(Business Economics in A Rapidly-Changing World - Global Recession - Causes, Impacts and Remedies) Johnson B. Powell-U.S. Insurance Industries After The 2007-2009 Financial Crisis-Nova Science Pub Inc

BUSINESS ECONOMICS IN A RAPIDLY-CHANGING WORLD
U.S. INSURANCE INDUSTRIES

AFTER THE 2007-2009
FINANCIAL CRISIS
No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or
by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no
expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No
liability is assumed for incidental or consequential damages in connection with or arising out of information
contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in
rendering legal, medical or any other professional services.
BUSINESS ECONOMICS IN A
RAPIDLY-CHANGING WORLD
Additional books in this series can be found on Novas website
under the Series tab.
Additional E-books in this series can be found on Novas website

under the E-book tab.
GLOBAL RECESSION - CAUSES,

IMPACTS AND REMEDIES
Additional books in this series can be found on Novas website
under the Series tab.
Additional E-books in this series can be found on Novas website

under the E-book tab.
BUSINESS ECONOMICS IN A RAPIDLY-CHANGING WORLD
U.S. INSURANCE INDUSTRIES

AFTER THE 2007-2009
FINANCIAL CRISIS
JOHNSON B. POWELL
EDITOR
New York
Copyright 2013 by Nova Science Publishers, Inc.

All rights reserved. No part of this book may be reproduced, stored in a retrieval system or
transmitted in any form or by any means: electronic, electrostatic, magnetic, tape,
mechanical photocopying, recording or otherwise without the written permission of the
Publisher.
For permission to use material from this book please contact us:
Telephone 631-231-7269; Fax 631-231-8175
Web Site: http://www.novapublishers.com
NOTICE TO THE READER

The Publisher has taken reasonable care in the preparation of this book, but makes no
expressed or implied warranty of any kind and assumes no responsibility for any errors or
omissions. No liability is assumed for incidental or consequential damages in connection
with or arising out of information contained in this book. The Publisher shall not be liable
for any special, consequential, or exemplary damages resulting, in whole or in part, from
the readers use of, or reliance upon, this material. Any parts of this book based on
government reports are so indicated and copyright is claimed for those parts to the extent
applicable to compilations of such works.
Independent verification should be sought for any data, advice or recommendations
contained in this book. In addition, no responsibility is assumed by the publisher for any
injury and/or damage to persons or property arising from any methods, products,
instructions, ideas or otherwise contained in this publication.
This publication is designed to provide accurate and authoritative information with regard
to the subject matter covered herein. It is sold with the clear understanding that the
Publisher is not engaged in rendering legal or any other professional services. If legal or any
other expert assistance is required, the services of a competent person should be sought.
FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A
COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF
PUBLISHERS.
Additional color graphics may be available in the e-book version of this book.
Library of Congress Cataloging-in-Publication Data

ISBN: (eBook)
Published by Nova Science Publishers, Inc. New York
CONTENTS
vii
Preface
Chapter 1
Chapter 2
Index
Insurance Markets: Impacts of and Regulatory

Response to the 2007-2009 Financial Crisis
United States Government Accountability Office
Government Assistance for AIG: Summary and Cost
Baird Webel
1
81
105
PREFACE
The U.S. life and property/casualty (P/C) insurance industries wrote over
$1 trillion in total premiums in 2011 and play an important role in ensuring the
smooth functioning of the economy. Concerns about the oversight of the
insurance industry arose during the 2007-2009 financial crisis, when one of the
largest U.S. holding companies that had substantial insurance operations,
American International Group, Inc. (AIG), suffered large losses. These losses
were driven in large part by activities conducted by a non-insurance affiliate,
AIG Financial Products, but also included securities lending activity
undertaken by some of its life insurance companies which created liquidity
issues for some insurers. The losses threatened to bankrupt the company, and
AIG was one of the largest recipients of assistance by the Federal Reserve
Bank of New York and the federal government under the Troubled Asset
Relief Program (TARP) set up during the crisis. This book examines any
effects of the financial crisis on the insurance industry and policyholders, and
addresses what is known about how the financial crisis affected the insurance
industry and policyholders, and the types of actions that have been taken since
the crisis to help prevent or mitigate potential negative effects of future
economic downturns on insurance companies and their policyholders.
Chapter 1 - Insurance plays an important role in ensuring the smooth
functioning of the economy. Concerns about the oversight of the $1 trillion life
and property/casualty insurance industry arose during the 2007-2009 financial
crisis, when one of the largest holding companies, AIG, suffered severe losses
that threatened to affect its insurance subsidiaries. GAO was asked to examine
any effects of the financial crisis on the insurance industry.
This report addresses (1) what is known about how the financial crisis of
2007-2009 affected the insurance industry and policyholders, (2) the factors
viii
Johnson B. Powell
that affected the impact of the crisis on insurers and policyholders, and (3) the
types of actions that have been taken since the crisis to help prevent or
mitigate potential negative effects of future economic downturns on insurance
companies and their policyholders.
To do this work, GAO analyzed insurance industry financial data from
2002 through 2011 and interviewed a range of industry observers, participants,
and regulators.
Chapter 2 - American International Group (AIG), one of the worlds major
insurers, was the largest direct recipient of government financial assistance
during the recent financial crisis. At the maximum, the Federal Reserve (Fed)
and the Treasury committed approximately $182.3 billion in specific
extraordinary assistance for AIG and another $15.9 billion through a more
widely available lending facility. The amount actually disbursed to assist AIG
reached a maximum of $184.6 billion in April 2009. In return, AIG paid
interest and dividends on the funding and the U.S. Treasury ultimately
received a 92% ownership share in the company. As of December 14, 2012,
the government assistance for AIG ended. All Federal Reserve loans have
been repaid and the Treasury has sold all of the common equity that resulted
from the assistance.
Going into the financial crisis, the overarching AIG holding company was
regulated by the Office of Thrift Supervision (OTS), but most of its U.S.
operating subsidiaries were regulated by various states. Because AIG was
primarily an insurer, it was largely outside of the normal Federal Reserve
facilities that lend to thrifts facing liquidity difficulties and it was also outside
of the normal Federal Deposit Insurance Corporation (FDIC) receivership
provisions that apply to banking institutions. September 2008 saw a panic in
financial markets marked by the failure of large financial institutions, such as
Fannie Mae, Freddie Mac, and Lehman Brothers. In addition to suffering from
the general market downturn, AIG faced extraordinary losses resulting largely
from two sources: (1) the AIG Financial Products subsidiary, which
specialized in financial derivatives and was primarily the regulatory
responsibility of the OTS; and (2) a securities lending program, which used
securities originating in the state-regulated insurance subsidiaries. In the panic
conditions prevailing at the time, the Federal Reserve determined that a
disorderly failure of AIG could add to already significant levels of financial
market fragility and stepped in to support the company. Had AIG not been
given assistance by the government, bankruptcy seemed a near certainty. The
Federal Reserve support was later supplemented and ultimately replaced by
assistance from the U.S. Treasurys Troubled Asset Relief Program (TARP).
Preface
ix
The AIG rescue produced unexpected financial returns for the

government. The Fed loans were completely repaid and it directly received
$18.1 billion in interest, dividends, and capital gains. In addition, another
$17.5 billion in capital gains from the Fed assistance accrued to the Treasury.
The $67.8 billion in TARP assistance, however, resulted in a negative return to
the government, as only $54.4 billion was recouped from asset sales and $0.9
billion was received in dividend payments. If one offsets the negative return to
TARP of $12.5 billion with the $35.6 billion in positive returns for the Fed
assistance, the entire assistance for AIG showed a positive return of
approximately $23.1 billion. It should be noted that these figures are the
simple cash returns from the AIG transactions and do not take into account the
full economic costs of the assistance. Fully accounting for these costs would
result in lower returns to the government, although no agency has performed
such a full assessment of the AIG assistance. The latest Congressional Budget
Office (CBO) estimate of the budgetary cost of the TARP assistance for AIG,
which is a broader economic analysis of the cost, found a loss of $14 billion
compared with the $12.5 billion cash loss. CBO does not, however, regularly
perform cost estimates on Federal Reserve actions.
Congressional interest in the AIG intervention relates to oversight of the
Federal Reserve and TARP, as well as general policy measures to promote
financial stability. Specific attention has focused on perceived corporate
profligacy, particularly compensation for AIG employees, which was the
subject of a hearing in the 113th Congress and legislation in the 111th
Congress.
In: U.S. Insurance Industries

Editor: Johnson B. Powell
ISBN: 978-1-62948-118-0
2013 Nova Science Publishers, Inc.
Chapter 1
INSURANCE MARKETS: IMPACTS OF AND

REGULATORY RESPONSE TO THE 2007-2009
FINANCIAL CRISIS*
WHY GAO DID THIS STUDY
Insurance plays an important role in ensuring the smooth functioning of
the economy. Concerns about the oversight of the $1 trillion life and
property/casualty insurance industry arose during the 2007-2009 financial
crisis, when one of the largest holding companies, AIG, suffered severe losses
that threatened to affect its insurance subsidiaries. GAO was asked to examine
any effects of the financial crisis on the insurance industry.
This report addresses (1) what is known about how the financial crisis of
2007-2009 affected the insurance industry and policyholders, (2) the factors
that affected the impact of the crisis on insurers and policyholders, and (3) the
types of actions that have been taken since the crisis to help prevent or
mitigate potential negative effects of future economic downturns on insurance
companies and their policyholders.
This is an edited, reformatted and augmented version of United States Government

Accountability Office, Publication No. GAO-13-583, dated June 2013.
To do this work, GAO analyzed insurance industry financial data from

2002 through 2011 and interviewed a range of industry observers, participants,
and regulators.
WHAT GAO FOUND

The effects of the financial crisis on insurers and policyholders were
generally limited, with a few exceptions. While some insurers experienced
capital and liquidity pressures in 2008, their capital levels had recovered by
the end of 2009 (see figure). Net income also dropped but recovered somewhat
in 2009. Effects on insurers investments, underwriting performance, and
premium revenues were also limited. However, some life insurers that offered
variable annuities with guaranteed living benefits, as well as financial and
mortgage guaranty insurers, were more affected by their exposures to the
distressed equity and mortgage markets. The crisis had a generally minor
effect on policyholders, but some mortgage and financial guaranty
policyholdersbanks and other commercial entitiesreceived partial claims
or faced decreased availability of coverage.
Source: GAO analysis of statutory financial statement data in SNL Financial.

Note: Data are shown in nominal dollars (i.e., unadjusted for inflation).
Life and Property Casualty Insurers Net Income and Capital, 2002-2011.
Actions by state and federal regulators and the National Association of

Insurance Commissioners (NAIC), among other factors, helped limit the
effects of the crisis. First, state insurance regulators shared more information
with each other to focus their oversight activities. In response to transparency
Insurance Markets
issues highlighted by American International Group, Inc.s securities lending

program, NAIC required more detailed reports from insurers. Also, a change
in methodology by NAIC to help better reflect the value of certain securities
also reduced the risk-based capital some insurers had to hold. To further
support insurers capital levels, some states and NAIC also changed reporting
requirements for certain assets. These changes affected insurers capital levels
for regulatory purposes, but rating agency officials said they did not have a
significant effect on insurers financial condition. Several federal programs
also provided support to qualified insurers. Finally, insurance business
practices, regulatory restrictions, and a low interest rate environment helped
reduce the effects of the crisis.
NAIC and state regulators efforts since the crisis have included an
increased focus on insurers risks and capital adequacy, and oversight of
noninsurance entities in group holding company structures. The Own Risk and
Solvency Assessment, an internal assessment of insurers business plan risks,
will apply to most insurers and is expected to take effect in 2015. NAIC also
amended its Insurance Holding Company System Regulatory Act to address
the issues of transparency and oversight of holding company entities.
However, most states have yet to adopt the revisions, and implementation
could take several years.
ABBREVIATIONS
ABS
ACL
AIG
AMBUL
AMBUPC
CDO
CFPB
CMBS
DTA
EESA
FAWG
FIO
FHFA
GLB
IAIS
asset-backed securities
authorized control level
American International Group, Inc.
A.M. Bests U.S. Life Insurance Index
A.M. Bests U.S. Property Casualty Insurance Index
collateralized debt obligations
Bureau of Consumer Financial Protection
commercial mortgage-backed security
deferred tax asset
Emergency Economic Stabilization Act of 2008
Financial Analysis Working Group
Federal Insurance Office
Federal Housing Finance Agency
guaranteed living benefits
International Association of Insurance Supervisors
4
MBS
NAIC
NYA
NYSE
ORSA
P/C
RBC
RMBS
SIFI
SMI
SPV
SSAP
TARP
mortgage-backed securities
National Association of Insurance Commissioners
NYSE Composite Index
New York Stock Exchange
Own Risk and Solvency Assessment
property and casualty
risk-based capital
residential mortgage-backed security
systemically important financial institution
Solvency Modernization Initiative
special purpose vehicle
Statement of Statutory Accounting Principles
Troubled Asset Relief Program
June 27, 2013

The Honorable Randy Neugebauer
Chairman
Subcommittee on Housing and Insurance Committee
on Financial Services
House of Representatives
The Honorable Steve Stivers
House of Representatives
The U.S. life and property/casualty (P/C) insurance industries wrote over
$1 trillion in total premiums in 2011 and play an important role in ensuring the
smooth functioning of the economy. Concerns about the oversight of the
insurance industry arose during the 2007-2009 financial crisis, when one of the
largest U.S. holding companies that had substantial insurance operations,
American International Group, Inc. (AIG), suffered large losses. These losses
were driven in large part by activities conducted by a non-insurance affiliate,
AIG Financial Products, but also included securities lending activity
undertaken by some of its life insurance companies which created liquidity
issues for some insurers. The losses threatened to bankrupt the company, and
AIG was one of the largest recipients of assistance by the Federal Reserve
Bank of New York and the federal government under the Troubled Asset
Relief Program (TARP) set up during the crisis.1 Some other insurance
companies also took advantage of federal assistance, raising concerns about
Insurance Markets
their financial position and regulators response to and preparation for future
financial crises that might affect insurers and their policyholders.
The report responds to your request to examine any effects of the financial
crisis on the insurance industry and policyholders. The report addresses (1)
what is known about how the financial crisis affected insurance industry and
policyholders, (2) the factors that affected the impact of the crisis on insurers
and policyholders, and (3) the types of actions that have been taken since the
crisis to help prevent or mitigate potential negative effects of future economic
downturns on insurance companies and their policyholders.2
For all objectives, we reviewed relevant laws and regulations, conducted a
literature search and reviewed literature and past GAO reports on the financial
crisis. To address how the financial crisis affected the insurance industry and
policyholders, we consulted academic papers, government reports, industry
representatives, and regulatory officials to identify the key characteristics
associated with the financial crisis. We obtained and analyzed financial data
from a variety of data sources including SNL Financial, a private financial
database that contains publicly filed regulatory and financial reports, the
Global Receivership Information Database from the National Association of
Insurance Commissioners (NAIC), and A.M. Bests U.S. Life Insurance Index
(AMBUL) and U.S. Property Casualty Insurance Index (AMBUPC). We
determined that the data reviewed were sufficiently reliable for our purposes.
To assess reliability, we compared select data reported in individual
companies annual financial statements to that reported in SNL Financial. We
also obtained information from A.M. Best and NAIC staff about their internal
controls and procedures for data collection.
To address the factors that affected the impact of the crisis on insurers and
policyholders and insurance regulatory actions taken during and since the
crisis, we reviewed and analyzed relevant state guidance, NAICs model
investment act, reports and documents such as the Statements of Statutory
Accounting Principles, information on securities lending and permitted
practices and the Solvency Modernization Initiative including associated
guidance manuals and model laws such as the Insurance Holding Company
System Regulatory Act. We reviewed our prior work and other sources to
identify federal programs that were available to insurance companies to
increase access to capital. Appendix I contains additional information on our
scope and methodology.
We conducted this performance audit from June 2012 to June 2013 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and

conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.
BACKGROUND
Insurance Industry Overview
Generally, insurers offer several lines, or types, of insurance to consumers
and others. Some types of insurance include life and annuity products and
P/C.3 An insurance policy can include coverage for individuals or families,
(personal lines,) and coverage for businesses, (commercial lines). Personal
lines include home owners, renters, and automobile coverage. Commercial
lines may include general liability, commercial property, and product liability
insurance. The U.S. life and P/C industries wrote, or sold, an annual average of
$601 billion and $472 billion, respectively, in premiums from 2002 through
2011. Figures 1 and 2 illustrate the percentage of premiums written for
selected lines of insurance, compared to total premiums written in the life and
P/C industries, for that time period.4 Overall, individual annuities made up the
largest portion of business (32 percent) in the life industry, while private
passenger auto liability insurance was the largest portion of business (20
percent) in the P/C industry.5 In the P/C industry, financial and mortgage
guaranty insurance represented less than 2 percent of premiums written on
average during the period.6 These lines differ from the other P/C lines we
reviewed because they facilitate liquidity in the capital markets. By protecting
investors against defaults in the underlying securities, financial and mortgage
guaranty insurance can support better market access and greater ease of
transaction execution.
In general, life and P/C insurers have two primary sources of revenue:
premiums (from selling insurance or annuities) and investment income. When
the revenues they collect are greater than the claims and other expenses they
pay, an insurer earns a profit. Both life and P/C insurers collect premiums in
order to pay policyholder claims. Further, both life and P/C insurers earn
investment income from unearned premium reserves, loss reserves and
policyholder surplus. However, because of differences in potential claims,
their investment strategies also generally differ. For instance, life insurance
companies have longer-term liabilities than P/C insurers, so life insurance
Insurance Markets
companies invest more heavily in longer-term assets, such as high-grade

corporate bonds with 30-year maturities. P/C insurers, however, have shorterterm liabilities and tend to invest in a mix of lower-risk, conservative
investments such as government and municipal bonds, higher-grade corporate
bonds, short-term securities, and cash.

Note: Data for some years do not add up to 100 percent due to rounding.
Figure 1. Premiums Written for Selected Lines of Life Insurance Business as a Percentage
of Total Premiums Written, 2002-2011.

Note: Data for some years do not add up to 100 percent due to rounding.
Figure 2. Premiums Written for Selected Lines of Property/Casualty Insurance Business, as
a Percentage of Total Premiums Written, 2002-2011.
Regulatory Overview
Insurance is regulated primarily by state insurance regulators who are
responsible for enforcing state insurance laws and regulations. State regulators
license agents, review insurance products and premium rates, and examine
insurers financial solvency and market conduct. State insurance regulators
typically conduct on-site financial solvency examinations every 3 to 5 years,
although they may do so more frequently for some insurers, and may perform
additional examinations as needed. In addition to on-site monitoring, state
insurance regulators, through NAIC, collect financial information from
insurers for ongoing financial solvency monitoring purposes. State regulators
Insurance Markets
generally carry out market conduct examinations in response to specific

consumer complaints or regulatory concerns and monitor the resolution of
consumer complaints against insurers.
NAIC is the voluntary association of the heads of insurance departments
from the 50 states, the District of Columbia, and five U.S. territories. While
NAIC does not regulate insurers, according to NAIC officials, it does provide
services designed to make certain interactions between insurers and regulators
more efficient. According to NAIC, these services include providing detailed
insurance data to help regulators analyze insurance sales and practices;
maintaining a range of databases useful to regulators; and coordinating
regulatory efforts by providing guidance, model laws and regulations, and
information-sharing tools. Generally, a model act or law is meant as a guide
for subsequent legislation. State legislatures may adopt model acts in whole or
in part, or they may modify them to fit their needs.
The Federal Insurance Office (FIO) was established by the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Although FIO is not a regulator or supervisor, it monitors certain aspects of the
insurance industry, including identifying issues or gaps in the regulation of
insurers that could contribute to a systemic crisis in the insurance industry or
the U.S. financial system. FIO also coordinates federal efforts and develops
federal policy on international insurance matters. FIO represents the interests
of the U.S. federal government in the International Association of Insurance
Supervisors (IAIS), while NAIC and the states represent the interests of the
insurance regulators at IAIS.7 Additionally, some insurance companies are
owned by thrift holding companies that are regulated by the Federal Reserve
System.
Risk-Based Capital Requirements and Guaranty Funds

State regulators require insurance companies to maintain specific levels of
capital to continue to conduct business. NAICs Risk-Based Capital (RBC) for
Insurers Model Act applies to life and P/C insurance companies, and most
U.S. insurance jurisdictions have adopted statutes, regulations, or bulletins that
are substantially similar to NAICs Model Act, as the model act is an
accreditation standard at NAIC. Under this act, state insurance regulators
determine the minimum amount of capital appropriate for a reporting entity
(i.e., insurers) to support its overall business operations, taking into
consideration its size and risk profile. It also provides the thresholds for
10
regulatory intervention when an insurer is financially troubled. RBC limits the

amount of risk a company can take and requires a company with a higher
amount of risk to hold a higher amount of capital. Generally, the RBC
formulas focus on risk related to (1) assets held by an insurer, (2) insurance
policies written by the insurer, and (3) other risks affecting the insurer. A
separate RBC formula exists for each of the primary insurance types that focus
on the material risks common to that type. For instance, RBC for life insurers
includes interest rate risk, because of the material risk of losses from changes
in interest rate levels on the long-term investments that these insurers
generally hold.
States have separate guaranty funds for life and P/C insurance to help
ensure that policyholders continue to receive coverage if their insurer becomes
insolvent, or unable to meet its liabilities.8 Generally, insolvencies are funded
by the remaining assets of the insolvent insurer and also by the guaranty funds,
which are funded by assessments on insurers doing business in their state. The
National Organization of Life and Health Guaranty Associations and the
National Conference of Insurance Guaranty Funds represent the state life and
P/C guaranty funds, respectively. Certain products, such as certain variable
annuities, financial guaranty insurance, and mortgage guaranty insurance, are
not covered by state guaranty funds.
EFFECTS OF THE CRISIS WERE LIMITED LARGELY TO

