40-2a21. Securities lending, repurchase and reverse repurchase transactions; requirements; definitions.

40-2a21

Chapter 40.--INSURANCE Article 2a.--INVESTMENTS BY OTHER THAN LIFE INSURANCE COMPANIES

      40-2a21.   Securities lending, repurchase and reverse repurchasetransactions; requirements; definitions.As used in this section:

      (a) (1)   Acceptable collateral means:

      (A)   With respect to securities lending transactions, cash, cash equivalents,letters of credit, direct obligations of or securities that are fullyguaranteed as to principal and interest by, the government of the United Statesor any agency of the United States, specifically including the federal nationalmortgage association and the federal home loan mortgage corporation, and withrespect to lending foreign securities, sovereign debt rated 1 by the SVO, allto the extent authorized by K.S.A. 40-2a01 et seq. and amendmentsthereto;

      (B)   with respect to repurchase transactions, cash, cash equivalents anddirect obligations of, or securities that are fully guaranteed as to principaland interest by the government of the United States or any agency of the UnitedStates specifically including the federal national mortgage association and thefederal home loan mortgage corporation, all to the extent authorized by K.S.A.40-2a01, et seq. and amendments thereto; and

      (C)   with respect to reverse repurchase transactions, cash and cashequivalents to the extent authorized by K.S.A. 40-2a01 et seq. andamendments thereto.

      (2)   "Cash equivalents" means short-term, highly rated and highly liquidinvestments or securities readily convertible to known amounts of cash withoutpenalty and so near maturity that they present insignificant risk of change invalue. For purposes of this definition:

      (A)   "Short-term" means investments with a remaining term to maturity of 90days or less;

      (B)   "highly rated" means an investment rated "P-1" by Moody's Investor'sService, Inc. or "A-1" by Standard and Poor's, or its equivalent rating by anationally recognized statistical rating organization recognized by the SVO;and

      (C)   cash equivalents include government money market mutual funds andmoney market mutual funds rated 1 by the SVO.

      (3)   "Equivalent securities" means:

      (A)   In a securities lending transaction, securities that are identical tothe loaned securities including the amount thereof, except as to certificatenumber if held in physical form, provided that if any different security shallbe exchanged for any loaned security by recapitalization, merger, consolidationor other corporate action, such different security shall be deemed to be theloaned security;

      (B)   in a repurchase transaction, securities that are identical to thepurchased securities including the amount of the purchased securities, exceptas to certificate number if held in physical form; and

      (C)   in a reverse repurchase transaction, securities that are identical tothe sold securities including the amount of the sold securities, except as tocertificate number if held in physical form.

      (4)   "Letters of credit" means clean, irrevocable and unconditional lettersof credit issued or confirmed by, and payable and presentable at, financialinstitutions on the list of financial institutions meeting the standards forissuing letters of credit pursuant to the purposes and procedures of thesecurities valuation office or any successor publication. To constituteacceptable collateral for the purposes of this section, a letter of credit musthave an expiration date beyond the term of the subject transaction.

      (5)   "Market value" means for the purpose of this section:

      (A)   With respect to cash and letters of credit, the amounts thereof; and

      (B)   with respect to any security as of any date, the price for the securityon that date obtained from a generally recognized source, or the most recentquotation from such a source, plus accrued but unpaid income thereon to theextent not included in such price as of that date.

      (6)   "Qualified business entity" means a business entity which is, or is asubsidiary or affiliate of:

      (A)   An issuer of obligations or preferred stock which are rated 1 or 2 bythe SVO or an issuer of obligations, preferred stock or derivative instrumentswhich are rated the equivalent of 1 or 2 by the SVO or by a nationallyrecognized statistical rating organization recognized by the SVO; or

      (B)   a primary dealer in United States government securities, asrecognized by the federal reserve bank of New York.

      (7)   "Repurchase transaction" means a transaction in which an insurerpurchases securities from a business entity which is obligated to repurchasethe purchased securities or equivalent securities from the insurer at aspecified price, and either within a specified period of time or upon demand.

      (8)   "Reverse repurchase transaction" means a transaction in which an insurersells securities to a business entity and is obligated to repurchase the soldsecurities or equivalent securities from the business entity at a specifiedprice and either within a specified period of time or upon demand.

      (9)   "Securities lending transaction" means a transaction in whichsecurities are loaned by an insurer to a business entity which is obligated toreturn the loaned securities or equivalent securities to the insurer, within aspecified period of time or upon demand.

      (10)   "Substantially similar securities" means securities that meet all thecriteria for substantially similar securities specified in the NAIC accountingpractices and procedures manual, as amended, and in an amount thatconstitutes good delivery form.

      (11)   "SVO" means the securities valuation office of the national associationof insurance commissioners or any successor office established by the nationalassociation of insurance commissioners.

      (b)   Any property and casualty insurance company organized under any law ofthis state may enter into securities lending, repurchase and reverse repurchasetransactions, subject to the following requirements:

      (1)   The insurer's board of directors shall adopt a resolution authorizinginvestments under this section and a written plan which specifies guidelinesand objectives to be followed, such as:

      (A)   A description of how cash received will be invested or used for generalcorporate purposes of the insurer;

      (B)   operational procedures to manage interest rate risk, counterpartydefault risk and the use of acceptable collateral in a manner that reflects theliquidity needs of the transaction; and

      (C)   the extent to which an insurer may engage in these transactions.

