Q: Would the State Insurance Regulators Have Seized the Insurance Companies if AIG had Filed for Bankruptcy?

  • (p9) – Mr. Bensinger added that the New York Department of Insurance stated that it would seize the New York insurance companies if AIG went into bankruptcy.
    • Mr. Herzog agreed and stated that, based on his discussions, other insurance commissioners would likely do the same.

2008 0916 – AIG Board of Directors Minutes 9/5/2008 – 24p

  • If AIG had gone bankrupt, state regulators would have seized the individual insurance companies.

2010 0202 – WSJ – Eric Dinallo – What I Learned at the AIG Meltdown: State Insurance Regulation Wasn’t the Problem – [link]  

  • (p141) – Chair Elizabeth WARREN. So I want to be clear, if I can, about setting the stage a little bit for this panel.
    • If you’ve read the testimony from the Fed and we’ve had multiple meetings now with the Fed, they basically have made the argument that negotiation was simply not possible, and that it was not possible because negotiation under these circumstances, particularly in the case of rapid dissent, is never possible, that ratings downgrades would have triggered multiple cross-defaults and contagion throughout the market, and that the insurance regulators would have seized the insurance companies and therefore destroyed the value of the entity and possibly caused losses to the insured, people around the country.
    • So the reason we asked this panel to come is that we wanted to probe that claim.
    • That’s what we’re here about, to just push back on this alternative.

2010 0526 – COP – TARP and Other Government Assistance for AIG – [PDF-241p

  • 2021 – YPFS Lessons Learned Oral History Project: An Interview with Eric Dinallo – 19p
    • (p17-18) – Eric Dinallo [to Tim Geithner]:. If you file for bankruptcy at the holding company level…
      • Some states may even require by law … that the states will seize the operating companies, because the holding company filed for bankruptcy.
      • They’re going to pull up the drawbridge, and go into castle mode.
      • Then you’re going to have a run on insurance companies.

How Does US Insurance Regulation compare to Other US Federal Regulation?

  • (p16) – Mr. ROSS. And that causes less stringent regulation?
  • Mr. SCHWARCZ. Of course. If you-
  • Mr. ROSS. To whom? What about the State regulator? Are you demeaning the State regulator by saying they don’t require stringent regulation?

2018 0307 – GOV (House) – Legislative Review of H.R. 5059, the State Insurance Regulation Preservation Act

Q: What May Have Happened if AIG had Gone Bankrupt?

  • Davis Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for AIG, like cascading champagne glasses where secured creditors are at the top with their glasses filled first, then spilling over to the glasses of other creditors, and finally to the glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926, 5930-31;

LC – Starr International Company, Inc. v. The United States – Case 1:11-cv-00779-TCW – Opinion and Order on Defendant’s Motion to Dismiss – 49p

  • My role was to make it clear that whatever happened with the AIG parent company, policyholders and the funds set aside to pay their claims, would be protected.
    • In my congressional testimony, I said that AIG’s insurance companies had adequate reserves to protect policyholders.
      • Mr. Geithner does not contradict that.
      • What he does say is that a bankruptcy of the parent company would have caused problems for the insurance companies, policyholders, and the insurance market as a whole.
  • I agree.
    • If AIG had gone bankrupt, state regulators would have seized the individual insurance companies.
    • The reserves of those insurance companies would have been set aside to pay policyholders and thereby protected from AIG’s creditors.
  • However, as Mr. Geithner correctly points out, AIG’s insurance companies were intertwined with each other and the parent company.
  • Policyholders would have been paid, but only after a potentially protracted delay. It would have taken time to allocate the companies’s assets.

2010 0202 – WSJ – What I Learned at the AIG Meltdown: State Insurance Regulation Wasn’t the Problem, by Eric Dinallo – [link]

  • Then there is the uncertainty of what a bankruptcy would have done to Al G’s insurance companies. Making his own list of AIG systemic risks one day, the superintendent of the New York State insurance department, Eric Dinallo, wrote down the thought that the failure of a company once seen as impregnable might cause a general loss of confidence in the insurance industry. That danger indeed acquired a certain substance on AI G’s fateful day of Sept. 16, when news spread globally that the company’s operating insurers were set to send $20 billion of rescue money to parent AlG, In Singapore, some customers promptly rushed to AIG offices and sought to cash out their policies.
  • AIG’s public relations people panicked at this insurance version of a run, putting out a weird press release that assured the world – and specifically Asia – that the company’s operating insurers would husband their cash for themselves.
  • In the end, says Dinallo, “it was incalculable as to what the ramifications of a bankruptcy were going to be.”
    The matter, in any case, became moot on Sept. 16. By saving , AIG, the federal government preempted the question of what would have happened had it gone down, and moved the argument to what happens now.

