304.7-419 Derivative transactions -- Hedging -- Income generation -- Counterparty
exposure amounts.
An insurer may, directly or indirectly through an investment subsidiary, engage in
derivative transactions under this section under the following conditions:
(1) (a) An insurer may use derivative instruments under this section to engage in
hedging transactions and certain income generation transactions, as these
terms may be further defined in regulations promulgated by the commissioner;
and
(b) An insurer shall be able to demonstrate to the commissioner the intended
hedging characteristics and the ongoing effectiveness of the derivative
transaction or combination of the transactions through cash flow testing or
other appropriate analyses.
(2) An insurer may enter into hedging transactions under this section if, as a result of
and after giving effect to the transaction:
(a) The aggregate statement value of options, caps, floors, and warrants not
attached to another financial instrument purchased and used in hedging
transactions does not exceed seven and one-half percent (7.5%) of its admitted
assets;
(b) The aggregate statement value of options, caps, and floors written in hedging
transactions does not exceed three percent (3%) of its admitted assets; and
(c) The aggregate potential exposure of collars, swaps, forwards, and futures used
in hedging transactions does not exceed six and one-half percent (6.5%) of its
admitted assets.
(3) An insurer may only enter into the following types of income generation
transactions if, as a result of and after giving effect to the transactions, the aggregate
statement value of the fixed income assets that are subject to call or that generate
the cash flows for payments under the caps or floors, plus the face value of fixed
income securities underlying a derivative instrument subject to call, plus the amount
of the purchase obligations under the puts, does not exceed ten percent (10%) of its
admitted assets:
(a) Sales of covered call options on noncallable fixed income securities, callable
fixed income securities if the option expires by its terms prior to the end of the
noncallable period, or derivative instruments based on fixed income
securities;
(b) Sales of covered call options on equity securities, if the insurer holds in its
portfolio, or can immediately acquire through the exercise of options,
warrants, or conversion rights already owned, the equity securities subject to
call during the complete term of the call options sold;
(c) Sales of covered puts on investments that the insurer is permitted to acquire
under this subtitle, if the insurer has escrowed or entered into a custodian
agreement segregating cash or cash equivalents with a market value equal to
the amount of its purchase obligations under the put during the complete term
of the put option sold; or
(d)
(4)
(5)
Sales of covered caps or floors, if the insurer holds in its portfolio the
investments generating the cash flow to make the required payments under the
caps or floors during the complete term that the cap or floor is outstanding.
An insurer shall include all counterparty exposure amounts in determining
compliance with the limitations of KRS 304.7-403.
In accordance with administrative regulations promulgated under KRS 304.7-367,
the commissioner may approve additional transactions involving the use of
derivative instruments in excess of the limits of subsection (2) of this section or for
other risk management purposes under administrative regulations promulgated by
the commissioner, but replication transactions shall not be permitted for other than
risk management purposes.
Effective: July 15, 2010
History: Amended 2010 Ky. Acts ch. 24, sec. 1019, effective July 15, 2010. -- Created
2000 Ky. Acts ch. 388, sec. 16, effective July 14, 2000.
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