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

David A. Paterson
Governor

James J. Wrynn
Superintendent

OGC Op. No. 09-10-04

The Office of General Counsel issued the following opinion October 26, 2009, representing the position of the New York State Insurance Department.

Re: Permissibility and Effect of Obtaining Financial Guaranty Insurance to Support the Rating of Insurance Company Assets

Questions Presented:

1. Would an insurance company (the “Company”) violate the New York Insurance Law if it were to obtain financial guaranty or portfolio insurance from an alien non-authorized insurer (“Guarantor”) on certain CMBS held in the Company’s general account?

2. Would the CMBS so insured remain admitted assets of the insurer and be classified as carrying the AA/Aa2 rating of the Guarantor?

3. Would the Company obtaining a guaranty on the CMBS require the Company to treat the transaction as a disposition of the original CMBS followed by the acquisition of a new CMBS?

Conclusions:

1. Not necessarily. The Company would not violate the New York Insurance Law if it were to obtain, outside of this state, financial guaranty or portfolio insurance from an alien non-authorized insurer (“Guarantor”) on certain CMBS held in the Company’s general account.

2. The CMBS would remain admitted assets even if they were downgraded. The effect of any downgrade would be upon their status as permissible reserve investments. Whether or not the CMBS continue to count as reserve investments depends upon whether they continue to conform to the statutory requirements (e.g., the rating) for assets of that type.

3. No. The Company obtaining a guaranty on the CMBS will not require the Company to treat the transaction as a disposition of the original CMBS followed by the acquisition of a new CMBS.

Facts:

At issue is the treatment of certain CMBS held in Company’s general account. The CMBS are currently rated between A and AAA (NAIC Category 1), but the Company is concerned that they may be downgraded in the future. Because of this concern, the Company is considering obtaining a guaranty (the “Guaranty”) insuring it against principal and interest losses on the CMBS. The Guaranty would be provided by an offshore entity (“Guarantor”) and would either take the form of a financial guaranty policy or a portfolio insurance policy.1 The Guarantor is authorized to write either of the foregoing kinds of policy under the laws of its domicile. The Guarantor is not authorized to engage in the business of insurance in New York and does not maintain an office or agency or other presence here, and does not transact any insurance business in this state or anywhere else in the United States. Finally, you note that in connection with obtaining the Guaranty it is contemplated that the CMBS and the Guaranty policy could be deposited into a segregated account owned by the Company.

Analysis:

The inquiry raises three questions. Each is addressed in turn.

Whether Obtaining the Guaranty Constitutes a Violation of New York Law

The first question is whether the Company would run afoul of the Insurance Law if it were to obtain the Guaranty from the Guarantor, an offshore entity not authorized to engage in the business of insurance in this State. N.Y. Ins. Law § 1102(a) (McKinney 2006) prohibits an unauthorized insurer from doing an insurance business within New York and provides, in relevant part, as follows:

(a) No person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter, or exempted by the provisions of this chapter from such requirement.

Although an unauthorized alien insurer is not be permitted to do an insurance business in New York, there is nothing to prevent an insured from seeking coverage from such an insurer provided that the entirety of the transaction takes place outside of New York. Accordingly, nothing prohibits the Company from obtaining, outside of this state, a portfolio insurance or financial guaranty insurance policy from an alien, unauthorized insurer.

Status of CMBS as Admitted Assets

The second inquiry pertains to the admissibility of assets in determining the financial condition of an insurer. Insurance Law § 1301 sets forth the various kinds of assets that can qualify as admitted assets. Based upon the representations set forth in the inquiry, it appears that the CMBS in question, given their status when acquired as obligations of an American institution rated in NAIC category 1, currently qualify as both reserve assets and admitted assets under Insurance Law §§ 1301(a)(2), 1404(a)(2), and 1407(a). Those statutes provide, respectively, as follows:

§ 1301. Admitted assets. (a) In determining the financial condition of a domestic or foreign insurer or the United States branch of an alien insurer for the purposes of this chapter, there may be allowed as admitted assets of such insurer, unless otherwise specifically provided in this chapter, only the following assets owned by such insurer

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(2) Investments acquired or held in accordance with the applicable provisions of this chapter, and the income due or accrued thereon subject to paragraphs three and four of this subsection as to dividends, interest, rents and accrued taxes paid.

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§ 1404. Types of reserve investments permitted for non-life insurers. (a) In addition to the investments specified in subsection (b) hereof, but excluding any investment prohibited by the provisions of paragraph one, three, four, six, eight, nine or ten of subsection (a) of section one thousand four hundred seven of this article, the reserve investments of a domestic insurer authorized to make investments under the authority of this section shall consist of the following:

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(2) Obligations of American institutions.
(A) Obligations which are issued by any solvent American institution or which are assumed or guaranteed by any solvent American institution (other than an insurance company) and which are not in default as to principal or interest provided such obligations:

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(iv) have been given the highest quality designation by the Securities Valuation Office of the National Association of Insurance Commissioners.

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§ 1407. Non-reserve and prohibited investments for property/casualty and certain other insurers.
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…

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Under the facts presented, the CMBS qualify as admitted assets under Insurance Law § 1407 and as reserve investments under Insurance Law § 1404.

The inquiry is prompted by concerns that the CMBS may be downgraded in the future. In order to remedy the consequences of a downgrade, the Company has proposed obtaining (outside of the United States) a financial guaranty or portfolio insurance policy on the CMBS from an alien, unaccredited insurer. It is important to note, however, that even if the CMBS are downgraded, they will nevertheless continue to qualify as admitted assets. Their continued status as permissible reserve investments could be endangered by a ratings downgrade, however.

In essence, the second question involves the possible “balance sheet” effect on the Company once it has acquired the Guaranty. This question, however, is ultimately not a legal one -- the determination of whether or not the CMBS (or any asset) remains a reserve investment depends upon the asset’s quality and characteristics. If CMBS retains its present high rating and continues to meet the requirements set forth in Insurance Law § 1404, then the CMBS will remain classified as reserve investments.

Whether the Purchase of the Guaranty Will be Viewed as a Disposition of the CMBS Followed by the Acquisition of a New CMBS

The third question asks whether, under the New York Insurance Law, obtaining the Guaranty will require Insurer to treat the transaction as a disposition of the CMBS followed by the purchase of the guarantied CMBS. Nothing in the Insurance Law requires such treatment, so for Annual Statement reporting purposes, the CMBS will not be treated as having been disposed of as a result of obtaining the Guaranty. Accordingly, for statutory accounting purposes, no gain or loss would be required to be recognized by the Company as a result of obtaining the Guaranty. Please note, however, that the Insurance Department’s Office of General Counsel will not opine upon the federal or state income tax consequences that may flow from the purchase of the Guaranty.

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

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1 A portfolio insurance policy is a policy that promises to make an investor whole should the value of the investor’s investment portfolio fall below a certain level. Portfolio insurance is not recognized as a permissible kind of insurance under New York law. See O.G.C. Opinion No. 05-11-02 (November 3, 2005) (holding that a policy that purported to guarantee the value of an investment portfolio did not constitute a permissible kind of financial guaranty insurance).