CERTAIN PRODUCTS AND LINES OF INSURANCE
The financial crisis generally had a limited effect on the insurance industry
and policyholders, with the exception of certain annuity products in the life
insurance industry and the financial and mortgage guaranty lines of insurance
in the P/C industry. Several large insurersparticularly on the life side
experienced capital and liquidity pressure, but capital levels generally
rebounded quickly. Historically, the number of insurance company
insolvencies has been small and did not increase significantly during the crisis.
Also, the effects on life and P/C insurers investments, underwriting
performance, and premium revenues were limited. However, the crisis did
affect life insurers that offered variable annuities with optional guaranteed
living benefits (GLB), as well as financial and mortgage guaranty insurersa
small subset of the P/C industry.9 Finally, the crisis had a generally minor
effect on policyholders, but some mortgage and financial guaranty
Insurance Markets
11
policyholders received partial claims or faced decreased availability of

coverage.
The Financial Crisis Had a Limited Effect on Most Insurers

Operations
Insurers Experienced Some Capital and Liquidity Pressure, but
Insolvencies Were Limited
Many life insurance companies experienced capital deterioration in 2008,
reflecting declines in net income and increases in unrealized losses on
investment assets.10 Realized losses of $59.6 billion contributed to steep
declines in life insurers net income that year. The realized losses stemmed
from other-than-temporary impairments on long-term bonds (primarily
mortgage-backed securities, or MBS) and from the sale of equities whose
values had recently declined.11 A dozen large life insurance groups accounted
for 77 percent of the total realized losses in 2008, with AIG alone, accounting
for 45 percent of the realized losses.12 As illustrated in figure 3, life insurers
net income decreased from 2007 to 2008, from positive income of $31.9
billion to negative income (a loss) of $52.2 billion. However, it rebounded
back to positive income of $21.4 billion in 2009, largely as a result of
decreased underwriting losses and expenses. Income increased further to $27.9
billion in 2010 but fell againto $14.2 billionin 2011, reflecting increased
underwriting losses and expenses.
Total unrealized losses of $63.8 billion in the life insurance industry,
combined with the decline in net income, contributed to a modest capital
decline of 6 percent, to $253.0 billion, in 2008.13 As with realized losses, AIG
accounted for 47 percent of total unrealized losses, and seven large insurance
groups accounted for another 35 percent (see app. II). The majority of the
unrealized losses occurred in common stocks and other invested assets (e.g.,
investments in limited partnerships and joint venture entities).14 However, the
unrealized losses and declines in net income were addressed by a substantial
increase in capital infusions from issuance of company stock or debt in the
primary market, transfer of existing assets from the holding company, or,
notably, from agreements with the U.S. Treasury or Federal Reserve (see paid
in capital or surplus in fig. 4). AIG accounted for more than half (55 percent)
of the capital infusions in 2008, reflecting an agreement with the U.S.
Treasury for the Treasurys purchase of about $40 billion in equity.15 Some
other large life insurance companiesthrough their holding companieswere
12
also able to raise needed capital through equity or debt issuance, or through the
transfer of existing assets from the holding companies. As shown in figure 4,
many publicly traded life insurers or their holding companies continued to pay
stockholder dividends throughout the crisis. Life insurers capital, increased by
15 percent, to $291.9 billion, from 2008 to 2009, partly as a result of the
increase in net income. By 2011, life insurers had net unrealized gains of $20.8
billion, indicating improvements in the value of their investment portfolios.
During the crisis, aggregated stock prices of publicly traded life insurers
declined substantially. As figure 5 illustrates, aggregate stock prices (based on
an index of 21 life insurance companies) began falling in November 2007 and
had declined by a total of 79 percent by February 2009. Although prices rose
starting in March 2009, they had not rebounded to pre-2008 levels by the end
of 2011. In comparison, the New York Stock Exchange (NYSE) Composite
Index declined by a total of 55 percent during the same time period. See
appendix II for additional analysis of stock prices.

Note: Data are shown in nominal dollars.
Figure 3. Life and Property/Casualty Insurers Net Income and Capital, 2002-2011.
Insurance Markets
13

Notes: Data are shown in nominal dollars.
Paid in capital and surplus, stockholder dividends, and net income are three of many factors
that affect capital.
Figure 4. Major Activities Affecting Life Insurers Capital, 2002-2011.
P/C insurers also experienced a steep decline in net income during the
crisis, with a drop of 94 percent from 2007 to 2008, although the industrys net
income remained positive at $3.7 billion (see previous fig. 3). Realized losses
of $25.5 billion contributed to the decline in net income. Seven P/C insurance
groups, including six large groups and one smaller financial guaranty
insurance group, accounted for 47 percent of the realized losses in 2008.16 The
realized losses resulted primarily from other-than-temporary impairments
taken on certain bonds and preferred and common stocks.17 Net underwriting
losses of $19.6 billion (compared to net underwriting gains of $21.6 billion in
2007) also affected net income for the P/C industry in 2008, as did declines in
net investment income and other factors. Many of the insurers with the
greatest declines in net income from 2007 to 2008 were primarily financial and
mortgage guaranty companies.
P/C insurers capital also declined from 2007 to 2008, to $466.6 billion (a
12 percent decline). Although the reduction in net income was a major factor
in the capital decline, unrealized losses of $85.6 billion also played a role. The
greatest unrealized losses occurred in common stocks and other invested
assets. Three large P/C insurance groups accounted for 55 percent of the
14
losses. Capital infusions mitigated the decline in capital, as illustrated in figure

6, and P/C insurers or their holding companies continued to pay stockholder
dividends. P/C insurers capital increased by 11.6 percent and 8.3 percent from
the previous year, respectively, in 2009 and 2010.
Source: GAO analysis of A.M. Best data on the A.M. Best U.S. Life and Property
Casuality Indexes and the New York Stock Exchange Composite index.
Notes: According to A.M. Best, an insurance rating and information provider, the A.M.
Best U.S. Life and Property Casualty Insurance Indexes provide a benchmark for
assessing investor confidence that often correlates with general financial
performance of the overall insurance industry, a specific insurance business
segment, and specific companies in the context of their business segments. The
indexes include all insurance industry companies that are publicly traded on major
global stock exchanges that also have an A.M. Best rating, or that have an
insurance subsidiary with an A.M. Best rating. They are based on the aggregation
of the prices of the individual publicly traded stocks and weighted for their
respective free float market capitalizations. The life index represents 21 life
insurance companies and the P/C index represents 56 P/C companies. As of
February 24, 2012 (the most recent date for which index composition data were
available), the NYSE Composite Index represented 1,867 companies that trade on
the New York Stock Exchange. The left vertical axis represents the basis for the
A.M. Best life and P/C indexes; they are based on an index value of 1,000 as of
December 31, 2004, when A.M. Best established the indexes. The right vertical
axis is the basis for the NYSE Composite Index, which is based on an index value
of 5,000 as of December 31, 2002, when a new methodology for the index took
effect. We overlaid the lines to more effectively compare changes in the indexes
over time.
Figure 5. Month-End Closing Stock Levels for Publicly Traded Life and
Property/Casualty Companies, December 2004- December 2011.
Insurance Markets
15

Notes: Data are shown in nominal dollars. Paid in capital and surplus, stockholder
dividends, and net income are three of many factors that affect capital.
Figure 6. Major Activities Affecting Capital of Property/Casualty Insurers, 2002-2011.
Aggregated stock prices of publicly traded P/C companies declined less

severely than those of life insurance companies during the crisis. As figure 5
demonstrates, P/C companies, like life insurance companies, saw their lowest
stock prices in February 2009, representing a 40 percent decline from the
highest closing price in December 2007. However, prices had rebounded to
2006 levels by mid-to-late 2009 and remained there through 2011. See
appendix II for additional analysis of stock prices.
While regulators we interviewed stated that most life and P/C insurers
strong capital positions just before the crisis helped minimize liquidity
challenges during the crisis, many still experienced pressures on capital and
liquidity. For example, a representative of the life insurance industry and a
regulator noted that it was extremely challenging for most insurersas well as
banks and other financial services companiesto independently raise external
capital during this time, which led to some insurers participation in federal
programs designed to enhance liquidity. In addition, some life insurers were
required to hold additional capital because of rating downgrades to some of
their investments. Mortgage and financial guaranty insurers with heavy
exposure to mortgages and mortgage-related securities experienced liquidity
issues later in the crisis, when mortgage defaults resulted in unprecedented
levels of claims. In addition to maintaining the ability to pay claims, it is
16
important for insurers to meet minimum capital standards to maintain their

credit ratings, which help them attract policyholders and investors.
The Insurance Industry Experienced Relatively Few Receiverships and

Insolvencies
During this period few insurance companies failedless than 1 percent.
The number of life and P/C companies that go into receivership and
liquidation tends to vary from year to year with no clear trend (see table 1).
While the number of life insurers being placed into receivership peaked in
2009, receiverships and liquidations for P/C companies in 2009 were generally
consistent with other years (except 2008, when incidences declined).
Table 1. Number of Receiverships and Liquidations for Life and
Property/Casualty Companies, 2002-2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Receiverships (10-year
Life
average: 6)
Liquidations (10-year
average: 4)
Receiverships (10-year
P/C
average: 15)
Liquidations (10-year
average: 13)
11
12
24
19
16
10
17
15
15
17
15
16
16
11
11
15
13
15
17
Source: GAO analysis of NAIC data.

Notes: Receiverships comprise conservatorships, rehabilitations, and liquidations. An
order of liquidation typically accompanies a declaration of insolvency. Although it
is not possible to determine whether the order of insolvency happened in the same
year as liquidation in every case, guaranty association representatives stated that
liquidation date was generally a good proxy for the insolvency date.
NAIC provided data on conservatorships, rehabilitations, and liquidations that
occurred during our review period of 2002 through 2011. They counted the
earliest instance of one of these three conditions as a receivership for a given year.
For example, a company could have gone into conservatorship in 2002 and into
liquidation in 2004. In that case, it would be counted as a receivership in 2002 and
as a liquidation but not a receivershipin 2004, to avoid double counting. As a
result of this methodology, liquidations reported in table 1 were not necessarily
included in the total number of receiverships for the year in which they occurred.
Specifically, throughout the 10-year review period, life insurance

receiverships and liquidations averaged about 6 and 4 per year, respectively. In
2009, there were 12 receiverships and 6 liquidations. P/C receiverships and
Insurance Markets
17
liquidations averaged about 15 and 13 per year, respectively; in 2009, there

were 15 receiverships and 13 liquidations. However, these companies
represented a small fraction of active companies in those years. There were
more than 1,100 active individual life companies and 3,000 active individual
P/C companies from 2007 through 2009. Appendix II provides information on
the assets and net equity (assets minus liabilities) of insurers that were
liquidated from 2002 through 2011.
Some regulators and insurance industry representatives we interviewed
stated that receiverships and liquidations that occurred during and immediately
after the financial crisis were generally not related directly to the crisis. While
one regulator stated that the crisis might have exacerbated insurers existing
solvency issues, regulators said that most companies that were placed under
receivership during that time had been experiencing financial issues for several
years. Regulators and industry officials we interviewed noted two exceptions
to this statement; both were life insurance companies that had invested heavily
in Fannie Mae and Freddie Mac securities and in other troubled debt
securities.18 See appendix III for a profile of one of these companies.
Effects on Insurers Investment Portfolios, Underwriting Performance,

and Premium Revenues Were Limited
Investment Income
As noted above, for most insurers investment income is one of the two
primary revenue streams. Insurers net investment income declined slightly
during the crisis but had rebounded by 2011.19 In the life and P/C industries in
2008 and 2009, insurers net income from investments declined by 7 percent
and 15 percent respectively from the previous year (see fig. 7). For life
insurers, these declines primarily reflected declines in income on certain
common and preferred stock, derivatives, cash and short term investments, and
other invested assets.20 For P/C insurers, the declines primarily reflected
declines in income on U.S. government bonds, certain common stock, cash
and short-term investments, and other invested assets.21
Table 2 illustrates the percentages of life and P/C insurers gross
investment income derived from various types of investments. Bonds were the
largest source of investment income in both industries, and they increased as a
percentage of gross investment income during the crisis. Life and P/C insurers
income from other types of investments, such as contract loans, cash, and
short-term investments, decreased during the crisis as a percentage of their
gross investment income. According to insurance industry representatives and
18
a regulator, going forward, low interest rates are expected to produce lower
investment returns than in the past, reducing insurers investment income and
likely pressuring insurers to increase revenue from their underwriting
activities. Although life and P/C companies had some exposure to MBS
(including residential and commercial MBS, known respectively as RMBS and
CMBS) from 2002 through 2011, as part of insurers total bond portfolios,
these securities did not present significant challenges.22 In both industries,
investments in derivatives constituted a negligible amount of exposure and
investment income and were generally used to hedge other risks the insurers
faced.

Figure 7. Life and Property/Casualty Insurers Net Investment Income, 2002-2011.
Insurance Markets
19
Table 2. Life and Property/Casualty Insurers Investment Income (Loss)

from Real Estate, Equities, Bonds, Derivatives, and Other Investments as
a Percentage of their Total Gross Investment Income, 2002-2011
Real estate
Equities
Bonds
Derivatives
All other
investments a
a
Life
P/C
Life
P/C
Life
P/C
Life
P/C
Life
P/C
2002 2003 2004 2005 2006 2007

15.4% 14.7% 14.3% 13.6% 13.1% 12.8%
4.2% 4.2% 4.0% 3.3% 3.1% 3.2%
2.8
2.6
2.8
3.1
3.4
4.7
15.3 14.6 12.8 12.9 12.8 12.3
73.8 74.3 74.3 73.5 72.1 70.6
72.7 70.1 71.5 64.3 66.6 67.0
-0.6 -0.3 -0.2 -0.3 0.8
0.3
0.2
0.4
0.1
0.0
-0.1 0.0
8.5
8.7
8.8
10.1 10.5 11.6
7.6
10.7 11.5 19.4 17.6 17.4
2008 2009 2010 2011

13.5% 13.5% 12.5% 12.3%
3.5% 3.8% 3.7% 3.7%
3.6
2.1
2.2
2.2
13.3 12.6 11.8 12.2
73.3 77.7 76.5 75.7
71.5 76.5 74.3 69.8
-1.2 -1.7 0.4
0.9
-0.1 -0.1 0.0
0.0
10.8 8.3
8.3
8.9
11.8 7.2
10.2 14.3
All other investments include contract loans, cash and short-term investments, other invested
assets, and investment write-ins.
Underwriting Performance
Life and P/C insurers underwriting performance declined modestly
during the crisis. In the life industry, benefits and losses that life insurers
incurred in 2008 and 2009 outweighed the net premiums they wrote (see fig.
8).23 A few large insurance groups accounted for the majority of the gap
between premiums written and benefits and losses incurred during these 2
years. For example, one large life insurance group incurred $61.3 billion more
in benefits and losses than it wrote in premiums in 2009.
Policyholders surrendered or allowed to lapse a slightly larger percentage
of life insurance policies during the crisis for both group and individual life
policies, but surrender and lapse rates for individual life policies were at or
below 1.2 percent and 7.4 percent, respectively, of all policies. One insurer
and a regulator we interviewed stated that some policyholders cashed in or
delayed paying the premiums on their life insurance policies because they
needed money for other necessities during the crisis. Surrender benefits and
withdrawals for annuities peaked in 2007, at $259.4 billion, following a 4 year
climb. Surrender benefits and withdrawals represent the amount an insurance
company pays out to a policyholder who surrenders (i.e., cashes in) or takes a
withdrawal from an annuity, minus any fees charged to the policyholder.
Contributing to this increase were surrender benefits and withdrawals for
individual annuities, which increased 33 percent from 2005 to 2006 and
another 11 percent from 2006 to 2007. By 2009, however, total surrender
benefits and withdrawals for annuities had declined to $180.7 billion, their
20
lowest level since 2004. Because interest rates dropped during the crisis,
variable annuities with guarantees purchased before the crisis were in the
money, meaning that the policyholders account values were significantly
less than the promised benefits on their accounts, so the policyholders were
being credited with the guaranteed minimum instead of the lower rates
actually being earned. Thus, policyholders were more likely to stay in their
variable annuities during the crisis because they were able to obtain higher
returns than they could obtain on other financial products.

Figure 8. Life Insurers Benefits and Losses Incurred Compared to Net Premiums Written,
2002-2011.
From 2007 to 2008, the P/C industrys underwriting losses increased as a

percentage of their earned premiums (loss ratio), and the average combined
ratioa measure of insurer underwriting performancerose from 95 percent
to 104 percent, indicating that companies incurred more in claims and
expenses than they received from premiums.24 However, as illustrated in figure
9, the ratios during the crisis were not substantially different from those in the
surrounding years. As discussed later in this report, financial and mortgage
Insurance Markets
21
guaranty insurers combined ratios were particularly high and contributed to

the elevated overall P/C industry combined ratios from 2008 going forward.
P/C insurance industry representatives we interviewed told us that the P/C
market was in the midst of a soft period in the insurance cycle leading into
the crisis. Such soft periods are generally characterized by insurers charging
lower premiums in competition to gain market share. In addition, timing of
certain catastrophic events in the P/C industry overlapped with crisis-related
events. For example, one state regulator noted that in the same week in
September 2008 that AIGs liquidity issues became publicly known, Hurricane
Ike struck the Gulf Coast. According to NAIC analysis, this resulted in
significant underwriting losses for many P/C insurers. NAIC determined that
Hurricane Ike, as well as two other hurricanes and two tropical storms,
contributed to more than half of the P/C industrys estimated $25.2 billion in
catastrophic losses in 2008, which represented a threefold increase from the
prior year. While the crisis may have exacerbated certain aspects of this cycle,
it is difficult to determine the extent to which underwriting losses were a result
of the crisis as opposed to the existing soft market or the weather events of
2008.

Figure 9. Average Property/Casualty Industry Loss Ratios and Combined Ratios, 20022011.
22
As noted previously, a few industry representatives and a regulator we

interviewed stated that decreased investment returns may place more pressure
on insurers to increase the profitability of their underwriting operations. As
shown in figures 10 and 11, life and P/C insurers net investment gains have
historically outweighed their net underwriting losses.25 As shown in figure 10,
life insurers experienced net underwriting losses during every year of our
review period, with the greatest losses occurring in 2008.

Notes:
Data are shown in nominal dollars.
Unlike NAICs annual financial statements for P/C insurers, the statements for life
insurers do not include line items for net investment gain/(loss) or net
underwriting gain/(loss). We created the net investment gain/(loss) measure for
life insurers by adding the line items for net investment income, amortization of
the interest maintenance reserve (adjustments to net investment income over the
remaining life of investments sold, with the intention of capturing the realized
gains/(losses) on those investments over time), and net realized gains/(losses). We
created the net underwriting gain/(loss) measure by subtracting underwriting
deductions from the sum of net premiums and other non-investment income.
Figure 10. Life Insurers Net Investment and Underwriting Gains/(Losses), 2002- 2011.
Insurance Markets
23

Figure 11. Property/Casualty Insurers Net Investment and Underwriting Gains/(Losses),
2002-2011.
Premium Revenues
Effects on premium revenues were primarily confined to individual
annuities in a handful of large insurers. In the life industry, net premiums
written declined by 19 percent from 2008 to 2009 to $495.6 billion, reflecting
decreases in all four of the lines we reviewedgroup and individual life
insurance and group and individual annuitieswith the largest decline in
individual annuities (see fig. 12).
Individual annuity premium revenues decreased more than for other life
products because these products attractiveness to consumers is based on the
guarantees insurers can provide. During the crisis, insurers offered smaller
guarantees, because insurers generally base their guarantees on what they can
earn on their own investments, and returns on their investments had declined.
A small group of large companies contributed heavily to the decreases in this
area. For example, one large life insurance group accounted for 6 percent of all
individual annuity premiums in 2008 and 65 percent of the decreases in that
area from 2008 to 2009. Another seven life insurance groups accounted for an
additional 29 percent of individual annuity premiums and 25 percent of
24
decreases in that area from 2008 to 2009. By 2011, net premiums in individual
annuities had rebounded beyond their precrisis levels.

