SB416 (2020) Detail

Relative to domestic insurance company investments.


SB 416 - AS AMENDED BY THE SENATE

 

03/05/2020   0784s

2020 SESSION

20-2892

11/04

 

SENATE BILL 416

 

AN ACT relative to domestic insurance company investments.

 

SPONSORS: Sen. D'Allesandro, Dist 20; Sen. Watters, Dist 4; Rep. Hunt, Ches. 11

 

COMMITTEE: Commerce

 

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ANALYSIS

 

This bill permits insurers to use derivative instruments to engage in hedging transactions, income generation transactions, and replication transactions subject to certain restrictions.

 

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Explanation: Matter added to current law appears in bold italics.

Matter removed from current law appears [in brackets and struckthrough.]

Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.

03/05/2020   0784s 20-2892

11/04

 

STATE OF NEW HAMPSHIRE

 

In the Year of Our Lord Two Thousand Twenty

 

AN ACT relative to domestic insurance company investments.

 

Be it Enacted by the Senate and House of Representatives in General Court convened:

 

1  Insurance Companies and Agents; Investments and Reserves; Types of Investments.  RSA 402:28, I(l)-(n) are repealed and reenacted to read as follows:

(l)  Derivative transactions.  An insurer may use derivative instruments to engage in hedging transactions, income generation transactions, and replication transactions on the following conditions:

(1)  An insurer may enter into hedging transactions if, measured at the time of acquisition after giving effect to such transactions, all of the following apply:

(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 7-1/2 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.

(C)  The aggregate potential exposure of collars, swaps, forwards, and futures used in hedging transactions does not exceed 6-1/2 percent of its admitted assets.

(D)  Transactions entered into to hedge the currency risk of investments denominated in a currency other than United States dollars shall not be included in the limits under this subparagraph.  An insurer may purchase, sell, or enter into one or more derivative transactions to offset, in whole or in part, any derivative instrument or derivative transaction previously purchased, sold, or entered into, without regard to the quantitative limitations of this paragraph, provided that such derivative instrument or derivative transaction is an exact offset, in whole or in part, to the original derivative instrument or derivative transaction being offset.

(2)  An insurer may enter into the following types of income generation transactions if, at the time of acquisition 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 before 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 section, 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.

(3)  An insurer may enter into replication transactions if both of the following apply:

(A)  The insurer would otherwise be authorized to invest its funds under this section in the asset being replicated.

(B)  The asset being replicated is subject to all the provisions of this section relating to the making of investments by the insurer in that type of asset as if the transaction constituted a direct investment by the insurer in the replicated asset.

(4)  The commissioner may approve of additional transactions involving the use of derivative instruments in excess of the limits of this paragraph or for other risk management purposes, except that replication transactions under this subparagraph shall be permitted only for risk management purposes.

(m)  Each derivative instrument shall be one of the following:

(1)  Traded on or entered into with a qualified exchange.

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

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

(4)  Traded on or entered into with a qualified foreign exchange.

(n)  For the purposes of subparagraphs I(l) and (m), unless the context otherwise requires:

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

(2)  "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.

(3)  "Collar" means an agreement, or series of agreements 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.

(4)  "Derivative instrument" means an agreement, option, or instrument, or a series or combination that:

(A)  Either requires a party to make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or to make a cash settlement in lieu thereof, or has a price, performance, value, or cash flow based primarily on the actual or expected price, level, performance, value, or cash flow of one or more underlying interests.

(B)  Includes options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, futures, and any other agreements, options, or instruments substantially similar thereto or any series or combination thereof and any agreements, options, or instruments permitted under rules adopted to carry out the provisions of subparagraphs I(l) and (m).

(C)  Does not include an investment authorized by RSA 402:28, I(a) through (k), RSA 402:28, I(o) through (p), RSA 402:28, I(r) through (s), or RSA 402:28, II through IV.   

(5)  "Derivative transaction" means a transaction involving the use of one or more derivative instruments.

(6)  "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 exceeds a reference price, level, performance, or value of one or more underlying interests.

(7)  "Forward" means an agreement, other than a future, 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, but shall not mean or include spot transactions effected within customary settlement periods, when-issued purchases, or other similar cash market transactions.

(8)  "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.

