OGC Op. No. 09-03-08

The Office of General Counsel issued the following opinion on March 19, 2009 representing the position of the New York State Insurance Department.

Re: Investments under Insurance Law §§ 1402(b)(1) and 1404(a)(1)(A)

Questions Presented:

1. Do FDIC Notes qualify as Insurance Law § 1402(b)(1) obligations?

2. Do FDIC Notes qualify as Insurance Law§ 1404(a)(1)(A) obligations?

Conclusions:

1. No. FDIC Notes do not qualify as an obligation of an agency of the United States under Insurance Law § 1402(b)(1).

2. Yes. FDIC Notes do qualify as a permitted reserve investment for non-life insurers under Insurance Law § 1404(a)(1)(A) for the duration of the FDIC’s guarantee.

Facts:

An insurer is considering investing in FDIC Notes, which are senior unsecured debt issued by banks, thrifts, and certain holding companies. Under 12 C.F.R. § 370 (2008), which sets forth details about the FDIC’s TLGP, the unsecured debt issued on or before June 30, 2008 is fully guaranteed as to principal and interest by the FDIC in the event of default through June 30, 2012.

Analysis:

12 C.F.R. § 370 provides details about the FDIC Notes in question. It provides that upon the failure of a participating entity to make timely payment of principal or interest as required under an FDIC-guaranteed debt instrument, the FDIC will pay the unpaid principal and/or interest. The duration of the guarantee is limited and, for debt issued on or before June 30, 2009, the guarantee expires at the earliest of the date of the participating entity’s opt-out, the maturity of the debt, or June 30, 2012. Indeed, 12 C.F.R. § 370.3 reads in relevant part as follows:

(a) Upon the uncured failure of a participating entity to make a timely payment of principal or interest as required under an FDIC-guaranteed debt instrument, the FDIC will pay the unpaid principal and/or interest, in accordance with § 370.12 and subject to the other provisions of this part.

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(d) Duration of Guarantee. For guaranteed debt issued on or before June 30, 2009, the guarantee expires on the earliest of the date of the entity's opt-out, if any, the maturity of the debt, or June 30, 2012.

The insurer asks whether the FDIC Notes satisfy Insurance Law § 1402(b)(1), which requires that 60% of the required minimum capital or surplus to policyholder investments shall consist of, among other types of investments, obligations of the United States or of any agency thereof, provided that both the principal and interest of the agency obligation are guaranteed by the United States. Insurance Law § 1402(b)(1) provides 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.

To qualify as a permissible investment under Insurance Law § 1402(b)(1), the obligation must be issued by the United States or of any agency thereof. The FDIC Notes that insurer proposes to purchase are issued by non-governmental entities, and are simply insured or guaranteed by the FDIC for a period of time. For this reason, the particular investments at issue do not satisfy the requirements of Insurance Law § 1402(b)(1).

However, with respect to non-life insurers such as the insurer herein, Insurance Law § 1404(a)(1)(A) permits as reserve investments “government obligations”, which include obligations, the principal and interest of which are guaranteed or insured by the United States or any agency thereof. Insurance Law § 1404(a)(1)(A) reads in relevant part as follows:

(a) The reserve investments of a domestic insurer authorized to make investments under the authority of this section shall consist of the following:

(1) Government obligations. Obligations which are not in default as to principal or interest, which are valid and legally authorized, and which are issued, assumed, guaranteed or insured by:

(A) the United States or by any agency or instrumentality thereof, …

To qualify as a “government obligation” under Insurance Laws § 1404(a)(1)(A), an obligation must be insured or guaranteed by the United States or an agency thereof. The obligations in which the insurer wishes to invest are guaranteed as to principal and interest by the FDIC until the earliest of the date of the participating entity's opt-out, if any, the maturity of the debt, or June 30, 2012. Therefore, these obligations, guaranteed by the FDIC, an agency of the United States, satisfy the definition of a “government obligation” under Insurance Law § 1404(a)(1)(A) for the duration of the guarantee.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.