FINANCIAL GUARANTY INSURANCE AND BONDS ROSEMARY QUINN CNA SURETY TIMONIUM, MD

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1 FINANCIAL GUARANTY INSURANCE AND BONDS ROSEMARY QUINN CNA SURETY TIMONIUM, MD

2 NEW YORK S APPLETON RULE Unique to New York General Licensing Provisions not specific to financial guaranty insurance Domestic Insurer may only write outside of New York those coverages which it may write in New York Foreign and Alien Insurers licensed in New York may not write outside of New York any coverages which they may not write in New York

3 HOW DOES APPLETON RULE IMPACT FINANCIAL GUARANTY INSURANCE? New York prohibits a multi-line property casualty insurer from writing financial guaranty insurance New York restricts the writing of financial guaranty insurance, as defined by the NY insurance laws, to monoline financial guaranty insurers Failure to comply with the Appleton Rule may result in such insurer losing its license or being subject to significant penalties NY Insurance Department fined an alien insurer $1Million in 1997 based on alleged violation of this law

4 WHAT IS FINANCIAL GUARATNY INSURANCE? A Hybrid of Insurance and Investment Banking Guaranties of Municipal Bond Obligations Credit Enhancement Monoline Insurers Asset-Backed Securities; Limited Partnership Bonds Highly Publicized Failures of Issuers Multiline Insurers

5 WHY REGULATE AS A SEPARATE LINE? $500 Billion Aggregate Loss Exposure to the P&C Industry Estimated in the early 1980s Series of Defaults with Large Losses Potential To Bankrupt Multiline Insurers Financial Guaranty vs. Property/Casualty The Law of Large Numbers Annual Adjustment of Premium NAIC Model Act (National Association of Insurance Commissioners)

6 ADOPTION OF MODEL ACT Florida California Connecticut New York Business Opportunities Extraterritorial Effect

7 FUNDAMENTAL PRINCIPLES Only Monoline Insurers May Write Financial Guaranty Insurance Multiline Insurers Are Forbidden To Do So But May Write Surety Insurance So, Is It Financial Guaranty Insurance or Surety Insurance? Reinsurance

8 STATUTORY SCHEME DEFINITIONS Financial Guaranty Insurance Guaranty of Indebtedness Changes in Levels of Interest Rates or Differential in Interest Rates Between Markets or Products Changes in Rates of Exchange of Currency Changes in Value of Assets, Financial or Commodity Indices, or Price Levels in General Other Substantially Similar Coverages

9 SURETY INSURANCE New York definition of surety includes a laundry list of bond types; some states use a broad definition without a list Surety Definition Prior to enactment of financial guaranty insurance legislation: Contracts, Including Payment and Performance Bonds, Other than Contract of Indebtedness Indemnity Bond for benefit of public bond, railroad, or charitable organization or a lost security or utility payment bond Any Unspecified Contract except Financial Guaranty Insurance Obligations Required or Permitted in Judicial Proceedings or Otherwise Allowed by Law Permissible Financial Guaranty Insurance

10 PERMISSIBLE FINANCIAL GUARANTY INSURANCE NY Surety definition revised after enactment of financial guaranty insurance law (1996 and 2005) to include certain permissible types of financial guaranty insurance: Guarantee, for period not to exceed 5 years, of the payment of premium, deductible or self-insured retention to an insurer under a workers compensation or liability policy Non-residential Lease obligations not to exceed 5 years Guarantee Indebtedness of up to $10 Million for One Obligor Depository bonds that insure deposits in financial institutions in excess of the amount already insured by the Federal Deposit Insurance Corporation (FDIC)

11 STATUTORY PING-PONG Product Within Both Financial Guaranty Insurance and Surety New York Only state to issue Attorney General Opinions Bond covering Mixed Obligations: if there is no specific carve-out in the surety definition, NY will most likely treat as financial guaranty insurance Bond that falls within surety and financial guaranty definitions will be treated as surety if the bond type is included in statutory list of permissible surety bonds Other States Unlike New York, no revision to surety definition following enactment of financial guaranty insurance law Need to be considered when risk state for a bond is Florida, California or Connecticut