S4093-2011 Actions

• Jan 4, 2012: REFERRED TO INSURANCE
• Mar 17, 2011: REFERRED TO INSURANCE

S4093-2011 Memo

BILL NUMBER:S4093

TITLE OF BILL:
An act
to amend the insurance law, in relation to qualified trusts and
qualified reserve credits;
and providing for the repeal of such provisions upon expiration thereof

PURPOSE:
This bill would allow the acquisition and management of
investments by financial guaranty insurance corporations through
certain dedicated trusts. It would make it clear that the financial
guaranty insurance corporation may carry the net equity of such a
trust as an asset on its statutory balance sheet. It would also allow
the net value of a qualified trust to be counted among the specific
assets that financial guaranty insurance corporations must maintain
with respect to unearned premium reserves, loss reserves and loss
adjustment expense reserves and that certain dedicated cash flows
from the trust may be counted against contingency reserves.

SUMMARY OF PROVISIONS:
Section 1 of the bill allows qualified reserve
credits to reduce the aggregate net liability of a financial guaranty
insurance corporation when determining the limits of the aggregate
risk that it may assume.

Section 2 of the bill defines a qualified trust and qualified reserve
credit.

Section 3 of the bill:

* Provides the clear authority of financial guaranty insurance
corporations to recognize the net equity of a qualified trust on its
books as an admitted asset.

* Limits the assets considered in determining the net equity of the
qualified trust to cash and treasuries.

* Establishes the financial guaranty insurance corporation's first
priority rights with respect to the assets, of a qualified trust and
therefore subordinates the interests of investors, trust certificate
holders and other interest holders of the support trust to the rights
of such corporation.

* Allows the net equity of a support trust to be counted in the same
manner as reserve investments required of financial guaranty
insurance corporations generally.

* Fixes the discount rate that is applied in determining the present
value of certain payments relating to a qualified trust.

Section 4 of the bill allows qualified reserve credits to cover
contingency reserves that are required of financial guaranty
insurance corporations.

Section 5 contains the effective Date.


JUSTIFICATION:
The decline of the financial health of established bond
insurers, the very limited activity of new entrants to this market,
and the unfilled need for new bond insurers to meet current demands
for bond insurance makes a strong case that the bond insurance
industry needs a break from tradition.
This legislation would facilitate a novel, yet robust, method to
provide bond insurance to municipal bond issuers and a new bond
insurer financial structure designed to simultaneously accomplish two
seemingly incompatible objectives: to strengthen the credit
worthiness and increase the credit stability of the bond insurer, and
to increase the efficiency of the insurer's capital structure by
lowering its cost of capital. Both objectives are accomplished by
using a capital structure involving the acquisition and management of
municipal bonds whose debt service payments secure payments relating
to defaults on insured bonds.
This is accomplished through a dedicated trust formed by the bond
insurer and approved by the superintendent.

This legislation recognizes the strength of this financial structure
and allows it to fit squarely within the regulatory scheme and
statutory accounting practices dictated for all New York bond insurers.

Significantly, this legislation maintains New York's position as the
nation's financial vanguard by promoting a viable solution for the
complex issues facing the municipal bond market, helping local
municipalities reduce their borrowing cost, fostering job creation in
New York, bolstering its economy, generating incremental tax revenue
and supporting minority business enterprise.

PRIOR LEGISLATIVE HISTORY:

S.8092-A/A.11324-A (2009-2010)

FISCAL IMPLICATIONS:
None.

EFFECTIVE DATE:
This act shall take effect immediately and shall
expire and be deemed repealed 5 years after such date.

S4093-2011 Text

                      S T A T E   O F   N E W   Y O R K
  ________________________________________________________________________

                                    4093

                         2011-2012 Regular Sessions

                              I N  SENATE

                               March 17, 2011
                                 ___________

  Introduced  by  Sen. MARTINS -- read twice and ordered printed, and when
    printed to be committed to the Committee on Insurance

  AN ACT to amend the insurance law, in relation to qualified  trusts  and
    qualified  reserve  credits;  and  providing  for  the  repeal of such
    provisions upon expiration thereof

    THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND  ASSEM-
  BLY, DO ENACT AS FOLLOWS:


    Section  1.  Subsection  (d)  of section 6901 of the insurance law, as
  added by chapter 48 of the laws of 1989, is amended to read as follows:

