of authority to write the kind ofinsurance which the insurer is authorized to write;
(2) the aggregate statement value of options, caps and floors written inhedging transactions may not exceed 3% of the insurance company's admittedassets; and
(3) the aggregate potential exposure of collars, swaps, forwards andfutures used in hedging transactions may not exceed 5% of the insurancecompany's admitted assets.
(d) An insurance company may enter into the following types of incomegeneration transactions if:
(1) Selling covered call options on noncallable fixed income securitiesor financial instruments based on fixed income securities, but the aggregatestatement value of assets subject to call during the complete term of the calloptions sold, plus the face value of fixed income securities underlying anyfinancial instrument subject to call, may not exceed 10% of the insurancecompany's admitted assets; and
(2) selling covered call options on equity securities, if the insurancecompany holds in its portfolio the equity securities subject to call during thecomplete term of the call option sold.
(e) Upon request of the insurance company, the commissioner may approveadditional transactions involving the use of financial instruments in excess ofthe limits of subsection (c) or for other risk management purposes, excludingreplication transactions, pursuant to regulations promulgated by thecommissioner.
(f) For the purposes of this section, the value or amount of an investmentacquired 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 reportedfor statutory accounting purposes as determined in accordance with proceduresprescribed in published accounting and valuation standards of the nationalassociation of insurance commissioners (NAIC), including the purposes andprocedures of the securities valuation office, the valuation of securitiesmanual, the accounting practices and procedures manual, the annual statementinstructions or any successor valuation procedures officially adopted by theNAIC.
(g) Prior to engaging in transactions in financial instruments, an insurershall develop and adequately document policies and procedures regardinginvestment strategies and objectives, recordkeeping needs and reportingmatters. Such policies and procedures shall address authorized investments,investment limitations, authorization and approval procedures, accounting andreporting procedures and controls and shall provide for review of activity infinancial instruments by the insurer's board of directors or such board'sdesignee.
Recordkeeping systems must be sufficiently detailed to permit internalauditors and insurance department examiners to determine whether operatingpersonnel have acted in accordance with established policies and procedures, asprovided in this section. Insurer records must identify for each transactionthe related financial instruments contracts.
History: L. 1985, ch. 156, § 2;L. 1996, ch. 83, § 1; July 1.
Article 2a.--INVESTMENTS BY OTHER THAN LIFE INSURANCE COMPANIES
40-2a24.Financial futures contracts; definitions; use for hedgingpurposes; definitions.(a) Any insurance company other than life organized under any law of thisstate may use financial instruments under this section to engage in hedgingtransactions and certain income generation transactions or as these terms maybe further defined in regulations promulgated by the commissioner. Theinsurance company shall be able to demonstrate to the commissioner the intendedhedging characteristics and the ongoing effectiveness of the financialinstrument transaction or combination of the transactions through cash flowtesting or other appropriate analysis.
(b) As used in this section:
(1) "Cap" means an agreement obligating the seller to make payments to thebuyer, each payment based on the amount by which a reference price or level orthe performance or value of one or more underlying interest exceeds apredetermined number, sometimes called the strike rate or price.
(2) "Collar" means an agreement to receive payments as the buyer of anoption, cap or floor and to make payments as the seller of a different option,cap or floor.
(3) (A) "Financial instrument" means an agreement, option, instrument orany series or combination thereof:
(i) To make or take delivery of, or assume or relinquish, a specifiedamount of one or more underlying interests, or to make a cash settlement inlieu thereof; or
(ii) which has a price, performance, value or cash flow based primarilyupon the actual or expected price, level, performance, value or cash flow ofone or more underlying interests.
(B) Financial instruments include options, warrants, caps, floors,collars, swaps, forwards, future and any other agreements, options orinstruments substantially similar thereto, or any series or combinationthereof.
(4) "Financial instrument transaction" means a transaction involving theuse of one or more financial instruments.
(5) "Floor" means an agreement obligating the seller to make payments tothe buyer in which each payment is based on the amount that a predeterminednumber, sometimes called the floor rate or price, exceeds a reference price,level, performance or value of one or more underlying interests.
(6) "Forward" means an agreement (other than a future) to make or takedelivery of, or effect a cash settlement based on the actual or expected price,level, performance or value of one or more underlying interests.
(7) "Future" means an agreement traded on a qualified exchange, to make ortake delivery of, or effect a cash settlement based on the actual or expectedprice, level, performance or value of one or more underlying interests.
(8) "Hedging transaction" means a financial instrument transaction whichis entered into and maintained to reduce:
(A) The risk of a change in the value, yield, price, cash flow or quantityof assets or liabilities which the insurer has acquired or incurred oranticipates acquiring or incurring; or
(B) the currency exchange-rate risk or the degree of exposure as to assetsor liabilities which an insurer has acquired or incurred or anticipatesacquiring or incurring.
(9) "Income generation transaction" means a financial instrumenttransaction involving the writing of the covered call options which is intendedto generate income or enhance return.
(10) "Option" means an agreement giving the buyer the right to buy orreceive, sell or deliver, enter into, extend or terminate, or effect a cashsettlement based on the actual or expected price, level, performance or valueof one or more underlying interests.