Figure 12. Net Premiums Written for Group and Individual Life and Annuities Products,
2002-2011.
P/C insurers net premiums written declined by a total of 6 percent from

2007 through 2009, primarily reflecting decreases in the commercial lines
segment. In the lines we reviewed, auto lines saw a slight decline in net
premiums written, but insurers actually wrote an increased amount of
homeowners insurance. One insurance industry representative we interviewed
stated that the recession caused many consumers to keep their old vehicles or
buy used vehicles rather than buying new ones, a development that negatively
affected net premiums written for auto insurance. Financial and mortgage
guaranty insurers experienced respective declines of 43 percent and 14 percent
in net premiums written from 2008 to 2009.
Insurance Markets
25
Annuity Products and Financial and Mortgage Guaranty Lines

Experienced Greater Financial Difficulties during the Crisis
As noted, many life insurers that offered variable annuities with GLBs
experienced strains on their capital when the equities market declined during
the crisis. Specifically, beginning in the early 2000s many life insurers began
offering GLBs as optional riders on their variable annuity products. In general,
these riders provided a guaranteed minimum benefit based on the amount
invested, and variable annuity holders typically focused their investments on
equities. From 2002 through 2007, when the stock market was performing
well, insurers sold a large volume of variable annuities (for example, as table 3
shows, they sold $184 billion in 2007). As illustrated in table 3, as of 2006 (the
earliest point for which data were available), most new variable annuities
included GLBs. These insurers had established complex hedging programs to
protect themselves from the risks associated with the GLBs. However,
according to a life insurance industry representative and regulators we
interviewed, when the equities market declined beginning in late 2007,
meeting the GLBs obligations negatively impacted insurers capital levels as
life insurers were required to hold additional reserves to ensure they could
meet their commitments to policyholders. According to a few regulators and a
life insurance industry representative we interviewed, ongoing low interest
rates have recently forced some life insurers to raise prices on GLBs or lower
the guarantees they will offer on new products.
In the P/C industry, the financial and mortgage guaranty lines were
severely affected by the collapse of the real estate market. As noted earlier,
these lines represented less than 2 percent of the total P/C industrys average
annual written premiums from 2002 through 2011 and are unique in that they
carry a high level of exposure to mortgages and mortgage-related securities.
Mortgage guaranty insurers primarily insured large volumes of individual
mortgages underwritten by banks by promising to pay claims to lenders in the
event of a borrower default (private mortgage insurance). Financial guaranty
insurers also were involved in insuring asset-backed securities (ABS), which
included RMBS. Additionally, these insurers insured collateralized debt
obligations (CDO), many of which contained RMBS.26 These insurers
guaranteed continued payment of interest and principal to investors if
borrowers did not pay. These credit protection products included credit default
swaps.27
26

Table 3. Variable Annuity Sales and GLB Election Rates, 2002-2012
Dollars in billions
Total
variable
annuity
sales
Year
2002
$116.6
2003
129.4
2004
132.9
2005
136.9
2006
160.4
2007
184.0
2008
155.7
2009
128.0
2010
140.5
2011
157.9
2012
147.4
New
variable
annuity
sales
NA
NA
NA
NA
$116.9
141.5
122.0
94.0
107.9
121.8
112.3
Percentage of new
variable annuities
sales for which GLB
was available
NA
NA
NA
NA
86%
91
91
90
89
90
85
GLB election rate for

new variable
annuities sales
NA
NA
NA
NA
76%
77
83
89
88
88
88
Source: GAO analysis of LIMRA data.

Notes:
LIMRA data on new variable annuity sales and GLB availability and election rates
prior to 2006 were not available (NA). LIMRA is a financial research firm that
provides consulting and research services to its over 850 member financial
services firms.
Financial and mortgage guaranty insurers we interviewed stated that prior

to the crisis, these two industries operated under common assumptions about
the real estate market and its risk characteristicsnamely, that housing values
would continue to rise, that borrowers would continue to prioritize their
mortgage payments before other financial obligations, and that the housing
market would not experience a nationwide collapse. As a result of these
common assumptions, these insurers underwrote unprecedented levels of risk
in the period preceding the crisis. For example, according to a mortgage
guaranty industry association annual report, the associations members wrote
$352.2 billion of new business in 2007, up from $265.7 billion in 2006. A
financial guaranty industry representative told us that the industry had
guaranteed about $30 billion to $40 billion in CDOs backed by ABS.
The unforeseen and unprecedented rate of defaults in the residential
housing market beginning in 2007 adversely impacted underwriting
performance significantly for mortgage and financial guaranty insurers. As
Insurance Markets
27
shown in table 4, combined ratiosa measure of insurer performance

increased considerably for both industries beginning in 2008, with mortgage
guaranty insurers combined ratios peaking at 135 percent in both 2010 and
2011. In 2008 and later, several insurers in these two industries had combined
ratios exceeding 200 percent.
Table 4. Financial and Mortgage Guaranty Insurers Average Loss and
Combined Ratios, 2002-2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Financial Loss
Guaranty Ratio
Combined
Ratio
Mortgage Loss
Guaranty Ratio
Combined
Ratio
89% 77% 75% 83% 65% 69% 90% 77% 83% 80%
118% 104% 101% 111% 92% 97% 118% 105% 113% 109%
84% 72% 79% 88% 68% 82% 102% 105% 110% 103%
110% 96% 103% 112% 93% 103% 123% 123% 135% 135%

Note: Table 4 includes all individual companies that reported positive net written
premiums in financial or mortgage guaranty insurance in any year from 2002
through 2011. We calculated the loss and combined ratios with industry totals
rather than taking an average of individual company ratios.
Financial and mortgage guaranty insurers are generally required to store

up contingency reserves in order to maintain their ability to pay claims in
adverse economic conditions. However, during the crisis, many insurers faced
challenges maintaining adequate capital as they increased reserves to pay
future claims. This led to ratings downgrades across both the financial and
mortgage guaranty insurance industries beginning in early 2008. For example,
in January 2008, Fitch Ratings downgraded the financial strength rating of
Ambac Financial Group, Inc., a financial guaranty insurer, from AAA to AA,
and Standard & Poors placed Ambacs AAA rating on a negative rating
watch. Standard & Poors downgraded the ratings of AMBAC and MBIA, Inc.
(also a financial guaranty insurer) from AAA to AA in June 2008, and Fitch
Ratings downgraded MGIC Investment Corp. and PMI Group, Inc.the two
largest mortgage insurersfrom AA to A+ in June 2008. These downgrades
had a detrimental impact on insurers capital standing and ability to write new
business. For example, because ratings reflect insurers creditworthiness (in
other words, their ability to pay claims), the value of an insurers guaranty was
28
a function of its credit rating. Thus when an insurer receives a credit rating
downgrade, the guaranty it provides is less valuable to potential customers.
Additionally, credit ratings downgrades sometimes required insurers to post
additional collateral at a time when their ability to raise capital was most
constrained.
According to industry representatives and insurers we interviewed,
financial and mortgage guaranty insurers generally had what were believed to
be sufficient levels of capital in the period leading into the crisis, but they had
varying degrees of success in shoring up their capital in response to the crisis.
Industry representatives and insurers also stated that early in the crisis,
liquidity was generally not an issue, as insurers were invested in liquid
securities and continued to receive cash flows from premium payments.
However, as defaults increased and resulted in unprecedented levels of claims
in 2008 and 2009, the pace and magnitude of losses over time became too
much for some insurers to overcome, regardless of their ability to raise
additional capital. As a result, several financial and mortgage guaranty insurers
ceased writing new business, and some entered rehabilitation plans under their
state regulator.28 In addition, insurers we interviewed told us that those
companies that continued to write new business engaged in fewer deals and
used more conservative underwriting standards than before the crisis.
The case of one mortgage insurer we reviewed illustrated some of the
challenges that financial and mortgage guaranty insurers experienced during
the crisis. By mid-2008, the insurer had ceased writing new mortgage guaranty
business and was only servicing the business it already had on its books. This
insurer is licensed in all states and the District of Columbia. Previously, the
insurer provided mortgage default protection to lenders on an individual loan
basis and on pools of loans. As a result of continued losses stemming from
defaults of mortgage loans many of which were originated by lenders with
reduced or no documentation verifying the borrowers income, assets, or
employment the state regulator placed the insurer into rehabilitation with a
finding of insolvency. See appendix III for a more detailed profile of this
distressed mortgage guaranty insurer.
The Effect of the Crisis on Policyholders Was Generally Small

NAIC and guaranty fund officials told us that life and P/C policyholders
were largely unaffected by the crisis, particularly given the low rate of
insolvencies. The presence of the state guaranty funds for individual life, fixed
Insurance Markets
29
annuities and the GLBs on variable annuities, and P/C lines meant that, for the
small number of insolvencies that did occur during or shortly after the crisis,
policyholders claims were paid up to the limits under guaranty fund rules
established under state law.29 However, financial and mortgage guaranty
insurers typically are not covered by state guaranty funds and, as described
below, some policyholders claims were not paid in full.
According to industry representatives, the crisis generally did not have a
substantial effect on the level of coverage that most life and P/C insurers were
able to offer or on premium rates. An insurer and industry representatives told
us that due to the limited effect on most insurers capital, the industry
maintained sufficient capacity to underwrite new insurance. As described
earlier, P/C industry representatives told us that the crisis years coincided with
a period of high price competition in the P/C insurance industry when rates
generally were stable or had decreased slightly (soft insurance market).
However, P/C industry representatives indicated that separating the effects of
the insurance cycle from the effects of the financial crisis on premium rates is
difficult. Moreover, insurers and industry representatives for both the life and
P/C industries noted that because investment returns had declined, insurers
were experiencing pressure to increase underwriting profits that in some cases
could result in increased premium rates.
In the annuities line, which was most affected by the crisis in the life
insurance industry, effects on policyholders varied. Policyholders who had
purchased variable annuities with GLBs before the crisis benefited from
guaranteed returns that were higher than those generally available from other
similar investments. However, as described previously, a few regulators and a
life insurance industry representative told us that the prevailing low interest
rates had forced some insurers to either lower the guarantees they offer on
GLBs associated with variable annuities or raise prices on these types of
products. According to data from LIMRA, the percentage of new variable
annuity sales that offered GLB options declined from about 90 percent to 85
percent from 2011 to 2012. As a result, some consumers may have more
limited retirement investment options.
Financial guaranty and mortgage guaranty policyholders were the most
affected among the P/C lines of insurance, although these policyholders were
institutions, not individual consumers. While most insurers have continued to
pay their claims in full, some insurers have been able to pay partial claims.30
Many financial and mortgage guaranty insurers are also no longer writing new
business. This fact, combined with tightened underwriting standards and
practices, may have made it more difficult for some policyholders to obtain
30
coverage. On the other hand, industry officials have told us that the market for
financial guarantees has declined because of the absence of a market for the
underlying securities on which the guarantees were based; the current lowinterest-rate environment; and the lowered ratings of insurers, which have
reduced the value of the guarantees.
ACTIONS BY STATE REGULATORS, FEDERAL PROGRAMS,

AND INSURANCE BUSINESS PRACTICES HELPED MITIGATE
SOME EFFECTS OF THE CRISIS
Multiple regulatory actions and other factors helped mitigate the negative
effects of the financial crisis on the insurance industry. State insurance
regulators and NAIC took various actions to identify potential risks, and
changed the methodology for certain RBC provisions and accounting
requirements to help provide capital relief for insurers. In addition, several
federal programs were also made available that infused capital into certain
insurance companies. Also, industry business practices and existing regulatory
restrictions on insurers investment and underwriting activities helped to limit
the effects of the crisis on the insurance industry.
State Regulators Took Actions to Identify and Address Potential

Risks
During the crisis, state regulators focused their oversight efforts on
identifying and addressing emerging risks. Initially, insurers did not know the
extent of the problems that would emerge and their effect on the insurance
industry and policyholders, according to officials from one rating agency we
spoke to. Further, as the financial crisis progressed, the events that unfolded
led to a high degree of uncertainty in the financial markets, they said. To
identify potential risks, state regulators said they increased the frequency of
information sharing among the regulators and used NAIC analysis and
information to help focus their inquiries.
For example, an official from one state told us that, during the crisis, state
regulators formed an ad hoc advisory working group on financial guaranty
insurance. The group consisted of state regulators that had oversight of at least
one domestic financial guaranty insurer in their state. The groups purpose was
Insurance Markets
31
to keep its members informed about the status of specific insurers and stay
abreast of developments in the financial guaranty insurance sector. The official
stated that the regulators also shared advice and details of regulatory actions
they were implementing for specific financial guaranty insurers. Another state
regulator increased its usual oversight activities and increased communications
with companies domiciled in the state.31
In addition to using information from other state regulators, state
insurance regulators said they also used information from NAIC to identify
potential risks. Three state regulators we interviewed said they used NAICs
information to identify potential problem assets and insurers with exposure to
such assets. For example, one state regulator said it used reports on RMBS and
securities lending from NAICs Capital Markets Bureau to better focus its
inquiries with insurers about their risk management activities.
According to state regulators and industry representatives we spoke with,
with the exception of mortgage and financial guaranty insurers, they did not
identify serious risks at most insurers as a result of the crisis.
A risk they did identify, although they said not many insurers were
engaged in the practice, was securities lending. Two state regulators told us
that to address potential risks, they created new rules covering securities
lending operations. For example, one state regulator said that during the crisis
it sought voluntary commitments from life insurers to limit their securities
lending operations to 10 percent of their legal reserves, thereby limiting any
risk associated with securities lending activities.32 Another state regulator
stated that it also enacted legislation extending to all insurers certain securities
lending provisions. Both states took these actions after AIGs securities
lending program was identified as one of the major sources of its liquidity
problems in 2008.
NAIC Also Took Steps to Identify Potential Risks and Share

Information with States
NAIC officials stated that NAIC increased its research activities to
identify potential risks and facilitated information sharing with state
regulators. NAIC operates through a system of working groups, task forces,
and committees comprised of state regulators and staffed by NAIC officials.
These groups work to identify issues, facilitate interstate communication, and
propose regulatory improvements. NAIC also provides services to help state
regulatorsfor instance, maintaining a range of databases and coordinating
regulatory efforts. NAIC officials said that they identified potential risks and
32
other trends through their regular analyses of statutory financial statement

filings, which contain detailed investment data. For example, during the crisis
NAICs analysis of insurers investment data identified companies with
exposure to certain European markets that posed potential risks for the
companies. NAIC passed this information along confidentially to the relevant
state regulators for further monitoring. As discussed above, a state regulator
we interviewed said they used NAICs in-depth analyses to help monitor their
domiciled insurers for potential risks such as RMBS. To facilitate information
sharing about private mortgage insurance, NAIC officials said it formed an
informal working group comprised of domestic regulators of private mortgage
insurance companies. These regulators, in turn, kept other states informed
about the status of private mortgage insurers. NAIC officials said this informal
working group was later made permanent as the Mortgage Guaranty Insurance
Working Group, which continues to assess regulations for private mortgage
insurance companies for potential improvements.
NAIC officials said its Financial Analysis Working Group (FAWG), a
standing working group comprised of staff from various state insurance
departments, identified insurers with adverse trends linked to developing
issues during the crisis and helped ensure that state regulators followed
through with appropriate oversight activities. The group shares information
about potentially troubled insurers and certain insurance groups, market
trends, and emerging financial issues. It also works to help ensure that state
regulators have taken appropriate follow-up actions. For example, NAIC
officials said that FAWG analyzed each insurers exposure to subprime
mortgage assets, identified those with the most exposure, and then took steps
to ensure that domestic state regulators followed up with them.33 State
regulators told us that they had used FAWG information to help identify
emerging issues, potentially troubled companies, and best practices, among
other things. Also, NAIC officials said that FAWG had informed state
regulators about the current status of financial guaranty and private mortgage
insurance companies on a regular basis as these sectors experienced more
financial distress than the rest of the insurance industry during the crisis.
Regulatory officials from one state said that they relied on information
collected by FAWG to monitor financial guaranty and private mortgage
insurers operating in their state because none of these insurers were domiciled
there. They added that the private mortgage insurers doing business in their
state had large exposures because of the large housing market in their state.
NAIC also expanded its Capital Markets Bureau activities during the crisis
to help analyze information on the insurance industrys investments, such as
Insurance Markets
33
exposure to potential market volatility, said NAIC officials. According to

NAICs website, the mission of the bureau is to support state insurance
regulators and NAIC on matters related to the regulation of insurers
investment activities. The bureau monitors developments and trends in the
financial markets that affect insurance companies, researches investment
issues, and reports on those that can potentially affect insurance company
investment portfolios. State regulators said they used these reports during the
crisis.
For example, one state said that the report on the effects of the European
debt crisis on U.S. insurers was useful and another state said the reports on
securities lending helped focus their dialogue with domiciled insurers about
their risk management practices. As discussed later in this report, the bureau
also worked with third parties to model the values of insurers portfolios of
RMBS and CMBS.
To increase transparency regarding insurers securities lending
reinvestment activities, NAIC made changes to the statutory accounting rule
and added disclosure requirements to address risks that were highlighted by
AIGs securities lending program, which was a major source of its liquidity
problems in 2008. According to an NAIC report, AIGs problems in 2008
highlighted the lack of transparency of securities lending collateral
specifically when the collateral was cash.34 The report stated that the statutory
accounting rule that addresses cash collateral, among other things, was subject
to liberal interpretations in the insurance industry and that consequently some
companies had not disclosed their cash collateral in their statutory financial
statements.35
To increase transparency, NAIC made changes to the statutory accounting
rule in 2010 and subsequently replaced it with the Statement of Statutory
Accounting Principles (SSAP) No. 103Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SSAP No.
103, which took effect on January 1, 2013, increases the details about cash
collateral that companies report on statutory financial statements, such as the
maturation of investments obtained with it and instances in which
counterparties can call it back. NAIC also added a new reporting requirement,
Schedule DL which requires insurance companies to provide more details to
support the aggregate information about invested collateral reported on an
insurers statutory financial statements.
34
Changes to Certain Risk-Based Capital Provisions and an

Accounting Requirement Helped Reduce Pressure on Insurers
Capital
NAIC Changed the Method of Calculating Risk-Based Capital Charges
for MBS
NAIC changed the methodology it used in its guidance to state insurance
regulators to determine the amount of risk-based capital (RBC) that state
regulators should require insurers to hold for nonagency MBS investments.36
As discussed earlier, life insurance companies saw a decline of almost 6
percent in capital in 2008. Prior to the change, NAICs methodology for
calculating RBC charges for nonagency MBS relied on agency ratings. For
example, capital charges were lower for RMBS with a relatively high agency
rating than for those with a lower rating. During the crisis, the historically high
levels of failed mortgages across the nation were followed by rating agency
downgrades of nonagency RMBS that required insurers to increase their
capital levels. NAIC officials told us that, in hindsight, using agency ratings to
help determine the amount of capital an insurer should hold for their
nonagency MBS investments was not appropriate because these securities
were rated too highly before the crisis and overly pessimistic after the crisis.
As a result, NAIC moved to a methodology for calculating RBC charges for
nonagency MBS that determined an expected recovery value for each security
based on a set of economic scenarios.37 NAIC contracts with BlackRock and
PIMCO to conduct these analyses.38 NAIC reported that this change in
methodology not only had eliminated reliance on agency ratings, but also had
increased regulatory involvement in determining how RBC charges were
calculated for nonagency MBS. NAIC officials saw both of these results as
positive.
Although this change in methodology did result in a change in RBC
charges for more than half of insurers RMBS holdings, the change did not
significantly affect insurers financial statements. Because the new
methodology resulted in estimated recovery values that were higher than the
amortized values of RMBS shown on financial statements, in 2010 capital
requirements for 59 percent of the insurance industrys nonagency RMBS
were reduced. However, almost 88 percent of industrywide CMBS holdings in
2011 were not affected by these changes. Officials from one rating agency said
the change was appropriate because the new methodology was actually similar
to the one used by the rating agency itself. Officials from another rating
agency said that the switch to the new modeling method reduced transparency
Insurance Markets
35
to insurers because NAIC did not release its modeling results for insurers to
use until late in the year.
Some States Allowed Certain Modifications to a Statutory Accounting

Rule on Deferred Tax Assets
During the financial crisis, some state regulators granted some insurers
permission to use prescribed and permitted accounting practices that helped
the insurers improve their capital positions.39 These practices included
allowing alternative methods of calculating an insurers assets or liabilities that
differ from statutory accounting rules and can result in a higher amount of
assets admitted to an insurers statutory financial statements. Based on data
from NAIC, insurers did request modifications to statutory accounting
practices. From 2005 to 2007, about 30 such requests were made each year
nationwide. In 2008, however, there were over 130 such requests.
For each year that an insurer has used a prescribed or permitted practice,
statutory accounting rules require it to disclose in its statutory financial
statements specific information about each practice it used, including the net
effect on its net income and capital. For example, an insurer could request a
permitted practice to use a different method of valuing its subsidiary, and a
higher valuation would increase the capital reported on its statutory financial
statements. Table 5 shows the net effect of prescribed and permitted practices
on life and P/C insurers net income and capital from 2006 through 2011. In
2009, the life insurance industrys aggregate net income was about $1 billion
less given the effects from prescribed and permitted practices, while P/C
insurers was about $5 billion more. In terms of capital, both life and P/C
insurers experienced a substantial positive impact from prescribed and
permitted practices in 2008 compared to 2007; these positive effects remained
through 2011.
One permitted practice in particular that was sought during the crisis could
generally help insurers increase the amount of admitted assets that could be
included in their statement of financial position by increasing the percentage
of deferred tax assets (DTA) that could be classified as an admitted asset.40
Admitted assets are those that are available for paying policyholder obligations
and are counted as capital for regulatory purposes. Statutory accounting
provisions do not allow insurers to include assets in their statutory statements
of financial position unless they are admitted assets.41 Specifically, insurers
requested that the limits for determining the percentage of DTAs that could be
classified as admitted assets be raised.42 NAIC officials said that more than
half of the 119 permitted practices that states granted to insurers in 2008 were
36
related to increasing the limits, which in turn increased the amount of DTA
that insurers could classify as admitted assets. This change enabled some
insurers to improve their reported capital positions by increasing the amount of
assets that were admitted to their statutory financial statements.
Table 5. Net Effects of All Prescribed and Permitted Practices on Life and
Property/Casualty Insurers Net Income and Capital, 2006-2011
Dollars in thousands
Net effect (positive and negative) in net
income
Year
Life
P/C
2006
$15,903
$-1,256,824
2007
-160,886
530,013
2008
1,515,952
2,533,518
2009
-1,014,710
5,242,658
2010
68,327
3,018,482
2011
-331,882
167,375
Net effect (positive and negative) in capital