    (d) "Aggregate net liability" means the aggregate  amount  of  insured
  unpaid principal, interest and other monetary payments, if any, of guar-
  antied  obligations  insured  or  assumed,  less  reinsurance ceded [and
  less], collateral AND QUALIFIED RESERVE CREDITS.
    S 2. Section 6901 of the insurance law is amended by  adding  two  new
  subsections (t) and (u) to read as follows:

    (T)  "QUALIFIED  TRUST"  MEANS A TRUST THAT IS ENGAGED OR ORGANIZED TO
  ENGAGE EXCLUSIVELY IN THE  ACQUISITION  AND  MANAGEMENT  OF  INVESTMENTS
  AVAILABLE  FIRST FOR THE PAYMENT OF LOSSES AND CLAIMS OF A SINGLE FINAN-
  CIAL GUARANTY INSURANCE CORPORATION.
    (U) "QUALIFIED RESERVE CREDIT" MEANS, WITH RESPECT TO  INVESTMENTS  IN
  WHICH  THE  INTERESTS  OF  THE  QUALIFIED TRUST ARE LIMITED TO RIGHTS TO
  PRINCIPAL, INTEREST OR OTHER PAYMENTS FROM SUCH INVESTMENTS, THE PRESENT
  VALUE OF AMOUNTS RECEIVABLE BY  THE  QUALIFIED  TRUST  FROM  INVESTMENTS
  GIVEN  A  DESIGNATION  OF  ONE BY THE SECURITIES VALUATION OFFICE OF THE
  NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS.
    S 3. Section 6902 of the insurance law is amended by adding three  new
  subsections (c), (d) and (e) to read as follows:

    (C)  IN  DETERMINING  THE FINANCIAL CONDITION OF A DOMESTIC OR FOREIGN
  FINANCIAL GUARANTY INSURANCE CORPORATION FOR THE PURPOSES OF THIS  CHAP-
  TER,  IN  ADDITION TO THE ASSETS SET FORTH IN SECTION ONE THOUSAND THREE
  HUNDRED ONE OF THIS CHAPTER, THERE SHALL BE ALLOWED AS AN ADMITTED ASSET

   EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                        [ ] is old law to be omitted.
                                                             LBD05170-01-1