(11) "Potential exposure" means:
(A) As to a futures position, the amount of the initial margin requiredfor that position; or
(B) as to swaps' collars and forwards, .5% times the notional amount timesthe square root of the remaining years of maturity.
(12) "Swap" means an agreement to exchange for net payments at one or moretimes based on the actual or expected price, level, performance or value of oneor more underlying interests.
(13) "Underlying interest" means the assets, other interests, or acombination thereof, underlying a financial instrument, such as any one or moresecurities, currencies, rates, indices, commodities or financial instruments.
(14) "Warrants" means an option to purchase or sell the underlyingsecurities or investments at a given price and time or at a series of pricesand times outlined in the warrant agreement. Warrants may be issued alone orin connection with the sale of other securities, as part of a merger orrecapitalization agreement, or to facilitate divestiture of the securities ofanother corporation.
(c) An insurance company may enter into financial instrument transactionsfor the purpose of hedging except that the transaction shall not cause any ofthe following limits to be exceeded:
(1) The aggregate statement value of options, caps, floors and warrantsnot attached to any other security or investment purchase in hedgingtransactions may not exceed 110% of the excess of such insurer's capital andsurplus as shown on the company's last annual or quarterly report filed withthe commissioner of insurance over the minimum requirements of a new stock ormutual company to qualify for a certificate of authority to write the kind ofinsurance which the insurer is authorized to write;
(2) the aggregate statement value of options, caps and floors written inhedging transactions may not exceed 3% of the insurance company's admittedassets; and
(3) the aggregate potential exposure of collars, swaps, forwards andfutures used in hedging transactions may not exceed 5% of the insurancecompany's admitted assets.
(d) An insurance company may enter into the following types of incomegeneration transactions if:
(1) Selling covered call options on noncallable fixed income securitiesor financial instruments based on fixed income securities, but the aggregatestatement value of assets subject to call during the complete term of the calloptions sold, plus the face value of fixed income securities underlying anyfinancial instrument subject to call, may not exceed 10% of the insurancecompany's admitted assets; and
(2) selling covered call options on equity securities, if the insurancecompany holds in its portfolio the equity securities subject to call during thecomplete term of the call option sold.
(e) Upon request of the insurance company, the commissioner may approveadditional transactions involving the use of financial instruments in excess ofthe limits of subsection (c) or for other risk management purposes, excludingreplication transactions, pursuant to regulations promulgated by thecommissioner.
(f) For the purposes of this section, the value or amount of an investmentacquired 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 reportedfor statutory accounting purposes as determined in accordance with proceduresprescribed in published accounting and valuation standards of the nationalassociation of insurance commissioners (NAIC), including the purposes andprocedures of the securities valuation office, the valuation of securitiesmanual, the accounting practices and procedures manual, the annual statementinstructions or any successor valuation procedures officially adopted by theNAIC.
(g) Prior to engaging in transactions in financial instruments, an insurershall develop and adequately document policies and procedures regardinginvestment strategies and objectives, recordkeeping needs and reportingmatters. Such policies and procedures shall address authorized investments,investment limitations, authorization and approval procedures, accounting andreporting procedures and controls and shall provide for review of activity infinancial instruments by the insurer's board of directors or such board'sdesignee.
Recordkeeping systems must be sufficiently detailed to permit internalauditors and insurance department examiners to determine whether operatingpersonnel have acted in accordance with established policies and procedures, asprovided in this section. Insurer records must identify for each transactionthe related financial instruments contracts.
History: L. 1985, ch. 156, § 2;L. 1996, ch. 83, § 1; July 1.
Article 2a.--INVESTMENTS BY OTHER THAN LIFE INSURANCE COMPANIES
40-2a24.Financial futures contracts; definitions; use for hedgingpurposes; definitions.(a) Any insurance company other than life organized under any law of thisstate may use financial instruments under this section to engage in hedgingtransactions and certain income generation transactions or as these terms maybe further defined in regulations promulgated by the commissioner. Theinsurance company shall be able to demonstrate to the commissioner the intendedhedging characteristics and the ongoing effectiveness of the financialinstrument transaction or combination of the transactions through cash flowtesting or other appropriate analysis.
(b) As used in this section:
(1) "Cap" means an agreement obligating the seller to make payments to thebuyer, each payment based on the amount by which a reference price or level orthe performance or value of one or more underlying interest exceeds apredetermined number, sometimes called the strike rate or price.
(2) "Collar" means an agreement to receive payments as the buyer of anoption, cap or floor and to make payments as the seller of a different option,cap or floor.
(3) (A) "Financial instrument" means an agreement, option, instrument orany series or combination thereof:
(i) To make or take delivery of, or assume or relinquish, a specifiedamount of one or more underlying interests, or to make a cash settlement inlieu thereof; or
(ii) which has a price, performance, value or cash flow based primarilyupon the actual or expected price, level, performance, value or cash flow ofone or more underlying interests.