Life
$-1,504,098
377,626
8,904,224
2,048,691
2,477,606
2,658,653
P/C
$1,225,426
6,628,204
11,060,723
8,192,046
12,641,458
13,611,375

Notes:
Amounts represent the difference between the net income or capital reported using
state prescribed or permitted practices and what would have been reported using
NAIC statutory accounting principles.
SNL Financial did not report these data on an aggregate level until 2006.
Industry stakeholders had mixed views on the effects of state regulators

granting permitted practices on a case-by-case basis. A state regulator and an
industry representative said insurance companies complained that granting
case-by-case permission created an uneven playing field because some
insurers were allowed to use the increased limits while others were not.
However, one rating agency official said the effects were insignificant because
DTAs represent a very small percentage of admitted assets. Another rating
agency official added that while the case-by-case permissions might result in
differences across different insurers statutory financial statements, the
financial effects of the changes were disclosed in the financial statements.
Therefore, they could be easily adjusted using the disclosures to facilitate
comparison of financial statements across different insurers.
Insurance Markets
37
NAIC Expanded the Limits That Were Used to Calculate Admitted Assets
from DTA
In 2009, NAIC issued Income Taxes Revised, A Temporary Replacement
of SSAP No. 10 (SSAP 10R), which generally adopted the increased limits that
some states had granted to individual insurers and made them available to all
life and P/C insurers that met certain eligibility requirements. SSAP 10R,
which superseded SSAP 10, had a sunset provision to expire at the end of
2010 and took effect for statutory financial statements filed for year-end 2009.
A new feature of SSAP 10R was its eligibility requirements, which were based
on certain RBC thresholds that would trigger regulatory action if they were
reached. To be eligible to apply SSAP 10R, insurers were to exceed 250 to 300
percent of these thresholds.43 As a result, only companies at or above certain
minimum capital standards were eligible to include expanded portions of
DTAs in their admitted assets. NAIC officials said that troubled insurance
companies that had violated the threshold for regulatory action were typically
troubled and would not be eligible to include higher portions of their DTAs as
admitted assets. However, they added that state insurance regulators have the
authority to determine if the financial conditions of a troubled company affect
the recoverability of any admitted assets, including admitted DTAs, and may
disallow the company from classifying certain ones as admitted assets. On
January 1, 2012, the Statement of Statutory Accounting Principles No. 101,
Income Taxes, a Replacement of SSAP No. 10R and SSAP No. 10 (SSAP 101)
went into effect. It permanently superseded the original principle and generally
codified the increased limits of SSAP 10R.44 However, SSAP 101 has tiered
eligibility requirements, which provide a more gradual reduction in the portion
of an insurers DTA that can be included as an insurers admitted assets.45
NAIC officials said that this more gradual reduction can help prevent a sudden
drop in capital at a time when an insurer is already experiencing a decline in
capital. That is, rather than suddenly losing the ability to count any DTAs as
admitted assets, the tiered eligibility requirements can spread these reductions
over time. Based on an actuarial study, among other things, NAIC increased
the limits of SSAP 10, which could provide insurers with capital relief.
According to this study, one of the major contributing factors to DTAs was the
large amounts of write-downs on impaired investments during the crisis. As
previously discussed, in 2008, life insurers had $64 billion in unrealized
losses, as well as other-than-temporary impairments of $60 billion in realized
losses on investments. To the extent that an insurers DTA increased due to
impairments that were taken on its investments, expanding the limits on the
admittance of DTA would help to increase their capital. From 2006 to 2011,
38
admitted DTA generally rose from over 4 percent to about 9 percent of capital
for life insurers while fluctuating from about 3 percent to over 4 percent for
P/C insurers (see figs. 13 and 14). The limits of SSAP 10 were intended to be
conservative, explained an NAIC official, admitting far fewer years of DTAs
than insurers had accumulated over the years.

Figure 13. Admitted Deferred Tax Assets as a Percentage of Capital for the Life Insurance
Industry.

Figure 14. Admitted Deferred Tax Assets as a Percentage of Capital for the
Property/Casualty Insurance Industry.
Insurance Markets
39
Industry groups we spoke to had mixed views about expanding the limits
of SSAP 10. A consumer advocacy group official stated that while expanding
the limits could help insurers show greater amounts of admitted assets and
capital in their statutory financial statements, in reality, no actual additional
funds were made available to protect policyholders because the additional
capital came from DTAs, a non-liquid asset. However, one rating agency
official said the increased limits have not significantly affected insurer capital
because DTAs are generally a relatively small line item on insurers financial
statements. The rating agency also said the effects of the expanded limits were
insignificant and did not affect the agencys ratings, nor were they enough to
make insolvent companies appear solvent. Officials from one rating agency
also explained that insurers pursued the expanded DTA limits even though
they were relatively small because, during the crisis, companies were not
certain how long the financial crisis would last and therefore sought various
avenues to help reduce stress on their capital. According to an actuarial
associations report, the limits in SSAP 10R were low and therefore
conservative.
Federal Programs Have Increased Access to Capital

During the crisis, several federal programs were available to insurance
companies to ease strain on capital and liquidity. Several insurers among the
largest life companiesbenefited from these federal programs.
Troubled Asset Relief Program, the Capital Purchase Program. The

U.S. Department of the Treasurys Troubled Asset Relief Program,
the Capital Purchase Program, was created in October 2008 to
strengthen financial institutions capital levels. Qualified financial
institutions were eligible to receive an investment of between 1 and 3
percent of their risk-weighted assets, up to a maximum of $25
billion.46 Eligibility was based on the applicants overall financial
strength and long-term viability. Institutions that applied were
evaluated on factors including their bank examinations ratings and
intended use of capital injections. The program was closed to new
investments in December 2009. The Hartford Financial Services
Group, Inc. and Lincoln National Corporation, holding companies that
own large insurers as well as financial institutions that qualified for
assistance from the Capital Purchase Program, received $3.4 billion
40
and $950 million, respectively. A few other large insurance

companies with qualifying financial institutions also applied for this
assistance and were approved but then declined to participate. Both
Hartford and Lincoln bought a bank or thrift in order to qualify for the
federal assistance.47
Commercial Paper Funding Facility. The Federal Reserves
Commercial Paper Funding Facility became operational in October
2008. The facility was intended to provide liquidity to the commercial
paper market during the financial crisis. The facility purchased 3
month unsecured and asset-backed commercial paper from U.S.
issuers of commercial paper that were organized under the laws of the
United States or a political subdivision or territory, as well as those
with a foreign parent. The facility expired on February 1, 2010. Ten
holding companies of insurance companies participated in the facility.
In 2008 and 2009, the 10 holding companies issued approximately
$68.8 billion in commercial paper through the facility. AIG issued
about 84 percent of this total. Of the 9 other insurance companies that
participated in the facility, several became ineligible for further
participation by mid-2009 because of downgrades to their credit
ratings.
Term Auction Facility. The Federal Reserve established the Term
Auction Facility in December 2007 to meet the demands for term
funding. Depository institutions in good standing that were eligible to
borrow from the Federal Reserves primary credit program were
eligible to participate in the Term Auction Facility. The final auction
was held in March 2010. By virtue of its role as a bank holding
company, MetLife, Inc., the life industrys largest company in terms
of premiums written, accessed $18.9 billion in short-term funding
through the Term Auction Facility.48
Term Asset-Backed Securities Loan Facility. The Federal Reserve
created the Term Asset-Backed Securities Loan Facility to support the
issuance of asset-backed securities collateralized by assets such as
credit card loans and insurance premium finance loans. The facility
was closed for all new loan extensions by June 2010. Prudential
Financial, Inc., Lincoln National Corporation, the Teachers Insurance
and Annuity Association of America (a subsidiary of TIAA-CREF),
MBIA Insurance Corp. (a financial guaranty insurer subsidiary of
MBIA, Inc.), and two other insurance companies borrowed over $3.6
billion in 2009 through the Term Asset-Backed Securities Loan
Insurance Markets
41
Facility. These loans were intended to spur the issuance of assetbacked securities to enhance the consumer and commercial credit
markets.
Federal Reserve Bank of New Yorks Revolving Credit Facility and
Treasurys Equity Facility for AIG. The Federal Reserve Bank of New
York and Treasury made over $182 billion available to assist AIG
between September 2008 and April 2009. The Revolving Credit
Facility provided AIG with a revolving loan that AIG and its
subsidiaries could use to enhance their liquidity. Some federal
assistance was designated for specific purposes, such as a special
purpose vehicle to provide liquidity for purchasing assets such as
CDOs. Other assistance, such as that available through the Treasurys
Equity Facility, was available to meet the general financial needs of
the parent company and its subsidiaries. Approximately $22.5 billion
of the assistance was authorized to purchase RMBS from AIGs life
insurance companies.49
A source of loans that eligible insurers have had access to, even prior to
the financial crisis, is the Federal Home Loan Bank System. It can make loans,
or advances, to its members, which include certain insurance companies that
engaged in housing finance and community development financial institutions.
The advances are secured with eligible collateral including government
securities and securities backed by real estate-related assets. According to a
representative of a large life insurance company we interviewed, the
borrowing capacity from the Federal Home Loan Bank System was especially
helpful because it provided access to capital during the crisis when other
avenues to the capital markets were relatively unavailable. In other words,
they were able to use their investment assets as collateral to access capital for
business growth. The number of insurance company members, as well as the
advances they took, increased during the crisis. In 2008, advances to insurance
companies peaked at a total of $54.9 billion for 74 companies, from $28.7
billion for 52 companies in 2007.
Insurance Business Practices, Regulatory Restrictions, and a Low

Interest Rate Environment May Have Helped to Mitigate Effects of the
Crisis
A variety of insurance business practices may have helped limit the effects
of the crisis on most insurers investments, underwriting performance, and
premium revenues. First, insurance industry participants and two regulators we
42
interviewed credited the industrys investment approach, as well as regulatory

restrictions, for protecting most companies from severe losses during the
crisis. Typically, insurance companies make investments that match the
duration of their liabilities. For example, life insurers liabilities are typically
long term, so they tend to invest heavily in conservative, long-term securities
(30 years). According to a life industry representative, this matching practice
helped ensure that life insurers had the funds they needed to pay claims
without having to sell a large amount of assets that may have decreased in
value during the crisis. A P/C industry representative said P/C insurers, whose
liabilities are generally only 6 months to a year, invest in shorter-term, highly
liquid instruments and did not experience significant problems paying claims.
In addition, P/C insurers higher proportion of assets invested in equities
(between about 17 to 20 percent from 2002-2011, as opposed to between about
2 to 5 percent for life insurers in the same period) helps explain their greater
decline in net investment income during the crisis. Both industries also derived
their largest source of investment income from bonds and these increased as a
percentage of insurers gross investment income during the crisis. Also, state
regulations placed restrictions on the types of investments insurers can make.
For example, one of NAICs model investment acts, which serves as a guide
for state regulations, specifies the classes of investments that insurers are
authorized to make and sets limits on amounts of various grades of
investments that insurers can count towards their admitted assets.
Second, industry participants we interviewed noted that the crisis
generally did not trigger the types of events that life and P/C companies
insurenamely, death and property damage or loss. As a result, most insurers
did not experience an increase in claims that might have decreased their capital
and increased their liquidity requirements. The exception, as described earlier,
was mortgage guaranty and financial guaranty insurers, where defaults in the
residential housing market triggered mortgage defaults that, in turn, created
claims for those insurers.
Finally, low rates of return on investments during the crisis reduced
insurers investment income, and according to two insurers and two of the
state regulators we interviewed, these low yields, combined with uncertainty in
the equities markets, moved investors toward fixed annuities with guaranteed
rates of return. In addition, industry participants and a state regulator we
interviewed said that the guarantees on many annuity products provided higher
returns than were available in the banking and securities markets, causing
existing policyholders to hold onto their guaranteed annuity productsfixed
and variablelonger than they might otherwise have done. In 2008 and 2009,
Insurance Markets
43
the total amount paid by insurers to those surrendering both individual and
group annuities declined. One industry representative we interviewed stated
that, for similar reasons, policyholders also tended to hold onto life insurance
policies that had cash value.
REGULATORS HAVE CONTINUED EFFORTS TO

STRENGTHEN THE REGULATORY SYSTEM SINCE THE
CRISIS
State regulators and NAIC efforts to strengthen the regulatory system
include an increased focus on insurer risks and group holding company
oversight. Industry groups we spoke to identified NAICs Solvency
Modernization Initiative (SMI) and highlighted the Own Risk and Solvency
Assessment (ORSA) and the amended Insurance Holding Company System
Regulatory Act as some key efforts within SMI. Although these efforts are still
underway, it will likely take several years to fully implement these efforts.
Solvency Modernization Initiative Places Increased Emphasis on

Insurer Risks and Group Holding Company Oversight
Since the financial crisis, regulators have continued efforts to strengthen
the insurance regulatory system through NAICs SMI. NAIC officials told us
that the financial crisis had demonstrated the need to comprehensively review
the U.S. regulatory system and best practices globally. According to NAIC,
SMI is a self-examination of the framework for regulating U.S. insurers
solvency and includes a review of international developments in insurance
supervision, banking supervision, and international accounting standards and
their potential use in U.S. insurance regulation. SMI focuses on five areas:
capital requirements, governance and risk management, group supervision,
statutory accounting and financial reporting, and reinsurance. The officials
highlighted some key SMI efforts, such as ORSA and NAICs amended
Insurance Holding Company System Regulatory Act, which focus on insurer
risks and capital sufficiency and group holding company oversight,
respectively. Industry officials pointed to NAICs SMI as a broad effort to
improve the solvency regulation framework for U.S. insurers.
44
Own Risk and Solvency Assessment

NAIC, state regulators and industry groups identified ORSA as one of the
most important modernization efforts, because it would help minimize
industry risks in the future. ORSA is an internal assessment of the risks
associated with an insurers current business plan and the sufficiency of capital
resources to support those risks under normal and severe stress scenarios.
According to NAIC, large- and medium-sized U.S. insurance groups and/or
insurers will be required to regularly conduct an ORSA starting in 2015.50
ORSA will require insurers to analyze all reasonably foreseeable and relevant
material risks (i.e., underwriting, credit, market, operation, and liquidity risks)
that could have an impact on an insurers ability to meet its policyholder
obligations. ORSA has two primary goals:
to foster an effective level of enterprise risk management at all

insurers, with each insurer identifying and quantifying its material and
relevant risks, using techniques that are appropriate to the nature,
scale, and complexity of these risks and that support risk and capital
decisions; and
to provide a group-level perspective on risk and capital.
In March 2012, NAIC adopted the Own Risk and Solvency Assessment
Guidance Manual, which provides reporting guidance to insurers, and in
September 2012 adopted the Risk Management and Own Risk and Solvency
Assessment.51 State regulators told us that some of their domestic insurers
participated in an ORSA pilot in which insurers reported information on their
planned business activities. NAIC officials told us that as part of the pilot,
state regulators reviewed the information that insurers reported, made
suggestions to improve the reporting, and helped develop next steps.
According to the officials, the pilot allowed states to envision how they would
use ORSA to monitor insurers. NAIC officials stated that they also received
public comments on the ORSA guidance manual and were in the process of
updating it to ensure greater consistency between the guidance manual and the
ORSA model law. NAIC officials told us that they planned to conduct an
additional pilot in the fall of 2013. The officials added that state regulators still
needed to develop their regulatory guidance for reviewing ORSA.
Insurance Holding Company System Regulatory Act

Another issue that insurance industry participants identified as significant
was oversight of noninsurance holding companies with insurance subsidiaries.
Insurance Markets
45
For instance, industry groups we spoke with identified the need for greater
transparency and disclosure of these entities activities. One industry
association stressed the importance of having all regulatory bodies look across
the holding company structure rather than at specific holding company
subsidiaries, such as insurance companies. According to NAIC, regulators
reviewed lessons learned from the financial crisis specifically issues
involving AIGand the potential impact of noninsurance operations on
insurance companies in the same group. In December 2010, NAIC amended
the Insurance Holding Company System Regulatory Act to address the way
regulators determined risk at holding companies.52 As part of this process,
between May 2009 and June 2010, NAIC held 16 public conference calls, five
public meetings, and one public hearing on the Insurance Holding Company
System Regulatory Act.53 Additionally, NAIC officials told us they also share
regulatory and supervisory information with federal regulators such as the
Federal Reserve, including information on the amended model act revisions, at
the Annual Regulatory Data Workshop.54
According to NAIC, the U.S. statutory holding company laws apply
directly to individual insurers and indirectly to noninsurance holding
companies. The revised model act includes changes to (1) communication
among regulators; (2) access to and collection of information; (3) supervisory
colleges; (4) enforcement measures; (5) group capital assessment; and (6)
accreditation. Some specific changes include:
expanded ability for regulators to look at any entity in an insurance

holding company system that may not directly affect the holding
company system but could pose reputational or financial risk to the
insurer through a new Form F-Enterprise Risk Report;55
enhancements to regulators rights to access information (including
books and records), especially regarding the examinations of
affiliates, to better ascertain the insurers financial condition; and
introduction of and funding for supervisory colleges to enhance the
regulators ability to participate in the colleges and provide guidance
on how to conduct, effectively contribute to, and learn from them.56
One state regulator stated that the revised Insurance Holding Company
System Regulatory Act was expected to make group-level holding company
data more transparent to state insurance regulators. Regulators also told us that
the amended model act gave them greater authority to participate in
supervisory colleges. U.S. state insurance regulators both participate in and
46
convene supervisory colleges. State insurance commissioners may participate

in a supervisory college with other regulators charged with supervision of such
insurers or their affiliates, including other state, federal, and international
regulatory agencies. For instance, the same state regulator stated that the
authority allowed for international travel, with the insurers paying the costs.
The act also increases the regulators ability to maintain the confidentiality of
records that they receive or share with other regulators.
According to NAIC officials, as of April 2013, 16 states have adopted the
model law revisions.57 Additionally, some state regulators we spoke to
indicated that they were working with their state legislatures to introduce the
revised Insurance Holding Company System Regulatory Act to their state
legislatures. For instance, officials from one state regulator said that the new
model act had been introduced in the state legislature in January 2013 and that
adopting it would mean rewriting the states existing holding company law. As
a result, they had decided to ask for the repeal of the existing law and the
adoption of the new statute for consistency.
Although the Solvency Modernization Initiative is underway, time is
needed to allow states to adopt requirements. For instance, NAIC officials said
that although they had completed almost all of what they saw as the key SMI
initiatives, implementing all SMI activities could take 2 or 3 years. According
to the officials, some decisions will be made in 2013, such as how to
implement governance activities and changes related to RBC. For instance, the
officials stated that they were looking to implement P/C catastrophe risk data
analysis later this year and would then consider how to integrate their findings
into RBC requirements. As mentioned earlier, ORSA is not expected to be
operational until 2015. Also, most states have yet to adopt revisions to the
Insurance Holding Company System Regulatory Act. NAIC officials told us
that getting changes adopted at the state level was challenging because of the
amount of time needed to get all 50 states on-board. For instance, the adoption
of model laws requires state legislative change and is dependent on the
frequency of state legislative meetings. The officials explained that some
states legislatures meet only every 2 years, limiting the possibility of
immediate legislative change. As we have previously reported, NAIC
operations generally require a consensus among a large number of regulators,
and NAIC seeks to obtain and consider the input of industry participants and
consumer advocates. 58 Obtaining a wide range of views may create a more
thoughtful, balanced regulatory approach, but working through the goals and
priorities of a number of entities can result in lengthy processes and long
implementation periods for regulatory improvements. As noted in our other
Insurance Markets
47
work earlier, continued progress in a timely manner is critical to improving the

efficiency and effectiveness of the insurance regulatory system.
Views Varied on Increased Oversight Efforts