 S. 4093                             2

  OF SUCH FINANCIAL GUARANTY INSURANCE CORPORATION THE  NET  EQUITY  OF  A
  QUALIFIED TRUST. THE ASSETS OF SUCH QUALIFIED TRUST CONSIDERED IN DETER-
  MINING  ITS  NET EQUITY SHALL BE LIMITED TO CASH, INCLUDING LEGAL TENDER
  OR  THE EQUIVALENT IN ANY OFFICE OF SUCH COMPANY OR IN TRANSIT UNDER ITS
  CONTROL AND THE TRUE BALANCE OF ANY DEPOSIT IN  A  SOLVENT  BANK,  TRUST
  COMPANY  OR THRIFT INSTITUTION, AND OBLIGATIONS WHICH ARE NOT IN DEFAULT
  AS TO PRINCIPAL OR INTEREST, WHICH ARE VALID AND LEGALLY AUTHORIZED, AND
  WHICH ARE ISSUED, ASSUMED, GUARANTEED OR INSURED BY THE UNITED STATES OR
  BY ANY AGENCY OR INSTRUMENTALITY THEREOF. THE RIGHTS AND OBLIGATIONS  OF
  THE  FINANCIAL GUARANTY INSURANCE CORPORATION WITH RESPECT TO A QUALIFY-
  ING TRUST SHALL BE DETERMINED BY THE TERMS AND CONDITIONS OF THE  QUALI-
  FYING TRUST, PROVIDED HOWEVER THAT THE RIGHTS OF ALL OTHER PARTIES SHALL
  BE SUBORDINATE TO THE RIGHTS OF SUCH FINANCIAL GUARANTY INSURANCE CORPO-
  RATION. THE FINANCIAL GUARANTY INSURANCE CORPORATION SHALL ESTABLISH THE
  TERMS AND CONDITIONS OF THE QUALIFYING TRUST, WHICH SHALL INCLUDE, WITH-
  OUT  LIMITATION,  THE REQUIREMENT THAT THE TRUSTEE'S AUTHORITY TO INVEST
  AND ACCEPT SUBSTITUTIONS THEREOF SHALL BE SUBJECT TO THE PRIOR  APPROVAL
  OF  SUCH  FINANCIAL  GUARANTY  INSURANCE  CORPORATION  UNLESS  THE TRUST
  INSTRUMENT OR AGREEMENT OF THE QUALIFYING TRUST SETS FORTH  THE  INVEST-
  MENTS  ACCEPTABLE  TO SUCH FINANCIAL GUARANTY INSURANCE CORPORATION. THE
  TERMS AND CONDITIONS OF A QUALIFYING TRUST FORMED BY A  DOMESTIC  FINAN-
  CIAL  GUARANTY  INSURANCE CORPORATION AND ANY AMENDMENT THERETO SHALL BE
  SUBJECT TO THE SUPERINTENDENT'S APPROVAL. NO PAYMENT IN COMPLIANCE  WITH
  THE  TERMS  AND CONDITIONS OF A QUALIFYING TRUST SHALL BE SUBJECT TO, OR
  INCLUDED IN CONNECTION WITH THE APPLICATION OF,  SECTION  FOUR  THOUSAND
  ONE HUNDRED FIVE OF THIS CHAPTER. SECTION ONE THOUSAND FOUR HUNDRED NINE
  OF  THIS  CHAPTER  SHALL  NOT  APPLY TO QUALIFYING TRUSTS OR A FINANCIAL
  GUARANTY INSURANCE CORPORATION'S INTEREST IN A QUALIFIED TRUST.
    (D) IF THE REQUIREMENTS OF SECTION ONE THOUSAND FOUR  HUNDRED  TWO  OF
  THIS  CHAPTER  AND  PARAGRAPH  ONE OF SUBSECTION (B) OF THIS SECTION ARE
  MET, A FINANCIAL GUARANTY INSURANCE  CORPORATION,  MAY,  EXCEPT  AS  SET
  FORTH  BELOW,  INVEST  ITS FUNDS IN, OR OTHERWISE ACQUIRE, OR LOAN UPON,
  ONLY THE TYPES OF INVESTMENTS SPECIFIED IN  SECTION  ONE  THOUSAND  FOUR
  HUNDRED  TWO OF THIS CHAPTER, SECTION ONE THOUSAND FOUR HUNDRED THREE OF
  THIS CHAPTER AND SUBSECTION (A) OF SECTION  ONE  THOUSAND  FOUR  HUNDRED
  FOUR  OF THIS CHAPTER (EXCEPT PARAGRAPHS EIGHT AND TEN OF SUBSECTION (A)
  OF SUCH SECTION); PROVIDED THAT ANY SUCH CORPORATION MAY ALSO INVEST ITS
  FUNDS IN, OR OTHERWISE ACQUIRE OR LOAN UPON INVESTMENTS PERMITTED  UNDER
  SECTIONS  ONE  THOUSAND  FOUR  HUNDRED  SEVEN OF THIS CHAPTER (INCLUDING
  INVESTMENTS OF THE CLASSES DESCRIBED IN  PARAGRAPHS  EIGHT  AND  TEN  OF
  SUBSECTION  (A)  OF SECTION ONE THOUSAND FOUR HUNDRED FOUR OF THIS CHAP-
  TER), SECTION ONE THOUSAND FOUR HUNDRED EIGHT OF THIS CHAPTER AND  ARTI-
  CLE  SIXTEEN  OF THIS CHAPTER, SO LONG AS IT MAINTAINS CASH, INVESTMENTS
  REQUIRED BY SECTION ONE THOUSAND FOUR HUNDRED TWO  OF  THIS  CHAPTER  OR
  PARAGRAPH  THREE  OF SUBSECTION (B) OF THIS SECTION, RESERVE INVESTMENTS
  UNDER SUBSECTION (A) OF SECTION ONE THOUSAND FOUR HUNDRED FOUR  OF  THIS
  CHAPTER  AND  INTERESTS  IN  A  QUALIFIED  TRUST,  FREE FROM ANY LIEN OR
  PLEDGE, WHICH, WHEN VALUED IN ACCORDANCE WITH  THE  PROVISIONS  OF  THIS
  CHAPTER,  SHALL  AT LEAST EQUAL FIFTY PERCENT OF THE AGGREGATE AMOUNT OF
  ITS UNEARNED PREMIUM, LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES AS SHOWN
  BY ITS LAST SWORN STATEMENT, ANNUAL  OR  QUARTERLY,  ON  FILE  WITH  THE
  SUPERINTENDENT.  IF A FINANCIAL GUARANTY INSURANCE CORPORATION MAINTAINS
  CASH, INVESTMENTS REQUIRED BY SECTION ONE THOUSAND FOUR HUNDRED  TWO  OF
  THIS  ARTICLE  OR  PARAGRAPH  THREE  OF  SUBSECTION (B) OF THIS SECTION,
  RESERVE INVESTMENTS UNDER SUBSECTION (A) OF SECTION  ONE  THOUSAND  FOUR
  HUNDRED  FOUR  OF  THIS CHAPTER AND INTERESTS IN A QUALIFIED TRUST, FREE

