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 April 26, 2002, representing the position of the New York State Insurance Department.

RE: Investment Rules Under N.Y. Ins. Law § 1404

Questions Presented:

1. Are obligations issued by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") considered to be "government obligations" under the New York Insurance Law?

2. If not, are they subject to the "5% per issuer" rule?

3. Would an individual mortgage-related security issued by FNMA or FHLMC be subject to the "5% per issuer" rule.

Conclusions:

1. FNMA and FHLMC obligations are treated as government obligations.

2. In light of the answer to Question 1, this inquiry is inapplicable.

3. Whether an individual mortgage-related security issued by FNMA or FHLMC would be subject to the "5% per issuer" rule depends on whether or not the security is guaranteed by the federal government.

Facts:

A company holds various Lloyd’s trust funds. The company’s inquiry involves the classification of certain investments under the New York Insurance Law.

Analysis:

N.Y. Ins. Law § 1404 (McKinney 2001) describes the types of reserve investments that may be owned by non-life companies. N.Y. Ins. Law § 1404(a)(1) and (2) describes "government obligations" and "obligations of American institutions" as follows:

(1) Government obligations. Obligations which are not in default as to principal or interest, which are valid and legally authorized, and which are issued, assumed, guaranteed or insured by:

(A) the United States or by any agency or instrumentality thereof,

(B) any state of the United States,

(C) any territory or possession of the United States or any other governmental unit in the United States, or

(D) any agency or instrumentality of any governmental unit referred to in subparagraphs (B) and (C) of this paragraph, provided that obligations to be eligible under this paragraph shall be by law (statutory or otherwise) payable, as to both principal and interest, from taxes levied or by law required to be levied or from adequate special revenues pledged or otherwise appropriated or by law required to be provided for the purpose of such payment, but in no event shall obligations be eligible for investment under this paragraph if payable solely out of special assessments on properties benefited by local improvements.

(2) Obligations of American institutions.

(A) Obligations which are issued by any solvent American institution or which are assumed or guaranteed by any solvent American institution (other than an insurance company) and which are not in default as to principal or interest provided such obligations: (i) are adequately secured by collateral security having a market value not less than the principal amount thereof and have investment qualities and characteristics wherein the speculative elements are not predominant, or (ii) are rated A or higher (or the equivalent thereto) by a securities rating agency recognized by the superintendent, or if not so rated, are similar in structure and in all material respects to other obligations of the same institution which are so rated, or (iii) are insured by one or more authorized insurance companies (other than the investing insurer or any parent, subsidiary or affiliate of such insurer) who are licensed to insure obligations in this state and, after considering such insurance, are rated Aaa (or the equivalent thereto) by a securities rating agency recognized by the superintendent, or (iv) have been given the highest quality designation by the Securities Valuation Office of the National Association of Insurance Commissioners.

(B) No investment in or loan upon the obligations of any institution, other than an institution which issues mortgage related securities, and no investment in any one mortgage related security, made pursuant to the provisions of this paragraph shall exceed five per centum of the admitted assets of such insurer as shown by its last statement on file with the superintendent. (emphasis supplied)

FNMA and FHLMC are often referred to as "Government Sponsored Entities" or "GSEs". The direct obligations of FNMA or FHLMC are regarded by the Department as government obligations under N.Y. Ins. Law § 1401(a)(1)(A). Specifically, insurers report the obligations of these entities as non-guaranteed obligations of government agencies or instrumentalities. Given this classification, the "5% per issuer" rule contained in Paragraph (2)(B) is inapplicable.

In the case of an individual mortgage-related security issued by FNMA or FHLMC, the applicability of the "5% per issuer" rule of N.Y. Ins. Law § 1401(a)(2)(B) depends upon whether or not the security in question is guaranteed as to principal and interest by the United States government. If the security is guaranteed, then it is classified as a "government obligation" and it would not be subject to the rule. If, however, the security is not so guaranteed, the rule would apply.

Investment-related inquiries regarding the management of these trust funds may also be posed to Lloyds to ascertain the applicability of any requirements over and above those imposed by the New York Insurance Law.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.