As used in this chapter:

(1) "Acceptable collateral" means:

(a) cash, cash equivalents, letters of credit, or direct obligations of, or securities that are fully guaranteed as to principal and interest by the government of the United States, an agency of the United States, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation in respect to securities lending transactions, repurchase transactions, and reverse repurchase transactions and for the purpose of calculating counterparty exposure amount; and

(b) sovereign debt rated 1 by the SVO or an equivalent rating by a nationally recognized statistical rating organization recognized by the SVO as to foreign securities lending transactions.

(2) "Acceptable private mortgage insurance" means insurance written by a private insurer protecting a mortgage lender against loss occasioned by a mortgage loan default and issued by a licensed mortgage insurance company, with a SVO 1 designation or a rating issued by a nationally recognized statistical rating organization equivalent to a SVO 1 designation, that covers losses to an eighty percent loan-to-value ratio.

(3) "Accident and health insurance" means protection that provides payment of benefits for covered sickness or accidental injury, excluding credit insurance, disability insurance, accidental death and dismemberment insurance, and long-term care insurance.

(4) "Accident and health insurer" means a licensed life or health insurer or health service corporation whose insurance premiums and required statutory reserves for accident and health insurance are at least ninety-five percent of total premium consideration or total statutory required reserves, respectively.

(5) "Admitted asset" means an asset that is identified specifically as an admitted asset within the NAIC accounting manual or is not identified specifically as a nonadmitted asset within the NAIC accounting manual, excluding assets of separate accounts because the investments and investment practices of separate accounts are not subject to the provisions of this chapter.

(6) "Affiliate" means, in respect to a person, another person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person.

(7) "Asset-backed security" means a security or other instrument, excluding a mutual fund, evidencing an interest in or the right to receive payments from or payable from distributions on an asset, a pool of assets, or specifically divisible cash flows that are transferred legally to a trust or another special purpose bankruptcy-remote business entity, on the following conditions:

(a) the trust or other business entity is established for the sole purpose of acquiring specific types of assets or rights to cash flows, issuing securities and other instruments representing an interest in or right to receive cash flows from those assets or rights, and engaging in activities required to service the assets or rights and any credit enhancement or support features held by the trust or other business entity; and

(b) the sole assets of the trust or other business entity are interest bearing obligations or other contractual obligations representing the right to receive payment from the cash flows from the assets or rights. The existence of credit enhancements such as letters of credit or guarantees or support features such as swap agreements do not cause a security or other instrument to be ineligible as an asset-backed security.

(8) "Business entity" means a sole proprietorship, corporation, limited liability company, association, general or limited partnership, joint stock company, joint venture, mutual fund, bank, trust, real estate investment trust, joint tenancy, or other similar form of business organization, whether organized for-profit or not-for-profit.

(9) "Cap" means an agreement obligating the seller to make payments to the buyer, with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number, sometimes called the "strike rate" or "strike price".

(10) "Capital and surplus" means the sum of the capital and surplus of the insurer required to be shown on the statutory financial statement of the insurer filed most recently with the director.

(11) "Cash equivalents" means highly rated, highly liquid, and readily marketable obligations that are convertible readily into known amounts of cash without penalty and have a remaining term to maturity of one year or less. For purposes of this definition, "highly rated" means an investment rated "P-1" by Moody's Investors Service, Incorporated, or "A-1" by the Standard and Poor's Division of The McGraw Hill Companies, Incorporated, or an equivalent rating by a nationally recognized statistical rating organization recognized by the SVO.

(12) "Class one bond mutual fund" means a mutual fund that is qualified for investment using the bond class one reserve factor of the SVO procedures manual.

(13) "Class one money market mutual fund" means a money market mutual fund that is qualified for investment using the bond class one reserve factor of the SVO procedures manual.

(14) "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 different option, cap, or floor.

(15) "Commercial mortgage loan" means a mortgage loan other than a residential mortgage loan.

(16) "Construction loan" means a loan of less than three years in term, made for financing the cost of construction of a building or other improvement to real estate, that is secured by the real estate.

(17) "Control" means the possession, directly or indirectly, by a person of the power to direct or cause the direction of the management and policies of another person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control is presumed to exist if a person, directly or indirectly, owns, controls, or holds with the power to vote or holds proxies representing ten percent or more of the voting securities of another person. This presumption may be rebutted by a showing that control does not exist in fact. The director may determine, after furnishing all interested persons notice and an opportunity to be heard and making specific findings of fact to support the determination, that control exists in fact, notwithstanding the absence of a presumption to that effect.

