N.Y. Insurance Law § 6904: Limitations

§ 6904. Limitations. (a) Financial guaranty insurance may be

transacted in this state only by a corporation licensed for such purpose

pursuant to section six thousand nine hundred two of this article.

(b) Permissible guarantees. (1) The superintendent shall not permit

the writing of financial guaranty insurance except as defined in

subparagraph (A) of paragraph one of subsection (a) of section six

thousand nine hundred one of this article, and a corporation may insure

the timely payment of United States dollar debt instruments, or other

monetary obligations, only in the following categories:

(A) municipal obligation bonds;

(B) special revenue bonds;

(C) industrial development bonds;

(D) obligations of corporations, trusts or other similar entities

established under applicable law;

(E) partnership obligations;

(F) asset-backed securities, trust certificates and trust obligations

other than mortgage-backed securities secured by first mortgages on real

property which are insurable by a mortgage guaranty insurer authorized

under paragraph twenty-three of subsection (a) of section one thousand

one hundred thirteen of this chapter, unless:

(i) such mortgages with loan-to-value ratios in excess of eighty

percent are:

(I) in the case of mortgages on property located in the state of New

York, insured by mortgage guaranty insurers authorized under paragraph

twenty-three of subsection (a) of section one thousand one hundred

thirteen of this chapter;

(II) in the case of mortgages on property located in a state other

than the state of New York, insured by mortgage guaranty insurers

authorized to do business in such other state; or

(III) in an aggregate principal amount less than the single risk

limits prescribed in paragraph five of subsection (d) of this section;

or

(ii) additional mortgages with principal balances, other collateral

with a market value, or (provided the insured risk is investment grade)

excess spread in an amount, in each instance at least equal to the

coverage that would otherwise be provided by such mortgage guaranty

insurers in accordance with item (i) of this subparagraph are pledged as

additional security for the asset-backed securities;

(G) installment purchase agreements executed as a condition of sale;

(H) consumer debt obligations;

(I) utility first mortgage obligations; and

(J) any other debt instrument or financial obligation that the

superintendent determines to be substantially similar to any of the

foregoing or shall otherwise be approved by the superintendent.

(2) An insurer may insure obligations enumerated in subparagraphs (A),

(B), and (C) of paragraph one of this subsection that are not investment

grade so long as at least ninety-five percent of the insurer's aggregate

net liability on the kinds of obligations enumerated in subparagraphs

(A), (B) and (C) of paragraph one of this subsection shall be investment

grade.

(3) A corporation may insure the timely payment of monetary

obligations in any category designated in this subsection

notwithstanding that such obligation may be insured by a financial

guaranty insurance policy issued by another insurer. In the event that

any obligation is insured by more than one financial guaranty insurance

policy, then each such insurance policy may by its terms specify its

priority of payment in the event of a default under the obligation

insured or any other insurance policy; provided that an insurer shall be

entitled to take into account payment under another policy insuring such

obligation for purposes of establishing and maintaining loss reserves

only to the extent that the policy issued by such insurer provides for

payment only in the event of payment default under both such obligation

and the other policy.

(4) A corporation may also write financial guaranty insurance as

defined in subparagraph (A) of paragraph one of subsection (a) of

section six thousand nine hundred one of this article to insure the

timely payment of non-United States dollar debt instruments or other

monetary obligations denominated or payable in foreign currency, only

for the categories listed in subparagraphs (A) through (J) of paragraph

one of this subsection, provided that:

(A) such currency is that of an Organisation for Economic Co-operation

and Development country or such other country (i) whose sovereign rating

is investment grade or (ii) as shall not otherwise be disapproved by the

superintendent within thirty days following receipt of written

notification. The superintendent shall not disapprove such notification

upon demonstration that there is no undue risk associated with insuring

the timely payment of such instruments or obligations. In making such a

determination the superintendent shall take into consideration the

corporation's outstanding liabilities on non-investment grade

instruments and obligations in relation to its outstanding liabilities

on all instruments and obligations and in relation to the amount of its

surplus to policyholders;

(B) reserves required pursuant to section six thousand nine hundred

three of this article in regard to such obligations shall be established

and adjusted quarterly based upon the then current foreign exchange

rates;

(C) such obligations shall not exceed twenty-five percent of an

insurer's aggregate net liability; and

(D) the aggregate and single risk limitations prescribed by

subsections (c) and (d) of this section shall be determined by applying

the then current foreign exchange rates.

(c) Aggregate risk limits. The corporation must at all times maintain

surplus to policyholders and contingency reserves in the aggregate no

less than the sum of:

(1)(A) 0.3333 percent or 1/300th of the aggregate net liability under

guaranties of municipal bonds including obligations demonstrated to the

satisfaction of the superintendent to be the functional equivalent

thereof and investment grade utility first mortgage obligations; plus

(B) 0.6666 percent or 1/150th of the aggregate net liability under

guaranties of investment grade asset-backed securities; plus

(C) 1.0 percent or 1/100th of the aggregate net liability under

guaranties, secured by collateral or having a term of seven years or

less, of:

(i) investment grade industrial development bonds,

(ii) other investment grade obligations; plus

(D) 1.5 percent or 1/66.67th of the aggregate net liability under

guaranties of other investment grade obligations; plus

(E) 2.0 percent or 1/50th of the aggregate net liability under

guaranties of:

(i) non-investment grade consumer debt obligations, and

(ii) non-investment grade asset-backed securities; plus

(F) 2.5 percent or 1/40th of the aggregate net liability under

guaranties of non-investment grade obligations secured by first

mortgages on commercial real estate and having loan-to-value ratios of

eighty percent or less; plus

(G) 4.0 percent or 1/25th of the aggregate net liability under

guaranties of other non-investment grade obligations; and

(H) if the amount of collateral required by subparagraph (C) of this

paragraph is no longer maintained, that proportion of the obligation

insured which is not so collateralized shall be subject to the aggregate

limits specified in subparagraph (D) of this paragraph; and

(2) surplus to policyholders determined by the superintendent to be

adequate to support the writing of residual value insurance, surety

insurance and credit insurance, if the corporation has elected to

transact such kinds of insurance pursuant to subsection (a) of section

six thousand nine hundred two of this article.

