The Office of General Counsel issued the following informal opinion on August 2, 2001, representing the position of the New York State Insurance Department.

Re: Issuance of Mandatorily Exchangeable Preferred Stock

Questions Presented

Would the financing arrangement described below be permissible under the New York Insurance Law?

Would the Department restrict the amount, timing or method of determining the level of dividends to be paid on such shares?

If the arrangement were determined to be permissible, how would the preferred shares be treated on the Company's balance sheet?


The financing arrangement would be permitted under the New York Insurance Law.

The Department would not impose any limits on dividends paid.

The shares would be treated no differently than shares of the insurer itself.


An employer has devised a financing structure that has been successfully utilized by a number of banks. The inquirer wants to know about its possible suitability for the insurance industry.

The proposed arrangement involves the creation of a wholly-owned investment subsidiary ("SPV") by a life insurance company ("Company"). The Company contributes assets (typically, real estate) to the SPV. The SPV issues preferred shares to the Company. The Company will arrange to have the preferred shares of the SPV sold to investors in a private placement.

The preferred shares will be securities of the SPV. However, should there occur a "credit event" with respect to the Company, the shares will be mandatorily exchangeable into shares of the Company, the assets of the SPV would revert to the Company, and the SPV would be dissolved. Thus, upon the occurrence of a credit event, the transfer of assets to the SPV would be unwound, and the investors would possess the preferred stock of the Company and not the SPV.


The proposed financing mechanism involves the establishment of an investment subsidiary of the Company. Such a subsidiary is defined by N.Y. Ins. Law § 1702 (McKinney 2000) as follows:

[A] subsidiary… engaged or organized to engage exclusively in the ownership and management of assets (other than equity securities of subsidiaries) authorized as investments for the past corporation and other investment subsidiaries…

In the proposed structure, the SPV constitutes an investment subsidiary of the Company in that it functions solely as the holder of investment assets transferred to it by the Company.

N.Y. Ins. Law § 1704 (d) (McKinney 2000) sets forth the characterization of investment subsidiary as simply an "alter-ego" or pass-through entity for purpose of insurance regulation. That section provides as follows:

Investments made or acquired by investment subsidiaries shall be deemed, for the purposes of this chapter, to be made or acquired directly by the parent corporation (pro rata, in the case of a subsidiary less than all of whose voting securities are owned by the parent corporation, in accordance with the parent corporation's investment in such subsidiary), and shall (to such extent) be subject to all the provisions and limitations (including quantitative limits) on the making thereof specified in this chapter with respect to investments by the parent corporation.

Under N.Y. Ins. Law § 1704 (d), assets held by the investment subsidiary are attributed to the parent insurance company. In effect, the existence of the subsidiary is disregarded.

Nothing in the New York Insurance Law prohibits the use of the financing method described in the inquiry. With respect to the second inquiry, the Department would not restrict the amount, timing or method of determining the level of dividends to be paid on the shares. Under N.Y. Ins. Law § 4207 (McKinney 2000), there are specific guidelines governing the payment of dividends by a stock life insurer. However, these guidelines are intended to protect the solvency of the insurer. The statute thus has no applicability to an investment subsidiary.

With respect to the treatment of the preferred shares of the investment subsidiary, such shares will be treated no differently than the shares of the insurer itself.

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