(18) "Counterparty" means the business entity that is the other party to an investment practices transaction with the insurer or, as to a securities lending transaction, the custodian bank or agent, if any, acting on behalf of the insurer.

(19)(a) "Counterparty exposure" or "counterparty exposure amount" means for an over-the-counter derivative instrument:

(i) not entered into pursuant to a written master agreement that provides for netting of payments owed by the respective parties:

(A) the market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or

(B) zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer; and

(ii) entered into pursuant to a written master agreement that provides for netting of payments owed by the respective parties, if the domiciliary jurisdiction of the counterparty is either within the United States or within a foreign jurisdiction listed as eligible for netting in the SVO procedures manual, the greater of:

(A) zero; and

(B) the net sum payable to the insurer in connection with all derivative instruments subject to the written master agreement upon their liquidation if the counterparty defaults pursuant to the master agreement, assuming there are no conditions precedent to the obligations of the counterparty to make the payment and no setoff of amounts payable pursuant to any other instrument or agreement.

(b) For purposes of this definition, "market value" or the "net sum payable" is determined at the end of the most recent quarter of the fiscal year of the insurer and must be reduced by the market value of acceptable collateral held by the insurer or a custodian or escrow agent on behalf of the insurer.

(20) "Credit tenant loan" has the same meaning as it has in the SVO procedures manual.

(21)(a) "Derivative instrument" means an agreement, option, or instrument, or a series or combination of any of them:

(i) to make or take delivery of, assume, or relinquish a specified amount of one or more underlying interests, or to make a cash settlement instead of it; or

(ii) that has a price, performance, value, or cash flow based primarily upon the actual or expected price, yield, level, performance, value, or cash flow of one or more underlying interests.

(b) For purposes of this definition "derivative instrument" includes options, warrants not attached to another financial instrument purchased by the insurer, caps, floors, collars, swaps, forwards, futures, and other substantially similar agreements, options, or instruments, or a series or combination of any of them. "Derivative instrument" does not include collateralized mortgage obligations, other asset-backed securities, principal-protected structured securities, floating rate securities, or instruments in which an insurer otherwise is authorized to invest or that an insurer otherwise is authorized to receive pursuant to this chapter, other than pursuant to Section 38-12-300 or 38-12-510, and any debt obligations of the insurer.

(22) "Derivative transaction" means a transaction involving the use of one or more derivative instruments. For purposes of Sections 38-12-300 and 38-12-510, dollar roll transactions, repurchase transactions, reverse repurchase transactions, and securities lending transactions are not considered derivative transactions.

(23) "Direct" or "directly," when used in connection with an obligation, means that the designated obligor is primarily liable on the instrument representing the obligation.

(24) "Dollar roll transaction" means two simultaneous transactions with different settlement dates no more than ninety-six days apart, so that in the transaction with the earlier settlement date an insurer sells to a counterparty, and in the other transaction the insurer is obligated to purchase from the same counterparty, substantially similar securities of the following types:

(a) asset-backed securities issued, assumed, or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or their respective successors; and

(b) other asset-backed securities referred to in Section 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. Section 77r-1), as amended.

(25) "Domestic jurisdiction" means the United States, Canada, or a state, province, or political subdivision of them.

(26) "Equity interest" means any of the following that are not rated credit instruments:

(a) common stock;

(b) preferred stock;

(c) trust certificate;

(d) equity investment in an investment company other than a money market mutual fund or a class one bond mutual fund;

(e) investment in a common trust fund of a bank regulated by a federal or state agency;

(f) an ownership interest in minerals, oil, or gas, the rights to which have been separated from the underlying fee interest in the real estate where the minerals, oil, or gas are located;

(g) instruments which are mandatorily, or at the option of the issuer, convertible to equity;

(h) limited partnership interests and those general partnership interests authorized by Section 38-12-60(A)(4);

(i) member interests in limited liability companies;

(j) warrants or other rights to acquire equity interests that are created by the owner or issuer of the equity to be acquired; or

(k) instruments that would be rated credit instruments except for the provisions of item (73)(b).

