§ 33-11-56 — Conditions for engaging in derivative transactions

(a) An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this article under the following conditions: (1) An insurer may use derivative instruments under this Code section to engage in hedging transactions which manage risk and certain income generation transactions, as these terms may be further defined in regulation 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) An insurer may enter into hedging transactions under this Code 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 7.5 percent of its admitted assets; (B) The aggregate statement value of options, caps, and floors written in hedging transactions does not exceed 3 percent of its admitted assets; and (C) The aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed 6.5 percent of its admitted assets; (4) An insurer may only enter into the types of income generation transactions described in subparagraphs (A) through (D) of this paragraph 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 10 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 article, 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) 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; and (5) An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of this article. (b) The Commissioner may approve additional transactions involving the use of derivative instruments in excess of the limits of this Code section or for other risk management purposes under regulations promulgated by the Commissioner.