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

(A)  The risk of a change in the value, yield, price, cash flow, or quantity of assets or liabilities that the insurer has acquired or incurred or anticipates acquiring or incurring either directly or indirectly through an investment in an underlying entity.

(B)  The currency exchange rate risk or the degree of exposure as to assets or liabilities that an insurer has acquired or incurred or anticipates acquiring or incurring either directly or indirectly through an investment in an underlying entity.

(10)  "Income generation transaction" means a derivative transaction involving the writing of covered call options, covered put options, covered caps, or covered floors that is intended to generate income or enhance return.

(11)  "Option" means an agreement giving the buyer the right to buy or receive, referred to as a "call option", to sell or deliver, referred to as a "put option", to enter into, extend, or terminate, or to effect a cash settlement based on the actual or expected price, spread, level, performance, or value of one or more underlying interests.

(12)  "Qualified exchange" means:

(A)  A securities exchange registered as a national securities exchange, or a securities market regulated under the Securities Exchange Act of 1934, as amended.

(B)  A board of trade, commodities exchange, or clearing organization designated as a contract market or derivatives clearing organization by the Commodity Futures Trading Commission or any successor thereof.

(C)  Private offerings, resales, and trading through automated linkages.

(D)  A designated offshore securities market as defined in securities exchange commission regulations, 17 C.F.R. part 230, as amended.

(E)  A qualified foreign exchange.

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

(A)  The exchange, board of trade, or contract market has received regulatory comparability relief under Commodity Futures Trading Commission rule 30.10, as set forth in 17 C.F.R. part 30, appendix C.

(B)  The exchange, board of trade, or contract market is, or its members are, subject to the jurisdiction of a foreign futures authority that has received regulatory comparability relief under Commodity Futures Trading Commission rule 30.10, as set forth in 17 C.F.R. part 30, appendix C as to futures transactions in the jurisdiction where the exchange, board of trade, or contract market is located.

(C)  Foreign stock index futures contracts are listed on the exchange, board of trade, or contract market and the contracts are the subject of no-action relief issued by the Commodity Futures Trading Commission office of general counsel if the exchange, board of trade, or contract market that qualifies as a qualified foreign exchange under this subdivision is a qualified foreign exchange only as to foreign stock index futures contracts that are the subject of no-action relief.

(14)  "Replication transaction":

(A)  Means a derivative transaction that is intended to replicate the performance of one or more assets that an insurer is authorized to acquire under this section.

(B)  Does not include a derivative transaction that is entered into as a hedging transaction.

(15)  “Spot transaction” means a transaction that settles via an actual delivery of the underlying asset within the standard settlement period for such asset.

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

(17)  "Underlying interest" means the assets, liabilities, other interests or a combination thereof underlying a derivative instrument, including any securities, currencies, rates, indices, commodities, or derivative instruments.

(18)  "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.  Warrants may be issued alone or in connection with the sale of other securities, including as part of a merger or recapitalization agreement or to facilitate divestiture of the securities of another business entity.

2  Effective Date.  This act shall take effect upon its passage.

Links

SB416 at GenCourtMobile
SB416 Discussion

Action Dates

Date Body Type
Feb. 4, 2020 Senate Hearing
March 5, 2020 Senate Floor Vote

Bill Text Revisions

SB416 Revision: 8218 Date: March 5, 2020, 12:52 p.m.
SB416 Revision: 7622 Date: Dec. 19, 2019, 9:46 a.m.

Docket

Date Status
Jan. 8, 2020 To Be Introduced 01/08/2020 and Referred to Commerce; SJ 1
Feb. 4, 2020 Hearing: 02/04/2020, Room 101, LOB, 02:00 pm; SC 5
March 5, 2020 Committee Report: Ought to Pass with Amendment # 2020-0784s, 03/05/2020; Vote 5-0; CC; SC 9
March 5, 2020 Committee Amendment # 2020-0784s, AA, VV; 03/05/2020; SJ 5
March 5, 2020 Ought to Pass with Amendment 2020-0784s, MA, VV; OT3rdg; 03/05/2020; SJ 5
March 12, 2020 Introduced 03/12/2020 and referred to Commerce and Consumer Affairs
June 30, 2020 Vacated and Laid on Table MA VV 06/30/2020