New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on May 11, 2000, representing the position of the New York State Insurance Department.

Global Funding Agreement-Backed Securities: Payment of Expenses by the Insurer.

Question Presented:

May the life insurer which issued a funding agreement used by a "special purpose vehicle" ("SPV") to collateralize securities issued by the SPV, pay the SPV's unanticipated expenses in the event the SPV does not have sufficient funds to make such payment?

Conclusion:

The life insurer may, at the inception of the transaction, provide the SPV with a pool of surplus funds to cover unanticipated expenses. The SPV may return any surplus funds to the insurer at the conclusion of the transaction.

Facts:

The letter states that under the proposed program the SPV will be responsible for paying the initial and ongoing expenses for the program. The SPV will pay the initial expenses from the difference between the net proceeds from the sale of the securities and the purchase price for the funding agreement which will secure the SPV's obligations under the securities. With respect to the ongoing expenses, the SPV will: (i) identify all ongoing expenses prior to negotiating the terms of the related funding agreement, and (ii) have all its service providers commit to a predetermined fixed fee for all services to be provided during the term of the securities. The anticipated ongoing expenses will be paid from the difference between the periodic payments under the funding agreement and the periodic payments under the securities and/or the difference between the net proceeds from the sale of the securities and the purchase price for the funding agreement. In the event that the SPV should incur any unanticipated expenses, the insurer has agreed to make additional payments to the SPV, as necessary, to cover such expenses.

However, instead of providing the insurer with an initial pool of surplus funds to cover unanticipated expenses, the insurer, in this case proposes to agree with the SPV to only pay additional amounts to cover such expenses when they are actually incurred. The letter states that this arrangement would be financially more favorable for the insurer.

Analysis:

N.Y. Ins. Law Section 3222(a)(McKinney 1985) states that the issuance of a funding agreement by an authorized life insurer constitutes doing an insurance business. The statute permits an authorized life insurer to sell funding agreements to entities which are enumerated in N.Y. Ins. Law Section 3222(b)(McKinney 1985). In the securitization transactions which have been reviewed, Department has taken the position that once the sale of the funding agreement is accomplished, it will not look beyond that transaction to focus on the activities of the purchaser, as along as, inter alia, the insurer does not have some continuing obligation to the issuer or the investors over and above its obligation to make periodic payments under the funding agreement and that the securities comply with all applicable state and federal securities laws.

Based on the above, the insurer may, at the inception of the transaction, provide a pool of surplus funds to cover the SPV's unanticipated expenses. The SPV may return any unused surplus funds to the insurer at the conclusion of the transaction.

For further information you may contact Associate Attorney Rochelle Katz at the New York City Office.