Industry officials we spoke with had favorable views of NAICs and state
regulators efforts to strengthen the regulatory system. For example, one
insurance association stated that NAIC and states had been reevaluating all
regulatory tools beyond those that were related to the financial crisis. Another
insurance association noted that ORSA would be a good tool to use to identify
potentially at-risk companies before they developed problems. A third
insurance association stated that coordination between domestic and
international regulators was more robust now and actions taken are more
coordinated. The officials also pointed to the work addressing supervisory
colleges that involve regulatory actions by other countries that might impact
domestic insurers. However, some insurance associations we spoke to voiced
concerns about the increased oversight of holding companies, and some
insurance associations and insurers also questioned the need for additional
regulatory changes.
Two insurance associations and a federal entity we spoke to were
concerned with potential information gaps related to the increased oversight of
holding companies. For instance, one insurance association told us that state
insurance regulators do not have jurisdiction over non-insurance affiliates
activities and as a result, do not have access to information on these affiliates
in order to evaluate if their activities could jeopardize the affiliated insurers.
Another insurance association stated that there was a need to address holding
company regulation, especially potential gaps between the federal and state
regulators in their oversight roles. Some insurers also questioned the need for
additional regulations and a few suggested that the regulators need to allow
time for implementing recent financial reforms under the Dodd-Frank Act.
One P/C insurer stated that imposing additional requirements on the entire
insurance industry is not necessary especially within the P/C industry. The
official explained that there needs to be greater flexibility in reporting and that
the P/C industry fared well during the crisis as evident by the lack of
widespread insolvencies. The official suggested that NAIC needs to reevaluate whether the additional requirements are useful. Another financial
guaranty insurer told us that no additional changes are needed in the regulatory
structure or regulations for the financial guaranty industry. The officials stated
48
that they are now dealing with federal regulators and regulatory changes
related to the Dodd-Frank Act. Additionally, one insurance association stated
that whether more regulatory coordination activities regarding holding
companies are needed is not yet known because federal regulators have not
finished implementing the recent Dodd-Frank reforms dealing with holding
company oversight.
Some Dodd-Frank Provisions That Address Financial Stability

Include Insurance Oversight
While many factors likely contributed to the crisis, and the relative role of
these factors is subject to debate, gaps and weaknesses in the supervision and
regulation of the U.S. financial system, including the insurance industry,
generally played an important role. The Dodd-Frank Act provided for a broad
range of regulatory reforms intended to address financial stability and the
creation of new regulatory entities that have insurance oversight
responsibilities or an insurance experts view, among other things. In our
previous work, we noted that the act created the Federal Insurance Office and
the Financial Stability Oversight Council.59
The act also seeks to address systemically important financial institutions
(SIFIs) and end bailouts of large, complex financial institutions.60 The DoddFrank Act has not yet been fully implemented; thus, its impacts have not fully
materialized.
Federal Insurance Office. As mentioned earlier, the Dodd-Frank Act

created the Federal Insurance Office within Treasury to, in part,
monitor issues related to regulation of the insurance industry. 61 The
Federal Insurance Offices responsibilities include, among other
things, identifying issues or gaps in the regulation of insurers that
could contribute to a systemic crisis in the insurance industry or the
U.S. financial system. The Federal Insurance Office was tasked with
conducting a study on how to modernize and improve the system of
insurance regulation in the United States and to submit a report to
Congress no later than January 21, 2010. The report is to consider,
among other things, systemic risk regulation with respect to insurance,
consumer protection for insurance products and practices, including
gaps in state regulation, and the regulation of insurance companies
and affiliates on a consolidated basis. Additionally, the Federal
Insurance Markets
49
Insurance Office is to examine factors such as the costs and benefits

of potential federal regulation of insurance across various line of
insurance. As of May 2013, the Federal Insurance Office had not yet
issued their report to Congress.
Financial Stability Oversight Council. The council was created to
identify risks to the stability of the U.S. financial system, including
those that might be created by insurance companies. 62 The council
includes some representation with insurance expertise. Some
authorities given to the Financial Stability Oversight Council allow it
to
collect information from certain state and federal agencies
regulating across the financial system so that regulators will be
better prepared to address emerging threats;
recommend strict standards for the large, interconnected bank
holding companies and nonbank financial companies designated
for enhanced supervision; and
facilitate information sharing and coordination among the
member agencies to eliminate gaps in the regulatory structure.
Additionally, the act provides that the Financial Stability Oversight

Council have 10 voting and 5 nonvoting members. The 10 voting members
provide a federal regulatory perspective, including an independent insurance
experts view. The 5 nonvoting members offer different insights as state-level
representatives from bank, securities, and insurance regulators or as the
directors of some new offices within TreasuryOffice of Financial Research
and the Federal Insurance Officethat were established by the act. The DoddFrank Act requires that the council meet at least once a quarter.63 One industry
association we spoke to stated that Financial Stability Oversight Council
members provided benefitsfor instance, they were able to discuss activities
that could be concerns in future crises and make recommendations to the
primary regulators.
Bureau of Consumer Financial Protection (known as CFPB). The

Dodd-Frank Act established CFPB as an independent bureau within
the Federal Reserve System and provided it with rulemaking,
enforcement, supervisory, and other powers over many consumer
financial products and services and many of the entities that sell them.
CFPB does not have authority over most insurance activities or most
activities conducted by firms regulated by SEC or CFTC. However,
50

certain consumer financial protection functions from seven existing
federal agencies were transferred to CFPB. 64 Consumer financial
products and services over which CFPB has primary authority include
deposit taking, mortgages, credit cards and other extensions of credit,
loan servicing, and debt collection. CFPB is authorized to supervise
certain nonbank financial companies and large banks and credit
unions with over $10 billion in assets and their affiliates for consumer
protection purposes.
The financial crisis also revealed weaknesses in the existing regulatory

framework for overseeing large, interconnected, and highly leveraged financial
institutions and their potential impacts on the financial system and the broader
economy in the event of failure. The Dodd-Frank Act requires the Board of
Governors of the Federal Reserve System (Reserve Board) to supervise and
develop enhanced capital and other prudential standards for these large,
interconnected financial institutions, which include bank holding companies
with $50 billion or more in consolidated assets and any nonbank financial
company that the Financial Stability Oversight Council designates.65
The act requires the enhanced prudential standards to be more stringent
than standards applicable to other bank holding companies and financial firms
that do not present similar risks to U.S. financial stability. The act further
allows the enhanced prudential standards to be more stringent than standards
applicable to other bank holding companies and financial firms that do not
present similar risks to U.S. financial stability. In April 2013, the Federal
Reserve issued a final rule that establishes the requirements for determining
when an entity is predominantly engaged in financial activities. Among the
criteria is whether an institution is primarily engaged in financial activities,
which can include insurance underwriting. As of May 2013, the Financial
Stability Oversight Council had yet to publicly make any such designations.
AGENCY COMMENTS
We provided a draft of this report to NAIC for their review and comment.
NAIC provided technical comments which we have incorporated, as
appropriate.
Alicia Puente Cackley
Director, Financial Markets and Community Investment
Insurance Markets
51
APPENDIX I: OBJECTIVES, SCOPE, AND METHODOLOGY

This report examines (1) what is known about how the insurance industry
and policyholders were affected by the financial crisis, (2) the factors that
affected the impact of the crisis on insurers and policyholders, and (3) the
types of regulatory actions that have been taken since the crisis to help prevent
or mitigate potential negative effects of future economic downturns on
insurance companies and their policyholders.
To address these objectives, we reviewed relevant laws and regulations on
solvency oversight such as the Dodd-Frank Wall Street Reform and Consumer
Protection Act and financial institution holding company supervision such as
the model Insurance Holding Company System Regulatory Act. We conducted
a literature search using ProQuest, EconLit, and PolicyFile and reviewed
relevant literature and past reports on the financial crisis and the insurance
industry, the general condition of the U.S. economy in 2008, and the events
surrounding the federal rescue of American International Group, Inc. (AIG).
We interviewed officials from selected state insurance departments, the
Federal Insurance Office, the National Association of Insurance
Commissioners (NAIC), the National Conference of Insurance Legislators,
insurance associations, insurance companies, credit rating agencies, and
consumer advocacy groups. We interviewed or received written responses to
our questions from insurance regulators in seven statesCalifornia, Illinois,
Iowa, Maryland, New York, Texas, and Virginia. We used an illustrative
sampling strategy to select states based on the states geographic diversity,
number of domiciled insurers, and premium volumes, which ranged from
small (Iowa) to large (California). We interviewed regulators from six of the
states and received written responses to our questions from one of the states.
We also met with six industry associations representing insurance companies
covering life and property/casualty (P/C), including financial guaranty and
mortgage insurance; two associations representing agents and brokers; and two
national insurance guaranty fund associations. Additionally, we met with six
insurers covering life and P/C insurance lines, including mortgage insurance
and financial guaranty insurance. The insurers represent different states of
domicile and varying market shares in net premiums written. Finally, we met
with two credit rating agencies and two consumer advocacy groups to obtain
their perspective on how the financial crisis impacted the insurance industry
and policyholders. We also reviewed congressional testimony and other
documents from industry participants, several of whom we interviewed for this
study.
52
Determining the Effect of Crisis on Insurance Companies and

Policyholders
To address how the financial crisis affected the insurance industry and
policyholders, we reviewed academic papers and government reports, and
interviewed industry representatives, regulatory officials, and internal
stakeholders to identify the key characteristics associated with the financial
crisis. This resulted in a list of five commonly identified major characteristics
of the crisis, which are declines in real estate values, declines in equities
values, lowered interest rates, increased mortgage default rates, and changes in
policyholder behavior. We reviewed industry documentsincluding NAICs
annual analyses of the life and P/C industriesto identify commonly used
financial measures for insurance companies.1 These measures help
demonstrate insurers financial health in a number of areas including
investment performance, underwriting performance, capital adequacy, and
profitability.
We selected specific lines of insurance within the life and P/C industries
for our analyses on net premiums written. In the life industry, we focused on
individual annuities, individual life insurance, group annuities, and group life
insurance. These lines accounted for 77 percent of average life insurance
premiums during our review period of 2002 through 2011, and the
policyholders were individual consumers (either independently or through
their workplaces). In the P/C industry, we focused on private passenger auto
liability, auto physical damage, home owners multiple peril, commercial
multiple peril, other liability (occurrence), other liability (claims-made),
financial guaranty, and mortgage guaranty insurance. These lines of insurance
accounted for 68 percent of average P/C insurance premiums over our 10-year
review period and involved individual and commercial policyholders. We
chose to review financial and mortgage guaranty insurance despite their small
percentage of premiums (less than 2 percent of average P/C premiums from
2002 through 2011) because we had learned through research and preliminary
interviews that they were more heavily affected by the crisis. We obtained
input on the data analysis plan from NAIC and a large rating agency and
incorporated their suggestions where appropriate.
We obtained the financial data from insurers annual statutory financial
statements, which insurance companies must submit to NAIC after the close of
each calendar year. We gathered the data for all life and P/C insurers for the
period January 2002 through 2011 using SNL Financial, a private financial
database that contains publicly filed regulatory and financial reports. We chose
Insurance Markets
53
the 10-year time period in order to obtain context for our findings around the
period of 2007 through 2009, which is generally regarded as the duration of
the financial crisis.
We analyzed data for both operating and acquired or nonoperating
companies to help ensure that we captured information on all companies that
were operating at some point during the 10-year period. The population of
operating and acquired or nonoperating life insurance companies from 2002
through 2011 was 937, while the population of operating and acquired or
nonoperating P/C companies from 2002 through 2011 was 1,917. We
conducted most of our analyses at the SNL group and unaffiliated companies
level, meaning that data for companies that are associated with a larger
holding company were aggregated, adjusted to prevent double counting, and
presented at the group level. We also ran a few selected analyses (such as our
analysis of permitted and prescribed practices) at the individual company level
to obtain detail about specific operating companies within a holding company
structure.
To analyze the number and financial condition of insurers that went into
receivership during the 10-year review period, we obtained data that NAIC
staff compiled from NAICs Global Receivership Information Database. The
data included conservation, rehabilitation, and liquidation dates, as well as
assets, liabilities, and net equity (the difference between assets and liabilities)
generally from the time of the receivership action, among other data items.2
Our analysis of numbers of receiverships and liquidations included 58 life
insurers and 152 P/C insurers. The NAIC staff that compiled the data told us
that data on assets, liabilities, and net equity were not always available in
either of their data systems. To address this problem of missing data, NAIC
staff pulled data when available from the last financial statement before the
company was placed into receivership or the first available financial statement
immediately after being placed into receivership and replaced the missing
data. This was the case for 5 of 58 life insurance companies and 27 of 152 P/C
companies.3 We believe these asset, liability, and net equity levels would have
changed little in the time between liquidation and when the financial
statements were prepared, and we determined that the time difference was
likely to have little effect on our estimate of the general size and net equity
levels of insurers at liquidation. However, the average assets and average net
equity we report might be slightly higher or lower than was actually the case
for each year. In addition, out of the 40 life insurers and 125 P/C insurers that
went into liquidation from 2002 through 2011, NAIC staff could not provide
asset data for 7 life insurers and 19 P/C insurers, and they could not provide
54
net equity data for 8 life insurers and 29 P/C insurers. We excluded these
companies from our analyses and indicated in tables 10 and 11 (app. II) when
data were not available. Our analysis of assets at liquidation included 33 life
insurers and 106 P/C insurers, and our analysis of net equity at liquidation
included 32 life insurers and 96 P/C insurers.
To describe how publicly traded life and P/C insurers stock prices
changed during the crisis, we obtained daily closing price data for A.M. Bests
U.S. Life Insurance Index (AMBUL) and U.S. Property Casualty Insurance
Index (AMBUPC). The indexes include all U.S. insurance industry companies
that are publicly traded on major global stock exchanges and that also have an
interactive A.M. Best rating, or that have an insurance subsidiary with an
interactive A.M. Best Rating. The AMBUL index reflects 21 life insurance
companies and the AMBUPC index reflects 56 P/C companies. We compared
the mean monthly closing price for each index to the closing price for the last
day of the month and determined that they were generally similar, so we
reported the latter measure. Because 48 of the 77 life and P/C companies in the
A.M. Best indexes trade on the New York Stock Exchange (NYSE), we also
analyzed closing stock prices from the NYSE Composite Index (NYA),
obtained from Yahoo! Finance, to provide context on the overall equities
market. NYA reflects all common stocks listed on NYSE, (1,867 companies).4
For all indexes, we analyzed the time period December 2004 through
December 2011 because A.M. Best did not have data prior to December 2004.
To select the two distressed insurers that we profiled in appendix III, we
focused on life and P/C companies that were placed in receivership during the
crisis. Based on interviews with regulators and industry officials, we learned
that the effects of the financial crisis were limited largely to certain annuity
products (provided by life insurers) and the financial and mortgage guaranty
lines of insurance. Therefore, through our interviews with industry
associations and state regulators, we selected one life insurer and one
mortgage guaranty insurer that were directly affected by the crisis to illustrate
the effects of the crisis at the company level. We obtained financial data
through SNL Financial and publicly available court documents to examine
these insurers cases.
We determined that the financial information used in this report
including statutory financial data from SNL Financial, stock price data from
A.M. Best, receivership and permitted practices data from NAIC, and annuity
sales and GLB data from LIMRAwas sufficiently reliable to assess the
effects of the crisis on the insurance industry. To assess reliability, we
compared data reported in individual companies annual financial statements
Insurance Markets
55
for a given year to that reported in SNL Financial. We also aggregated the
individual company data for net premiums for two SNL groups (one life and
one P/C group) to verify that our results matched SNLs, because
intercompany transactions would be rare in this field.5 In addition, we
compared the results of our analysis of key measuressuch as net income,
capital, net investment income, and surrender benefits and withdrawalsto
NAICs annual industry commentaries and found that they were generally
similar. We also obtained information from A.M. Best, NAIC, and LIMRA
staff about their internal controls and procedures for collecting their respective
stock price, receivership, and annuities data.
Factors That Affected the Impact of the Crisis on Insurers and

Policyholders
To address the factors that helped mitigate the effect of the crisis, we
reviewed NAICs model investment act, industry reports, and credit rating
agency reports to identify such factors. We also interviewed state insurance
regulators, insurance company associations, insurance companies, and credit
rating agencies to obtain their insights on the mitigating effects of industry
investment and underwriting practices, regulatory restrictions, and effects of
the crisis on policyholder behavior. We also reviewed our prior work and other
sources to identify federal programs that were available to insurance
companies to increase access to capital, including the Troubled Asset Relief
Program, the Board of Governors of the Federal Reserve Systems and Federal
Reserve Banks (Federal Reserve) liquidity programs, and the Federal Home
Loan Bank System, including assistance to help some of the largest life
insurers such as AIG during the crisis.
Regulatory Actions That Have Been Taken to Protect Insurers

and Policyholders
To assess the state insurance regulatory response system in protecting
insurers and policyholders and the types of insurance regulatory actions taken
during and following the crisis, we reviewed and analyzed relevant state
guidance. This included NAIC documents such as Capital Markets Bureau
reports, statutory accounting rules such as the Statements of Statutory
Accounting Principles, and information on securities lending and permitted
56
practices. We also reviewed the Solvency Modernization Initiative, including

associated guidance manuals and model laws such as the Insurance Holding
Company System Regulatory Act. In addition, we analyzed SNL Financial
data and reviewed reports on deferred tax assets, including actuary association
reports, a consumer groups public comments, and information from state
insurance regulator and industry consultant websites. We interviewed officials
from state regulators, NAIC, FIO, industry associations, insurers, and others to
obtain their perspectives on state regulatory actions taken in response to the
crisis and impacts on insurers and policyholders and efforts to help mitigate
potential negative effects of future economic downturns. Additionally, we
reviewed past reports on the provisions of the Dodd-Frank Act and the impacts
on the insurance industry with regard to oversight responsibilities. We
conducted this performance audit from June 2012 to June 2013 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based
on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
APPENDIX II: ADDITIONAL DATA ON LIFE AND P/C

INDUSTRY FINANCIAL PERFORMANCE, 2002-2011
This appendix provides some additional data on life and P/C insurers
financial performance, including realized and unrealized losses, financing cash
flow, P/C premium revenues, assets and net equity of companies in
liquidation, and stock price data.
Realized and Unrealized Losses

In 2008 and 2009, a small number of large insurance groups generally
comprised the majority of realized and unrealized losses in the life and P/C
industries.1 Tables 6 and 7 lists the life insurers with realized or unrealized
losses exceeding $1 billion in 2008 and 2009, and tables 8 and 9 list the same
data for P/C insurers. All of the insurers listed are either life or P/C groups
in the SNL Financial database, meaning that they include all of the U.S.
Insurance Markets
57
insurance companies in either the life or P/C industry within the same
corporate hierarchy.
Table 6. Life Insurers with $1 Billion or More in Realized Losses, 2008
and 2009
Insurer
American International Group

TIAA-CREF
MetLife Inc.
New York Life Insurance Group
CNO Financial Group Inc.
Northwestern Mutual Life Insurance
Company
Prudential Financial Inc.
Allstate Corporation
Allianz Group
ING Groep N.V.
Massachusetts Mutual Life Insurance
Company
Lincoln National Corporation
Insurer
TIAA-CREF
ING Groep N.V.
Hartford Financial Services
MetLife Inc.
Jackson National Life Group
AEGON NV
Prudential Financial Inc.
AXA
Genworth Financial Inc.
Realized
losses
2008
$-27,032,295
-4,562,314
-2,107,802
-1,828,390
-1,767,840
-1,519,738
Percentage of
allrealized losses
45.3%
7.6
3.5
3.1
3.0
2.5
-1,377,951
-1,175,618
-1,142,726
-1,098,560
-1,092,727
2.3
2.0
1.9
1.8
1.8
-1,053,231
1.8
Realized
losses
2009
$-3,451,216
-3,373,625
-2,864,587
-2,192,781
-1,985,188
-1,679,803
-1,644,108
-1,544,248
-1,391,188
-1,057,640
-1,056,030
Percentage of
allrealized losses
10.6%
10.3
8.8
6.7
6.1
5.1
5.0
4.7
4.3
3.2
3.2

58

Table 7. Life Insurers with $1 Billion or More in Unrealized Losses,
2008 and 2009
Insurer

MetLife, Inc.
AXA
Northwestern Mutual Life Insurance
Company
New York Life Insurance Group
TIAA-CREF
Western & Southern Mutual Holding
Company
Hartford Financial Services Group
MetLife, Inc.
Hartford Financial Services Group
Ameriprise Financial, Inc.
Pacific Mutual Holding Company
AEGON N.V.
Unrealized
losses
2008
$30,189,534
-5,002,128
-4,931,978
-4,368,554
Percentage of
allunrealized losses
47.33%
7.84
7.73
6.85
-3,027,290
-2,317,339
-1,364,643
4.75
3.63
2.14
-1,338,845
2009
$4,322,365
-3,390,195
-2,053,011
-1,837,537
-1,150,169
-1,087,585
2.10
22.51%
17.66
10.69
9.57
5.99
5.66

Tables 8 and 9 list the P/C insurers with realized and unrealized losses
exceeding $1 billion in 2008 and 2009.
Table 8. Property/Casualty Insurers with $1 Billion or More in Realized
Losses, 2008 and 2009
Insurer
Ambac Financial Group, Inc.

