The Office of General Counsel issued the following informal opinion on April 18, 2000 representing the position of the New York State Insurance Department.

Funding Agreement Securitizations

Questions Presented

1. If a special purpose vehicle ("SPV") formed for the purpose of purchasing and holding funding agreements issues securities which are offered to or purchased by investors in New York, will the SPV be considered to be doing an unlicensed insurance business in this state?

2. Will the entities that market the securities be selling insurance products in New York without the appropriate licenses?


1. No. The SPV which issues the securities will not be doing an unlicensed insurance business in this state.

2. No. The entities that market the securities will not be selling insurance products in New York without the appropriate licenses.


In a typical transaction of this kind, one or more life insurers issue one or more funding agreements which will be used to secure certain debt or equity securities issued by an SPV organized under the laws of a jurisdiction within or outside of the United States. Each of the life insurers are organized under the laws of a jurisdiction within the United States, and are subject to the supervision of its state of domicile.

The SPV is typically organized as a business trust, limited liability company or another type of single purpose entity. The SPV are not authorized as an insurance companies. The securities issued by the SPV may be issued in a number of different series and are sold through one or more investment banks or other securities firms, in the United States, to institutional buyers pursuant to Rule 144A, Regulation D or other applicable exemption under the Securities Act of 1933 or, outside of the United States, pursuant to Regulation S of the 1933 Act. The securities sold in the United States may be sold to investors who reside in New York.

The funding agreements may be initially purchased by and issued directly to the SPV or, alternatively, may be initially purchased by and issued to one or more securities firms or another person or entity not otherwise a party to the transaction and subsequently transferred to the SPV. The funding agreements provide for periodic payments by the issuing insurer to the SPV based on an agreed upon schedule which will not be tied to a loss or to a morbidity or mortality contingency.

The SPV use the proceeds from the sale of the securities to purchase or otherwise fund the purchase or transfer of the rights to or interests in the funding agreements from the insurers or the initial purchasers. Once the funding agreements have been transferred to the SPV, the funding agreements are not eligible for further transfer or assignment by the SPV without the prior consent of the issuing insurers. The SPV may enter into one or more swap transactions with persons or entities not affiliated with the insurers.

The securities are issued in denominations smaller than the face amount of any of the funding agreements held by the SPV. Generally, the total amounts paid on the securities issued in a transaction will be less than the total amounts paid to the SPV under the funding agreements used to fund payments with respect to such securities. The difference between the two amounts will be used by the SPV for the payment of the expenses related to the transaction. In certain circumstances, the total amounts paid with respect to the securities may be identical to amounts paid with respect to the funding agreements.

Payments with respect to the securities are the sole obligation of the SPV and are not directly guaranteed by the insurers or any other person. Investors in the securities have no rights with respect to or recourse against the insurers. In the event of nonpayment by the SPV, the sole enforcement right of the investors is against the SPV and its assets.


The term funding agreement is not defined in the Insurance Law. However, the Department has historically viewed an unallocated guaranteed investment contract that does not provide for annuity purchases by or on behalf of plan participants to be a funding agreement. Pursuant to N.Y. Ins. Law Section 3222(a)(McKinney 1985), the issuance of a funding agreement in New York by an authorized insurer constitutes doing an insurance business. N.Y. Ins. Law Section 3222(b)(McKinney 1985) enumerates the eligible holders of funding agreements. In particular, N.Y. Ins. Law Section 3222(b)(v)(McKinney 1985) permits an authorized insurer to issue a funding agreement to fund any program of an institution which has assets in excess of $25 million.

Assuming that the SPV, a securities firm or any other entity purchasing the funding agreement is a N.Y. Ins. Law Section 3222(b)(v) entity, then an authorized life insurer may issue the funding agreement to such entity. The Department will not look beyond that transaction to focus on the role or activities of the SPV or the securities firm in its sale of securities to the investors.

Where an unauthorized insurer issues a funding agreement for delivery outside of the state of New York to the SPV, a securities firm or other entity, the insurer must comply with the laws of its state of domicile. The New York Insurance Law is not implicated in these circumstances.

Moreover, the securities are not insurance contracts because there is no obligation on the part of the SPV to "confer a benefit of pecuniary value" on the purchasers of the securities upon the happening of a fortuitous event in which the purchaser has, or is expected to have, a pecuniary interest which will be adversely effected by the event. Securities are unlike insurance contracts because the purchasers of securities commit their resources in order to achieve investment returns. The investment transaction is complete upon purchase, payment by the security holder, and delivery of the security to the purchaser by the issuer. An insurance contract on the other hand involves an ongoing undertaking to deliver a benefit of some kind in the future upon the happening of an event, which may or may not happen. Since the securities do not meet the definition of insurance contract under New York law, the entities that will be selling the securities do not have to be licensed by this Department to sell the securities in New York.

For further information you may contact Associate Attorney Rochelle Katz at the New York City Office.