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 January 29, 2003, representing the position of the New York State Insurance Department.

Re: Regulation 114 Trust & Commercial Mortgage-Backed Securities

Questions Presented:

1. Does N.Y. Ins. Law § 1404(a)(2) (McKinney 2000) authorize the fixed-income asset manager of a reinsurance trust, created in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, §§ 126.1-126.8 (2002) (Regulation 114), to purchase commercial mortgage-backed securities of American institutions as an investment for such trust?

2. Is the 5% per mortgage-related security investment limitation of N.Y. Ins. Law § 1404(a)(2)(B) (McKinney 2000) applicable to the purchase of commercial mortgage-backed securities for such trust?

Conclusions:

1. Yes. N.Y. Ins. Law § 1404(a)(2) (McKinney 2000) authorizes the asset manager to purchase the commercial mortgage-backed securities of American institutions as an investment for a reinsurance trust created pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, §§ 126.1-126.8 (2002) (Regulation 114).

2. Yes. Commercial mortgage-backed securities are subject to the 5% per mortgage-related security investment limitation of N.Y. Ins. Law § 1404(a)(2)(B) (McKinney 2000) when purchased for a reinsurance trust created in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, §§ 126.1-126.8 (2002) (Regulation 114). Please note that § 1404(a)(2)(B) expressly excepts institutions that issue mortgage-related securities (which include commercial mortgage-backed securities) from the 5% per institution investment limitation.

Facts Presented:

The fixed-income asset manager (the "Asset Manager") of a reinsurance trust (the "Trust"), formed pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, §§ 126.1-126.8 (2002) (Regulation 114), intends to purchase commercial mortgage-backed securities (i.e., securities that represent an undivided ownership interest in a pool of commercial mortgages with payments on the underlying commercial mortgages used to make payments to the security holders) of American institutions (i.e., institutions "created or existing under the laws of the United States of America or of any state, district or territory thereof," N.Y. Ins. Law § 107(a)(6) (McKinney Supp. 2003)) as an investment for such Trust.

Analysis:

N.Y. Comp. Codes R. & Regs. tit. 11, §§ 126.1-126.8 (2002) ("Regulation 114") provides the requirements, conditions and standards for the formation of reinsurance trusts. § 126.5(a)(2) articulates the permissible categories of investments, which may constitute a reinsurance trust account, as follows:

(a) A reinsurance agreement, which is entered into in conjunction with a trust agreement and the establishment of a trust account, must contain provisions that:

. . . .

(2) stipulate that assets deposited in the trust account shall be valued according to their current fair market value, and shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments of the types specified in paragraphs (1), (2), (3), (8) and (10) of subsection (a) of section 1404 of the New York Insurance Law, provided that such investments are issued by an institution that is not the parent, subsidiary or affiliate of either the grantor or the beneficiary . . . .

(emphasis added).

N.Y. Ins. Law § 1404(a)(2)(A)-(B) (McKinney 2000) permits investment in the obligations, which include commercial mortgage-backed securities (which are by definition mortgage related), of American institutions if such obligations meet certain conditions. § 1404(a)(2)(A)-(B) provides that:

(a) In addition to the investments specified in subsection (b) hereof, but excluding any investment prohibited by the provisions of paragraph one, three, four, six, eight, nine or ten of subsection (a) of section one thousand four hundred seven of this article, the reserve investments of a domestic insurer authorized to make investments under the authority of this section shall consist of the following:

. . . .

(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) [n]o 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.

Accordingly, the Asset Manager may purchase the commercial mortgage-backed securities of American institutions as an investment for the Trust if such obligations satisfy all of the qualifications of N.Y. Ins. Law § 1404(a)(2)(A)-(B) (McKinney 2000), including the 5% per mortgage-related security investment limitation of § 1404(a)(2)(B). Please note that § 1404(a)(2)(B) expressly excepts institutions that issue mortgage-related securities (which include commercial mortgage-backed securities) from the 5% per institution investment limitation.

For further information you may contact Senior Attorney Kristian Earl Lynch at the New York City Office.