2008 1223 – CNN /Fortune-?- AIG’s rescue has a long way to go. When will the government’s costly bailout of the deeply distressed insurance giant be over? Don’t expect it to be anytime soon, by Carol J. Loomis – [link]

  • 2014 1002 – Starr International Company, Inc. v. The United States – Case 1:11-cv-00779-TCW – Trial Volume 4 – Tom Baxter (FRB) – 249p
    • (p153-154)  – Q. And you’ve mentioned that there was a discussion about some of the systemic issues concerning AIG, and I assume what you mean there is if AIG were to go bankrupt.
      • What were some of those systemic issues that were discussed, to your recollection?
    •  A. Yeah. The impact on 401(k) plans. The impact on other, other retirement plans that AIG had wrapped, that was another issue that came up. Stable value funds was another. I think I mentioned I remember a particular reference to teachers retirement plans. And the reason that I remember that is my wife is a New York City public school teacher, so I would have a much higher authority  to account for — account to, rather.
    • Q. Understood
    • A. And those were the kinds of things I remember. It would have been bad.
  •  
  • (p152) – Cliff STEARNS (R-FL)
    • Now, recently Michael McRaith, who is director of the National Association of Insurance Commissioners, told the Senate Banking Committee, he said, you know, if AIG had gone in bankruptcy, we would have taken care of it.
    • It would have been an orderly disposition.
      • This is what he said: ”AIG’s insurance operations and their other companies would have simply-we would have simply bought up AIG’s insurance assets, allowing a seamless delivery of AIG’s insurance obligations.”
    • So the question is, considering that the State Insurance Commissions would likely have seized AIG’s insurance subsidiaries, protected policyholders in an AIG bankruptcy, why was it necessary to bail out AIG with taxpayers’ money, based upon the testimony of the director of the National Association of Insurance Commissioners?
  • Hank PAULSON. I respectfully disagree with him, and I believe that it is–
  • Mr. STEARNS. So you disagree with this guy, with all his knowledge, his years of experience?
  • Mr. PAULSON. I will just say many people with years of experience had some regulatory responsibilities with regard to AIG, but this company was had a huge problem, and it is case No. 1 on what is wrong with our regulatory system.
    • There was no single regulator that had a line of sight on the total company.
    • So there were regulators that looked at different pieces of it, and if the company had gone down, it would have been a huge mess. 

2010 0127 – GOV (House-OGR) – The Federal Bailout AIG, Edolphus Towns (D-NY)  —  [BonkNote] 

  • (p39 / 92) – 9.1 “The Failure of AIG Would Have Been Catastrophic for a Financial System Already in Free Fall.” (PTX 563 at 15; Geithner: Trial Tr. 1421:16-23).
    • Bernanke, Geithner, Baxter, Paulson, Alvarez
    • (e) Geithner: “In late 2008, AIG faced the prospect of default and bankruptcy, which would have had catastrophic consequences for the economy.
      • AIG was the largest provider of conventional insurance in the world, with approximately 75 million individual and corporate customers in over 130 countries.
      • If AIG had failed, the crisis would have almost certainly spread to the entire insurance industry.
      • The government took action to prevent AIG’s failure and to protect the financial system.
      • This included helping restructure the credit default swap contracts that AIG had entered into with various counterparties.” (PTX 563 at 3; see also Geithner: Trial Tr. 1425:14 – 1426:7).
    • (g) Bernanke: “AIG’s demise would be a catastrophe”. (PTX 599 at 77; see also Bernanke: Trial Tr. 1958:16-20).

