The Office of the General Counsel of the New York Insurance Department (NYID) issued an opinion dated October 27, 2008, No. 08-10-09 (the Opinion), with respect to assets deposited under a reinsurance trust pursuant to New York Regulation No. 114 (11 N.Y.C.R.R 126). The Opinion addresses whether the assets on deposit under a qualified Regulation 114 trust must be denominated in U.S. dollars or must merely be issued by an “American Institution.” No specific facts apparently were provided by the inquiring party. In short, pursuant to the Opinion, the NYID requires that all Regulation 114 assets be denominated in U.S. currency.

Insurers need to be certain that their Regulation 114 trusts that are governed by the New York Insurance Code (the Code) will include only those assets that are denominated in U.S. currency.


Regulation 114 trusts usually are established by reinsurers that are not authorized under the Code in favor of a licensed insurer or reinsurer. Generally, if an insurer or reinsurer (including, under the view of the NYID, both a domestic and licensed insurer or reinsurer) reinsures insurance to an unauthorized reinsurer, the unauthorized reinsurer’s financial obligations under the reinsurance arrangement must be collateralized by one of three methods: a clean letter of credit (under NY Regulation 133 for New York domestic or licensed insurers), funds withheld or a Regulation 114 trust. Otherwise, the ceding insurer will not be afforded credit on its financial statement for the ceded risk.

One of the more popular means of securing reinsurance obligations is a Regulation 114 trust, since, among other reasons, Regulation 114 trusts generally are less expensive than letters of credit; do not require the use of a reinsurer’s lines of credit with the reinsurer’s bank; and affords the reinsurer some leeway in investing the underlying assets deposited in the Regulation 114 trust including, potentially, access to the income derived from those assets.

It is noteworthy that, since the NYID historically takes an extraterritorial view of the application of the Code, covering both New York domestic insurers and reinsurers as well as companies that are merely licensed in the state, Regulation 114 applies to most property/casualty and life insurers.

Investments Under Regulation 114

Regulation 114 limits the types of permitted trust assets in a Regulation 114 Trust to cash (U.S. legal tender); certificates of deposit (issued by a U.S. bank and payable in U.S. legal tender); and those investments specified under Section 1404(a)(1), (2), (3), (8) and (10) of the Code (as long as such investments are not issued by a parent, subsidiary or affiliate of either the reinsurer or the insurer). In sum, Section 1404(a)(1), (2), (3), (8) and (10) investments are: U.S. federal and state government obligations; obligations of American institutions (generally rated A or higher or NAIC 1); preferred stock of American institutions that have obligations that qualify under Section 1404(a)(2) of the Code; equity interests of American institutions, provided that the institution has debt and preferred stock that qualify under Section 1404(a)(2) and (a)(3) and those equity interests are registered securities; and certain registered investment companies that limit their investment to assets that qualify under Section 1404(a)(1), (2), (3) and (8).

Section 1404(a) defines an American institution as an institution that was created or exists under the laws of the United States or of any state, district or territory of the United States. However, neither the Code nor Regulation 114 itself requires that the security be U.S. dollar denominated.

The Opinion

The Opinion states that all assets deposited under a Regulation 114 trust must be U.S. dollar denominated since, according to the NYID, the use of foreign currency assets under a Regulation 114 trust would not fulfill the expressed purpose and intent of Regulation 114—protecting U.S. insurers that cede risks to unauthorized reinsurers by affording the ceding insurer access to collateral that can be readily liquidated. This position is consistent with previous opinions issued by the NYID with respect to the treatment of foreign currency denominated obligations. For more information, see for example NYID, Office of General Counsel Opinion No. 86-94, dated October 23, 1986. While that opinion specifically addresses the status of a foreign currency denominated obligation of an American institution, in the NYID’s view, its rationale would apply to any type of asset eligible for contribution to a Regulation 114 trust.

According to the Opinion, Regulation 114 is intended to protect domestic insurers that have ceded business to unauthorized reinsurers by affording cedents unfettered access to collateral that can be readily liquidated. For this reason, the Regulation prohibits any trust features that could possibly impair the use of the proceeds of an investment by the ceding company. Denomination of an asset in a foreign currency introduces the risk of exchange rate fluctuation (and possibly the imposition of exchange controls). Accordingly, to allow the use of foreign currency denominated assets would run counter to the intent and purpose of Regulation 114. Further, in addressing an earlier inquiry seeking an interpretation of Insurance Law § 1404(a), the Office of the General Counsel concluded that an obligation of a U.S. issuer denominated in a foreign currency would not qualify as an obligation of an American institution under Insurance Law § 1404(a)(2) because of the exchange rate fluctuation and currency blockage risks inherent in foreign currency denominated assets. Accordingly, only U.S. dollar denominated assets may be used to fund a Regulation 114 trust.