1991 0522 - GOV (House) - Certain Issues Related to the Conservatorship of the Executive Life Insurance Company

  • Executive Life Insurance Failure, Charles B. Rangel (D-NY)  ---  [BonkNote]
    • [PDF-145p-GooglePlay,  VIDEO-CSPAN - (1:55:49)] ->Not on govinfo.gov 
    • John Garamendi - California - Insurance Commissioner
    • Salvatori Curiale - New York - Superintendent Insurance
    • House - Committee on Ways and Means - Subcommittee on Select Revenue Measures
  • (p26) - Pete STARK (D-CA) The only thing I think we can do better than the States is pay, and I am not sure we can do that much better than a rich State like California or New York.
    • But I am suggesting that if we are called upon to pay, that perhaps at that point we could reasonably require some minimum asset standards, to insure the integrity of the assets, so we would not have to pay again and again and again.
  • John GARAMENDI, California Insurance Commissioner - That, of course, is coupled with regulation, and here is the case where my State fell down and did not carry out its regulatory responsibilities.
    • In fact, I suspect for most of America, the 1980s, the deregulation period, when the mantra of deregulation was preached in most every hall in America-the result of that is now the debacle of the 1990s, the S&Ls, the banks and now some parts of the insurance companies.

Garamendi

00:01:35

  • Rick Baum - California Insurance Department
  • seizures - First Capital, Executive Life (ELIC)
  • Regulatory Climate of the 80s
  • Executive Life - offered Higher yields, ie. Junk Bonds
  • Industry average Junk Bonds -
    • Executive Life - 60%
  • GICS - worth more than 3 Billion
  • Large portion of Junk Bonds - No Market
  • 200K-Life Insurance Policyholders, 160K-Annuitants
  • Potential Buyer's - Bidding Process
  • Restructuring the Liabilities - ie. Life Insurance Policyowners would pay
  • IRS Lien - 640 Million - Unresolved Tax Issue
  • PGBC - responsibilities

00:07:00 - Executive Life - GICS

  • Bank-Like, Municipalities, High Return, Junk Bonds, Public Sector Arbitrage, 1.9 Billion (Executive Life GICS), 1 Billion (Executive Life - Qualified Pension Plans), Most Concerned about Individual - 37 Billion in Term and Whole Life Insurance. 36,000 Retired, 40,000 Current Employees, 6,000 Structured Settlements, 

00:11:00 - IRS Lien for year 81, 82, 83, affect on selling the company.

Executive Life is in Conservativeship, not Bankruptcy.  Policyholder Protection comes first.

Who should suffer the consequences of Executive Life? Pensioners, widows, IRS.

00:15:00 - Raids, LBO's, not unique case of Pacific Life. The may just stop getting money.

Villians - Regulators, Accountants. etc.  None of the bad guys have the resources to pay back, to take care of the problem.

00:16:00 - IRS should move to the back of the line.

What the IRS won't get today, it will get in some other form.

People are going to wind up on the public dole.

00:17:00 - Fire Sale., multiplier effects <Contagion>

00:18:30 - PBGC Role, ERISA  legislation - 1970s, Duck Pension.

00:20:30 - Federal Government Knew - Could look like unnecessary roughness, not a case of bad faith by the government people, but it is a problem with the system.  Rely on Private .  We cannot fail these people.

What the IRS won't get today, it will get in some other form.

People are going to wind up on the public dole.

00:17:00 - Fire Sale., multiplier effects <Contagion>

00:18:30 - PBGC Role, ERISA  legislation - 1970s, Duck Pension.

00:20:30 - Federal Government Knew - Could look like unnecessary roughness, not a case of bad faith by the government people, but it is a problem with the system.  Rely on Private .  We cannot fail these people.

00:22:00 - IRS Claim.  Get together with the IRS.  IRS front of line,  Bankruptcy vs Receivership. Equity. Laws best made on equity.

Charles Rangel: Responsibilities of Congress. Never thought of the liability of the PBGC.

1990 0404 - JCT Report - PBGC, and a more recent report <?>

00:26:00 - Rangel - not just Executive Life, Congressional Guilt, They look more like Investment Companies than Insurance Companies

Garamendi - GICS not Traditional.  Pension funds raided, Pension Funds bought GICS from Executive Life

Rangel - Villians, lack of enforcement of existing regulations.

Garamendi - need a national standard for Solvency, States vs Federal - Suggests Model similar to OSHA (Federal Minimum Standard), not a model similar to ERISA

00:31:00 - Fred Grandy - Fiduciary Responsibilities of Pension Sponsors

Garamendi - actually- re: Solvency.  New york does it well. <ALM>

Grandy - Level of Risk

32:00 - Garamendi - New york - 20% in Junk Bonds----Life Insurance Companies should not be high risk enterprises.

Grandy - Garamendi - GIC - Different Types of GIC's. some have nothing to do with insurances.  Muni-GICS - not an insurance product. Recapitalize the PBGC.  Who's this We guy.  Pension Rating Game.  Companies pay.  Pension raids.