Starr International Company, Inc. v. The United States – Case 1:11-cv-00779 – Document 428 – Plaintiff’s Proposed Findings of  Fact – 573p 

  • 2009 0603 – GOV (House) – Challenges Facing the Economy, (CSPAN) State of the U.S. Economy, John Spratt (D-SC)
    • [PDF-77p, VIDEO-CSPAN]
    • Ben Bernanke
    • 43- – Questions for the record by Marcy Kaptur (D-OH) / Responses by Ben Bernanke Questions for the record
      • governmentattic.org/13docs/GovFRS-QFR_2010-2014.pdf
      • (p18) – 2009 1020 –
      • Q: Marcy Kaptur (D-OH):  14. Can you give me your thoughts on why AIG was saved, and Chrysler and GM allowed to enter bankruptcy? Sure you were involved in each discussion to some degree. 
      • A: Bernanke:  A failure of AIG would likely have resulted in harm to the holders of policies issued by AIG’s insurance subsidiaries, to state and local governments that lent funds to AIG, to workers whose 401(k) plans had purchased insurance from AIG, to global banks and investment companies that were counterparties of AIG in loans and derivatives transactions, and to money market mutual funds and other investors that held AIG’s commercial paper.
        • Moreover, as broad market dislocations precipitated by the bankruptcy of Lehman Brothers have shown, there was a serious risk that the harm of an AIG default would spread to the financial system as a whole.
        • As I explained in my testimony, an AIG failure could have exacerbated problems in the commercial paper market, could have led to a run on the broader insurance industry by policyholders and creditors, and could have led financial market participants to pull back even further from commercial and investment banks. 
    • House – Committee on the Budget
  • Hank Paulson [continuing]. I believe it would have taken down the whole financial system and our economy.  — It would have been a disaster.
    • Today, after all the actions that have been taken by the U.S. Government, we still have this terrible 10 percent unemployment level.
    • I believe that if the system had come down and failed, we could easily have had unemployment reaching or exceeding the 25 percent level we had in the Great Depression; we would have lost many additional billions of dollars in American savings; home prices would be much lower than they are today.

2010 0127 – GOV (House-OGR) – The Federal Bailout AIG, Edolphus Towns (D-NY)  —  [BonkNote] 

  • Paul KANJORSKI (D-PA) –  Am I correct that there were discussions held at the highest echelons of the U.S. Government and the Congress at that very time as to whether or not law and order could be secured in the United States if we did not take precipitous actions to assure the people that the economic markets in the United States and the world would be held secure?
  • Treasury Secretary GEITHNER. I was not in the executive branch at that time, so I can’t speak to that, but it would not surprise me if that was the case.

2010 0127 – GOV (House-OGR) – The Federal Bailout AIG, Edolphus Towns (D-NY)  —  [BonkNote] 

  • 2016 – FOIA Request – GovernmentAttic.org – Records related to the Commodity Futures Trading Commission’s (CFTC) investigation into alleged manipulation of the Commodity Exchange, Inc (COMEX) silver market and other silver markets, September 2008 – 1226p
  • (p276) – 09/17/2008 06:29:08 l(b)(?)(C) MORGAN (J.P.) Message: The Banking Equivalent of The Cuban Missile Crisis.
  • Last night, the financial community dodged the equivalent of a nuclear mushroom sized bullet.
  • Why? Because the FED bailed out AIG.
  • What does AIG matter to the non-insurance financial community?
    • If AIG had gone under, the global banking community (and in particular, the European banking community) would have had to try to simultaneously raise vast sums of capital, in order to maintain their capital adequacy ratios.
    • According to AIG’s regulatory filings, “Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $414bn in notional exposure of AIGFP’s super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee.
    • The counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position.
  • “So the long and the short of it is, if the FED hadn’t bailed out AIG, we would have been witnessing the domino falling of European banks as their CDS blew out and it became instantly apparent that it simply isn’t possible to raise tens of billions in additional capital in a market like this.
    • The missile carrying ships have not yet turned back, but at least we can be grateful that we aren’t in Armageddon this morning.

09/17/2008 06:29:1611 ‘)(?)(C) ! MORGAN (J.P.) Message: some things are just to big to fail then

  • (p8) – Tim Geithner:  AIG presented exactly the same kind of risk Lehman did.
    • But, in some ways, they were greater-because AIG as an insurance company, one of the largest in the world, was providing a range of insurance products to households across the country.
      • And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world. 