Realized
losses
2008
$-4,371,589
-1,697,065
Percentage of allrealized
losses
17.13%
6.65
Insurance Markets
Insurer
Group
CNA Financial Corporation
Erie Insurance Group
Berkshire Hathaway, Inc.
Ambac Financial Group, Inc.
59
Realized
losses
2008
-1,280,299
-1,268,082
Percentage of allrealized
losses
-1,196,010
-1,125,560
-1,036,242
2009
$-3,022,767
-2,770,133
4.69
4.41
4.06
5.02
4.97
25.53%
23.40

Table 9. Property/Casualty Insurers with $1 Billion or More in

Unrealized Losses, 2008 and 2009
Insurer
Unrealized
losses
Percentage ofall
unrealizedlosses
$-23,456,610
-17,182,241
27.41%
20.08
-6,193,138
-4,014,608
-3,158,281
-2,671,781
-1,983,859
-1,734,113
-1,565,621
-1,053,450
7.24
4.69
3.69
3.12
2.32
2.03
1.83
1.23
2008
State Farm Mutual Automobile
Insurance Company
Liberty Mutual
CNA Financial Corporation
Nationwide Mutual Group
Cincinnati Financial Corporation
FM Global
2009
Nationwide Mutual Group
$-1,998,528
47.10%

60
Financing Cash Flow

Financing cash flow reflects the extent to which insurers are willing or
able to access external capital to finance or grow their operations. It represents
the net flow of cash from equity issuance, borrowed funds, dividends to
stockholders, and other financing activities. With exceptions in 2004 and 2007
for life insurers and 2005 for P/C insurers, both industries had negative
financing cash flows a few years before the crisis began, indicating that
insurers were reducing their outstanding debt and equity. These reductions
could have resulted from the insurers buying back their stock and not issuing
new debt as their existing debt matured. The increasingly negative financing
cash flows for both industries starting in 2008 also reflect what we were told
about the difficulty of obtaining outside capital during the crisis. Insurers
might not have been able to raise money during the crisis even if they had
wanted or needed to do so.

Figure 15. Life and Property/Casualty Insurers Net Cash Flows from Financing and
Miscellaneous Sources, 2002-2011.
Insurance Markets
61
P/C Premium Revenues

In the P/C industry as a whole, net premiums written declined from $443.7
billion in 2006 to $417.5 billion in 2009a total decline of 6 percent during
the crisis years. In most of the lines of P/C insurance that we reviewed,
declines in premiums during the crisis were modest (see fig.16).

Figure 16. Net Premiums Written for Selected Property/Casualty Lines of Business, 20022011.
Financial and mortgage guaranty insurance (which combined represent

less than 2 percent of the P/C industry)as well as other liability (occurrence)
(insurance against miscellaneous liability due to negligence or improper
62
conduct)were the exceptions. For example, financial guaranty insurers net

premiums written fell from $3.2 billion in 2008 to $1.8 billion in 2009 (a 43
percent decline). By 2011, net financial guaranty premiums written were less
than $1 billion, reflecting a total decline of 69 percent since 2008. Mortgage
guaranty insurance premiums fell from $5.4 billion to $4.6 billion (a 14
percent decline) from 2008 to 2009 and to $4.2 billion (another 8 percent
decline) in 2010. Net premiums written for other liability (occurrence)
declined from $25.9 billion to $24.3 billion (a 6 percent decline) in 2008 and
to $20.9 billion (a 14 percent decline) in 2009. On the other hand, net
premiums written for homeowners insurance increased in every year of the
10-year review period, including increases of about 2 percent annually in 2008
and 2009 with net premiums of $56.9 billion in 2009. Net premiums written
for all other lines of P/C insurance combined declined from $142.2 billion in
2007 to $129.0 billion in 2009, reflecting annual decreases of less than 1
percent in 2007, 3 percent in 2008, and 7 percent in 2009.2
Assets and Net Equity of Companies in Liquidation

Based on the available data that NAIC provided us on companies that
were liquidated from 2002 through 2011, average assets and net equity of
liquidated life and P/C insurers varied by year.3 As tables 10 and 11 illustrate,
average assets of liquidated companies were significantly above the 10-year
average in 2004 for the life industry and in 2003 and 2008 for the P/C
industry. This was generally due to one or two large companies being
liquidated. For example, in 2004, London Pacific Life and Annuity Company
was liquidated with $1.5 billion in assets and negative $126 million in net
equity, meaning that its liabilities exceeded its assets by that amount.
Similarly, MIIX Insurance Company, a P/C insurer, was liquidated in 2008
with assets of $510 million and negative $32 million in net equity. Average net
equity, based on the available data, was positive for liquidated life insurers in
2003, 2007, 2009, and 2010 (see table 10). According to NAIC staff, this is
not unusual, as regulators typically try to liquidate distressed insurers before
their net equity reaches negative levels.
Insurance Markets
63
Table 10. Average Assets and Net Equity (Assets Minus Liabilities) of Life
Insurance Companies in Liquidation, 2002-2011
2002
Average
assets
$228,832
$85,492
Average net
equity
($9,174,419)
2003
355,911
355,911
287,136
2004
491,288,146
761,126
(42,340,783)
2005
2006
2007
4,771,020
7,563,413
25,167,723
3,113,824
5,602,572
11,899,542
(2,068,372)
(2,843,453)
1,331,556
2008
2009
2010
2011
10 year
average assets:
92,995,829
65,110,752
26,472,746
37,919,411
$73,347,592
4,062,709
3,432,952
11,197,352
37,919,411
(201,581,872)
7,480,692
2,064,663
(160,962)
Year
Median assets
Notes
Based on financial data
available for 4 of 7
companies.
companies.
companies.
Average net equity based on

financial data available for 2
of 3 companies.

companies.
Source: GAO analysis of NAIC Global Receivership Information Database data.

Notes:
Unless otherwise noted in the Notes column, figures reflect data on all liquidations
that occurred in a given year.
Table 11. Average Assets and Net Equity (Assets Minus Liabilities) of
Property/Casualty Companies in Liquidation, 2002-2011
Year
2002
Average
assets
$16,814,604
Median
assets
$19,119,524
Average net
equity
($75,550,387)
2003
365,951,597
34,992,852
(401,800,128)
Notes
Average and median assets based
on financial data available for 11
of 16 companies. Averagenet
equity based on financial data
available for 6 of 16 companies.
64
Table 11. (Continued)

Year
2004
Average
assets
34,399,196
Median
assets
31,518,779
Average net
equity
(16,199,179)
2005
10,441,213
10,575,389
(7,765,547)
2006
97,118,048
37,602,758
(46,792,277)
2007
2008
2009
8,793,203
130,585,870
12,011,297
4,384,739
5,927,680
3,678,951
(7,155,768)
(8,913,750)
(5,093,472)
2010
18,011,525
8,334,604
(8,945,922)
2011
27,943,467
10,997,641
(3,521,801)
10 year
average
assets:
$64,140,648
Notes
Average net equity based on
financial data available for 10 of
11 companies.
Based on financial data available
for 11 of 15 companies.

Source: GAO analysis of NAIC Global Receivership Information Database data.

Notes:
Unless otherwise noted in the Notes column, figures reflect data on all liquidations
that occurred in a given year.
Stock Prices
We analyzed the monthly closing stock prices of publicly traded life and
P/C insurance companies for the period December 2004 through December
2011. We used two A.M. Best indexesthe A.M. Best U.S. Life Index and the
A.M. Best Property Casualty Indexas a proxy for the life and P/C industries.
According to A.M. Best, the indexes include all U.S. insurance industry
companies that are publicly traded on major global stock exchanges that also
have an A.M.
Source: GAO analysis of A.M. Best data on the A.M. Best U.S. Life and Property Casuality Indexes and the New York Stock Exchange Composite
Index.
Notes:
According to A.M. Best, the A.M. Best U.S. Life and Property Casualty Insurance Indexes provide a benchmark for assessing investor confidence that
often correlates with general financial performance of the overall insurance industry, a specific insurance business segment, and specific companies
in the context of their business segments. The indexes include all insurance industry companies that are publicly traded on major global stock
exchanges that also have an interactive Bests rating, or that have an insurance subsidiary with an interactive Bests rating. They are based on the
aggregation of the prices of the individual publicly traded stocks and weighted for their respective free float market capitalizations. The life index
represents 21 life insurance companies and the P/C index represents 56 P/C companies. The NYSE Composite Index represents more than 1,800
companies that trade on the New York Stock Exchange.
The left vertical axis represents the basis for the A.M. Best life and P/C Indexes; they are based on an index value of 1,000 as of December 31, 2004,
when A.M. Best established the indexes. The right vertical axis is the basis for the NYSE Composite Index, which is based on an index value of
5,000 as of December 31, 2002, when a new methodology for the index took effect. We overlaid the lines to more effectively compare changes in
the indexes over time.
Figure 17. Month-End Closing Stock Levels for Publicly Traded Life and Property/Casualty Companies and NYSE Companies, December 2004December 2011.
Source: GAO analysis of A.M. Best data on the A.M. Best U.S. Life and Property Casuality Indexes and the New York Stock Exchange
Composite Index.
Figure 18. Key Events in the Financial Crisis and Stock Indices for Publicly Traded Life and Property/Casualty Insurers for 2007.
Figure 19. (Continued).
Composite Index.
Composite Index.
70
Best rating, or that have an insurance subsidiary with an A.M. Best rating.
They are based on the aggregation of the prices of the individual publicly
traded stocks and weighted for their respective free float market
capitalizations. The life index represents 21 life insurance companies and the
P/C index represents 56 P/C companies. Since more than 60 percent of the
companies on the A.M. Best indexes we selected trade on NYSE, we also
obtained monthly closing stock prices on the New York Stock Exchange
(NYSE) Composite Index, which, as of February 2012, represented 1,867
companies that trade on NYSE, to provide a contextual perspective on the
overall stock market during our review period.
As figure 17 illustrates, life and P/C insurers aggregate stock prices
generally moved in tandem with the larger NYSE Composite Index from the
end of 2004 through 2011, but life insurers aggregate stock prices fell much
more steeply in late 2008 and early 2009 than P/C insurers and NYSE
companies aggregate stock prices.
We selected several key time periods or events from the financial crisis
and identified the largest drops in life and P/C insurers aggregate stock prices
during those time periods (see fig.18). While many factors can affect the daily
movement of stock prices, we observed that changes in life insurers aggregate
stock prices tended to be more correlated with several of the events that
occurred during the crisis than P/C insurers aggregate stock prices.
APPENDIX III: PROFILES OF DISTRESSED INSURERS

This appendix provides more detail on two distressed insurersone
mortgage guaranty insurer and one life insurerduring the financial crisis.1
Mortgage Guaranty Insurer

We studied a mortgage guaranty insurer operating in a run-off of its
existing book of business (that is, it had ceased writing new mortgage guaranty
business and was only servicing the business it already had on its books). This
insurer is licensed in all states and the District of Columbia. Prior to its runoff, the insurer provided mortgage default protection to lenders on an
individual loan basis and on pools of loans. As a result of continued losses
stemming from defaults of mortgage loans, the state regulator placed the
insurer into rehabilitation with a finding of insolvency in 2012.2
Insurance Markets
71
During the financial crisis, the insurer began experiencing substantial

losses due to increasing default rates on insured mortgages, particularly in
California, Florida, Arizona, and Nevada. As table 12 shows, in 2007 and
2008, over 30 percent of the insurers underwritten riskthe total amount of
coverage for which it was at risk under its certificates of insurancewas
originated in these distressed markets, which experienced default rates that
peaked at more than 35 percent in 2009. In addition, the insurer had significant
exposure to Alt-A loans, which are loans that were issued to borrowers based
on credit scores but without documentation of the borrowers income, assets,
or employment. These loans experienced higher default rates than the prime
fixed-rate loans in the insurers portfolio.
Table 12. Distressed Market Default Rates and Percentage of Insurers
Total Underwritten Risk, 2007-2011
Calendar
Year
2007
2008
2009
2010
2011
Default rate in
distressed markets
5.7%
22.7
35.4
29.9
26.9
Coverage in distressed markets as

percentage of insurers total underwritten
risk
32.1%
34.4
25.2
23.5
22.1
Source: GAO analysis of insurers annual Form 10-K filings.
This insurer rapidly depleted its capital as it set aside reserves to meet
obligations resulting from the overall rising volume of mortgage defaults.
Rising defaults combined with unsuccessful attempts to raise additional capital
during the crisis adversely affected its statutory risk-to-capital ratio starting in
2008. While state insurance regulations generally require this relationship of
insured risk to statutory capital (in this case, the sum of statutory surplus and
contingency reserves) to be no greater than 25 to 1, this insurers statutory
capital declined 85 percent from year-end 2007 to year-end 2008, increasing
the risk-to-capital ratio from 21 to 1 to 125 to 1.3 As a result, in 2008, this
insurer entered into an order with its state regulator to cease writing new
business and operate in run-off status. Due to continued increases in mortgage
defaults, the regulator required a capital maintenance plan in 2009 that allowed
the insurer to maintain a positive statutory capital position during the run-off
and also to pay partial claims.
72
According to court filings, the insurer reported to the state regulator that
its liabilities outweighed its assets by more than $800 million for the second
quarter of 2012. As a result, the state regulator entered an order with the
relevant county circuit court in late 2012 to take the insurer into rehabilitation
with a finding of insolvency. At that time, the court named the state insurance
regulator as rehabilitator, which means that it gave the regulator authority over
the insurers property, business, and affairs until the insurers problems are
corrected.
Life Insurer
We studied a life insurer that primarily writes life, annuity, and accident
and health business. Due to losses sustained from equity investments in Fannie
Mae and Freddie Mac in 2008, the state regulator placed the insurer in
rehabilitation in early 2009.4 In late 2011, the regulator approved of the
insurers acquisition by a third-party insurer. This transaction facilitated the
insurers successful exit from rehabilitation in mid-2012.
The insurer was invested in Fannie Mae and Freddie Mac stock. In 2008,
the insurer sustained approximately $95 million in investment losses.
Approximately $47 million of those investment losses were related to
investments in Fannie Mae and Freddie Mac stock. These events adversely
affected the insurers capital, which declined by over 38 percent from March
31, 2008 to September 30, 2008. 5 As of December 31, 2008, the insurer had
capital of $29 million, down from about $126 million as of December 31,
2007.
Due to the rapid deterioration of its financial condition, the court placed
the insurer into rehabilitation in early 2009. According to testimony by a
member of the receivership team, at the time of the order of rehabilitation, the
insurer had a net liability of $118 million on a liquidation basis. 6 In
receivership, the regulator granted the insurer an exemption from a state
insurance statute restricting certain types of investments based on a companys
surplus and asset levels. According to the testimony, this exemption allowed
the insurer to report capital of $400,000 instead of a $259 million deficit as of
December 31, 2009.
In late 2009, the receiver issued a request for proposal for the sale of the
insurer. By mid-2010, the receiver was in negotiations with another life
insurance group. In 2011, policyholders and the receiver approved of a
purchase plan. The plan would recapitalize the insurer to allow it sufficient
Insurance Markets
73
surplus to meet state minimum requirements to resume writing new business.

The plan was executed in mid-2012, which allowed the insurer to exit
rehabilitation.
End Notes
1
The Federal Reserve, through its emergency powers under section 13(3) of the Federal Reserve
Act, and Treasury, through the Emergency Economic Stabilization Act of 2008 (EESA),
which authorized the Troubled Asset Relief Program (TARP), collaborated to make
available more than $180 billion for the benefit of AIG. EESA, Pub. L. No. 110-343, Div.
A,122 Stat. 3765 (2008), codified, as amended, at 12 U.S.C. 5201 et seq. EESA was
enacted on October 3, 2008. EESA originally authorized Treasury to purchase or guarantee
up to $700 billion in troubled assets. The Helping Families Save Their Homes Act of 2009,
Pub. L. No. 111-22, Div. A, 123 Stat. 1632 (2009), amended EESA to reduce the maximum
allowable amount of outstanding troubled assets under EESA by almost $1.3 billion, from
$700 billion to $698.741 billion. The Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), (1) further reduced Treasurys
authority to purchase or insure troubled assets to a maximum of $475 billion and (2)
prohibited Treasury, under EESA, from incurring any additional obligations for a program
or initiative unless the program or initiative had already been initiated prior to June 25,
2010.
2
This report focuses on the life and property/casualty (P/C) insurance sectors and does not
review activities within the health insurance industry.
3
P/C insurance provides protections from risk in two basic areas: protection for physical items
such as houses, cars, commercial buildings and inventory (property), and protection against
legal liability (casualty). Property insurance is coverage for losses related to a
policyholders own person/property. Casualty (or liability) insurance is coverage for a
policyholders legal obligations against losses the policyholder may cause to others.
4
Premiums refer to direct (gross) written premiums registered on the books of an insurer or a
reinsurer at the time a policy is issued and paid for. For life insurers, premiums also include
annuity considerations, which are single or periodic payments made to purchase an annuity.
5
An annuity is a contract sold by insurance companies that pays a regular income benefit for the
life of one or more persons, or for a specified period of time. Types of annuities include
fixed annuities, which have rates that can change periodically but will never be below a
minimum contract rate and variable annuities, which can be invested in a variety of
investments whose market returns are not guaranteed. Annuities can be sold to individuals,
or to groups through employer-sponsored retirement plans.
6
Financial guaranty insurance covers financial loss resulting from default or insolvency, interest
rate-level changes, currency exchange rate changes, restrictions imposed by foreign
governments, or changes in the value of specific goods or products. According to the
Association of Financial Guaranty Insurers, these companies generally provide insurance in
the sectors of public finance, infrastructure finance, and asset backed securities. Mortgage
guaranty insurance (otherwise known as private mortgage insurance) protects a mortgage
lender if a home owner defaults on a loan. In financial and mortgage guaranty insurance, the
policyholders are commercial entities rather than individual consumers.
74
7
The International Association of Insurance Supervisors represents insurance regulators and

