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

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on May 13, 2008, representing the position of the New York State Insurance Department.

Re: Superintendent's Discretion to Approve Repayment of Surplus Notes

Question Presented:

Are there any official guidelines with respect to the extent of the Superintendent's discretion under Insurance Law § 1307 in determining whether the financial condition of an insurer warrants the making of payments on surplus notes?

Conclusion:

No. While there are no official guidelines per se with respect to the extent of the Superintendent's discretion under Insurance Law § 1307, the Superintendent is guided by various financial requirements set forth in the Insurance Law, as well as statutory accounting principles, in determining whether the financial condition of an insurer warrants the making of such payments.

Facts:

The inquirer reports that his company would like to buy surplus notes issued by monoline financial guaranty insurers such as Company A, Company B and Company C. The inquirer further reports that the offering documents for the insurers' surplus notes state that "[t]here are no official guidelines or interpretations as to the extent of the Superintendent's discretion under Insurance Law § 1307 in determining whether the financial condition of an insurer warrants the making of such payments." The inquirer asks whether that statement is accurate.

Analysis:

Insurance Law § 1307, which addresses the contingent liability of certain insurers for borrowings, provides:

(a) Any domestic stock, mutual or co-operative insurance company or reciprocal insurer may, without pledging any of its assets, receive advances or borrow funds to:

(1) conduct its business, (2) enable it to comply with any surplus requirement or make good any impairment or deficiency or other requirement of this chapter, (3) defray the reasonable expenses of its organization, (4) provide any fund to be voluntarily contributed to surplus, or (5) organize, acquire or invest in any subsidiaries authorized by this chapter.

(b) Such borrowing may only be made upon an agreement that such moneys and such interest thereon as may be agreed upon, at a rate not exceeding the maximum rate provided in section 5-501 of the general obligations law, in effect at the time the agreement is executed, shall be repaid only out of free and divisible surplus of such insurer with the approval of the superintendent whenever, in his judgment, the financial condition of such insurer warrants. In the event of insolvency of a mutual or co-operative insurance company unearned premiums shall be deemed to be part of its free and divisible surplus.

(c) Any sum so advanced or borrowed shall not be part of the legal liabilities of such insurer and shall not be a basis of any set-off but until repaid all statements published by such insurer or filed with the superintendent shall show, as a footnote, the amount then remaining unpaid.

(d) No such insurance company or reciprocal insurer shall directly or indirectly make any agreement for any advance or borrowing pursuant to this section unless such agreement is in writing and shall have been approved by the superintendent as not unfair, misleading or contrary to law.

Insurance Law § 1307(d) prohibits insurers and reciprocal insurers from making any agreement for any advances or borrowing, unless such agreement is in writing and the Superintendent has approved it as not being unfair, misleading or contrary to law.

Insurance Law § 1307(b) also provides for the Superintendent's approval prior to the repayment of principal and interest on a surplus note; such repayment is to be paid out of the free and divisible surplus of the insurer.

When the Department receives any repayment request, the Superintendent, on a case-by-case basis, reviews the insurer's most recently filed annual/quarterly statements, reserve adequacy, and considers any factors/trends that may adversely affect the insurers financial condition. In determining the financial condition of a financial guaranty insurer, in particular, the Superintendent's analysis is guided by the financial requirements set forth in the Insurance Law (see, e.g., Insurance Law, Article 69), as well as statutory accounting principles.

Before making a decision as to whether to purchase any surplus notes, the inquirer was directed to review the annual and/or quarterly statements of the insurer.

For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.