 S. 4093                             3

  FROM ANY LIEN OR PLEDGE, WHICH,  WHEN  VALUED  IN  ACCORDANCE  WITH  THE
  PROVISIONS OF THIS CHAPTER, SHALL AT LEAST EQUAL THE AGGREGATE OF SEVEN-
  TY  PERCENT  OF  ITS LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES AND FIFTY
  PERCENT  OF  ITS  UNEARNED  PREMIUM  RESERVES AS SHOWN BY ITS LAST SWORN
  STATEMENT, ANNUAL OR QUARTERLY, ON FILE WITH  THE  SUPERINTENDENT,  THEN
  SUCH  CORPORATION  MAY  IN ADDITION ENTER INTO THE TYPES OF TRANSACTIONS
  SET FORTH IN SECTION ONE THOUSAND FOUR  HUNDRED  TEN  OF  THIS  CHAPTER,
  SUBJECT  TO THE LIMITATIONS SET FORTH IN SUCH SECTION. THE TERM "LIEN OR
  PLEDGE" AS USED IN THIS SUBSECTION SHALL  NOT  INCLUDE  ANY  DEPOSIT  OF
  SECURITIES  OR  CASH  WITH  ANY  GOVERNMENT, NOR TRUSTED ASSETS, HELD IN
  TRUST FOR THE BENEFIT OR PROTECTION OF ALL OR ANY CLASS OF  THE  POLICY-
  HOLDERS, OR POLICYHOLDERS AND CREDITORS, OF SUCH CORPORATION.
    (E)  FOR  PURPOSES  OF  DETERMINING  QUALIFIED  RESERVE  CREDITS,  THE
  DISCOUNT RATE USED TO DETERMINE PRESENT VALUE SHALL BE THE AVERAGE  RATE
  OF  RETURN  ON  THE  ADMITTED ASSETS OF THE FINANCIAL GUARANTY INSURANCE
  CORPORATION AS OF THE DATE OF THE COMPUTATION OF THE APPLICABLE  RESERVE
  UNDER  THIS  CHAPTER.  THE DISCOUNT RATE SHALL BE ADJUSTED AT THE END OF
  EACH CALENDAR YEAR.
    S 4. Paragraph 5 of subsection (a) of section 6903  of  the  insurance
  law,  as  amended by chapter 605 of the laws of 2004, is amended to read
  as follows:

    (5) Contingency reserves required in paragraphs two, three and four of
  this subsection may be established  and  maintained  net  of  collateral
  [and],  reinsurance AND QUALIFIED RESERVE CREDITS, provided that, in the
  case  of  reinsurance,  the  reinsurance  agreement  requires  that  the
  reinsurer  shall,  on  or  after  the effective date of the reinsurance,
  establish and maintain a reserve in an amount equal  to  the  amount  by
  which  the  insurer  reduces  its  contingency  reserve, and contingency
  reserves required in paragraphs three and four of this subsection may be
  maintained (A) net of refundings and  refinancings  to  the  extent  the
  refunded or refinanced issue is paid off or secured by obligations which
  are  directly  payable or guarantied by the United States government and
  (B) net of insured securities in a unit investment trust or mutual  fund
  that have been sold from the trust or fund without insurance.
    S  5.  This  act shall take effect immediately and shall expire and be
  deemed repealed 5 years after such date.