Creates the insurer fund for underserved neighborhood/rural area development corporation

1) defines the terms IFUND Corporation', "qualified investments," "low and moderate income," "member,' "underserved areas," "family farm,' "small businesses," 'operating expenses' and "investment capital," and "health information technology;"

2) outlines membership and investment requirements for insurers in the IFUND Corporation;

3) requires the Corporation to adopt a plan of operations to accomplish its purpose with the approval of the superintendent

4) establishes mechanisms for the governance of the IFUND Corporation, including election of the board of directors and appointments to the board of directors; and

5) provides for an annual audit and annual report to the superintendent, the Governor and legislative leaders. Sections two and three amend subdivision 1 of section 2426 and subdivision 2 of section 2428 of the Public Authorities law to add the IFUND Corporation as an eligible lender for projects which can be insured by the SONYMA Mortgage Insurance Fund. Section four sets out the effective date.

Justification

The federal Community Reinvestment Act (CRA) was passed in 1977 in response to the "redlining" of low- and moderate-income communities by banks. New York and many other states adopted state CRA requirements the following year. These CRA laws established that regulated financial institutions have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered. Banks are graded based on the lending and services they provide in disinvested communities, and these grades are used by regulators in exercising their discretion over applications by banks requiring state or federal regulatory approvals. According to a 2000 Federal Reserve Report, the CRA, and state laws modeled on it have stimulated more than $1 trillion in bans in low- and moderate-income communities. Here in New York, many communities have been revitalized as a result of this activity.

Like banks, insurers control vast amounts of capital. According to the NYS Insurance Department Annual Report for 2009, New York's 141 licensed life insurers reported over $2.19 trillion in admitted assets in the calendar year ending in 2005. Domestic insurers accounted for over $815.4 billion of that total. Similarly, property/casualty insurers reported almost $947 billion in admitted assets for 2005. During the same period, life insurers maintained almost $120 billion in capital and surplus and property/casualty insurers $347 billion in surplus to policyholders.

Total admitted assets for the U.S. life insurance industry topped $5 trillion at year-end 2007, a 5.7% increase from a year earlier, new data released by A.M. Best Co. shows.

Investments from these large sums of capital raised from premiums generate significant returns. According to the 2006 report by the Superintendent of Insurance, the 2005 investment income for the life insurance industry was $79 billion, over 26% of their total income. MetLife, New York's largest domestic life insurer earned $19.0 billion from investments in the 2007 fiscal year, according to company's 10-K filings with the SEC.

The passage of the Gramm-Leach-Bliley Financial Services Modernization Act (GLBA), which allows the creation of insurance, banking and financial services conglomerates within the same holding company system, has sparked renewed interest in insurers' investment practices. Federal legislation anticipating federal chartering of insurers is pending requiring CRA-type investments for insurers. Arid several states have taken action to require or encourage community investments by insurers:

* The California Insurance Department promotes investments by insurers in affordable housing and other areas through the California Organized Investment Network (COIN) program. Some of the COIN investments are eligible for special tax treatment. Some 170 investments by insurers were facilitated totaling S477 million in California's low-income communities by the end of 2000;

* Twelve insurers in California have formed the IMPACT Community Capital Program to invest in California's low and moderate income communities;

* Massachusetts created the Life and Property & Casualty Initiatives programs in 1998, under which the life and property/casualty industries are encouraged to make $200 million available for CRA-type investments in exchange for tax reductions; and

* Various other bills regarding insurer investments are pending in California, Rhode Island, Pennsylvania and other states.

New York's Insurance Law prescribes in some detail the types of investments insurers may make and these laws are updated from time to time. Life insurers, for example, have sought and have received significantly increased authority to invest In foreign countries twice in the past six years. Almost 20 years ago, Chapter 567 of the Laws of 1983 made sweeping changes in the law governing investments for life insurers, and increased the amount of equity investments insurers could make in exchange for New York investments in new and high tech business enterprises, minority-owned businesses or businesses located in depressed areas and low-income housing. More recently, Chapter 610 of the Laws of 1995, which dramatically increased amounts that insurers could invest in foreign countries, requires life insurers to submit a statement along with their annual reports, which details investments in real estate, including affordable housing, government obligations, small businesses, commercial enterprises in depressed areas and charitable activities. The law requires the superintendent to report annually to the Legislature and the Governor on the investments.

This legislation, recognizing New York's pressing capital needs in a number of areas, would create a new for-profit investment company owned and managed by insurers, the insurer Fund for Underserved Neighborhood/Rural Area Development Corporation (the 'FUND Corporation"), Insurers would participate in the operating expenses and investments of the IFUND Corporation based an their premium volume and profitability. Qualified investments would include: 1) loans and purchases of loans or equity to or from Community Development Corporations, nonprofit intermediaries qualified under section 501(c)(3) of the Internal Revenue code which package loans and administer loan funds and qualified community development entities as defined in section 450(e) of the IRS code; 2) the financing of single- or multi-family housing affordable to low and moderate-income persons, family farms, small businesses and other community development activities approved by the superintendent that revitalize or stabilize underserved areas, certified capital companies as defined in section eleven of the tax law, community service facilities, including child care, educational, health or social services targeting underserved areas and the environmental cleanup or redevelopment of industrial sites in underserved areas; and 3) purchases of NYS and local government agency bonds that primarily benefit underserved areas, with certain limitations.

The legislation prescribes required investment activity for the IFUND Corp. of 5100 million in 2007 and $250 million in 2008. For the years following, the board of directors of the IFUND Corp. will have the discretion to set investment capital limits, but in no event would the capital investment amount exceed one percent of aggregate net direct premiums written by the members or five one-hundredths of one percent of the capital and surplus or surplus to policyholders of New York licensed insurers. Since capital and surplus/surplus to policyholders are generally reflective of the profitability of the insurance industry, the FUND Corp. would not be burdened with the static investment requirements that don't take into account the business cycles of the insurance industry. The legislation would also allow the superintendent to credit insurers for investments made on their own or through similar mechanisms in other states.

In order to make it easier for the IFUND Corporation to make safe and sound investments called for under the statute. The bill also authorizes the State of New York Mortgage Agency (SONYMA) to provide credit enhancements for FUND investments through the Mortgage Insurance Fund. This will both limit the risk insurers face in making qualified investments, and increase the yield.

This legislation puts the insurance industry's capital to work in under-served areas In New York at a time when such capital is desperately needed. Funneling the capital through the IFUND Corporation owned and controlled by insurers will 1) allow the industry to continue to manage the funds in a way that is prudent for their policyholders; 2) relieve small insurers without the needed expertise of making investment decisions; arid 3) combine insurance capital from many companies to create economies of scaled and massed amounts of capital that can really have an impact. Such investment capital is sorely needed at a time when the slate and local governments are facing the most significant budget deficits in decades.

The IFUND also makes good business sense for insurers. Sound, prudent IFUND investments offer attractive yields and less risk at a time when marry insurers incurred sharply lower returns on their investments. Contributing to the prosperity of the state's economy will make it more likely that New York consumers purchase insurance products. The industry's image with the public, never outstanding but lately tarnished with churning scandals, settlement of unfair sales practices class action snits and other matters, would improve immeasurably with the activities of the IFUND. Finally, experts agree that future premium growth will come from new markets; investing in underserved areas will help insurers access these markets.

Legislative history

A.10302 of 2009.

Fiscal implications

None.

Effective date

Immediately.