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 July 23, 2004, representing the position of the New York State Insurance Department.

Re: Permitted Reserve Investments for Non-Life Insurers

Question Presented

Does N.Y. Ins. Law § 1404(a)(2) (McKinney 2000) permit a security to be used for a reserve investment if such investment was initially rated A or better by two rating agencies, but then one of those rating agencies subsequently downgrades the rating to below A?

Conclusion

Yes, pursuant to N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000), as long as an investment is rated A or better by at least one rating agency, which is recognized by the Superintendent, it can be used as a reserve investment by non-life insurers.

Facts

The inquirer wants to know if an investment that was initially rated A or better by two rating agencies, but then one of those rating agencies subsequently downgrades the rating to below A, still meets the test provided in N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000).

Analysis

The inquirer specifically asks about N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000) which addresses reserve investments. N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000) is one of four alternate tests that an insurer may use to determine if an investment qualifies to be used as a reserve investment. N.Y. Ins. Law § 1404(a)(2) (McKinney 2000) states, in pertinent part, the four alternative tests:

. . . 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.

Therefore, even if an investment was formerly A rated or better by multiple rating agencies, and subsequently, one of those rating agencies downgrades its rating to below A, such investment may still meet the standard of N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000) because one rating agency still rates it A or higher, if such rating agency is, pursuant to N.Y. Ins. Law § 1404(a)(2)(ii) (McKinney 2000), " . . . recognized by the Superintendent . . . . " Please note that because each of the above tests of N.Y. Ins. Law § 1404(a)(2) (McKinney 2000) is listed in the disjunctive, if the investment meets any one of the four tests provided above in N.Y. Ins. Law § 1404(a)(2) (McKinney 2000), it can be used by an insurer as a reserve investment.

For further information one may contact Senior Attorney Susan A. Dess at the New York City Office.