2009 1119 – GOV (JEC) – Financial Regulatory Reform: Protecting Taxpayers and the Economy, Carolyn B. Maloney (D-NY)   —   [BonkNote]

Modco – Modified Coinsurance

  • What happened under TEFRA? Several things: 
    • We lost MODCO 820 forever.
    • We had a deceptively modest reduction in 818(c)2.
    • A lot of the teeth were taken out of reinsurance as a tax planning tool.
    • Universal Life was given legitimacy through 101(f).
  • In terms of Anderson’s Taxation Horseman, it is now clearly possible for the industry to provide a competitive rate of interest return to policyholders–at least on new money products. 
  • The matter of the existing portfolio of assets is another question, but at least on new money products, the industry is in the position of being able to offer competitive products.
  • In addition, the 818(c)2 adjustment is available for the first time to many companies.

—  William R. Britton, Jr., Vice President and Principal of the Tillinghast firm

1983 – SOA – Individual Life Insurance, Society of Actuaries – 22p

  • At least one interpretation within the California Department is that many modco type treaties do not appropriately transfer liability to the reinsurer. Would you agree with either of the following analyses?
    • Company and Reinsurer enter a co/modco treaty covering a universal life block of business.
    • As experience unfolds the reinsurer receives a risk and profit charge on each settlement due.
      • This is the only cash that ever transfers hands.
      • Company recaptures the business when the coinsurance reserve set up by Reinsurer decreases to zero.
    • ⇒ Does this mean no liability was transferred to the reinsurer?

1992-1A, NAIC Proceedings

  • 1981 – GAO – Billions Of Dollars Are Involved In Taxation Of The Life Insurance Industry — Some Corrections In The Law Are Needed, Government Accountability Office – 242p
    • 1 / For example, “Prudential Insurance Company of America , the nation’s largest insurance company, paid $ 380.2 million in federal income taxes in 1979. Last year, despite the growth of its business, Prudential’s tax bill plummeted to $120 million, less than one-third of the 1979 total . . . The tax magic is accomplished through transactions known as ‘modified coinsurance.’ Richard V. Minck, [an executive of the industry’s chief trade group says he believes that the tax loss to the federal government from [modified coinsurance transactions] runs in the billion or billion-and-a- half range.
      • Daniel Hertzberg, “Life Insurers Cut Federal Income Taxes Using Special Reinsurance Arrangement, “Wall Street Journal, May 20, 1981, p. 14.
      • For a further  discussion of the use of modified coinsurance to reduce Federal income taxes, see Herbert E. Goodfriend, “Odd Men Out,” Barron’s, January 12, 1981, p. 28 .
  • 1982 0414 – GAO – Letter – GAO to Dan Rostenkowski (D-IL), Chairman, Joint Committee on Taxation – re: Modified Coinsurance Used to Reduce Taxes – 9p
  • 1982 0318 – GAO – Statement of Morton A. Myers – Director, Program Analysis Division Before The Senate Committee on Finance on Modified Coinsurance, Government Accountability Office – 13p
    • By entering into modified coinsurance agreements under Section iv, 820 of the Internal Revenue Code, some insurance companies–most notably the very large mutual companies –are able to convert investment income on which they pay taxes into underwriting gains on which they pay little, if any, taxes. This was not the intent of Congress when section 820 was included in the code.
      • It was intended to avoid possible double taxation when these coinsurance arrangements are used.
    • Without a section 820 election double taxation could occur because both the original insurer and the company sharing the risk would be subject to tax on some of the same income.
  • 1959 – GOV – 112 PUBLIC LAW 86-69-JUNE 25, 1959 [73 STAT.https://www.govinfo.gov › STATUTE-73-Pg112
    • a modified coinsurance contract (as defined in subsection (b)) shall be … Be it enacted hy th^e Senate and House of Representatives of the. United States of … – 30 pages

CARVM – Commissioners Annuity Reserve valuation Method

  • This was introduced at the December 1976 NAIC meeting, at which time the Commissioners Annuity Reserve valuation Method (CARVM) was defined for the first time.

1978 – Individual Annuities, rsa78v4n36 – Society of Actuaries – 16p

Q: Should the Insurance Industry Be Looked At?

  • It is hard to fix a system that has not been analyzed.  (p14) 

—  J. Robert Hunter (CFA)

2003 0506 – GOV (House) – Increasing the Effectiveness of State Consumer Protection – [PDF-123p, VIDEO-?] 

