§601.14. Derivative transactions

            An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions pursuant to this Section by meeting all of the following conditions:

            (1) 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.

            (2) 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.

            (3) The counterparty shall have a minimum quality rating of one or two by the SVO.

            (4) Before engaging in a derivative transaction, an insurance company shall establish written guidelines, approved by the commissioner that shall be used for effecting and maintaining derivative transactions. The guidelines shall do all of the following:

            (a) Specify insurance company objectives for engaging in derivative transactions and derivative strategies and all applicable risk constraints, including credit risk limits.

            (b) Establish counterparty exposure limits and credit quality standards.

            (c) Identify permissible derivative transactions and the relationship of those transactions to insurance company operations, including but not limited to a precise identification of the risks being hedged by a derivative transaction.

            (d) Require compliance with internal control procedures.

            (5) An insurance company shall have a written methodology for determining whether a derivative instrument used for hedging has been effective.

            (6) An insurance company shall have written policies and procedures describing the credit risk management process and a credit risk management system for over-the-counter derivative transactions that measures credit risk exposure using the counterparty exposure amount.

            (7) An insurance company's board of directors shall, in accordance with R.S. 22:601.4, do all of the following:

            (a) Approve the written guidelines, methodology, and policies and procedures required by Paragraphs (4), (5), and (6) of this Section and the systems required by Paragraphs (5) and (6) of this Section.

            (b) Determine whether the insurance company has adequate professional personnel, technical expertise, and systems to implement investment practices involving derivatives.

            (c) Review whether derivative transactions have been made in accordance with the approved guidelines and consistent with stated objectives.

            (d) Take action to correct any deficiencies in internal controls relative to derivative transactions.

            (8) Written documentation explaining the insurance company's internal guidelines and controls governing derivative transactions shall be submitted for approval to the commissioner. The commissioner may disapprove the guidelines and controls proposed by the company if the insurance company cannot demonstrate the proposed internal guidelines and controls would be adequate to manage the risks associated with the derivative transactions the insurance company intends to engage in.

            (9) An insurance company shall maintain all of the following documentation and records relating to each derivative transaction:

            (a) The purpose or purposes of the transaction.

            (b) The assets or liabilities to which the transaction relates.

            (c) The specific derivative instrument used in the transaction.

            (d) For over-the-counter derivative instrument transactions, the name of the counterparty and the market value.

            (e) For exchange-traded derivative instruments, the name of the exchange and the name of the firm that handled the trade and the market value.

            (10) Each derivative instrument shall be any of the following:

            (a) Traded on a qualified exchange.

            (b) Entered into with, or guaranteed by, a business entity.

            (c) Issued or written with the issuer of the underlying interest on which the derivative instrument is based.

            (d) Entered into with a qualified foreign exchange.

            (11) An insurer may enter into hedging transactions pursuant to this Section if, as a result of and after giving effect to the transaction, all of the following requirements are met:

            (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 of its admitted assets.

            (b) The aggregate statement value of options, caps, and floors written in hedging transactions does not exceed three percent of its admitted assets.

            (c) The aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed six and one-half percent of its admitted assets.

            (12) An insurer may enter only into any of 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 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 option sold.

            (c) Sales of covered puts on investments that the insurer is permitted to acquire under this Subpart, 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.

            (d) 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.

            (13) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of R.S. 22:601.6.

            (14) The commissioner may approve additional transactions involving the use of derivative instruments in excess of the limits of Paragraph (11) of this Section or for other risk management purposes under regulations promulgated by the commissioner, but replication transactions shall not be permitted for purposes other than risk management purposes upon approval by the commissioner.

            (15)(a) Before engaging in a transaction authorized pursuant to this Section, an insurer that has a statutory net capital and surplus of less than ten million dollars shall file a written notice with the commissioner describing the need to engage in the transaction, the lack of acceptable alternatives, and the insurer's plan to engage in the transaction. If the commissioner fails to issue an order prohibiting the insurer from engaging in the transaction within ninety days after the date of receipt of the insurer's notice, the insurer may engage in the transaction described in the notice.

            (b) An insurer that has a statutory net capital and surplus of ten million dollars or greater shall file a written notice with the commissioner describing the need to engage in the transaction and the lack of acceptable alternatives within ninety days of initiating the transaction.

            (c) The commissioner may at any time issue an order prohibiting an insurer or insurers from engaging in transactions otherwise authorized pursuant to this Section if the transactions are considered likely to subject the insurance company to a hazardous financial condition.

            (d) An insurer with a statutory net capital and surplus less than the minimum amount of capital and surplus required for a new charter and certificate of authority for the same type of insurer shall not engage in the transactions authorized under this Section.

            Acts 2021, No. 165, §1, eff. Jan. 1, 2022.