Reinsurance trusts are a common means of securing a reinsurer’s obligation to a ceding company. For arrangements subject to New York law, such trusts are established under New York’s Regulation 114, which limits the types of assets that may be held in the trust to specific categories, including those of the type specified in select paragraphs of Section 1404(a) of the New York Insurance Code. One type of eligible investments consists of “A” rated (or higher) obligations of American institutions. Regulation 114 does not, however, specify when the rating requirement is measured, leaving open the question of whether a security that was “A” rated when placed in the trust loses its eligibility under Regulation 114 if subsequently down rated.
The Office of the General Counsel of the New York Insurance Department addressed this question in an opinion dated September 30, 2009, OGC Op. No. 09-09-06. In that opinion, the OGC noted that Section 1401(b) of the New York Insurance Code provides that “All financial tests and other requirements for the making of any investment are satisfied if complied with on the date of acquisition by the insurer, except as otherwise permitted by this chapter or by regulation.” The OGC then interpreted this language to mean that “absent any express legal or regulatory authorization to the contrary, any financial requirement (such as the rating of a given security) is measured as of the date of acquisition of the security.” Applying this standard, the OGC concluded that, because nothing in Regulation 114 or elsewhere in New York Insurance Law specifies otherwise, any assets contributed to a Regulation 114 trust must meet any applicable statutory rating requirement as of the asset’s acquisition date.