(d) Single risk limits. A financial guaranty insurance corporation

shall limit its exposure to loss on any one risk insured by policies

providing financial guaranty insurance, net of collateral and

reinsurance, as follows:

(1) for municipal obligation bonds, special revenue bonds, and

obligations demonstrated to the satisfaction of the superintendent to be

the functional equivalent thereof:

(A) the insured average annual debt service with respect to a single

entity and backed by a single revenue source shall not exceed ten

percent of the aggregate of the insurer's surplus to policyholders and

contingency reserve; and

(B) the insured unpaid principal issued by a single entity and backed

by a single revenue source shall not exceed the following percent of the

aggregate of the insurer's surplus to policyholders and contingency

reserve based on the highest sovereign rating, by a nationally

recognized statistical rating organization acceptable to the

superintendent, of the country of the applicable governmental unit:

(i) seventy-five percent: any rating in one of the top two generic

lettered rating classifications;

(ii) fifty-nine percent: an A+, A1, or equivalent rating at the

highest grade of the third generic lettered rating classification;

(iii) forty-three percent: an A, A2, or equivalent rating at the

middle grade of the third generic lettered rating classification; and

(iv) twenty-six percent: an A-, A3, or equivalent rating at the lowest

grade of the third generic lettered rating classification;

(2) for each issue of asset-backed securities issued by a single

entity and for each pool of consumer debt obligations, the lesser of:

(A) insured average annual debt service; or

(B) insured unpaid principal (reduced by the extent to which the

unpaid principal of the supporting assets and, provided the insured risk

is investment grade, excess spread exceed the insured unpaid principal)

divided by nine;

shall not exceed ten percent of the aggregate of the insurer's surplus

to policyholders and contingency reserve, provided that no asset in the

pool supporting the asset-backed securities exceeds the single risk

limits prescribed in paragraph five of this subsection, if directly

guaranteed; and provided further that, if the issuer of such insured

asset-backed securities is a special purpose corporation, trust or other

entity and such issuer shall have indebtedness outstanding with respect

to any other pool of assets, either such other indebtedness shall be

entitled to the benefits of a financial guaranty policy of the same

insurer, or such other indebtedness shall: (i) be fully subordinated to

the insured obligation, with respect to, or be non-recourse with respect

to, the pool of assets that supports the insured obligation, (ii) be

non-recourse to the issuer other than with respect to the asset pool

securing such other indebtedness and proceeds in excess of the proceeds

necessary to pay the insured obligation ("excess proceeds") and (iii)

not constitute a claim against the issuer to the extent that the asset

pool securing such other indebtedness or excess proceeds are

insufficient to pay such other indebtedness;

(3) for obligations issued by a single entity and secured by

commercial real estate, and not meeting the definition of asset-backed

securities, the insured unpaid principal less fifty percent of the

appraised value of the underlying real estate shall not exceed ten

percent of the aggregate of the insurer's surplus to policyholders and

contingency reserve;

(4) for utility first mortgage obligations, the insured average annual

debt service shall not exceed ten percent of the aggregate of the

insurer's surplus to policyholders and contingency reserve; and

(5) for all other policies providing financial guaranty insurance with

respect to obligations issued by a single entity and backed by a single

revenue source, the insured unpaid principal shall not exceed ten

percent of the aggregate of the insurer's surplus to policyholders and

contingency reserve.

(e) Except as provided in subsection (f) of this section, if an

insurer at any time exceeds any limitation prescribed by subsection (c)

or (d) of this section or paragraph two of subsection (b) of this

section, the insurer shall within thirty days after the limitations are

breached, submit a written plan to the superintendent detailing the

steps that it will take or has taken to reduce its exposure to loss to

no more than the permitted amounts, and if after notice and hearing the

superintendent determines that an insurer has exceeded any limitation

prescribed by this section, he may order such insurer to cease

transacting any new financial guaranty insurance business until its

exposure to loss no longer exceeds said limitations or with respect to

the limitations prescribed in paragraph two of subsection (b) of this

section, may order such insurer to limit its writing of the types of

guaranties permitted under subparagraphs (A), (B) and (C) of paragraph

one of subsection (b) of this section to investment grade obligations

until such time as it shall be in compliance with such limitations.

(f) An insurer shall not be deemed in violation of any limitation

prescribed by subsection (d) of this section with respect to any

financial guaranty insurance outstanding prior to the effective date of

this article, if the insurer was in compliance with the applicable

single risk limit in effect in this state at the time that the financial

guaranty insurance policy was issued. If the insurer was not so in

compliance, such financial guaranty insurance shall comply with the

limitations prescribed by subsection (d) of this section no later than

three years after the effective date of this article.

(g) No insurer authorized to transact the business of financial

guaranty insurance shall pay any commission or make any gift of money,

property or other valuable thing to any employee, agent or

representative of any potential purchaser of a financial guaranty

insurance policy, as an inducement to the purchase of such a policy, and

no such employee, agent or representative of such potential purchaser

shall receive any such payment or gift. Violation of the provisions of

this section shall not, however, have the effect of rendering void the

insurance policy issued by the insurer.