  • My staff has conducted a major investigation of these issues.
    • I must say today that I was shocked when I saw its findings.  (p1)

—  Senator Metzenbaum

1979 – GOV (Senate) – Cost Disclosure in Life Insurance – Senator Metzenbaum – [PDF-279p-GooglePlay]

  • 2009 0924 – GOV (Senate) – Systemic Risk and Resolution Issues / Experts’ Perspectives on Systemic Risk and Resolution Issues –  [PDF-128p, VIDEO-CSPAN] 
    • Paul Volcker – “…..insurance companies, which I would say parenthetically I hope better regulatory systems will be developed, maybe not as part of this legislation but next year.”  (p7)
    • Paul Volcker – “I would hope this committee would look at the question of national charters for insurance companies and bring them under-at least the big ones-under a framework so that something like AIG with similar problems can’t arise in the future.”  (p19)
  • But nowhere has there been a serious, full dress attempt to re-define the modern American insurance transaction as a sui generis matter.
  • Perhaps the job is too big, or too dull.
    • [Bonk: sui generis ~ unique]

1950 – LR -The Special Nature of the Insurance Contract: A Few Suggestion for Further Study, by Franklin M. Schultz – 15p

  • 1939 0412 – SEC to President (Franklin D. Roosevelt) – Re: Insurance Investigation –  3p
  • 2009 0924 – GOV (Senate) – Experts’ Perspectives on Systemic Risk and Resolution Issues, (CSPAN) Systemic Risk and Resolution Issues, Barney Frank (D-MA) -[PDF-128p, VIDEO-CSPAN]
    • (p7) – Paul Volcker (former Chairman of the Board of Governors of the Federal Reserve System) – “…..insurance companies, which I would say parenthetically I hope better regulatory systems will be developed, maybe not as part of this legislation but next year.” 
  • 2009 0114 – COP – Hearing – Modernizing America’s Financial Regulatory Structure, Congressional Oversight Panel
    • [PDF-180p,  VIDEO-CSPAN]
    • (p72) – Statement of Joel Seligman, President, University of Rochester  
      • Second, the scope of any systematic review of financial regulation should be comprehensive.
        • This not only means that obvious areas of omission today, such as credit default swaps and hedge funds, need to be part of the analysis but also means, for example, our historic system of state insurance regulation should be re-examined as well as current securities laws exemptions for areas, including municipal securities.
        • The fact that the Federal Government provided over $100 billion to insurance giant AIG alone suggests that insurance regulation is no longer purely a state matter. 

Receivership

  • UILA – Uniform Insurers Liquidation Act
  • 1940 – LR – Legislation: The Uniform Insurers Liquidation Act – 12p
    • Although there has been a vast improvement in national bankruptcy legislation, with the passage of the Chandler Act in 1938,2 so that the receivership device has been abandoned to a large degree by most corporations, insurance companies have been excluded from the Act.3
      • Consequently, they must still rely upon receivership and local statutory substitutes for insolvency proceedings
  • 2021 – NAIC – Legislative Priorities – 1p
  • Support Legislation to Help Protect Policyholders During an Insurance Receivership
    • Current law provides no deadline to the federal government for filing claims in an insurance receivership, causing proceedings to drag on for years and reducing recoveries for insurance consumers.
    • Congress should support NAIC proposed legislation that would require the federal government to file claims it may have against insolvent insurance companies within a specified time consistent with bankruptcy proceedings.
  • Privide State Insurance Regulators a Vote on the Financial Stability Oversight Council (FSOC) (H.R. 3099)
    • The insurance sector is the only financial services sector whose primary regulator is not a voting member of the FSOC.
    • The Primary Regulators of Insurance Vote Act (H.R. 3099) would grant state regulators full participation on FSOC by allowing them to vote.
  • Oppose Preemption of State Insurance Data Privacy and Data Security Standards
    • Federal data privacy and security legislation should acknowledge the state insurance regulatory framework and not undermine state laws and regulations to protect the best interests of insurance consumers.

ICP 18 – Intermediaries

  • The supervisor sets and enforces requirements for the conduct of insurance intermediaries, in order that they conduct business in a professional and transparent manner. 

— ICP 18 – Intermediaries –