A New York insurer can buy financial guaranty insurance to back its commercial mortgage-backed securities, but New York will look mainly at ratings when deciding whether the CMBS can be used to invest reserves.

Officials in the general counsel’s office at the New York State Insurance Department come to that conclusion in Office of the General Counsel Opinion Number 09-10-04.

New York department officials address 3 questions in the opinion:

1. Would an insurance company (the “Company”) violate the New York Insurance Law if it were to obtain financial guaranty or portfolio insurance from an alien non-authorized insurer (“Guarantor”) on certain CMBS held in the Company’s general account?

2. Would the CMBS so insured remain admitted assets of the insurer and be classified as carrying the AA/Aa2 rating of the Guarantor?

3. Would the Company obtaining a guaranty on the CMBS require the Company to treat the transaction as a disposition of the original CMBS followed by the acquisition of a new CMBS?

The insurer would not be violating New York insurance laws if it obtained the guaranty insurance, and the CMBS would continue to be admitted assets if they were backed by financial guaranty insurance, even if they were downgraded, the department officials write.

“The effect of any downgrade would be upon their status as permissible reserve investments,” the officials write. “Whether or not the CMBS continue to count as reserve investments depends upon whether they continue to conform to the statutory requirements (e.g., the rating) for assets of that type.”