New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on October 17, 2005 representing the position of the New York State Insurance Department.

RE: Financial Guaranty Insurance – Triple X Securitizations

Question:

May a financial guaranty insurer issue a policy of financial guaranty insurance that guaranties the payment of principal and interest of debt obligations issued in connection with "Regulation XXX securitizations" as described below?

Conclusion:

Yes, a financial guaranty insurer may issue a policy of financial guaranty insurance that guaranties the payment of principal and interest of debt obligations issued in connection with "Regulation XXX securitizations" as described below.

Facts:

The Department has been presented with various proposals from financial guaranty insurers and their outside counsel involving transactions that feature the writing of financial guaranty policies to the issuers of obligations that are issued in connection with securitizations undertaken in the financing of Regulation XXX reserves of various life insurers. The proposals each differ somewhat in structure, however, a typical transaction is essentially structured as follows: A New York authorized life insurer (the "Life Insurer") incorporates (and is sole shareholder of) a South Carolina domiciled captive reinsurer (the "Captive"). The Life Insurer capitalizes the Captive with an amount of equity capital adequate to support an investment grade rating on the surplus notes issued by the Captive to a special purpose vehicle ("SPV"), which in turn issues debt securities ("Notes") to institutional investors. The SPV uses the proceeds from the sale of the securities to purchase the surplus notes from the Captive. A financial guaranty insurer issues a financial guaranty policy to insure that the scheduled interest and principal payments are made on the Notes. The Notes are themselves backed by the interest and principal received on the identical amount of the surplus notes.

The Captive and the Life Insurer enter into a reinsurance agreement whereby the Captive reinsures a defined block of life policies written by the Life Insurer and assumes the Life Insurer’s reserve liabilities on the assumed business, including the Regulation XXX reserves.

The proceeds received by the Captive from the sale of the surplus notes, together with the reinsurance premiums received, are held in an investment trust as mandated by Regulation 114, 11 N.Y. Code Rules & Regs. tit. 11, § 126 (2000), ("Regulation 114 Trust"). The assets in the Regulation 114 Trust are used to satisfy the Captive’s reinsurance obligations as well as the applicable regulatory reserve requirements in connection with the reinsured policies. The Captive receives all the cash flow from the reinsured policies as well as the investment income from the Regulation 114 Trust. The Captive uses these amounts to pay the interest and principal due on the surplus notes. In turn, the payments that the SPV receives from the surplus notes are used by the SPV to make principal and interest payments to the holders of the Notes. Neither the SPV nor the holders of the Notes have any obligation to the insurer or reinsurer to cover claims under either the underlying policies or the reinsurance contract.

Analysis:

The issuance of a financial guaranty policy in connection with a Regulation XXX securitization transaction such as that described herein does not constitute the issuance of guaranties of life insurance policies and such activity is not the conduct of a life insurance business by the financial guaranty insurer. As expressly permitted by Article 69 of the New York Insurance Law, the financial guaranty insurer in a Regulation XXX transaction is simply providing a guaranty that the principal and interest payable to the purchasers of the Notes (which are "investment grade") issued by the SPV will be paid by the SPV. The fact that the source of funds for the payments to be made on these bonds may be ultimately derived from a block of life insurance policies does not warrant a recharacterization of the financial guaranty policy in question since neither the SPV nor the purchasers of the Notes have any obligation to the insurer or the reinsurer should either be unable to meet its insurance obligations. This view is consistent with an earlier decision of the Department that concluded that a financial guaranty insurer could properly issue a financial guaranty policy insuring the payment of principal and interest on debt obligations issued by a special purpose vehicle that was funded by life insurance policies obtained via life settlement transactions.

For the above reasons, the Notes herein do not constitute insurance contracts. Therefore, providing a guaranty that principal and interest on the Notes in the instant circumstances will be paid does not constitute the impermissible guaranty or reinsurance of an insurance contract.

Accordingly, a financial guaranty insurer may issue a policy of financial guaranty insurance that guaranties the payment of principal and interest of debt obligations issued in connection with the "Regulation XXX securitizations" of the nature described above. This Opinion is limited to the facts presented herein, and nothing presented herein should be construed as an endorsement of the foregoing proposals.

For further information you may contact Deputy Superintendent and General Counsel Audrey L. Samers at the New York City office.