S4 - <KEY> 00:37:00 - Stark/Garamendi - There are probably more companies in trouble.  Policyholder runs.  Federal Regulation.  Show Me - Missouri.  Asset Standards, G-California didn't . 1980s Deregulation. Result now - debacles. S-6,000 Structured Settlement Contracts -Special consideration? 

00:45:00 - Garamendi - Stretching out time for payments. 

S5 - 00:46:00 - Don Sundquist (TN-R) - Scheming, Raiding, S-Overreaching. Is every one of them a raid?  Let's deal with facts and not get emotional.  It wasn't illegal. G-I can get very emotional.  G-Muni-GICS - Financial Game. Muni-GICS not covered under Guaranty Funds.  S-What impact will your comments have on the price of the bonds? G - People don't listen to me.  S - Making public statements, will hurt bond holders, and policyholders. G-Lack of hearing what I've been saying for a long time.<MORE>

RECESS

00:54:00 - Back from Recess - Dorgan

Dorgan - Anger - Unfettered Greed in the Junk Bond Market.  Incompetence and Greed - Executive Life 60+% in Junk Bonds.  How did this happen? 14 other companies. same companies as S and L's.  We got stuck with the bill. Oversight.  

00:57:00 - Garamendi - 1980s - New Way - Greed is Good. New york is a better example. Insurance companies should be asked to justify the assets/ investments. <ALM>.  Quality and the Nature of the investment itself.  Rating Agencies. 

Dorgan - How could they put 60+% into a company? Anchor National Life - Could they buy more Junk Bonds., anything that catches your attention>

Garamendi - absolute changes in percentages.  NAIC Follows this. Anchor National Life took over Integrated Resources. Language - Bonds, vs Junk Bonds, Asset Analysis, Statutory Accounting,

01:03:00 - Dorgan - Staggering Incompetence on the part of the State Regulators, Drexel, everbody knew what was going on with Leveraged Buyouts financed by Drexel.

Garamendi - higher yield. higher Risk

Dorgan - Executive Life lost 3 Billion like that <

<Skipping Video - 01:06:00->

Garamendi - discipline life insurance companies

Dorgan - Why should we allow Life Insurance companies invest in Junk Bonds when they are the engine for LBO's

Garamendi - New york - ALM - Excellent way to go

Dorgan - compares to Savings and Loans.  Saying the same things about Life Insurance Regulators

Garamendi - if the Federal Government can do it well, and the States cannot, then do it.

Dorgan - Regulators just sat by and did nothing.

01:10:00 - Garamendi - Executive Life bought from Drexel what they couldn't sell to anybody else.

to New york Insurance Commissioner - Savatore Curiale

01:11:00 - ELNy - numbers of Policyholders. change in Insurance industries. because of interest rates in 1970s/ 1980s. New Products - change from security to investments

  • 1990s - consolidation of industry,
  • gradually fixing problems of 1980s 
  • reinsurance - made company take reinsurance off the books
  • ALM
  • Capital Infusion
  • Annuity contracts
  • 1987 - Junk Bonds %, 1989 down to 50%
    • Heavy Surrenders - Fire Sale - Junk Bonds to over 60%
    • Press - More Surrenders
    • California ELIC  - More Surrenders, Fire Sales
  • 01:18:00 - Letter to Policyholders - no Surrenders or Loans - unless for Hardship - Death Claims paid, Annuitants paid, 
  • 01:20:00 - IRS Lien
  • Life Insurance - continue to pay premiums, or use Cash Value to pay
  • guarantee fund limits - 
  • GICS - Guaranty Funds - 1million for each contract, only 3 contracts in ELNy with a commitment of 15 million.
  • PBGC - Defined Benefit vs Defined Contribution - GICS
  • Regulators Role - 
  • ELNys management 
  • 01:24:00 - State of Life Insurance Industry - Executive Life - Junk Bonds, not all companies used them
  • balancing innovation and safety
  • upheaval of life insurance industry in the last decade
  • New york - problems - Junk Bonds, reinsurance, ALM - and act aggressively to fix them.

<End New york - 01:25:00]

01:25:00 - Rod Chandler (R-Washington)

  • outrage, elderly, trusted a system, sickening, Preventing this in the future
  • Villains - Executive Life managers and investors, Plan Sponsors, Congress <PBGC Law>, Regulators, IRS
  • to Curiale - re: Guaranty Fund - who will be made whole? Curiale - yes.  
  • 01:29:00 - to Garamendi - is that true in California?  Garamendi - the first unanswered question is does the Guaranty fund apply to Executive Life?  ELIC weaker than ELNy. California allowed reinsurance, New york didn't. Junk Bonds shipped to ELIc from ELNy.
  • Chandler - so California may not fully pay, and New york will pay
  • Garamendi - Baum mentions that if the IRS claim goes through then nobody may get paid.
  • Chandler - Number of GICs. and Breakdown by Defined Benefit and Defined Contribution.
  • Garamendi - 300 plus - over 1 Billion dollars
  • 01:33:00 - Chandler - Plans spons did exactly what the law allowed.  PBGCs collections.  more and more companies are terminating plans.

