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

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on February 15, 2002, representing the position of the New York State Insurance Department.

Re: Financial Guaranty Insurance Policy; SPV

Questions Presented:

1. Does the transaction set forth below violate the New York State Insurance Law’s prohibition against doing an unlicensed insurance business in New York?

2. Would the SPV in the proposed transaction violate the New York State Insurance Law’s prohibition against acting for or aiding an unauthorized insurer?

2. Would the SPV in the proposed transaction violate the New York State Insurance Law’s prohibition against calling attention to an unauthorized insurer?

Conclusions:

1. No, the alien unauthorized insurer here would not conduct any of the activities that N.Y. Ins. Law § 1102 (McKinney’s 2002) requires to find that it would be conducting an insurance business in New York.

2. No, the special purpose vehicle’s acts, as described here, would not be aiding an unauthorized insurer as prohibited by N.Y. Ins. Law § 2117 (McKinney’s 2002).

3. No, the special purpose vehicle’s acts, as described here, would not violate N.Y. Ins. Law § 2122(a) (McKinney’s 2002).

Facts:

A special purpose vehicle ("SPV") outside of the United States issues securities (the "Securities") to institutional investors (the "Investors") located in New York. All of the Investors would be "accredited investors" under the Securities Act of 1933 or qualified institutional buyers under Rule 144A. The SPV would invest the majority of the proceeds from that issuance in private equity offerings (the "SPV Assets"). To secure payments of interest and/or principal on the Securities, the SPV would pledge the SPV Assets and substantially all of its other assets to the securities’ purchasers’ agent (the "Indenture Trustee") on behalf of the Investors.

An alien unauthorized insurer ("Insurer") would underwrite a principal protection policy (the "Insurance Policy") to be issued and delivered to the SPV outside the United States. The SPV would be responsible for payment of the premiums for the Insurance Policy and the premiums would be paid outside of the United States. Were the SPV Assets’ performance such that the SPV could not pay the interest or principal due to the Investors, the Indenture Trustee would be entitled to draw up to the full amount available under the Insurance Policy.

The Insurance Policy would be assigned to the Indenture Trustee for the direct benefit of the SPV and the indirect benefit of the Indenture Trustee. In this instance, the Securities would be obligations of the SPV only and would not themselves be guaranteed by the Insurer or any other person. There would be no privity of contract between the insurer and the securities’ purchasers, the SPV would remain the sole source of the payment on the securities, and the SPV’s securities would not be represented to prospective investors as a type of insurance contract or product.

Analysis:

The Insurer will not perform any of the acts that, if performed in New York, would result in a finding that they would be doing an insurance business under your proposal. See, N.Y. Ins. Law § 1101(b)(1)(McKinney’s 2002). Specifically, "[w]here an unauthorized issuer issues [an insurance product] for delivery outside of the state of New York to [the New York based underwriter of the out-of-state SPV securities], the insurer must comply with the laws of its … domicile." Opinion letter from Katz to Gallagher of January 28, 2000, at 3. The letter concluded, "New York Insurance Law is not implicated in these instances." Id.

The SPV would not violate N.Y. Ins. Law § 2117(a)’s prohibition of aiding an unlicensed or unauthorized insurer. As neither the SPV or its materials will not be directing the insured’s attention to the unauthorized alien insurer, nor will it solicit, negotiate, or effect insurance policies, N.Y. Ins. Law § 2117 will not be violated.

The SPV will not violate N.Y. Ins. Law § 2122(a)’s prohibition on calling attention to any unauthorized insurer or insurers. That section "was enacted for the protection of the public against being misled or deceived by false statements as to the financial condition of the corporations required to make annual reports to the Superintendent of Insurance." People v. Dilliard, 271 N.Y. 403 (1936). The securities will not be offered to the general public; they will be made available only to "accredited investors" under the Securities Act of 1933 or qualified institutional buyers under S.E.C. Rule 144A, represented by a sophisticated Indenture Trustee. As Private Placement Memoranda generally cover only the financial condition of the company issuing the securities, it is believed that the Investors in this transaction will rely on the statements made regarding the issuer’s financial condition. Finally, the entities here are not required to make annual reports to the Superintendent. For these reasons, the SPV will not be violating N.Y. Ins. Law § 2122(a)(McKinney’s 2002).

For further information you may contact James W. Everett, Jr., Capital Markets Counsel at the New York City Office.