OGC Op. No. 07-06-11
The Office of General Counsel issued the following opinion on June 14, 2007 representing the position of the New York State Insurance Department.
Loans or Extensions of Credit Among Affiliates
Does New York Insurance Law § 1407(a)(4) prohibit all loans or extensions of credit between a domestic property/casualty insurer that is exempt from the provisions of Article 15 of the Insurance Law and one or more of its affiliates?
Yes. New York Insurance Law § 1407(a)(4) prohibits all loans or extensions of credit between a domestic property/casualty insurer and one or more of its affiliates, irrespective of whether the insurer is exempt from the provisions of Article 15 of the Insurance Law.
The inquiry is general in nature, without reference to specific facts.
New York Insurance Law § 1407 is central to the inquiry. It governs the non-reserve and prohibited investments of property/casualty insurers.1 Prohibited investments include the obligations, shares and securities of an insurer’s parent or affiliate.2 The statute reads, in relevant part, as follows:
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, except the following prohibited investments:
(4) Obligations, shares or other securities (including certificates of deposit) issued by a parent corporation or a corporation which is an affiliate or will be an affiliate after direct or indirect acquisition by the insurer.
N.Y. Ins. Law § 1407 (a) (4) (McKinney 2006). The plain text of the statute unambiguously sets forth the rule that a property/casualty insurer may not invest in its parent’s or affiliate’s obligations or securities.
It was suggested that Paragraph 4 (i) of the Department’s Circular Letter 17-2001 (August 13, 2001) implies that loans or extensions of credit may be made among affiliates of companies if they are exempt from the provisions of Article 15.3 That paragraph states in pertinent part:
Beginning September 1, 2001, every authorized domestic insurer that is exempt from the provisions of Article 15 of the New York Insurance Law is hereby directed ... to furnish this Department by e-mail with a report ... at least 30 days in advance of entering into any of the following transactions: (An "affiliate" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the insurer.)
i. Sales, purchases, exchanges, loans, extensions of credit, or investments with an affiliate, provided the transactions are equal to or exceed:
· With respect to nonlife insurers, the lesser of three percent (3%) of the insurer’s admitted assets or twenty-five percent (25%) of surplus to policyholders...
The Department does not share this interpretation of Paragraph 4(i).
The Department issued Circular Letter 17-2001 at the behest of the National Association of Insurance Commissioners to better conform New York’s reporting requirements regarding holding company transactions to those of the other states. It was not intended to limit the scope of Insurance Law § 1407(a) (4), or any other provision of the Insurance Law. In fact, a Circular Letter can not amend or limit any statute. Given this circumstance, Circular Letter 17-2001 should not be read to provide an exemption from the limitation set forth in Insurance Law § 1407(a) (4).
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 Non-reserve investments are investments that an insurer may make only after it has satisfied its statutory obligation to make minimum capital and minimum surplus to policyholders investments and required reserve investments. See N.Y. Ins. Law §§ 1402 and 1403 (McKinney 2006) and O.G.C. Opinion (March 6, 2002.
2 An “affiliate” is defined by N.Y. Ins. Law § 107(a)(4) as a corporation, the majority of whose shares is owned or controlled by the shareholders, directors or officers of another corporation, who own or control a majority of the shares of the other corporation. Generally, affiliates are “brother-sister” corporations, i.e., subsidiaries of the same parent.
3 Article 15 of the Insurance Law (N.Y. Ins. Law § 1501 et seq.) governs holding companies, which are defined as any person that directly or indirectly controls an authorized insurer. Article 15 sets forth rules governing transactions between insurers and the entities that control them and between insurers and other affiliates in the same holding company system. It also sets forth various reporting requirements. If an insurer is an “ultimate parent”, i.e., is not owned or controlled by any other entity, it is exempt from the provisions of Article 15. See N.Y. Ins. Law § 1502(a).