(27) "Equivalent securities" means securities that are identical to the:

(a) loaned securities in all features including the amount of the loaned securities, except as to certificate number if held in physical form, but if a different security is exchanged for a loaned security by recapitalization, merger, consolidation, or other corporate action, the different security is considered to be the loaned security, in a securities lending transaction;

(b) purchased securities in all features including the amount of the purchased securities, except as to the certificate number if held in physical form, in a repurchase transaction; or

(c) sold securities in all features including the amount of the sold securities, except as to the certificate number if held in physical form, in a reverse repurchase transaction.

(28) "Floor" means an agreement obligating the seller to make payments to the buyer in which each payment is based on the amount by which a predetermined number, sometimes called the floor rate or price, exceeds a reference price, level, performance, or value of one or more underlying interests.

(29) "Foreign currency" means a currency other than that of a domestic jurisdiction.

(30)(a) "Foreign investment" or "foreign investment practice" means an investment or investment practice in a foreign jurisdiction, an investment practice with a person domiciled in a foreign jurisdiction, or an investment in a person, real estate, or asset domiciled in a foreign jurisdiction. An investment or investment practice is not considered to be foreign if the issuing person, counterparty, qualified primary credit source, or qualified guarantor is a domestic jurisdiction or a person domiciled in a domestic jurisdiction, unless the:

(i) counterparty or the issuing person is a shell business entity; and

(ii) investment or investment practice is not assumed, accepted, guaranteed, or insured or otherwise backed by a domestic jurisdiction or a person domiciled in a domestic jurisdiction that is not a shell business entity.

(b) For purposes of this definition:

(i) "Shell business entity" means a business entity having no economic substance, except as a vehicle for owning interests in assets issued, owned, or previously owned by a person domiciled in a foreign jurisdiction.

(ii) "Qualified guarantor" means a guarantor against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action may be brought in a domestic jurisdiction.

(iii) "Qualified primary credit source" means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action may be brought in a domestic jurisdiction.

(31) "Foreign jurisdiction" means a jurisdiction other than a domestic jurisdiction.

(32) "Forward" means an agreement, other than a future, to make or take delivery in the future of, or effect a cash settlement based on the actual or expected price, level, performance, or value of, one or more underlying interests. "Forward" does not mean spot transactions effected within customary settlement periods, when issued purchases, or other similar cash market transactions.

(33) "Future" means an agreement traded on a qualified exchange or qualified foreign exchange to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance, or value of, one or more underlying interests. "Future" includes an insurance future.

(34) "Futures exchange" means a qualified foreign exchange or an exchange, contract market, or board of trade on which trading in futures is conducted that the Commodities Futures Trading Commission or its successor has authorized for futures trading in the United States.

(35) "Government money market mutual fund" means a money market mutual fund that at all times:

(a) invests only in obligations issued, guaranteed, or insured by the federal government of the United States or collateralized repurchase agreements composed of these obligations; and

(b) qualifies for investment without a reserve pursuant to the SVO procedures manual.

(36) "Government sponsored enterprise" means a:

(a) governmental agency; or

(b) corporation, limited liability company, association, partnership, joint stock company, joint venture, trust, or other entity or instrumentality organized pursuant to the laws of a domestic jurisdiction to accomplish a public policy or other governmental purpose.

(37) "Guaranteed or insured", when used in connection with an obligation acquired pursuant to this chapter, means that the guarantor or insurer has agreed to:

(a) perform or insure the obligation of the obligor or purchase the obligation; or

(b) be obligated unconditionally until the obligation is repaid to maintain in the obligor a minimum net worth, fixed charge coverage, stockholders' equity, or sufficient liquidity to enable the obligor to pay the obligation in full.

(38) "Hedging transaction" means a derivative transaction that is entered into and maintained to reduce the:

(a) risk of a change in the value, yield, price, cash flow, or quantity of assets or liabilities, or a portfolio of assets or liabilities or both, that an insurer has acquired or incurred or anticipates acquiring or incurring; or

(b) currency exchange rate risk related to assets or liabilities, or a portfolio of assets or liabilities, or both of them, that an insurer has acquired or incurred or anticipates acquiring or incurring.

(39) "High grade investment" means a rated credit instrument rated 1, 2, P1, P2, PFS1, or PFS2 by the SVO or an equivalent rating by a nationally recognized statistical rating organization recognized by the SVO.

(40) "Income", as to a security, means interest, accrual of discount, dividends, or other distributions, such as rights, tax credits, assessment credits, warrants, and distributions in kind.