Mrs. Kennelly Letter - Connecticut wouldn't let Executive Life sell since 1973.

01:35:00 - Mr. Cohen

  • Q:  How much has the reduction for Annuity Benefits been? A: 30%
  • Q:  Will that ever go back up? A:  We don't know.  the Junk Bonds have no market Value.  Auctions. I don't know what the long-term prospects are for policyholders.  IRS Claim.
  • Garamendi - 100% will not be recouped.
  • Cohen:  Junk Bonds = Gambling?  Garamendi - I would put negative modifiers on the word gambling.

01:39:00 - Can't find the villains, nor who supported these junk bonds.  We have to find out how this happened. What went wrong? and should the Federal Government play a part.

  • Curiale - What went wrong is a complicated question. Society of savers to society of investors. <Search for yield>, People like Mr. Lennon who decided that there was risk in this type of investments.
  • Curiale - 1986 - New york Insurance Department started to control Junk Bonds in insurance companies.  Got pressure from the New york legislature and Washington. Cuomo stood strong.
  • 01:44:00 - Garamendi - What went wrong? one word - Deregulation. Clearly lead to Savings and Loan and Bank problems. and now the insurance companies. 1980s
  • 01:45:00 - Dorgan - 20% Junk Bonds
  • Curiale - NAIC SVO Levels, 
  • Lennon - long term liabilities - Market Values - Life Insurance vs Property - MSVR - 
  • Dorgan / Lennong - There is no long term on failure.  Junk Bond losing value - lose value of company.  Measure performance of assets on a long term basis.  
  • Dorgan - Perception, runs, Milken, Drexel, Executive Life.  Consumers = Stuck.  Staggering Incompetency in a number of areas.  We are told State Insurance regulation is effective, perhaps in some areas it isn't.
  • 01:55:00 - Garamendi - New york has done a good job.  They threw out and fined 3 people from Executive Life,,,they came to California- ELIC.
  1. 20min - Garamendi 1 (California Insurance Commissioner) - Opening
  2. Garamendi 2 (California Insurance Commissioner) - PBGC, IRS, Junk Bonds, Milken
  3. Curiali  (New York Insurance Commissioner) -
  • 51:00- 52:50 - Garamendi - Tennesee Sundquist - Shouldn't Say, Have to Say /  Can't Say. Bonds Prices. 
  • (p10) - John Garamendi, California Insurance Commissioner -
    • Let me go back over that and make clear what I have just said.
      • First of all, we are working towards an agreement. We do not yet have a deal.
      • Second, the arrangement, the deal, would involve the purchase of certain assets, not all of them.
      • And, third, there would likely be a restructuring of the liabilities, which is a nice way of saying that some or all of Executive Life Insurance's customers will contribute to the rehabilitation by incurring a loss.
    • This may be the very best that we can do. There will be some damage to Executive Life customers, although it is my hope and my goal to limit that pain as much as possible.
      • However, our dream of rehabilitation could become a nightmare, if a $643 million lien filed by the Internal Revenue Service is perfected. Just the filing of the lien is a threat to the sleep of thousands of people who, in many cases, quite literally depend upon Executive Life for the income on which to survive. The uncertainty created by an unresolved tax issue may well prevent anyone from buying into the company
      • Actually, the enforcement of the lien will kill outright any rehabilitation effort and force a destructive liquidation of this company.
    • Another troublesome question is whether the U.S. Labor Department's Pension Benefit Guaranty Corporation is liable for possibly millions of dollars due to beneficiaries of terminated pension plans. Why terminated? So that the plan's sponsors, that is the employers, could use the plan's excess funds, for whatever reason, by converting the plan's obligations into insurance annuities.
      • The tragedy is that, while the direct pension obligations were guaranteed by the Federal Government, the insurance annuities, according to the PBGC, are not.
      • Moreover, this transfer was usually done without the pensioners' knowledge, and certainly without their consent and, in at least one case, over their objections.
    • (p10) - [Muni-GICS] - John Garamendi, California Insurance Commissioner - Let us take a closer look at the Executive Life Company, its products and its customers.
      • Executive Life sold guaranteed investment contracts to State and local governmental entities.
      • These GICs are similar to certificates of deposit, that is, lending money to the insurance company under a contract which guarantees a rate of return.
        • The contracts were guaranteed only in the sense that a certain unusually high rate of return was promised by Executive Life to the purchasers.
        • That rate of return was always enticingly higher than what the governments themselves were obliged to pay for their municipal bonds.
      • ELIC was able to offer such attractive "guarantees," because of its own heavy reliance on even higher yielding junk bonds.
      • So the scene was set for some would-be public sector arbitragers.
      • The State and local government organizations would issue low interest bonds, use some or all of the funds thus borrowed to purchase high-interest Executive Life GICs and expect to make an easy profit on the difference, but there was trouble ahead. Ultimately, as of the end of March of this year, $1.9 billion of these kinds of municipal GICs are on the books.