The Office of General Counsel issued the following opinion on February 10, 2006, representing the position of the New York State Insurance Department.
Re: Statutory Deposit Requirement
Are corporate bonds eligible securities to fulfill the deposit requirement of a life insurance company?
No, corporate bonds are not eligible securities to fulfill the deposit requirement of a life insurance company.
The inquirer states that currently a life insurance company invests in United States Treasury Bonds, which are authorized investments under N.Y. Insurance Law § 1402(b)(1), to fulfill its deposit requirement. The company has asked if investing in corporate bonds could replace its investment in United States Treasury Bonds. The request did not state the specific corporate bond the insurer is interested in investing in order to fulfill its deposit requirements.
Under N.Y. Ins. Law § 4206 (McKinney Supp. 2006), every domestic life insurance company before being licensed to business, must deposit securities with the superintendent in an amount determined by the date the company was initially licensed.
N.Y. Ins. Law § 1318(a) (McKinney 2000) provides that the eligible securities for the deposit "shall be in the securities specified in paragraphs one and two of subsection (b) of section one thousand four hundred two" of the Insurance law.
N.Y. Ins. Law § 1402 (McKinney 2000) states in relevant part:
(b) Not less than sixty percent of the amount of the required minimum capital or surplus to policyholder investments shall consist of the types specified in paragraphs one and two hereof:
(1) Obligations of the United States or of any agency thereof provided such agency obligations are guaranteed as to principal and interest by the United States.
(2) Direct obligations of this state or of any county, district or municipality thereof.
The deposit requirement may be fulfilled with United States Treasury Bonds, which are eligible investments under N.Y. Ins. Law § 1402(b)(1) (McKinney 2000) because such bonds are guaranteed by the United States. However, corporate bonds are not eligible investments because they are not guaranteed by the United States. A corporate bond is a security issued and guaranteed by a corporation, as opposed to those issued by the government. Compared to government bonds, corporate bonds have a higher risk of default.
As this Department has opined before, one of the principles underlying Section 1402(b)(1) is that required minimum capital investments of an insurer should be of a relatively conservative nature.
For further information please contact Senior Attorney Elizabeth Barrett at the New York City Office.