(41) "Income generation transaction" means a derivative transaction that is intended to generate income or enhance return. A derivative transaction that is entered into as a hedging transaction or a replication transaction is not an income generation transaction.

(42) "Initial margin" means the amount of cash, securities, or other consideration initially required to be deposited to establish a futures position.

(43) "Insurance future" means a future relating to an index or pool that is based on insurance-related items.

(44) "Insurance futures option" means an option on an insurance future.

(45) "Investment company" means an investment company as defined in Section 3(a) of the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), as amended, and a person described in Section 3(c) of that act.

(46) "Investment company series" means an investment portfolio of an investment company organized as a series company to which portfolio assets of the investment company have been allocated specifically.

(47) "Investment practices" means transactions of the types described in Sections 38-12-280, 38-12-300, 38-12-490, and 38-12-510.

(48) "Investment affiliate" means a subsidiary of an insurer or a direct or indirect subsidiary of the insurer's parent company (parent) that is engaged or organized to engage exclusively in the ownership and management of assets authorized as investments for the insurer, if the affiliate agrees to limit its investment in any asset so that its investments will not cause the amount of the total investment of the insurer to exceed the investment limitations or avoid other provisions of this chapter applicable to the insurer. As used in this item, the total investment of the insurer includes:

(a) direct investment by the insurer in an asset;

(b) the insurer's proportionate share of an investment in an asset by an investment affiliate of the insurer, calculated by multiplying the amount of the subsidiary's investment by the percentage of the insurer's ownership interest in the subsidiary; and

(c) the insurer's proportionate share of an investment in an asset by an investment affiliate of the insurer other than a subsidiary of the insurer, calculated by multiplying the amount of the investment affiliate's investment by a fraction, the numerator of which must be the aggregate amount of investments held and investment practices engaged in by the investment affiliate on behalf of the insurer and the denominator of which must be the aggregate amount of investments held and investment practices engaged in by the investment affiliate on behalf of all insurance company subsidiaries of the parent.

(49) "Investment strategy" means the techniques and methods used by an insurer to meet its investment objectives, such as active bond portfolio management, passive bond portfolio management, interest rate anticipation, growth investing, and value investing.

(50) "Letter of credit" means a clean, irrevocable, and unconditional letter of credit issued or confirmed by, and payable and presentable at, a financial institution on the list of financial institutions meeting the standards for issuing letters of credit pursuant to the SVO procedures manual. A letter of credit must have an expiration date beyond the term of the subject transaction to constitute acceptable collateral for the purposes of Sections 38-12-280 and 38-12-490.

(51) "Limited liability company" means a business organization, excluding partnerships and ordinary business corporations, organized or operating pursuant to the laws of the United States or a state of the United States that limits the personal liability of investors to the equity investment of the investor in the business entity.

(52) "Lower grade investment" means a rated credit instrument rated 4, 5, 6, P4, P5, P6, PFS4, PFS5, or PFS6 by the SVO or an equivalent rating by a nationally recognized statistical rating organization recognized by the SVO.

(53) "Market value" means:

(a) the amount of cash or a letter of credit; or

(b) the price of a security or derivative instrument on any date obtained from a generally recognized source or the most recent quotation from the source or, to the extent no generally recognized source exists, the price for the security or derivative instrument as determined pursuant to the terms of the instrument or in good faith by the parties to a transaction, plus accrued but unpaid income on the security or derivative instrument to the extent that income is not included in the price as of the date that market value is determined.

(54) "Medium grade investment" means a rated credit instrument that at the time of acquisition by the insurer is rated 3, P3 or PSF3 by the SVO or an equivalent rating by a nationally recognized statistical rating organization recognized by the SVO.

(55) "Money market mutual fund" means a mutual fund that meets the conditions of 17 Code of Federal Regulations Par. 270.2a-7, pursuant to the Investment Company Act of 1940 (15 U.S.C. Sections 80a-1 et seq.) as amended.

(56) "Mortgage loan" means an obligation secured by a mortgage, deed of trust, trust deed, or other consensual lien on real estate.

(57) "Multilateral development bank" means an international development organization of which the United States is a member.

(58) "Mutual fund" means an investment company or, in the case of an investment company that is organized as a series company, an investment company series, that, in either case, is registered with the United States Securities and Exchange Commission pursuant to the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), as amended.

(59) "NAIC" means the National Association of Insurance Commissioners.

(60) "NAIC accounting manual" means the NAIC "Accounting Practices and Procedures Manual", as amended, or any successor publication.