      (2)   The insurer shall enter into a written agreement for all transactionsauthorized in this section. Such agreementshall adequately identify each security to which the agreement applies andshall require that each transaction terminate on a specified date no more thanone year from its inception or upon earlier demand of the insurer. In arepurchase transaction, the agreement must also state that in the event ofdefault by the party agreeing to repurchase the securities described in theagreement at the terms contained in the agreement, title to the describedsecurities must pass immediately to the insurance company without recourse. Such agreement shall be with the counterparty business entity. For securitieslending transactions the agreement may be with an agent acting on behalf of theinsurer, if such agent is a qualified business entity, and if such agreement:

      (A)   Requires the agent to enter into separate agreements with eachcounterparty that are consistent with the requirements of this section; and

      (B)   prohibits securities lending transactions under the agreement with theagent or its affiliates.

      (3)   Cash received in a transaction under this section shall be invested inaccordance with K.S.A. 40-2a01 et seq. and amendments thereto, and in amanner that recognizes the liquidity needs of the transaction, or shall be usedby the insurer for its general corporate purposes. For so long as thetransaction remains outstanding, the insurer, its agent or custodian shallmaintain, in the United States, as to acceptable collateral received in atransaction under this section, either physically or through book entrysystems of the federal reserve or through a clearing corporation as permittedby K.S.A. 40-2a20 and amendments thereto: (A) Possession of the acceptablecollateral; or (B) a perfectedsecurity interest in the acceptable collateral.

      (4)   For purposes of calculating the limitations of K.S.A. 40-2a01 etseq. and amendments thereto, securities lending, repurchase and reverserepurchase transactions shall not be considered investments inthe counterparty, or in any issue of securities issued by the counterparty, orin the jurisdiction in which the counterparty is located. For purposes ofcalculations made to determine compliance with this part 4 of subsection (b),no effect will be given to the insurer's future obligation to resell securitiesin the case of a repurchase transaction, or to repurchase securities in thecase of a reverse repurchase transaction. An insurer may not enter into atransaction under this section if, as a result of and after giving effect tothe transaction:

      (A)   The aggregate amount of all securities then loaned or sold to, orpurchased from, any one business entity pursuant to this section would exceed5% of its admitted assets. In calculating the amount sold to or purchased froma business entity pursuant to repurchase or reverse repurchase transactions,effect may be given to netting provisions under a master written agreement; or

      (B)   the aggregate amount of all securities then loaned or sold to, orpurchased from, all business entities under this section, without the effect ofnetting referred to in subpart (A), would exceed 40% of its admitted assets.

      (5)   In a securities lending transaction, the insurer shall receiveacceptable collateral having a market value as of the transaction date at leastequal to 102% of the market value of the securities loaned by the insurer insuch transaction as of that date. If at any time the market value of suchacceptable collateral is less than the market value of the loaned securities,the business entity to which the securities are loaned shall be obligated todeliver additional acceptable collateral, the market value of which, togetherwith the market value of all acceptable collateral then held in connectionwith the transaction, equals at least 102% of the market value of the loanedsecurities.

      (6)   In a reverse repurchase transaction, the insurer shall receiveacceptable collateral having a marketvalue as of the transaction date at least equal to 95% of the market value ofthe securities transferred by the insurer in such transaction as of that date. If at any time the market value of such acceptable collateral is less than 95%of the market value of the securities so transferred, the business entity shallbe obligated to deliver additional acceptable collateral, the market value ofwhich, together with the market value of all acceptable collateral then held inconnection with the transaction, at least equals 95% of the market value of thetransferred securities.

      (7)   In a repurchase transaction, the insurer shall receive as acceptablecollateral transferred securities having a market value at least equal to 102%of the purchase price paid by the insurer for such securities. If at any timethe market value of such acceptable collateral is less than 100% of thepurchase price paid by the insurer, the business entity shall be obligated toprovide additional acceptable collateral, the market value of which, togetherwith the market value of all acceptable collateral then held in connection withthe transaction, equals at least 102% of such purchase price. Securitiesacquired by an insurer in a repurchase transaction shall not be sold in areverse repurchase transaction, loaned in a securities lending transaction, orotherwise pledged.

      (c)   Unless otherwise specified, an investment limitation computed on thebasis of an insurer's admitted assets or capital and surplus shall relate tothe amount required as shown on the insurer's last annual report as filedwith the commissioner of insurance or a more recent quarterly financialstatement as filed with the commissioner, on a form prescribed by the nationalassociation of insurance commissioners, within 45 days following the end of thecalendar quarter to which the interim statement pertains. For purposes ofcomputing any limitation based upon admitted assets, the insurer shall deductfrom the amount of its admitted assets the amount of the liability recorded onsuch statutory balance sheet for:

      (1)   The return of acceptable collateral received in a reverse repurchase ora securities lending transaction; and

      (2)   the amount reported as borrowed money in the most recently filedfinancial statement to the extent not included in subpart (1).

      History:   L. 1982, ch. 201, § 2;L. 1996, ch. 27, § 1; July 1.