supervisors of more than 200 jurisdictions in nearly 140 countries. Its objectives are to
promote effective and globally consistent supervision of the insurance industry in order to
develop and maintain fair, safe, and stable insurance markets for the benefit and protection
of policyholders; and contribute to global financial stability.
8
Guaranty funds for life and P/C insurance are similar to the Federal Deposit Insurance
Corporation for insured depository institutions. Guaranty funds pay covered claims within
limits set by individual state laws and the insurance contract. For instance, the overall
benefit cap in most states for an individual life or property casualty policy is $300,000,
though some states have maximums that are higher.
9
A variable annuity is an insurance contract in which a consumer makes payments that are held
in a separate account of the insurer. While the insurance company is the owner of the
separate account assets, the assets are held for the benefit of consumers. In return, the
insurer agrees to make periodic payments beginning immediately or at some future date.
The consumer bears the risk of investment losses in the separate account. However, GLBs
generally guarantee certain benefit amounts should the account value fall below a given
level or fail to achieve certain performance levels. There are several types of GLBs,
including guaranteed lifetime withdrawal benefits, guaranteed minimum income benefits,
guaranteed minimum accumulation benefits, and others. GAO reviewed certain aspects of
guaranteed lifetime withdrawal benefits in GAO, Retirement Security: Annuities with
Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies
across States, GAO-13-75, (Washington, D.C.: Dec. 10, 2012).
10
For assets that are sold (or impaired), realized gains/(losses) represent the appreciation or
decline in the assets value between the date of purchase and the date of sale (or
impairment). For assets that are unsold, unrealized gains or losses represent appreciation or
decline in the unsold assets value. When assets are sold, their realized gain or loss is shown
on the insurance companys income statement; any unrealized gain or loss is not included
within the income statement. However, unrealized gains or losses are taken into account in
determining the insurance companys capital.
11
An other-than-temporary impairment is a charge taken on a security whose fair value has fallen
below the carrying value on the balance sheet and its value is not expected to recover
through the holding period of the security. Long-term bonds are bonds with a long maturity
periodgenerally at least 10 or 15 years. MBS are created when originating mortgage
lenders sell or assign their interest in both the note and the deed of trust to other financial
institutions for the purpose of securitizing the mortgage. Through securitization, the
purchasers of these mortgages then package them into pools and issue securities known as
MBS for which the mortgages serve as collateral. These securities pay interest and principal
to their investors, which include financial institutions, pension funds, or other institutional
investors, such as insurance companies. According to NAIC, insurers claimed
approximately $29.7 billion in other-than-temporary impairments on their non-agency MBS
from 2008 through 2011, with more than 80 percent of that amount occurring in 2008 and
2009. However, a representative of one life insurer we interviewed noted that the values of
the companys MBS holdings had recently rebounded, and a representative of another life
insurer noted that they were holding onto their MBS in the hope of recovering their losses
when they are eventually sold.
12
See tables 6 and 7 in appendix II for more detail on life insurers with more than $1 billion in
realized or unrealized losses in 2008 and 2009.
Insurance Markets
13
75
Throughout this report, we use the term capital to mean capital and surplus for life insurers
and policyholders surplus for P/C insurers. Both measures generally refer to the excess of
an insurance companys assets above its legal obligations to meet the benefits, or liabilities,
payable to its policyholders.
14
Common stock is a security representing equity ownership of a companys assets. Voting rights
are normally accorded to holders of common stock.
15
This was part of AIGs TARP assistance. See GAO, Troubled Asset Relief Program: Status of
Government Assistance Provided to AIG, GAO-09-975, (Washington, D.C.: Sept. 21,
2009).
16
See tables 8 and 9 in appendix II for more detail on P/C insurers with more than $1 billion in
realized or unrealized losses in 2008 and 2009.
17
Preferred stocks are equities with a class of ownership in a corporation that has a higher claim
on the assets and earnings than common stock. Preferred stock generally has a dividend that
must be paid out before dividends to common stockholders and the shares usually do not
have voting rights.
18
Congress established Fannie Mae and Freddie Mac in 1968 and 1989, respectively, as forprofit, shareholder-owned corporations. They share a primary mission that has been to
stabilize and assist the U.S. secondary mortgage market and facilitate the flow of mortgage
credit. To accomplish this goal, the enterprises issued debt and stock and used the proceeds
to purchase conventional mortgages that met their underwriting standards from primary
mortgage lenders such as banks or savings and loan associations (thrifts). In turn, banks and
thrifts used the proceeds to originate additional mortgages. The enterprises held the
mortgages in their portfolios or packaged them into MBS, which were sold to investors in
the secondary mortgage market. In exchange for a fee, the enterprises guaranteed the timely
payment of interest and principal on MBS that they issued. Both enterprises are required to
provide assistance to the secondary mortgage markets that includes purchases of mortgages
that serve low- and moderate-income families.
19
Net investment income represents the total of all interest, dividends, and other earnings derived
from an insurers invested assets minus any associated expenses. Realized and unrealized
gains and losses are also excluded from this measure.
20
NAIC defines cash and short-term investments as investments whose maturities (or repurchase
dates) at the time of acquisition were 1 year or less.
21
Changes to net investment income for life and P/C insurers might also have reflected changes
to their asset allocations.
22
MBS represented between 15 percent and 18 percent of life insurers admitted assets and
between 10 percent and 13 percent of P/C insurers admitted assets during the review
period. Admitted assets are assets that are permitted by state law to be included in an
insurers annual statement.
23
Benefits and losses refer to death, annuity, and other benefits paid out to policyholders,
including surrender benefits and withdrawals (in other words, the amount insurers paid to
policyholders who surrendered or took withdrawals from their life insurance policies or
annuities, net of any fees charged to the policyholders within the specified surrender
period). For example, a variable annuity contract with a $10,000 purchase payment may
have a surrender charge of 6 percent in the first year after a purchase payment, 5 percent the
next year, 4 percent the next, and so on until the charge decreases to zero. Net premiums
written are the premiums registered on the books of an insurer or a reinsurer at the time a
policy is issued and paid for, minus deductions for commissions and reinsurance.
76
24
The combined ratio represents the sum of the loss ratio (incurred losses plus loss adjustment
expenses, divided by net premiums earned) and the expense ratio (underwriting and other
expenses divided by net premiums earned). Combined ratios under 100 percent indicate an
underwriting profit; ratios over 100 percent indicate underwriting losses.
25
For P/C insurers, net investment gains/(losses) represent the sum of net investment income and
net realized gains/(losses), minus capital gains taxes. Although net investment gain/(loss) is
not a specific line item on life insurers financial statements, we added the line items for net
investment income, amortization of the interest maintenance reserve (adjustments to net
investment income over the remaining life of investments sold, with the intention of
capturing the realized gains/(losses) on those investments over time), and net realized
gains/(losses) to establish a comparable measure. Similarly, for P/C insurers, net
underwriting gains/(losses) generally reflect earned premiums minus total underwriting
deductions (i.e., claims and other expenses incurred). For life insurers, we subtracted
underwriting deductions from the sum of net premiums and other non-investment income to
establish a comparable measure.
26
CDOs are diversified, multiclass securities backed by pools of bonds, bank loans, or other
assets. They may own corporate bonds, commercial loans, ABS, RMBS, CMBS, or
emerging market debt.
27
Financial guaranty insurers generally provided guarantees through insurance and credit default
swaps (CDS). For insurance, the insurer would directly insure payment of principal and
interest in the credit default event. For CDS, according to the New York state regulator,
many policies sold by financial guaranty insurers into the structured finance market backed
commitments by special purpose vehicles (SPV) that entered into CDS with banks and
securities firms. In accordance with Article 69 of the New York Insurance Law, the SPVs,
as CDS protection sellers, could offer certain contract terms that could not be legally
included in policies issued directly by a financial guaranty insurer. If a credit event
occurred, the SPV would be obligated to pay as counterparty. If the SPV failed to pay, the
financial guaranty insurer would then be required to pay under its guarantee of the SPV
counterparty obligations, even though the credit event triggering the SPVs requirement to
pay may have been beyond the scope of risks that could be guaranteed by a financial
guaranty insurance policy.
28
Rehabilitation occurs under a court order by which a state insurance regulator is appointed
rehabilitator of a financially troubled insurance company, and is given the authority to
manage the company until its problems are corrected. In this situation, the regulator takes
control of the insurers books, records, and assets and assumes all powers of the insurers
directors, officers, and managers.
29
State guaranty associations typically do not provide coverage for the investment accounts that
fund variable annuities, but they cover the promises made under GLB riders on variable
annuities.
30
Industry association officials told us that financial guaranty insurers across the industry are
engaged in litigation against banks regarding representation and warranties made about the
underlying residential mortgages that were securitized and insured. There have been some
settlements with banks paying financial guaranty for some of their MBSrelated losses.
According to one insurer we interviewed, these and future settlements could allow
companies that are paying partial claims, or no claims, to increase their payments.
31
The states are principally responsible for regulating the business of insurance. An insurance
company is chartered under the laws of a single state, known as its state of domicile.
Insurers can conduct business in multiple states, but the regulator in the insurers state of
Insurance Markets
77
domicile is its primary regulator. States in which an insurer is licensed to operate, but in
which it is not chartered, typically rely on the companys primary regulator in its state of
domicile to oversee the insurer.
32
The state regulator said it subsequently codified the 10 percent limit.
33
According to many researchers, around mid-2007, losses in the mortgage market triggered a
reassessment of financial risk in other debt instruments and sparked the financial crisis.
34
NAICs Capital Markets, Special Report, Securities Lending in the Insurance Industry, July 8,
2011.
35
The statutory accounting rule was Statement of Statutory Accounting Principles (SSAP) No.
91RAccounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
36
A small percentage of nonagency RMBS were not modeled for different reasons. These
nonmodeled securities included interest-only strips, foreign transactions, and some highly
complex resecuritizations. For these, U.S. insurers were to continue to use agency ratings.
37
NAIC changed the methodology for nonagency RMBS in 2009 and CMBS in 2010.
38
Both firms, BlackRock and PIMCO, provide various investment services to their clients
including asset management and risk management.
39
Prescribed practices are exceptions from NAIC statutory accounting practices that a state
insurance regulator has granted or the states regulatory provisions have extended to all
companies domiciled within their state. Permitted practices are exceptions to statutory
accounting practices granted by state insurance regulators to individual insurers on a caseby-case basis.
40
Deferred Tax Assets (DTA) record the future tax benefits that accrue each year, from
differences between statutory accounting and tax accounting rules. They are used to
recognize a reduction in the amount of income tax that a company is expected to owe in a
future period. For example, tax accounting rules do not recognize unrealized losses of
investments until they are sold, while statutory accounting rules may recognize unrealized
losses before they are sold. This can make taxable income higher than statutory income,
raising a companys current tax bill; but these types of differences can eventually cancel
out, or reverse, in future years depending on future events, so that at some point in the
future, taxable income might be less than statutory income, reducing the companys future
tax bill. Statutory accounting rules determine the percentage of DTA that can be included as
admitted assets on insurers statutory balance sheets.
41
According to the Statement of Statutory Accounting Principles No. 4, Assets and Nonadmitted
Assets, an insurer cannot include assets in its statutory financial statement of financial
position if they have an economic value other than those which can be used to fulfill
policyholder obligations, or those assets which are unavailable due to encumbrances or
other third party interests.
42
During the financial crisis, the Statement of Statutory Accounting Principles No. 10, Income
Taxes (SSAP 10), and its revision SSAP 10R, were the effective guidance on DTAs and
their potential inclusion in admitted assets. Among the limits set in SSAP 10 that insurers
sought to change was a limit on how many years in the future a reversal might occur in
order for a DTA to be considered an admitted asset, as well as a limit on what portion of an
insurers total statutory surplus would be used as a ceiling on the amount of DTAs that can
be classified as admitted assets. The permitted practices generally allowed DTAs for
inclusion in an insurers admitted assets at a rate of up to 15 percent of statutory surplus as
compared to up to 10 percent under SSAP 10, and increased the number of years into the
future for the inclusion of expected DTA reversals from 1 year to 3.
78
43
Specifically, the RBC level that, if reached, would trigger regulatory action is known as the
authorized control level RBC (ACL RBC). Life insurers are eligible to use SSAP 10R when
they exceed 250 percent of their ACL RBC; for P/C insurers, the threshold is 300 percent of
their ACL RBC.
44
SSAP 101 allows up to a possible limitation based upon 15 percent of statutory surplus and a 3
years reversal test.
45
To be eligible for the expanded limits of SSAP 101, the risk-based capital (RBC) of a life or
P/C insurer is to be greater than 300 percent of the RBC level that would trigger regulatory
action. Such insurers with RBC levels of 200 to 300 percent of the level that would trigger
regulatory action are to use the limits under SSAP 10; if their RBC level is below 200
percent, no additional amount from DTAs can be admitted. SSAP 101 also has separate
eligibility requirements for financial guaranty and private mortgage insurance companies
based upon such companies surplus and policyholders and contingency reserves.
46
Qualifying financial institutions generally included stand-alone U.S.-controlled banks and
savings associations, as well as bank holding companies and most savings and loan holding
companies.
47
Generally, companies had to be U.S.-controlled banks, savings associations, or bank and
savings and loan holding companies to be eligible for Capital Purchase Program assistance.
Other applicants of this program were already bank or savings and loan holding companies
prior to 2008.
48
On February 14, 2013, MetLife, Inc. announced that it had received the required approvals
from both the Federal Deposit Insurance Corporation and the Board of Governors of the
Federal Reserve to deregister as a bank holding company. MetLife completed its sale of
MetLife Banks depository business to General Electric Capital on January 11, 2013.
49
The Federal Reserve Bank of New York created a special purpose vehicleMaiden Lane II
to provide AIG liquidity by purchasing residential mortgage backed securities from AIG life
insurance companies. The Federal Reserve Bank also provided a loan to the vehicle for the
purchases.
50
ORSA will apply to any individual U.S. insurer that writes more than $500 million of annual
direct written and assumed premium, and/or insurance groups that collectively write more
than $1 billion of annual direct written and assumed premium.
51
States need to adopt a state version of NAICs Risk Management and Own Risk and Solvency
Assessment Model Act for the statute to be in effect within the states.
52
NAICs Insurance Holding Company System Regulatory Act (Model #440) is a model act. As
mentioned earlier in this report, a model act serves as a guide for subsequent legislation.
State legislatures may adopt model acts in whole or in part, or they modify them to fit their
needs.
53
NAIC, Amendments to the Insurance Holding Company System Model Act & Model
Regulation, Powerpoint presentation, February 7, 2013.
54
The purpose of the Annual Regulatory Data Workshop is to improve the quality of financial
regulatory and supervisory data, by bringing together the full community of government
financial data, and technology for shared learning and the exchange of best practices.
55
According to NAIC, the Form F is an annual filing required of the ultimate controlling
person(s) which identifies material risks within the insurance holding company system that
could pose enterprise risk to the insurer or the holding company system as a whole.
56
A supervisory college is a meeting of insurance regulators or supervisors where the topic of
discussion is regulatory oversight of one specific insurance group that is writing significant
amounts of insurance in other jurisdictions.
Insurance Markets
79
57
As of April 2013, the 16 states are California, Connecticut, Georgia, Idaho, Indiana, Kansas,
Kentucky, Louisiana, Maryland, Mississippi, Nebraska, Pennsylvania Rhode Island, Texas,
West Virginia and Wyoming.
58
GAO, Insurance Reciprocity and Uniformity: NAIC and State Regulators Have Made Progress
in Producer Licensing, Product Approval, and Market Conduct Regulation, but Challenges
Remain, GAO-09-372 (Washington, D.C.: Apr. 6, 2009).
59
GAO, Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the
Dodd-Frank Act, GAO-13-180 (Washington D.C.: Jan. 16, 2013).
60
While the Dodd-Frank Act does not use the term systemically important financial institution,
this term is commonly used by academics and other experts to refer to bank holding
companies with $50 billion or more in total consolidated assets and nonbank financial
companies designated by the Financial Stability Oversight Council for Federal Reserve
supervision and enhanced prudential standards.
61
31 U.S.C. 313.
62
The provisions of the Dodd-Frank Act dealing with FSOC are contained primarily in subtitle A
of title I, 111-123, codified at 12 U.S.C. 5321-5333. And title VIII, codified at 12
U.S.C. 5461-5472.
63
GAO, Financial Stability: New Council and Research Office Should Strengthen the
Accountability and Transparency of Their Decisions, GAO-12-886 (Washington D.C.: Sept.
11, 2012).
64
These agencies included the Federal Reserve, Federal Deposit Insurance Corporation, the
Federal Trade Commission, the Department of Housing and Urban Development, the
National Credit Union Administration, Office of the Comptroller of the Currency, and
Office of Thrift Supervision.
65
Dodd-Frank Act, 165, 124 Stat. at 14231432, codified at 12 U.S.C. 5365.
End Notes for Appendix I

1
Our selected measures included gross and net investment income, total invested assets, capital
and paid in surplus, net cash from financing and miscellaneous sources, net income, capital
and surplus and policyholders surplus (capital), net premiums written, surrenders, lapses,
and other measures.
2
NAIC counted the earliest instance of conservatorship, rehabilitation, or liquidation within the
2002-2011 period as a receivership for a given year. For example, a company could have
gone into conservatorship in 2002 and into liquidation in 2004. In that case, it would be
counted as a receivership in 2002, but not in 2004, to avoid double counting. As a result of
this methodology, liquidations we reported in table 1 were not necessarily included in the
total number of receiverships for the year in which they occurred.
3
The time difference between the date of liquidation and the year from which NAIC was able to
obtain data in these cases ranged from about 1 to 14 years for life insurance companies and
from about 1 to 8 years for P/C companies, but the average time difference was about 6
years for life insurance companies and about 4 years for P/C companies.
4
NYA had 1,867 component companies as of February 24, 2012.
5
We have assessed the reliability of SNL Financial data as part of previous studies related to
banking and finance and found the data to be reliable for the purposes of our review.
80

Because we had not used SNL Financials insurance data in the past, we took additional
measures to ensure their reliability.
End Notes for Appendix II

1
Realized gains/(losses) are increases or decreases in capital assets (such as stocks and bonds)
between the date of purchase and the date of sale or impairment. Unrealized gains or losses
represent appreciation or decline in the unsold assets value.
2
The P/C industry encompasses many lines of insurance. For example, other lines of P/C
insurance includebut are not limited tofire, farmowners, ocean marine, medical
professional liability, earthquake, group accident and health, workers compensation,
product liability, commercial auto liability, and credit insurance.
3
NAIC was not able to provide complete financial data for all insurers. The figures in tables 10
and 11 are based on the available data. We have noted the extent to which we were missing
financial data for each year. See the Objectives, Scope and Methodology section for further
explanation.
End Notes for Appendix III

1
Although we used court documents to compile the profiles, we refrained from citing them in
order to maintain the two insurers anonymity.
2
In rehabilitation, a court gives the state insurance regulator the authority to manage a financially
troubled insurer until its problems are corrected. A finding of insolvency means that an
insurer is unable to meet its liabilities.
3
Policyholders surplus is the excess of an insurance companys assets above its legal obligations
to meet the benefits (liabilities) payable to its policyholders. Mortgage guaranty insurers
must set aside 50 percent of unearned premiums remaining after establishment of their
unearned premium reserve in a contingency reserve. The contingency reserve is meant to
protect policyholders against the effects of adverse economic cycles.
4
Fannie Mae and Freddie Mac are government-sponsored enterprises that were established to
provide liquidity, stability, and affordability in the secondary market for both single- and
multifamily mortgages. They purchase mortgages that meet their underwriting standards
from primary mortgage lenders, such as banks or thrifts, and either hold the mortgages in
their portfolios or package them into mortgage-backed securities (MBS).
5
On September 6, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and
Freddie Mac into conservatorship out of concern that their deteriorating financial condition
would destabilize the financial system.
6
This means that the company assumed that policies would have been voluntarily surrendered by
all policyholders and that those policyholders would therefore, have had to pay surrender
charges on those policies. Alternatively, according to the receivership team members
testimony, if the company had assumed that policyholders would have been compelled to
surrender their policies rather than doing so voluntarily, the deficit would have been
approximately $190 million.
In: U.S. Insurance Industries

Editor: Johnson B. Powell
ISBN: 978-1-62948-118-0
2013 Nova Science Publishers, Inc.
Chapter 2
GOVERNMENT ASSISTANCE FOR AIG:

SUMMARY AND COST
Baird Webel
SUMMARY
American International Group (AIG), one of the worlds major
insurers, was the largest direct recipient of government financial
assistance during the recent financial crisis. At the maximum, the Federal
Reserve (Fed) and the Treasury committed approximately $182.3 billion
in specific extraordinary assistance for AIG and another $15.9 billion
through a more widely available lending facility. The amount actually
disbursed to assist AIG reached a maximum of $184.6 billion in April
2009. In return, AIG paid interest and dividends on the funding and the
U.S. Treasury ultimately received a 92% ownership share in the
company. As of December 14, 2012, the government assistance for AIG
ended. All Federal Reserve loans have been repaid and the Treasury has
sold all of the common equity that resulted from the assistance.
Going into the financial crisis, the overarching AIG holding
company was regulated by the Office of Thrift Supervision (OTS), but
most of its U.S. operating subsidiaries were regulated by various states.
Because AIG was primarily an insurer, it was largely outside of the
normal Federal Reserve facilities that lend to thrifts facing liquidity
This is an edited, reformatted and augmented version of a Congressional Research Service

publication, CRS Report for Congress R42953, prepared for Members and Committees of
Congress, from www.crs.gov, dated March 11, 2013.
82
Baird Webel
difficulties and it was also outside of the normal Federal Deposit
Insurance Corporation (FDIC) receivership provisions that apply to
banking institutions. September 2008 saw a panic in financial markets
marked by the failure of large financial institutions, such as Fannie Mae,
Freddie Mac, and Lehman Brothers. In addition to suffering from the
general market downturn, AIG faced extraordinary losses resulting
largely from two sources: (1) the AIG Financial Products subsidiary,
which specialized in financial derivatives and was primarily the
regulatory responsibility of the OTS; and (2) a securities lending
program, which used securities originating in the state-regulated
insurance subsidiaries. In the panic conditions prevailing at the time, the
Federal Reserve determined that a disorderly failure of AIG could add to
already significant levels of financial market fragility and stepped in to
support the company. Had AIG not been given assistance by the
government, bankruptcy seemed a near certainty. The Federal Reserve
support was later supplemented and ultimately replaced by assistance
from the U.S. Treasurys Troubled Asset Relief Program (TARP).
The AIG rescue produced unexpected financial returns for the
government. The Fed loans were completely repaid and it directly
received $18.1 billion in interest, dividends, and capital gains. In
addition, another $17.5 billion in capital gains from the Fed assistance
accrued to the Treasury. The $67.8 billion in TARP assistance, however,
resulted in a negative return to the government, as only $54.4 billion was
recouped from asset sales and $0.9 billion was received in dividend
payments. If one offsets the negative return to TARP of $12.5 billion
with the $35.6 billion in positive returns for the Fed assistance, the entire
assistance for AIG showed a positive return of approximately $23.1
billion. It should be noted that these figures are the simple cash returns
from the AIG transactions and do not take into account the full economic
costs of the assistance. Fully accounting for these costs would result in
lower returns to the government, although no agency has performed such
a full assessment of the AIG assistance. The latest Congressional Budget
Office (CBO) estimate of the budgetary cost of the TARP assistance for
AIG, which is a broader economic analysis of the cost, found a loss of
$14 billion compared with the $12.5 billion cash loss. CBO does not,
however, regularly perform cost estimates on Federal Reserve actions.
Congressional interest in the AIG intervention relates to oversight of
the Federal Reserve and TARP, as well as general policy measures to
promote financial stability. Specific attention has focused on perceived
corporate profligacy, particularly compensation for AIG employees,
which was the subject of a hearing in the 113th Congress and legislation
in the 111th Congress.
83
INTRODUCTION
In 2007, American International Group (AIG) was the fifth-largest insurer
in the world with $110 billion in overall revenues. In the United States, it
ranked second in property/casualty insurance premiums ($37.7 billion/7.5%
market share) and first in life insurance premiums ($53.0 billion/8.9%). For
particular lines, AIG ranked first in surplus lines, ninth in private passenger
auto, first in overall commercial lines (fifth in commercial auto), and fourth in
mortgage guaranty. It was outside the top 10 in homeowners insurance.1
According to the National Association of Insurance Commissioners (NAIC),
AIG had more than 70 state-regulated insurance subsidiaries in the United
States, with more than 175 non-insurance or foreign entities under the general
holding company.
Although primarily operating as an insurer, prior to the crisis AIG was
overseen at the holding company level by the federal Office of Thrift
Supervision (OTS) because the company owned a relatively small thrift
subsidiary. The bulk of the companys insurance operations were regulated by
the individual state regulators as, per the 1945 McCarran-Ferguson Act,2 the
states act as the primary regulators of the business of insurance. Because AIG
was primarily an insurer, it was largely outside of the normal Federal Reserve
(Fed) facilities that lend to thrifts (and banks) facing liquidity difficulties and it
was also outside of the normal Federal Deposit Insurance Corporation (FDIC)
receivership provisions that apply to FDIC-insured depository institutions.
AIG, as did most financial institutions, suffered losses on a wide variety of
financial instruments in 2008. The exceptional losses which resulted in the
essential failure of AIG arose primarily from two sources: the derivative
activities of the AIG Financial Products (AIGFP) subsidiary and the securities
lending activities managed by AIG Investments with securities largely from
the AIG insurance subsidiaries. Regulatory oversight of these sources was
split. The OTS was responsible for oversight of AIGFP, while the state
insurance regulators were responsible for oversight of the insurance
subsidiaries which supplied the securities lending operations, and would
ultimately bear losses if the securities, or their equivalent value, could not be
returned.
With the company facing losses on various operations, AIG experienced a
significant decline in its stock price and downgrades from the major credit
rating agencies in 2008.3 These downgrades led to immediate demands for
significant amounts of collateral (approximately $14 billion to $15 billion in
collateral payments, according to contemporary press reports).4 As financial
84
Baird Webel
demands on the company mounted, bankruptcy appeared a possibility, as