(61) "Obligation" means a bond, note, debenture, trust certificate including an equipment trust certificate, production payment, negotiable bank certificate of deposit, bankers' acceptance, asset-backed security, credit tenant loan, loan secured by financing a net lease or net leases, and other evidence of indebtedness for the payment of money, or participations, certificates, or other evidences of an interest in any of them, whether constituting a general obligation of the issuer or payable only out of certain revenues or certain funds pledged or otherwise dedicated for payment.

(62) "Option" means an agreement giving the buyer the right to buy or receive, (a "call option"), sell or deliver, (a "put option"), enter into, extend, or terminate or effect a cash settlement based on the actual or expected price, spread, level, performance, or value of one or more underlying interests, including without limitation, an option to purchase or sell a swap at a given price and time or at a series of prices and times. "Option" includes an insurance futures option.

(63) "Over-the-counter derivative instrument" means a derivative instrument entered into with a counterparty other than through a qualified exchange or futures exchange or cleared through a qualified clearinghouse.

(64) "Person" means an individual, a business entity, a multilateral development bank, or a government or quasi-governmental body, such as a political subdivision or a government sponsored enterprise.

(65) "Policyholder obligations" means those liabilities of the insurer to or for its policyholders arising out of its policies and to its creditors and includes the liabilities required to be included in the insurer's annual statement including, but not limited to, the unearned premium reserve, reserves required by applicable mortality or morbidity tables, and claim or loss reserves including incurred but not reported claims. "Policyholder obligations" does not include that portion of the insurer's capital or guaranty fund, or that portion of its surplus, in excess of the minimum capital or guaranty fund, and surplus required by law for the insurer, or the Asset Valuation Reserve.

(66) "Potential exposure" means:

(a) the amount of initial margin required for a futures position; or

(b) as to swaps, collars, and forwards, one-half of one percent times the notional amount times the square root of the remaining years to maturity.

(67) "Preferred stock" means preferred, preference, or guaranteed stock of a business entity authorized to issue the stock, that has a preference in liquidation over the common stock of the business entity.

(68) "Qualified bank" means:

(a) a national bank, state-chartered bank, or trust company that is at all times capitalized adequately as determined by standards adopted by United States banking regulators and that is either regulated by state banking laws or is a member of the Federal Reserve System; or

(b) a bank or trust company incorporated or organized pursuant to the laws of a country other than the United States that is regulated as a bank or trust company by that country's government or an agency of it and that is at all times capitalized adequately as determined by the standards adopted by international banking authorities.

(69) "Qualified business entity" means a business entity that is:

(a) an issuer of obligations or preferred stock that are rated 1 or 2 by the SVO or an issuer of obligations, preferred stock, or derivative instruments that are rated the equivalent of 1 or 2 by the SVO or by a nationally recognized statistical rating organization recognized by the SVO;

(b) a primary dealer in United States government securities, that is recognized by the Federal Reserve Bank of New York; or

(c) with respect to investment practices under Section 38-12-280, an affiliate of an entity that is a qualified business entity pursuant to this item, provided that the affiliate's obligation pursuant to its agreement with the insurer are guaranteed by a qualified business entity that meets the requirements of subitem (a) or (b).

(70) "Qualified clearinghouse" means a clearinghouse subject to the rules of a qualified exchange or a qualified foreign exchange that provides clearing services, including acting as a counterparty to each of the parties to a transaction so that the parties no longer have credit risk to each other.

(71) "Qualified exchange" means:

(a) a securities exchange registered as a national securities exchange, or a securities market regulated pursuant to the Securities Exchange Act of 1934 (15 U.S.C. Section 78 et seq.);

(b) a board of trade or commodities exchange designated as a contract market by the Commodity Futures Trading Commission (CFTC) or a successor of it;

(c) Private Offerings, Resales and Trading through Automated Linkages (PORTAL);

(d) a designated offshore securities market as defined in Securities Exchange Commission Regulation S, 17 C.F.R. Part 230, as amended; or

(e) a qualified foreign exchange.

