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 informal opinion on December 5, 2003, representing the position of the New York State Insurance Department.

RE: Reserve Investments for Non-life Insurers.

Question Presented:

Does the restriction of N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000) that the obligations of American Institutions be rated "A" or higher imply that common shares of only companies whose debt rating is "A" or higher are eligible for investment by non-life insurers?

Conclusion:

No. The restrictions on reserve investments for non-life insurers under N.Y. Ins. Law § 1404(a)(2)(ii) do not imply that the common shares of American Institutions whose overall debt rating is "A" or higher are eligible for investment. The statute requires each and every obligation of the American Institution rated "A" or higher in order for its equities to qualify for reserve investment. If any obligation of the American Institution is rated below "A," then its equity shares will not qualify for reserve investment under this section.

Facts:

The inquiry generally requests whether reserve investments of a non-life insurer in common shares are restricted to American institutions whose overall debt rating is "A" or higher and does not relate to any specific circumstances or set of facts.

Analysis:

Investments in equity interests by property/casualty insurers under N.Y. Ins. Law §1404(a)(8) (McKinney 2000) are prohibited as reserve investments by operation of N.Y. Ins. Law §1403(c) (McKinney 2003) which also addresses when such investment may be made under N.Y. Ins. Law § 1407 (McKinney Supp. 2003). In contrast, insurance companies making reserve investments under N.Y. Ins. Law §1404 pursuant to N.Y. Ins. Law §1403(a)(2) and (b) (McKinney Supp. 2003)(which includes non-profit medical and dental indemnity or health and hospital service corporations, title insurance corporations, fraternal benefit societies, charitable annuity societies and retirement systems) must make investments in equity interests subject to the restrictions contained in N.Y. Ins. Law § 1403(a)(2) and (b), and §1404(a)(8).

N.Y. Ins. Law § 1404(a) (McKinney 2000) provides in pertinent part, as follows:

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:

* * *

(8) Equity interests. (A) Investments in common shares or partnership interests of any solvent American institution, if:

(i) all its obligations and preferred shares, if any, are eligible as investments under this subsection and

(ii) such equity interests of any such institution except an insurance company are registered on a national securities exchange, as provided in the Securities Exchange Act of 1934, 15 U.S.C. § § 78a-78kk or otherwise registered pursuant to said act and, if so otherwise registered, price quotations therefor are furnished through a nationwide automated quotations system approved by the National Association of Securities Dealers, Inc., provided that an insurer may invest under this paragraph an amount not exceeding one percent of the insurer's admitted assets as shown by its last statement on file with the superintendent even though such equity interests are not so registered and are not issued by an insurance company.

While N.Y. Ins. Law § 1404(a)(8) permits reserve investments in common shares of any American institution that is solvent, it also requires that all of the obligations and preferred shares, if any, of the American institution be eligible as investments under this subsection. In order to be eligible as reserve investments for non-life insurers, N.Y. Ins. Law § 1404(a)(2)(a) requires obligations to be:

(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.

The terms "American Institution" and "Institution" are defined respectively in N.Y. Ins. Law §§ 107(a)(6) and 107(a)(24)(McKinney Supp. 2003). The term "obligations" is defined under N.Y. Ins. Law §107(a)(33) (McKinney Supp. 2003) as including any bond, debentures, notes or other evidences of indebtedness, and participation interests in any of the foregoing. The term obligation has not been interpreted to refer to the overall debt rating of an American Institution.

Therefore, the restrictions on reserve investments for non-life insurers under N.Y. Ins. Law § 1404(a)(2)(ii) do not imply that the common shares of American Institutions whose overall debt rating is "A" or higher are eligible for investment. The statute requires each and every obligation of the American Institution to be rated "A" or higher in order for its equities to qualify for reserve investment. If any obligation of the American Institution is rated below "A," then its equity shares will not qualify for reserve investment under this section.

For further information you may contact Special Counsel Athan Shinas at the Albany Office.