New York State Seal

STATE OF NEW YORK

INSURANCE DEPARTMENT

25 BEAVER STREET

NEW YORK, NEW YORK 10004

David A. Paterson

Governor

Kermitt J. Brooks

Acting Superintendent

OGC Op No 09-08-03

The Office of General Counsel issued the following opinion on August 7, 2009 representing the position of the New York State Insurance Department.

Re: Affiliated company loans and investments

Questions Presented:

1) May an authorized New York insurer that is part of a holding company system make a “loan secured by a first or second mortgage” to a corporation if the corporation is owned by a sole shareholder who owns 100% of the stock of the insurer’s holding company?

2) May an authorized insurer invest a portion of its admitted assets in the obligations of a New York-domiciled corporation that owns the land and building in which the insurer maintains its principal place of business, if a single shareholder owns all the stock of the insurer’s holding company, as well as all the shares of the corporation?

Conclusions:

1) No. Because a “loan secured by a first and second mortgage” is an obligation under the New York Insurance Law, the insurer may not engage in that transaction with its affiliate, unless the affiliate is another insurer within the limitations prescribed in N.Y. Ins. Law § 1408 (McKinney 2006 & Supp. 2009).

2) No. An insurer may not invest in obligations, shares, or other securities (including certificates of deposit) issued by an affiliate, unless the affiliate is another insurer within the limitations prescribed in Insurance Law § 1408.

Facts:

The inquirer reports that he represents an authorized property/casualty insurer that is domiciled in New York. A New York domiciled holding company (the “Holding Company”) owns one hundred percent of the insurer’s stock. An individual (the “Stockholder”) owns all of the Holding Company’s stock.

He further reports that the insurer is considering “potential investment vehicles,” including “a loan secured by a first or second mortgage” to another New York-domiciled business corporation that the Stockholder owns. The inquirer ask whether such an investment is permissible.

The inquirer also asks whether the insurer may invest a portion of its admitted assets in the “obligations of a New York domiciled business corporation which is the owner of the land and building” in which the insurer maintains its principal place of business if the Stockholder is the owner of all of that corporation’s shares.

Analysis:

As an initial matter, the insurer, and the corporations owned by the Stockholder, are “affiliates” under the Insurance Law. Insurance Law § 107(a)(4) defines an “affiliate” as “a corporation a majority of whose shares is owned or controlled by shareholders, directors or officers of another corporation, who own or control a majority of the shares of the other corporation.”

In turn, Insurance Law § 107(a)(16) sets forth the definition of “control.” That provision states:

“Control”. Except for the purposes of article fifteen of this chapter, “control”, including the terms “controlling”, “controlled by” and “under common control with”, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an institution, whether through the ownership of voting securities, by contract or otherwise.

Thus, the insurer and the corporations here are affiliates because they are under common control. Here, the Stockholder indirectly possesses the power to direct or cause the direction of the management and policies of the insurer. Furthermore, that Stockholder holds the same power with respect to the corporations.

New York Insurance Law § 1407 is relevant to the questions directly raised by the inquiry. That provision prohibits certain investments for property/casualty insurers and certain other insurers. Insurance Law § 1407(a) states in relevant part as follows:

Any insurer that makes investments under the authority of subsection (c) of section one thousand four hundred three of this article and meets the requirements of such subsection (c) and section one thousand four hundred two of this article may invest in, or otherwise acquire or loan upon, directly or indirectly, any of the types of investments described in section one thousand four hundred four of this article, but without having to meet the applicable qualitative standards or quantitative limitations which are set forth in subsection (a) of section one thousand four hundred four of this article, except the following prohibited investments:

(4) Obligations, shares or other securities (including certificates of deposit) issued by a parent corporation or a corporation which is an affiliate or will be an affiliate after direct or indirect acquisition by the insurer. Nothing in this paragraph shall be deemed to prevent any investment in obligations, shares or other securities of:

(A) another insurance corporation within the limitations prescribed in section one thousand four hundred eight of this article,

(B) a subsidiary organized to engage exclusively in the acquisition, ownership or management of investments of the type described in paragraphs one, two, three, six, seven, eight or ten of subsection (a) of section one thousand four hundred four of this article, provided such subsidiary is wholly-owned by two or more insurance companies domiciled in the United States who are members of the same holding company system, as such term is defined in article fifteen of this chapter. Furthermore, each individual insurer's share of the net investment made by such subsidiary shall be:

(i) computed in proportion to its equity interests in such subsidiary, and

(ii) included when computing any applicable investment limitations, or

(C) subsidiaries subject to and within the limitations prescribed in article sixteen of this chapter.

Therefore, an insurer that meets the requirements set forth in Insurance Law § 1402, which sets forth the minimum capital or minimum surplus to policyholder investments, and Insurance Law § 1403, which sets forth reserve and other investment requirements, may invest its funds in, or otherwise acquire or loan upon, investments set forth in Insurance Law § 1404. Insurance Law § 1404 permits certain types of reserve investments for non-life insurers, including loans secured by real property. See Insurance Law § 1404(a)(4)(A). However, an insurer may not invest in obligations, shares or other securities (including certificates of deposit) issued by an affiliate, unless the affiliate is another insurer within the limitations prescribed in Insurance Law § 1408.

A “loan secured by a first or second mortgage” is an “obligation” under the Insurance Law. Insurance Law § 107(a)(33) defines “obligations” to include “bonds, debentures, notes and other evidences of indebtedness (whether or not liability for payment extends beyond the security therefore) as well as participation interests in the foregoing.”

Here, both transactions that the insurer proposes would run afoul of Article 14 of the Insurance Law for the same reason: the Insurance Law prohibits the insurer from investing in the obligations, shares, or other securities (including certificates of deposit) issued by an affiliate, unless the affiliate is another insurer and then only within the limitations prescribed in Insurance Law § 1408.

For further information you may contact Senior Attorney Sapna Maloor at the New York City office.