OGC Op. No. 09-09-04

The Office of General Counsel issued the following opinion September 16, 2009, representing the position of the New York State Insurance Department.

Re: Determining Investment Limitations and Financial Condition Under N.Y. Ins. Law § 1408

Questions Presented:

1. May an insurer, pursuant to Insurance Law § 1408(a), determine “surplus over and above its liabilities and capital” by either calculating the surplus less the total liabilities and capital stock or calculating the surplus less capital stock?

2. For the purposes of determining financial condition of a domestic insurer or United States branch of an alien insurer within the meaning of Insurance Law § 1408(b), what is the difference between “surplus to policyholders” and “surplus of such insurer”?

Conclusions:

1. No. An insurer, pursuant to Insurance Law § 1408(a), must determine “surplus over and above its liabilities” by calculating surplus to policyholders less “the aggregate par value of all classes of shares of capital stock issued and outstanding.”

2. For the purposes of determining the financial condition of a domestic insurer or United States branch of an alien insurer within the meaning of Insurance Law§ 1408(b), “surplus to policyholders” is equal to the excess of total admitted assets over liabilities, and “surplus of such insurer” is equal to the admitted assets, including any voluntary reserves, or any part thereof, which are not required by law, in excess of (1) its capital and (2) its liabilities.

Facts:

The inquirer reports that he seeks clarification for a customer regarding the investment limitations and required financial condition pr align="justify"ovisions se forth in Insurance Law § 1408 governing the acquisition of shares in an insurance company. He further reports that the customer is confused about how to calculate “surplus over and above its liabilities and capital” pursuant to Insurance Law § 1408(a). The customer “reasons that surplus is by definition assets less liabilities so liabilities are already backed out of the surplus number.” Thus, the customer is unsure whether it may calculate “surplus over and above its liabilities and capital” by subtracting capital stock from surplus or by subtracting total liabilities and capital stock from the surplus. The inquirer therefore asks whether the customer may determine “surplus over and above its liabilities and capital” by either calculating surplus minus the total liabilities and capital stock or calculating the surplus minus capital stock.

He also asks the difference between “surplus to policyholders” and “surplus of such insurer” in determining an insurer’s financial condition within the meaning of Insurance Law § 1408(b).

Analysis:

Insurance Law § 1408 governs the acquisition of insurance company shares by domestic insurers or United States branches of alien insurers and limits the amount of such investments in determining the financial condition of the domestic insurer. That section provides, in pertinent part, as follows:

(a) Any insurer which makes investments under the authority of subsection (c) of section one thousand four hundred three of this article and which meets the requirements of such subsection and section one thousand four hundred two of this article, may invest in, or otherwise acquire, the shares, including voting trust certificates, certificates of deposit, interim receipts and other similar instruments representing such shares, of any other insurance companies, including for purposes of this section any corporation having a majority of its assets invested in one or more insurance companies, in an amount which, together with its present holdings and with any indirect or proportionate interest in insurance company shares held by it through any intermediate subsidiary, shall not exceed in value thirty-five percent of the surplus to policyholders of such acquiring insurer, or fifty percent of its surplus over and above its liabilities and capital, whichever is greater. No United States branch of an alien insurer shall be permitted to acquire or hold any shares of any alien insurance corporation.

(b) This section shall not prohibit the acquisition of insurance company shares by the acceptance of a stock dividend nor prohibit the owner of previously lawfully acquired shares of an insurance company from making a contribution, with the approval of the superintendent, to such other insurance company`s surplus. Notwithstanding any other provisions of this chapter, any domestic insurer or United States branch of an alien insurer, which, prior to January first, nineteen hundred forty, acquired shares of other insurance companies in accordance with law in force at the time of such acquisition, may continue to hold them. In determining the financial condition of a domestic insurer shares of other insurance companies shall be valued in accordance with subsection (c) of section one thousand four hundred fourteen of this article ¹ but in no event shall their aggregate value be allowed as an admitted asset in excess of fifty per centum of the surplus to policyholders or sixty per centum of the surplus of such insurer, whichever is greater.

(c) In applying the formulas of this section, the initial calculation of surplus shall include voluntary reserves not required by law and the value of insurance company shares before adjustment for any excess holdings thereof. (Emphasis added.)

Thus, to determine whether a domestic insurer or United States branch of an alien insurer can lawfully acquire insurance company shares, the insurer must meet the investment limitations and financial condition requirements set forth in Insurance Law § 1408(b).

Calculating “Surplus over and above its liabilities and capital” within the meaning of Insurance Law § 1408(a)

The inquirer first asks whether an insurer, pursuant to Insurance Law § 1408(a), may determine “surplus over and above its liabilities and capital” by either calculating the surplus minus the total liabilities and capital stock or calculating the surplus minus capital stock. Insurance Law § 107(a)(12) defines “capital” as “the aggregate par value of all classes of shares of capital stock issued and outstanding.” Thus, an insurance company must calculate “surplus over and above its liabilities” pursuant to Insurance Law § 1408(a) by calculating surplus to policyholders minus “the aggregate par value of all classes of shares of capital stock issued and outstanding.” This value is equal to the sum listed, for a given year, in Line 35 of the “Liabilities, Surplus and Other Funds” form of the New York State Insurance Department 2008 Annual Statement, less the sum listed, for a given year, in Line 28.

Differentiating between “surplus to policyholders” and “surplus of such insurer” under § 1408(b)

The inquirer also asks about the difference between “surplus to policyholders” and “surplus of such insurer” for the purposes of determining financial condition within the meaning of Insurance Law § 1408(b). Insurance Law § 107(a)(42) defines “surplus to policyholders” as “the excess of total admitted assets over the liabilities of an insurer, which is the sum of all capital and surplus accounts minus any impairment thereof.” The term “surplus” is defined in Insurance Law § 4105(a)(3) as “the amount of the insurer’s admitted assets in excess of its capital and liabilities” including “any voluntary reserves, or any part thereof, which are not required by law.” As noted above, Insurance Law § 107(a)(12) defines capital as “the aggregate par value of all classes of shares of capital stock issued and outstanding.” Thus, a domestic insurer or United States branch of an alien insurer must determine “surplus to policyholders” by calculating the excess of total admitted assets over liabilities, and must determine “surplus of such insurer” by calculating the admitted assets, including any voluntary reserves, or any part thereof, which are not required by law, in excess of (1) its capital and (2) its liabilities.

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

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¹ Insurance Law § 1414(c) addresses the valuation of shares of an insurance company which is not a subsidiary, and provides that such shares should be valued at market value if listed on a national securities exchange. If not so listed, the shares should be valued at the lesser of market value or book value.