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 10, 2002, representing the position of the New York State Insurance Department.

Re: Insurance Law § 1413(a)- substantial compliance

Question Presented:

Does the Superintendent have discretion to permit a foreign property/casualty insurer to take credit on a New York basis for certain notes contributed to the insurer by its ultimate parent, or must such notes be reported as non-admitted assets?

Conclusion:

The Superintendent has no discretion under N.Y. Ins. Law § 1413(a) (McKinney 2000) to permit a foreign insurer to take credit on a New York basis for certain notes contributed to the insurer by its ultimate parent and such notes must be reported as non-admitted assets.

Facts:

A foreign property/casualty insurance company licensed in New York has a surplus position that has suffered severe deterioration. Its ultimate parent made a surplus contribution to the insurer, effective September 28, 2001. The contribution was in the form of an assignment to the insurer of all right to and interest in six promissory notes issued by the parent, in the aggregate face amount of one billion dollars. The notes consist of one note issued by the parent in the amount of $180 million and five notes issued by subsidiaries of the parent, totaling $820 million. The insurer states that the contribution is in the form of promissory notes due to business considerations that render it economically inefficient for the parent to liquidate sizable investment holdings at this time. The parent states that the notes represent high quality fixed income obligations that the parent believes is otherwise consistent with the parent’s investment guidelines and fiduciary responsibilities. According to the insurer, the parent’s note is secured by a pledge of marketable securities equal to 120% of the face amount of the note and the notes from the subsidiaries are each unconditionally guaranteed by the parent, which guarantee is secured by a pledge of marketable securities equal to 120% of the face amount of the note.

Analysis:

A domestic property/casualty insurer is subject to N.Y. Ins. Law § 1407(a) (McKinney 2000), which provides, in pertinent part:

(a) Any insurer that makes investments under the authority of subsection (c) of section one thousand four hundred three of this article and meets the requirements of such subsection (c) and section one thousand four hundred two of this article may invest in, or otherwise acquire or loan upon, directly or indirectly, any of the types of investments described in section one thousand four hundred four of this article, but without having to meet the applicable qualitative standards or quantitative limitations which are set forth in subsection (a) of section one thousand four hundred four of this article, except the following prohibited investments:

* * *

(4) Obligations, shares or other securities (including certificates of deposit) issued by a parent corporation or a corporation which is an affiliate or will be an affiliate after direct or indirect acquisition by the insurer….

While there are certain exceptions specified in paragraph (4), none of them are relevant to this inquiry. If the insurer were a domestic insurer, the investments in question would be prohibited investments under this section since the insurer’s parent and affiliates issued the investments. It is irrelevant that the notes were made as "contributions"; they are nonetheless investments for the purposes of Article 14.

While the investment is absolutely prohibited for domestic insurers, foreign insurers are governed by the substantial compliance requirement contained in N.Y. Ins. Law § 1413(a) (McKinney 2000), which provides, in pertinent part:

(a) The superintendent may refuse a new or renewal license to any foreign insurer, if he finds that its investments do not comply in substance with the investment requirements and limitations imposed by this chapter upon like domestic insurers hereafter organized to do the same kind or kinds of insurance business. For the purposes of this subsection, except for derivative transactions authorized pursuant to section one thousand four hundred ten of this article, a foreign insurer's investments shall be deemed to comply in substance with such requirements and limitations if, after disallowing as admitted assets in whole or in part any investments not in compliance therewith, the superintendent finds that such foreign insurer's adjusted surplus to policy-holders is not less than an amount which is reasonable in relation to its outstanding liabilities and adequate to its financial needs, and at least equal to the minimum surplus to policyholders required on organization of a domestic insurer to do the same kind or kinds of insurance business….

Since the insurer’s investment in its parent would not be allowed for domestic insurers, the question posed is whether the Superintendent, in determining whether the insurer’s investments comply in substance with the investment requirements and limitations imposed by the Insurance Law upon like domestic insurers hereafter organized to do the same kind or kinds of insurance business, must disallow the investment.

The Superintendent has no discretion under § 1413’s substantial compliance test in this matter and must disallow the insurer’s investment in the parent. The legislative history is remarkably clear as to the genesis of this particular provision. Prior to 1956, § 90(1) of the Laws of 1939, the predecessor section to current § 1413(a), consisted of only the first quoted sentence of subsection (a) and the unquoted third sentence, which is not relevant to this inquiry. The Department construed the provision by first taking into consideration the relationship that the non-conforming investments bore to the total investments of the insurer and then determined to what extent non-conforming investments constituted a departure from, in substance, compliance with the investment requirements and limitations imposed upon like domestic insurers. Using this test, the Department expected that the insurer would have a surplus to policyholders in proportion to its size and adequate to its needs, but not less than the minimum imposed by the Insurance Law for the organization of a like domestic insurer. (See, for example, letter dated July 28, 1948 from Deputy Superintendent and Counsel Harris to Howard J. Brace.) While domestic insurers would have to dispose of prohibited investments, a foreign insurer was just prohibited from taking credit for the investments.

The Attorney General issued an opinion on January 20, 1956 questioning the Department’s interpretation. He concluded that a proposal by the Connecticut General Life Insurance Company to acquire 80% of the capital stock of the National Fire Insurance Company would not have complied in substance with the investment requirements and limitations imposed by the Insurance Law upon like domestic insurers hereafter organized to do the same kind or kinds of insurance business. As stated in the Memorandum to the Governor dated March 15, 1958, the 1958 amendment to § 90, which added the current second sentence quoted above1, was in response to the Attorney General’s opinion and codified the Department’s practice regarding the non-conforming investments in determining a foreign insurer’s substantial compliance with the investment requirements and limitations imposed upon like domestic insurers. Otherwise, under the Attorney General’s interpretation, many foreign life insurers then doing business in New York would have had their license renewals denied. Accordingly, the Superintendent has no discretion in this case and § 1413 requires the Superintendent to disallow the investment in the parent. See also Connecticut General Life Insurance Co. v. Superintendent of Ins., 10 N.Y.2d 42 (1961)

After disallowing any investment that does not comply with the investment requirements and limitations, the test to determine whether the insurer complies in substance with the investment requirements and limitations imposed by the Insurance Law upon like domestic insurers hereafter organized to do the same kind or kinds of insurance business is threefold. The remaining investments must not be less than an amount that is: 1. Reasonable in relation to the insurer’s outstanding liabilities; 2. Adequate to its financial needs; and 3. At least equal to the minimum surplus to policyholders required on organization of a domestic insurer. While the Superintendent has discretion in determining whether the investments are in fact reasonable and adequate, we have consistently concluded that the Superintendent has no discretion in applying the objective minimum surplus requirement. We have also stated that the insurer must meet the minimum investment requirements of N.Y. Ins. Law § 1402(a) (McKinney 2000). (See my opinion of June 19, 1997 to Frederick J. Pomerantz, which also gives a fuller legislative history).

The Superintendent has no discretion under N.Y. Ins. Law § 1413(a) to permit a foreign property/casualty insurer to take credit on a New York basis for certain notes contributed to the insurer by its ultimate parent. The notes must be reported as non-admitted assets.

For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.


1The only significant differences between the current version of the quoted provision and the earlier version is that the current phrase "adjusted surplus to policyholders" was originally "surplus to policyholders," and the earlier version did not have a reference to derivative transactions.