Current through February 24, 2025
(a) A property and
casualty insurer may, directly or indirectly through an investment subsidiary,
engage in a derivative transaction under the following conditions:
(1) a property and casualty insurer may use a
derivative instrument to engage in a hedging transaction or in an income
generation transaction;
(2) a
property and casualty insurer shall demonstrate to the director 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 as required under
3
AAC 21.213.
(b) A property and casualty insurer may not
enter into a hedging transaction if, as a result of and after giving effect to
the transaction, the aggregate
(1) admitted
asset value of options, caps, floors, and warrants not attached to another
financial instrument purchased and used in hedging transactions exceeds seven
and one-half percent of the property and casualty insurer's admitted
assets;
(2) admitted asset value of
options, caps, and floors written in hedging transactions exceeds three percent
of the property and casualty insurer's admitted assets; or
(3) potential exposure of collars, swaps,
forwards, and futures used in hedging transactions exceeds six and one-half
percent of the property and casualty insurer's admitted assets.
(c) Except as otherwise provided
in (d) of this section, a property and casualty insurer may not enter into an
income generation transaction if, as a result of and after giving effect to the
transaction, the aggregate admitted asset value of the fixed income assets that
are subject to call or that generate the cash flows for payments under caps or
floors, the face value of fixed income securities underlying a derivative
instrument subject to call, and the amount of the purchase obligations under
the puts exceeds 10 percent of the property and casualty insurer's admitted
assets.
(d) A property and casualty
insurer may only enter into income generation transactions of one or more of
the following types:
(1) a sale of a covered
call option on a
(A) noncallable fixed income
security;
(B) callable fixed income
security if the option expires by the option's terms before the end of the
noncallable period; or
(C)
derivative instrument based on a fixed income security;
(2) a sale of a covered call option on an
equity security if the property and casualty insurer
(A) holds the equity security in the property
and casualty insurer's portfolio; or
(B) through the exercise of an option,
warrant, or conversion right already owned, has the right to acquire
immediately the equity security subject to call during the complete term of the
call option sold;
(3) a
sale of a covered put on an investment that the property and casualty insurer
is permitted to acquire under
3
AAC 21.201 -
3
AAC 21.399 if the property and casualty insurer has
escrowed, or has entered into a custodian agreement segregating cash or cash
equivalents with a market value equal to the amount of the property and
casualty insurer's purchase obligations under the put during the complete term
of the put option sold;
(4) a sale
of a covered cap or floor if the property and casualty insurer holds in the
property and casualty insurer's portfolio the investments generating the cash
flow to make the required payments under the cap or floor during the complete
term that the cap or floor is outstanding.
(e) A property and casualty insurer shall
include all counterparty exposure amounts in determining compliance with the
limitations of
3
AAC 21.325.
(f) A replication transaction is not
permitted for other than a risk management purpose.
Authority:AS
21.06.090
AS 21.18.010
AS 21.18.030
AS 21.18.040
AS 21.21.010
AS 21.21.020
AS 21.21.255
AS
21.21.420
