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
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
organized under any law of this state may use financial instruments
this section to engage in hedging transactions and certain income
eration transactions or as these terms may be further defined in
tions promulgated by the commissioner. The life insurance company
be able to demonstrate to the commissioner the intended hedging
acteristics and the ongoing effectiveness of the financial
action or combination of the transactions through cash flow testing
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
erence price or level or the performance or value of one or more
lying interest exceeds a predetermined number, sometimes called
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
option, cap or floor.
(3) "Counterparty" means the business
entity with which a life in-
surance company enters into financial instrument
(4) "Crediting basis amount" means the
amount of interest credited
to an insured's account value for the percentage of change on an
(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
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
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
ments substantially similar thereto, or any series or combination
(6) "Financial instrument transaction" means a
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
that a predetermined number, sometimes called the floor rate or
exceeds a reference price, level, performance or value of one or
(6) (8) "Forward"
means an agreement (other than a future) to make
or take delivery of, or effect a cash settlement based on the
expected price, level, performance or value of one or more
(7) (9) "Future"
means an agreement traded on a qualified exchange,
to make or take delivery of, or effect a cash settlement based on
or expected price, level, performance or value of one or more
(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
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
acquiring or incurring.
(9) (11) "Income
generation transaction" means a financial instru-
ment transaction involving the writing of covered call options
intended to generate income or enhance return.
(12) "Option" means an agreement giving the buyer the
buy or receive, sell or deliver, enter into, extend or terminate,
a cash settlement based on the actual or expected price, level,
ance or value of one or more underlying interests.
(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
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,
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.
(17) "Underlying interest" means the assets, other
a combination thereof, underlying a financial instrument, such as
or more securities, currencies, rates, indices, commodities or
(18) "Warrants" means an option to purchase or sell the
lying securities or investments at a given price and time or at a
prices and times outlined in the warrant agreement. Warrants may
issued alone or in connection with the sale of other securities, as
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
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
transactions may not exceed 110% of the excess of such insurer's
and surplus as shown on the company's last annual or quarterly
filed with the commissioner of insurance over the minimum
of a new stock or mutual company to qualify for a certificate of
to write the kind of insurance which the insurer is authorized to
(2) the aggregate statement value of
options, caps and floors written
in hedging transactions may not exceed 3% of the life insurance
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
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
gate statement value of assets subject to call during the complete
the call options sold, plus the face value of fixed income
derlying any financial instrument subject to call, may not exceed
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
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
regarding income generation transactions shall not apply to any
ments made by a life insurance company where such investments
only to hedge the crediting basis amount an insured receives on
ular insurance policy which is determined by an underlying
vided, however, that such investments shall not in the aggregate
exceed 10% of the life insurance company's admitted assets as
the company's last annual or quarterly report, without the prior
approval of the commissioner of insurance. All investments made
to this subsection shall only be made with counterparties that
rating designated as "1" by the national association of
missioners (NAIC) in its most recently published valuations of
manual or supplement thereto, or its equivalent rating by a
recognized statistical rating organization recognized by the
(e) (f) Upon
request of the life insurance company, the commissioner
may approve additional transactions involving the use of financial
ments in excess of the limits of subsection (c) or for other risk
ment purposes, excluding replication transactions, pursuant to
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
in this code, shall be the value at which assets of an insurer are
to be reported for statutory accounting purposes as determined in
cordance with procedures prescribed in published accounting and
ation standards of the national association of insurance
(NAIC), including the purposes and procedures of the securities
office, the valuation of securities manual, the accounting
procedures manual, the annual statement instructions or any
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
regarding investment strategies and objectives, recordkeeping needs
reporting matters. Such policies and procedures shall address
investments, investment limitations, authorization and approval
dures, accounting and reporting procedures and controls and shall
vide for review of activity in financial instruments by the
of directors or such board's designee.
Recordkeeping systems must be sufficiently
detailed to permit internal
auditors and insurance department examiners to determine whether
erating personnel have acted in accordance with established
procedures, as provided in this section. Insurer records must
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.