(72) "Qualified foreign exchange" means a foreign exchange, board of trade, or contract market located outside the United States, its territories, or possessions:

(a) that has received regulatory comparability relief pursuant to CFTC Rule 30.10, as provided in Appendix C to Part 30 of the CFTC's Regulations, 17 C.F.R. Part 30;

(b) that is, or its members are, subject to the jurisdiction of a foreign futures authority that has received regulatory comparability relief under CFTC Rule 30.10, as provided in Appendix C to Part 30 of the CFTC's Regulations, 17 C.F.R. Part 30, as to futures transactions in the jurisdiction where the exchange, board of trade, or contract market is located; or

(c) upon which foreign stock index futures contracts are listed that are the subject of no-action relief issued by the CFTC's Office of General Counsel, provided that an exchange, board of trade, or contract market that qualifies as a "qualified foreign exchange" pursuant to this item only is a "qualified foreign exchange" only as to foreign stock index futures contracts that are the subject of no-action relief.

(73)(a) "Rated credit instrument" means an obligation or other instrument that gives its holder a contractual right to receive cash or another rated credit instrument from another entity, and that:

(i) is rated by the SVO or a nationally recognized statistical rating organization recognized by the SVO;

(ii) is issued, guaranteed, or insured by an entity that is rated by, or another obligation or other instrument of such entity is rated by, the SVO or a nationally recognized statistical rating organization recognized by the SVO, in the case of an obligation or other instrument with a maturity of three hundred ninety-seven days or less;

(iii) has been issued, assumed, accepted, guaranteed, or insured by a qualified bank, in the case of an obligation or other instrument with a maturity of ninety days or less;

(iv) is a share of a class one bond mutual fund; or

(v) is a share of a money market mutual fund.

(b) "Rated credit instrument" does not mean:

(i) an obligation or other instrument that is mandatorily, or at the option of the issuer, convertible to an equity interest; or

(ii) a security that has a par value and whose terms provide that the issuer's net obligation to repay all or part of the par value is determined by reference to the performance of an equity, a commodity, a foreign currency, or an index of equities, commodities, foreign currencies, or combinations of them.

(74)(a) "Real estate" means:

(i) real property;

(ii) interests in real property, such as leaseholds, minerals, and oil and gas that have not been separated from the underlying fee interest;

(iii) improvements and fixtures located on or in real property; and

(iv) the seller's equity in a contract providing for a deed of real estate.

(b) As to a mortgage on a leasehold estate, "real estate" includes the leasehold estate only if it has an unexpired term, including renewal options exercisable at the option of the lessee, extending beyond the scheduled maturity date of the obligation that is secured by a mortgage on the leasehold estate by a period equal to at least twenty percent of the original term of the obligation or ten years, whichever is greater.

(75) "Replication transaction" means a derivative transaction or combination of derivative transactions that is entered into separately or in conjunction with other permissible investments held or acquired by the insurer in order to replicate the investment characteristics of otherwise permissible investments or operate as a substitute for cash market transactions, or for both reasons. A derivative transaction that is entered into by the insurer as a hedging transaction or an income generation transaction authorized pursuant to this chapter is not a replication transaction.

(76) "Repurchase transaction" means a transaction in which an insurer purchases securities from a counterparty that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, within a specified period of time or upon demand.

(77) "Required liabilities" means total liabilities required to be reported on the statutory financial statement of the insurer most recently required to be filed with the director.

(78) "Residential mortgage loan" means a loan primarily secured by a mortgage on real estate improved with a one-to-four family residence.

(79) "Reverse repurchase transaction" means a transaction in which an insurer sells securities to a qualified bank or a qualified business entity or a bank or a business entity whose obligations with respect to the transaction are guaranteed by a qualified bank or a qualified business entity and the insurer is obligated to repurchase the sold securities or equivalent securities from the bank or business entity at a specified price, within a specified period of time or upon demand.

(80) "Secured location" means the contiguous real estate owned by one person.

(81) "Securities lending transaction" means a transaction in which securities are loaned by an insurer or its custodian bank or agent to a qualified bank or a qualified business entity or a bank or a business entity whose obligations with respect to the transaction are guaranteed by a qualified bank or a qualified business entity that is obligated to return the loaned securities or equivalent securities to the insurer, its custodian bank, or agent, within a specified period of time or upon demand.

(82) "Series company" means an investment company that is organized as a series company, as defined in Rule 18f-2(a) adopted under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq., as amended).

(83) "Sinking fund stock" means preferred stock that:

(a) is subject to a mandatory sinking fund or similar arrangement that provides for the redemption, or open market purchase, of the entire issue over a period not longer than forty years from the date of acquisition; and

(b) provides for mandatory sinking fund installments, or open market purchases, commencing not more than ten and one-half years from the date of issue, with the sinking fund installments providing for the purchase or redemption, on a cumulative basis commencing ten years from the date of issue, of at least two and one-half percent each year of the original number of shares of that issue of preferred stock.

