The Office of General Counsel issued the following opinion on May 11, 2000 representing the position of the New York State Insurance Department.

Posting of Collateral in Connection with Derivative Transactions

Questions Presented:

1. To what extent would an insurance company be permitted to post collateral to another financial institution in connection with a derivatives transaction?

2. Would assets used as collateral as described above be viewed as "non-admitted assets"?

3. If an insurance company were to go into rehabilitation, would the Superintendent attempt to recover the assets pledged as collateral for the benefit of policyholders?


1. Provided that the posting of collateral in connection with derivative transaction does not cause the insurer to violate the provisions of N.Y. Ins. Law § 1410 (McKinney Supp. 2000) or Regulation 163, N.Y. Comp. Codes R. & Regs. tit. 11 §§ 178.0 – 178.11 (1999), the posting of collateral is not prohibited.

2. Assets posted as collateral by an insurer would qualify as "admitted assets". However, the insurer must disclose the status of such assets on its annual statement and in any other public statement of its financial condition.

3. Depending upon the particular facts and circumstances of the situation, if an insurer were to go into rehabilitation, the Superintendent may seek to recover assets pledged by the insurer as collateral in a derivative transaction.


An insurer is engaged in a derivative transaction. Owing to potential market movements during the course of the transaction, the insurer’s counterparty requests that the insurer post assets as collateral to assure the counterparty of payment at the settlement of the transaction. The permissibility of the posting of collateral and the treatment of any assets so posted thus becomes a matter of concern.


1. Posting of collateral

Chapters 650 and 651 of the Laws of 1998 amended several sections of Article 14 of the Insurance Law and added new Section 1410 (Derivative transactions and derivative instruments). N.Y. Ins. Law § 1410 (McKinney Supp. 1999-2000). The purpose of these enactments was to expand the authority of insurers to enter into derivative transactions.

The new provisions addressing the issue of derivative transactions set limits on authorized derivative transactions and instituted the requirement that insurers must formulate and file a derivative use plan with the Superintendent. The Regulation promulgated pursuant to the new law more completely defines the terms used in Section 1410, establishes the content of the derivative use plan, and establishes management oversight, reporting, internal control, documentation requirements, and accounting standards for derivative transactions. Regulation 163, N.Y. Comp. Codes R. & Regs. tit. 11, § 178.0 (1999).

If an insurer were not in violation of any other requirement of the applicable law and regulations, the Department would not object to an insurer’s posting of collateral in connection with a derivative transaction.

2. "Admitted Asset" Status of Assets Posted as Collateral

The qualification of an asset as "admitted" is governed by Section 1301 of the Insurance Law. Paragraphs (1) through (20) of Section 1301(a) comprise a detailed listing of the types of assets which specifically qualify as "admitted assets". Paragraph (21) of Section 1301(a) is a "catch all" category of admitted asset, and states that the following will be allowed as admitted assets: "[o]ther assets, not inconsistent with the foregoing provisions, deemed by the Superintendent available for the payment of losses and claims, at values determined by him." N.Y. Ins. Law §1301(a)(21) (McKinney Supp. 1999-2000).

Although Section 1301 sets forth the types of assets that qualify as admitted assets, it does not address whether the posting of an asset as collateral disqualifies the asset from being counted as an admitted asset on the books of an insurer. That question, however, is indirectly answered by Section 1313 (c), which mandates that an insurer may not publish a statement of separate financial condition unless it clearly indicates the amount of securities included in admitted assets which are pledged for any loan or guaranty. N.Y. Ins. Law §1313(c) (McKinney 1985). Insurers are also required to reveal the amount of assets pledged as collateral on their annual statement filed with the Insurance Department. In addition, individual assets owned by the insurer which are pledged as collateral must be identified in the asset schedules by placing the letter "C" to the far right in the description column alongside each such asset. National Association of Insurance Commissioners, Annual Statement Instructions – Life, Accident & Health 113, 114 (1997).

In light of the above, the fact that an asset is pledged as collateral by an insurer does not mean that the asset no longer qualifies as an admitted asset. Nevertheless, the insurer must report such an asset’s impaired status.

3. Recovery of pledged assets upon liquidation/rehabilitation of insurer

The recoverability of assets pledged as collateral is not specifically addressed by the Insurance Law. However, the Superintendent could seek to recover such assets in the event the insurer were to go into rehabilitation or liquidation. Whether such assets are recoverable, however, depends upon the provisions of the collateral agreement and the particular circumstances under which the assets were pledged. For example, any such transfer may be viewed as a voidable transfer under Section 7425 of the Insurance Law. That section provides, in relevant part, as follows:

Any transfer of, or lien created upon, the property of an insurer within twelve months prior to the granting of an order to show cause under this article with the intent of giving to any creditor or enabling him to obtain a greater percentage of his debt than any other creditor of the same class and which is accepted by such creditor having reasonable cause to believe that such a preference will occur, shall be voidable.

N.Y. Ins. Law § 7425(a) (McKinney Supp. 1999-2000).

Courts have previously held that assets posted as collateral by an insurer were within the jurisdiction of the Superintendent in his capacity as rehabilitator. See People by Van Schaick v. Title & Mortgage Guarantee Co. of Buffalo, 149 Misc. 643, 269 N.Y.S. 16 (Sup. Ct. Erie Co. 1933), aff’d, 264 N.Y. 69, 190 N.E. 153 (1934). In that case, Title & Mortgage Guarantee Co. of Buffalo (the "Insurer"), had deposited bonds and mortgages with the Marine Trust Company of Buffalo (the "Trust Company"). These deposited assets were held as collateral security for mortgage certificates that the Insurer had sold to the public. When the Insurer was forced into rehabilitation, the Superintendent, as rehabilitator, moved to acquire the deposited assets, and Trust Company, along with certain of the certificate holders, objected. The court held that the assets deposited with the Trust Company remained the property of the Insurer, and, as such, were properly subject to the control of the rehabilitator, stating:

Prior temporary relinquishment of possession of property by the [Insurer] did not limit the absolute right of the rehabilitator to take such property of the [Insurer] unto himself. To that extent the rehabilitator has greater powers than the [Insurer] had before the order of rehabilitation. … The bonds, mortgages, cash, Liberty Bonds, and real property deposited with the [Trust Company] were at all times the property of the [Insurer]. … The depositary agreements provided that the [Insurer] represented itself as the owner of the bonds and mortgages so deposited. At no time did the [Insurer] agree to nor did it relinquish that ownership to the depositary, the certificate holders or any other individual or corporation. The [Insurer] retained, and until the order of rehabilitation exercised exclusive control, right of substitution, and actual ownership of, the bonds and mortgages.

Id., 269 N.Y.S. at 18-19.

Although the particulars of any given collateral or security arrangement may vary, in view of the foregoing the pledging of assets as collateral by an insurer should not be viewed as insulating those assets from attachment by the Superintendent in the event of a liquidation or rehabilitation of the insurer.

For further information you may contact Senior Attorney Michael Campanelli of the Department’s New York office.