Effective yesterday, December 15, 2021 (and through the January 1, 2027 sunset date when the regulation will again be evaluated), the New York Department of Financial Services (“DFS”) adopted Regulation 172 (the “Regulation”), which permits New York insurance companies to treat investments in certain bond Exchange Traded Funds (“ETFs”) in a manner similar to bonds for purposes of risk-based capital (“RBC”) and interest maintenance reserve ("IMR") calculations, critical to an analysis of a carrier’s solvency. Risk-Based Capital (RBC) is a method of measuring the minimum amount of capital appropriate for a reporting entity to support its overall business operations in consideration of its size and risk profile. RBC limits the amount of risk a company can take. It requires a company with a higher amount of risk to hold a higher amount of capital. Interest maintenance reserve is also generally required by regulators in order to maintain the financial stability of the insurance industry. An IMR is a reserve of funds and other assets that are held according to standard accounting principles in order to deal with fluctuations in the interest rate. The value of financial vehicles like bonds or mortgages are particularly susceptible to change along with the interest rate.
EFTs are a type of investment fund that offer two attributes of both mutual funds (EFTs are also diverse investments) as well as of stocks (like stock, ETFs are easily traded). They are viewed as a low cost way to earn a similar return to an index or commodity and can diversify an investment portfolio. Bonds are also sold or traded on an exchange if they are EFT Bonds. The EFT offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. Unlike mutual funds, however, ETF shares are traded on a national stock exchange. The NY Regulation is intended to align treatment of the EFT bond with that of the underlying bonds.
As a result of today’s Regulation, the following will occur with regard to certain bonds in an insurer’s portfolio :
- Bond-like RBC treatment of certain bond ETFs
- Bond-like IMR treatment of certain bond ETFs held by New York life insurance companies .
Statutory accounting treatment of bond ETFs in New York will remain unchanged (currently fair value).
To receive bond-like RBC and IMR treatment, a bond ETF must satisfy the following criteria:
- Holds investments in fixed income securities, cash, and cash equivalents
- Tracks a bond index and makes publicly available detailed holdings no less frequently than monthly
- Minimum AUM of US $1BN
- Allows in-kind redemptions through an Authorized Participant
- Registered with the Securities and Exchange Commission in accordance with the terms of the Investment Company Act of 1940 and the rules and regulations thereunder.
- Rated by a national recognized statistical rating organization (“NRSRO”)
- Qualifies for bond treatment as identified by the NAIC’s Purposes and Procedures manual and has a preliminary or final NAIC designation.
Though New York has followed Texas (which made a similar change in 2019) and a few other states in modernizing its insurance investment laws with regard to treatment of bond EFTs, to date few other states, including New Jersey, have followed this trend.
Please refer questions regarding this new Regulation to Cynthia Borrelli.