(84)(A) "Special rated credit instrument" means a rated credit instrument that is:

(1) an instrument that is structured so that, if it is held until retired by or on behalf of the issuer, its rate of return based on its purchase cost and any cash flow stream possible under the structure of the transaction may become negative due to reasons other than the credit risk associated with the issuer of the instrument. However, a rated credit instrument is not a special rated credit instrument pursuant to this item if it is:

(a) a share in a class one bond mutual fund;

(b) an instrument, other than an asset-backed security, with payments of par value fixed as to amount and timing, or callable but payable only at par or greater, and interest or dividend cash flows that are based on either a fixed or variable rate determined by reference to a specified rate or index;

(c) an instrument, other than an asset-backed security, that has a par value and is purchased at a price not greater than one hundred ten percent of par;

(d) an instrument, including an asset-backed security, whose rate of return would become negative only as a result of a prepayment due to casualty, condemnation, or economic obsolescence of collateral or change of law;

(e) an asset-backed security that relies on collateral that meets the requirements of subsubsubitem (b), the par value of which collateral may:

(i) not be paid sooner than one-half of the remaining term to maturity from the date of acquisition;

(ii) be paid before maturity only at a premium sufficient to provide a yield to maturity for the investment, considering the amount prepaid and reinvestment rates at the time of early repayment, at least equal to the yield to maturity of the initial investment; or

(iii) be paid before maturity at a premium at least equal to the yield of a Treasury issue of comparable remaining life; or

(f) an asset-backed security that relies on cash flows from assets that are not prepayable at any time at par, but is not governed otherwise by subsubsubitem (e), if the asset-backed security has a par value reflecting principal payments to be received if held until retired by or on behalf of the issuer and is purchased at a price not greater than one hundred five percent of the par amount;

(2) An asset-backed security that:

(a) relies on cash flows from assets that are prepayable at par at any time;

(b) does not make payments of par that are fixed as to amount and timing; and

(c) has a negative rate of return at the time of acquisition if a prepayment threshold assumption is used with the prepayment threshold assumption defined as:

(i) two times the prepayment expectation reported by a recognized, publicly available source as being the median of expectations contributed by broker dealers or other entities, except insurers, engaged in the business of selling or evaluating those securities or assets. The prepayment expectation used in this calculation must be, at the insurer's election, the prepayment expectation for pass-through securities of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or for other assets of the same type as the assets that underlie the asset-backed security, in either case with a gross weighted average coupon comparable to the gross weighted average coupon of the assets that underlie the asset-backed security; or

(ii) another prepayment threshold assumption specified by the director by regulation promulgated pursuant to Section 12-38-90.

(B) For purposes of subsubitem (2), if the asset-backed security is purchased in combination with one or more other asset-backed securities that are supported by identical underlying collateral, the insurer may calculate the rate of return for these specific combined asset-backed securities in combination. The insurer shall maintain documentation demonstrating that the securities were acquired and continue to be held in combination.

(85) "State" means a state, territory, or possession of the United States of America, the District of Columbia, or the Commonwealth of Puerto Rico.

(86) "Substantially similar securities" means securities that meet all criteria for substantially similar securities specified in the NAIC accounting manual, and in an amount that constitutes good delivery form as determined by "The Bond Market Association".

(87) "SVO" means the Securities Valuation Office of the NAIC or any successor office established by the NAIC.

(88) "SVO procedures manual" means the "Purposes and Procedures of the Securities Valuation Office", as amended, or any successor publication.

(89) "Swap" means an agreement to exchange or to net payments at one or more times based on the actual or expected price, yield, level, performance or value of one or more underlying interests.

(90) "Underlying interest" means the assets, liabilities, or other interests, or a combination of them, underlying a derivative instrument such as any one or more securities, currencies, rates, indices, commodities, or derivative instruments that are or relate to investments or investment practices that an insurer is permitted to acquire or engage in pursuant to this chapter.

(91) "Unrestricted surplus" means the amount by which total admitted assets exceed one hundred twenty-five percent of the insurer's required liabilities.

(92) "Warrant" means an instrument that gives the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement.

HISTORY: 2002 Act No. 319, Section 2, eff June 3, 2002.