(B) Financial instruments include options, warrants, caps, floors,collars, swaps, forwards, future and any other agreements, options orinstruments substantially similar thereto, or any series or combinationthereof.
(4) "Financial instrument transaction" means a transaction involving theuse of one or more financial instruments.
(5) "Floor" means an agreement obligating the seller to make payments tothe buyer in which each payment is based on the amount that a predeterminednumber, sometimes called the floor rate or price, exceeds a reference price,level, performance or value of one or more underlying interests.
(6) "Forward" means an agreement (other than a future) to make or takedelivery of, or effect a cash settlement based on the actual or expected price,level, performance or value of one or more underlying interests.
(7) "Future" means an agreement traded on a qualified exchange, to make ortake delivery of, or effect a cash settlement based on the actual or expectedprice, level, performance or value of one or more underlying interests.
(8) "Hedging transaction" means a financial instrument transaction whichis entered into and maintained to reduce:
(A) The risk of a change in the value, yield, price, cash flow or quantityof assets or liabilities which the insurer has acquired or incurred oranticipates acquiring or incurring; or
(B) the currency exchange-rate risk or the degree of exposure as to assetsor liabilities which an insurer has acquired or incurred or anticipatesacquiring or incurring.
(9) "Income generation transaction" means a financial instrumenttransaction involving the writing of the covered call options which is intendedto generate income or enhance return.
(10) "Option" means an agreement giving the buyer the right to buy orreceive, sell or deliver, enter into, extend or terminate, or effect a cashsettlement based on the actual or expected price, level, performance or valueof one or more underlying interests.
(11) "Potential exposure" means:
(A) As to a futures position, the amount of the initial margin requiredfor that position; or
(B) as to swaps' collars and forwards, .5% times the notional amount timesthe square root of the remaining years of maturity.
(12) "Swap" means an agreement to exchange for net payments at one or moretimes based on the actual or expected price, level, performance or value of oneor more underlying interests.
(13) "Underlying interest" means the assets, other interests, or acombination thereof, underlying a financial instrument, such as any one or moresecurities, currencies, rates, indices, commodities or financial instruments.
(14) "Warrants" means an option to purchase or sell the underlyingsecurities or investments at a given price and time or at a series of pricesand times outlined in the warrant agreement. Warrants may be issued alone orin connection with the sale of other securities, as part of a merger orrecapitalization agreement, or to facilitate divestiture of the securities ofanother corporation.
(c) An insurance company may enter into financial instrument transactionsfor the purpose of hedging except that the transaction shall not cause any ofthe following limits to be exceeded:
(1) The aggregate statement value of options, caps, floors and warrantsnot attached to any other security or investment purchase in hedgingtransactions may not exceed 110% of the excess of such insurer's capital andsurplus as shown on the company's last annual or quarterly report filed withthe commissioner of insurance over the minimum requirements of a new stock ormutual company to qualify for a certificate of authority to write the kind ofinsurance which the insurer is authorized to write;
(2) the aggregate statement value of options, caps and floors written inhedging transactions may not exceed 3% of the insurance company's admittedassets; and
(3) the aggregate potential exposure of collars, swaps, forwards andfutures used in hedging transactions may not exceed 5% of the insurancecompany's admitted assets.
(d) An insurance company may enter into the following types of incomegeneration transactions if:
(1) Selling covered call options on noncallable fixed income securitiesor financial instruments based on fixed income securities, but the aggregatestatement value of assets subject to call during the complete term of the calloptions sold, plus the face value of fixed income securities underlying anyfinancial instrument subject to call, may not exceed 10% of the insurancecompany's admitted assets; and
(2) selling covered call options on equity securities, if the insurancecompany holds in its portfolio the equity securities subject to call during thecomplete term of the call option sold.
(e) Upon request of the insurance company, the commissioner may approveadditional transactions involving the use of financial instruments in excess ofthe limits of subsection (c) or for other risk management purposes, excludingreplication transactions, pursuant to regulations promulgated by thecommissioner.
(f) For the purposes of this section, the value or amount of an investmentacquired 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 reportedfor statutory accounting purposes as determined in accordance with proceduresprescribed in published accounting and valuation standards of the nationalassociation of insurance commissioners (NAIC), including the purposes andprocedures of the securities valuation office, the valuation of securitiesmanual, the accounting practices and procedures manual, the annual statementinstructions or any successor valuation procedures officially adopted by theNAIC.
(g) Prior to engaging in transactions in financial instruments, an insurershall develop and adequately document policies and procedures regardinginvestment strategies and objectives, recordkeeping needs and reportingmatters. Such policies and procedures shall address authorized investments,investment limitations, authorization and approval procedures, accounting andreporting procedures and controls and shall provide for review of activity infinancial instruments by the insurer's board of directors or such board'sdesignee.
Recordkeeping systems must be sufficiently detailed to permit internalauditors and insurance department examiners to determine whether operatingpersonnel have acted in accordance with established policies and procedures, asprovided in this section. Insurer records must identify for each transactionthe related financial instruments contracts.
History: L. 1985, ch. 156, § 2;L. 1996, ch. 83, § 1; July 1.