occurred with Lehman Brothers in the same timeframe. Fears about the
spillover effects from such a failure brought calls for government action to
avert such a failure. Many feared that AIG was too big to fail5 due to the
potential for widespread disruption to financial markets resulting from such a
failure. AIGs size was not the only concern in this regard, but also its
innumerable connections to other financial institutions.
The New York Insurance Superintendent, primary regulator of many of
the AIG insurance subsidiaries, led an effort to provide the parent AIG holding
company with access to up to $20 billion in cash from AIGs insurance
subsidiaries, which were perceived as solvent and relatively liquid. Ultimately,
this transfer did not take place and efforts to find private funding for AIG
failed as well; instead, the Federal Reserve approved an extraordinary loan of
up to $85 billion in September 2008. As AIGs financial position weakened
following the initial Fed loan, several rounds of additional funding were
provided to AIG by both the Fed and the Treasurys Troubled Asset Relief
Program (TARP). Assistance to AIG was restructured several times, including
loosening of the terms of the assistance6 (see Appendix A below for more
complete discussion of the changes to AIGs assistance).
The 2010 Dodd-Frank Act7 overhauled the financial regulatory structure
in the United States. Of particular note with regard to AIG, the act moved all
federal financial holding company regulation to the Federal Reserve and
moved the oversight of thrift subsidiaries to the Office of the Comptroller of
the Currency. Thus, both the AIG holding company and the AIG thrift
subsidiary are currently overseen by different agencies than before the crisis.8
In addition, the act created a Financial Stability Oversight Council (FSOC) and
the possibility of enhanced regulation by the Fed of institutions deemed
systemically important. AIG announced in October 2012 that it had received
notice that the company was being considered for such designation,9 though a
decision has yet to be released by FSOC. The act also put restrictions on the
Federal Reserves lending authority that would limit its ability to make future
extraordinary assistance available to individual companies, as was done in the
case of AIG. The Dodd-Frank Act did not create a federal insurance regulator;
thus the states continue to be the primary regulators of the various insurance
operations of AIG.
The assistance for AIG has provoked controversy on several different
levels. Significant attention, and anger, has been directed at questions of
employee compensation. Following reports of bonuses being paid for
employees of AIGFP, the House passed legislation (H.R. 1664, 111th
85
Congress) aimed at prohibiting unreasonable and excessive compensation and

compensation not based on performance standards for TARP recipients,
including AIG (see Appendix B for additional information on executive
compensation restrictions under TARP). Issues around TARP compensation
continue in the 113th Congress, with the House Committee on Oversight &
Government Reforms Subcommittee on Economic Growth, Job Creation &
Regulatory Affairs holding a hearing entitled Bailout Rewards: The Treasury
Departments Continued Approval of Excessive Pay for Executives at
Taxpayer-Funded Companies on February 26, 2013.10
Questions have also been raised about the transparency and legality of the
assistance. Although the billions of dollars in government assistance went to
the AIG, in many cases, it can be argued that AIG has acted as an intermediary
for this assistance. In short order after drawing on government assistance,
substantial funds flowed out of AIG to entities on the other side of AIGs
financial transactions, such as securities lending or credit default swaps. Seen
from this view, the true beneficiary of many of the federal funds that flowed to
AIG was not AIG itself, but instead AIGs counterparties, who may not have
received full payment in the event of a bankruptcy. In the interest of
transparency, many argued that AIGs counterparties, particularly those who
received payments facilitated by government assistance, should be identified.
Many of these counterparties were only identified after public and
congressional pressure.11
Lawsuits challenging the legality of the government actions relating to the
assistance, particularly the equity taken as part of this assistance, have been
filed by Starr International Company, Inc. (Starr). This company is owned by
Maurice Hank Greenberg, formerly the CEO of AIG and a major
stockholder in the company. Starr has sought compensation for the allegedly
unconstitutional taking of AIG shareholder property without compensation in
connection with the federal assistance package rescuing AIG from bankruptcy.
The Board of Directors of AIG declined to join this suit in January 2013, but it
is still pending before the Court of Federal Claims.12
SUMMARY OF GOVERNMENT ASSISTANCE TO AIG

The extraordinary direct government assistance for AIG that began in
September 2008 has ended. All loans to assist AIG have been repaid and the
assets purchased from AIG by Federal Reserve entities have been sold. The
common equity holdings in AIG that resulted from both Federal Reserve and
86
Baird Webel
U.S. Treasury TARP assistance for AIG have been sold. The final connection
between the government and AIG was a relatively small amount of warrants
issued to the Treasury as part of the TARP assistance. AIG repurchased these
warrants for approximately $25 million on March 1, 2013.13 With the sale of
the TARP equity, the TARP corporate governance and executive
compensation restrictions imposed on AIG were lifted.
The government assistance for AIG took a variety of different forms, with
the initial Federal Reserve loans followed by TARP assistance in three major
restructurings in November 2008, March 2009, and September 2010. The
following briefly summarizes the primary types of assistance (see Appendix A
for more complete details).
Federal Reserve Loans to AIG

The initial assistance for AIG came in the form of an $85 billion loan
commitment announced on September 16, 2008. In addition to a high, variable
interest rate,14 the government received a nearly 80% share of the common
equity in AIG. This loan was augmented by an additional $37.8 billion loan
commitment in October 2008, which was collateralized by securities from the
AIG securities lending program. The maximum amount outstanding under
these loans was over $90 billion in October 2008. The limit on the Fed loan
was reduced to $60 billion in November 2008 and $35 billion in March 2009.
The 2009 reduction occurred as the Fed accepted $25 billion in AIG subsidiary
equity as partial repayment of the loans. The loans were eventually repaid in
January 2011, primarily through cash gained by AIG from sales of various
assets and from TARP assistance. The Fed received a total of $8.2 billion in
interest and dividends from these loans and the common equity stake resulting
from the loans was sold by the Treasury for $17.5 billion. Federal Reserve
profits are mostly remitted to the Treasury and such remittances more than
doubled from 2007 to 2010.15
Federal Reserve Loans to Finance Asset Purchases from AIG

In November 2008, the Fed loan to AIG was partially replaced by Fed
loans to Limited Liability Corporations (LLCs) created and controlled by the
Fed, which were known as Maiden Lane II and Maiden Lane III.16 Up to $52.5
billion in loans from the Fed were committed to Maiden Lanes II and III with
87
$43.8 billion actually disbursed.17 These LLCs purchased various securities,

which were an ongoing financial drain on AIG at the time. After purchase,
these securities were held by the LLCs and then sold as market conditions
improved. All the loans were repaid by June 2012, and the facilities ultimately
returned an additional $9.5 billion in interest and other gains to the Fed.
AIG Commercial Paper Funding Facility Borrowing

The Commercial Paper Funding Facility (CPFF) was created by the
Federal Reserve in 2008 as a widely available vehicle to provide liquidity
during the financial crisis.18 AIG and its subsidiaries were approved to borrow
up to a maximum of $20.9 billion, with actual borrowing reaching $16.1
billion in January 2009. AIGs CPFF borrowing is typically not included in the
reporting of AIG assistance done by the Fed and Treasury. This borrowing,
however, occurred at the same time as AIG was accessing the other Fed loans
and TARP assistance and likely was preferred over these sources because
CPFF charged lower interest rates19 and individual CPFF borrowers and
borrowing amounts were not reported by the Fed at the time. The Dodd-Frank
Act required the Fed to report full details of the CPFF and other Fed
facilities.20 This reporting shows AIG borrowing beginning in October 2008
and extending until April 2010. Although interest amounts were not reported,
according to CRS estimates based on the principal amounts and interest rates
that were reported, the Fed appears to have received approximately $0.4
billion in interest from AIGs CPFF borrowing.
TARP Assistance for AIG

In November 2008, $40 billion in TARP assistance was committed to
AIG, and it was disbursed through Treasury purchase of AIG preferred
equity.21 The commitment was increased to nearly $70 billion in March 2009,
and the maximum level of disbursement of $67.8 billion was reached in
January 2011, primarily to facilitate the withdrawal of Federal Reserve
involvement with AIG.22 Although TARP assistance took the form of
preferred equity purchases, $47.5 billion in AIG preferred equity was
converted into common equity, which brought the government ownership
stake in AIG to a high of 92% in January 2011. The Treasury began selling the
common equity in May 2011 and completed the sales in December 2012. In
88
Baird Webel
addition to the equity, the Treasury received a relatively small number of stock
warrants through TARP, which it sold back to AIG in March 2013.23 The
Treasury received $34.1 billion from its sales of the TARP common equity
and approximately $25 million from the warrant sales. AIG completely
redeemed the $20.3 billion in unconverted preferred equity in March 2012,
and the company paid a total $0.9 billion in cash dividends to the government
on this equity. Comparing the total amount disbursed to the total amount
recouped shows a $12.5 billion shortfall on the TARP portion of the assistance
for AIG.
Table 1 below summarizes the direct government assistance for AIG,
including maximum amounts committed by the government, the amounts
actually disbursed, and the returns from this assistance.
Indirect Assistance for AIG

Although the loans and preferred equity purchase directly aided AIG, the
company also benefited from other actions taken by the U.S. government to
address the financial crisis. For example, TARP provided nearly $205 billion
in additional capital to U.S. banks in 2008 and early 2009. To the extent that
AIG had assets that depended on the health of these banks, or liabilities, such
as CDS, that might have increased with the failure of these banks, the TARP
assistance for banks would have aided AIGs financial position as well as the
financial position of most other financial institutions. If AIG was perceived as
being too big to fail due to the government assistance, the company may
also have received an advantage in insurance markets and in debt markets
compared to other firms competing with AIG. The reputational effect of
government-backing, however, also had negative effects on the company to
the degree that AIG even changed the name of its primary insurance
subsidiary. Such second-order effects from the government actions are
difficult to quantify and typically are not included in assessments of the
assistance for AIG.
Another indirect, but more definite, benefit to AIG from government
action during the crisis came from policy rulings by the Internal Revenue
Service (IRS).24 Under normal circumstances, a corporation undergoing a
change in control is not able to carry forward previous tax losses.25
Government holdings gained through TARP, however, generally have not
been treated by the IRS as causing such a change in control. AIG was able to
report a $17.7 billion accounting gain from these tax benefits in 2011.26
89
Economic theory would suggest that these tax benefits resulted in the
government receiving a higher price for the AIG shares when they were sold,
so the final result may not have been to increase the overall cost of the AIG
assistance. Whether or not one includes these tax rulings as specific assistance
for AIG, however, would significantly change the assessment of the overall
financial results from the assistance. Neither the Treasury nor CBO have
included these tax rulings in their assessments of the assistance for AIG.
WHAT DID THE ASSISTANCE FOR AIG COST?

From the above accounting, which largely follows that offered by the
Treasury in its announcements,27 the cost of the AIG assistance seems
relatively straightforward. Summing the various amounts of interest,
dividends, and equity sales, one arrives at a total of $207.7 billion returned to
the Treasury and Federal Reserve compared with a total maximum
disbursement of $184.1 billion, for a positive return of $23.1 billion. This cash
accounting, however, falls short of a full economic assessment of the
assistance for AIG. Such assessments typically include other factors, such as
the time value of money (a dollar in 2008 was not worth the same as a dollar
in 2012) and the opportunity cost of the funds involved (what would the
returns have been if the money involved had been used for other purposes?).
The budgetary cost estimates undertaken by the Congressional Budget
Office (CBO) incorporate some broader economic principles in assessing the
costs of government actions. In particular, CBOs official budgetary cost
estimates for TARP must follow not only the Federal Credit Reform Act,28
which requires that the present value of the full long-term cost of loans and
loan guarantees be recognized, but also that market rates be used in these
calculations rather than the lower Treasury borrowing costs.29 These
requirements have the effect of lowering the returns. This effect can be seen by
comparing the CBO estimates with the more simple cash accounting above.
The latest CBO estimates, which occurred after most of the AIG equity had
been sold, saw a budgetary cost of $14 billion attributed to the TARP portion
of the AIG assistance,30 compared to a negative return of $12.5 billion using
the simple cash accounting.
The Federal Reserve actions which make up a majority of the returns from
the government assistance for AIG are not subject to regular CBO or OMB
budgetary cost assessment. CBO did publish a study of the budgetary impact
and subsidy cost of the Federal Reserves response to the financial crisis in
90
Baird Webel
May 2010. CBO estimated a cost of $2 billion from the Federal Reserve loans
to AIG at their inception,31 compared to a final positive return of $35.6 billion
on a cash accounting basis. The CBO estimates for TARP have become
significantly more positive over time, and it is quite possible that, were CBO
to redo the estimates at the current date, the estimate for the Federal Reserve
actions would become more positive as well.
Table 1. Summary of Direct AIG Assistance
Type of
Assistance
Extraordinary
Fed Loans to
AIG
Fed Loans for
Asset Purchases
Fed Loans
through CPFF
TARP Preferred
Share Purchases
Totals
Maximum
Amount
Committed
Maximum
Date of
Amount Actually Repayment
Disbursed
$122.8 billion
(Oct. 2008)
$90.3 billion (Oct.

Jan. 2011
22, 2008)
$52.5 billion
(Nov. 2008)
$20.9 billion
(Nov. 2008)
$69.8 billion
(March 2009)
$198.2 billion
(March 2009)
$43.8 billion (Dec.

2008)
$16.1 billion (Jan.
2009)
$67.8 billion (Jan.
2011)
$184.6 billion
(April 2009)
Gain or Loss (-)

on Assistance
$25.7 billion
June 2012
$9.5 billion
April 2010
$0.4 billion
Dec. 2012
-$12.5 billion
Dec. 2012
$23.1 billion
Source: Federal Reserve weekly H.4.1 statistical release; Federal Reserve Board and
Federal Reserve Bank of NY data releases; U.S. Treasury TARP Monthly
Reports; CRS calculations.
Note: Warrants associated with TARP preferred shares repurchased by AIG in March
2013. The approximately $25 million gain from this is included in the -$12.5
billion loss from the TARP shares.
APPENDIX A. DETAILS OF GOVERNMENT ASSISTANCE

FOR AIG
Assistance Prior to TARP Involvement
Initial Loan
On September 16, 2008, the Fed announced, after consultation with the
Treasury Department, that it would lend up to $85 billion to AIG over the next
two years. Drawing from the loan facility would only occur at the discretion of
the Fed. A new CEO was installed after the initial intervention and Fed staff
91
was put on site with the company to oversee operations. The interest rate on
the funds drawn from the Fed was 8.5 percentage points above the London
Interbank Offered Rate (LIBOR), a rate that banks charge to lend to each
other. AIG also was to pay a flat 8.5% interest rate on any funds that it did not
draw from the facility. The government received warrants that, if exercised,
would give the government a 79.9% ownership stake in AIG. Three
independent trustees were to be named by the Fed to oversee the firm for the
duration of the loan. The trustees for the AIG Credit Trust were announced on
January 16, 2009, and the warrants were later exercised.32
This lending facility (and its successors) was secured by the assets of
AIGs holding company and non-regulated subsidiaries.33 In other words, the
Fed could seize AIGs assets if AIG failed to honor the terms of the loan. This
reduced the risk that the Fed, and the taxpayers, would suffer a loss, assuming,
of course, that the Fed would have been willing to seize these assets. The risk
still remained that if AIG turned out to be insolvent, its assets might be
insufficient to cover the amount it had borrowed from the Fed.
On September 18, 2008, the Fed announced that it had initially lent $28
billion of the $85 billion possible. This amount grew to approximately $61
billion on November 5, 2008, shortly before the restructuring of the loan
discussed below in Federal Reserve Loan Restructuring.34
Securities Borrowing Facility35

On October 8, 2008, the Fed announced that it was expanding its
assistance to AIG by swapping cash for up to $37.8 billion of AIGs
investment-grade, fixed-income securities. These securities stemmed from the
AIG securities lending program. As some counterparties stopped participating
in the lending program, AIG was forced to incur losses on its securities
lending investments.36 AIG needed liquidity from the Fed to cover these losses
and counterparty withdrawals. This lending facility was to extend for nearly
two years, until September 16, 2010, and advances from the securities
borrowing facility to AIG paid an interest rate of 1% over the average
overnight repo rate.37 As of November 5, 2008, shortly before the facility was
restructured, $19.9 billion of the $37.8 billion was outstanding.
Although this assistance resembled a typical collateralized loan (the lender
receives assets as collateral, and the borrower receives cash), the Fed
characterized the agreement as a loan of securities from AIG to the Fed in
exchange for cash collateral. The arrangement may have been structured this
way due to New York state insurance law provisions regarding insurers using
securities as collateral in a loan.38
92
Baird Webel
Commercial Paper Funding Facility

The Commercial Paper Funding Facility (CPFF) was initially announced
by the Fed on October 7, 2008, as a measure to restore liquidity in the
commercial paper market.39 It was a general facility, open to many recipients,
not only AIG. Through the CPFF, the Fed purchased both asset-backed and
unsecured commercial paper. Rather than charging an interest rate, the Fed
purchased the paper at a discount based on the three-month overnight index
swap rate (OIS). Unsecured paper was discounted by 3%, whereas secured
paper was discounted by 1%.
AIG announced that, as of November 5, 2008, it had been authorized to
issue up to $20.9 billion of commercial paper to the CPFF and had actually
issued approximately $15.3 billion of this amount. Subsequent downgrades of
AIGs airline leasing subsidiary (ILFC) reduced the maximum amount AIG
could access from the CPFF to $15.2 billion in early January 2009. ILFC had
approximately $1.7 billion outstanding to the CPFF when it was downgraded;
this amount was repaid by January 28, 2009.40
Table A-1. Summary of AIG Assistance Before TARP
Program
Federal Reserve
Loan
Maximum
Committed
Amount of
Government
Assistance
$85 billion
Government
Assistance
Outstanding (as
Nov. 5, 2008)
Recompense to the Expiration

Government
Date
$61 billion:
LIBOR+8.5%
(includes principal (drawn amounts);
and interest)
8.5% (undrawn
amounts); 79.9% of
AIG equity
Federal Reserve
$37.8 billion $19.9 billion:
Overnight repo rate
Securities
(includes principal +1%
Borrowing Facility
and interest)
Commercial Paper $20.9 billion $15.3 billion
OIS rate+1%;
Funding Facility
OIS+3%
September
2010
September
2010
February
2010
Source: Federal Reserve EESA Section 129 reports; AIG SEC filings.
On February 17, 2010, the reported total CPFF borrowing outstanding was
$2.3 billion.41 CPFF new purchase of commercial paper expired February 1,
2010, with maximum maturities extending 90 days from this point. Thus, by
the end of April 2010, all AIG borrowing from the CPFF was repaid.
93
November 2008 Revision of Assistance to AIG

On November 10, 2008, the Federal Reserve and the U.S. Treasury
announced a restructuring of the federal intervention to support AIG.
Following the initial loan, some, notably AIGs former CEO Maurice
Greenberg, criticized the terms as overly harsh, arguing that the loan itself
might be contributing to AIGs eventual failure as a company. As evidenced
by the additional borrowing after the September 16 loan, AIG had continued to
see cash flow out of the company.
The revised agreement eased the payment terms for AIG and had three
primary parts: (1) restructuring of the initial $85 billion Fed loan, (2) a $40
billion direct capital injection from the Treasury, and (3) up to $52.5 billion in
Fed loans used to purchase troubled assets. Separately, AIG continued to
access the Fed CPFF as described above.
Federal Reserve Loan Restructuring

The Fed reduced the $85 billion loan facility to $60 billion, extended the
time period to five years, and eased the financial terms considerably.
Specifically, the interest rate on the amount outstanding was reduced by 5.5
percentage points (to LIBOR plus 3%), and the fee on undrawn funds was
reduced by 7.75 percentage points (to 0.75%).
Troubled Asset Relief Program Assistance
Through TARP, the Treasury purchased $40 billion in preferred shares of
AIG. In addition to the preferred shares, the Treasury also received warrants
for common shares equal to 2% of the outstanding AIG shares. AIG was the
first announced non-bank to receive TARP funds. The $40 billion in preferred
AIG shares held by the Treasury were slated to pay a 10% dividend per
annum, accrued quarterly.42
The amount of shares held in trust for the benefit of the U.S. Treasury
under the previous Fed loan was also reduced so that the total government
equity interest in AIG (trust shares plus Treasury warrants) remained under
80% after the TARP intervention.
Purchase of Troubled Assets
Although EESA provided for Treasury purchase of troubled assets under
TARP, the troubled asset purchases related to AIG were done by LLCs created
and controlled by the Federal Reserve. This structure was similar to that
created by the Fed to facilitate the purchase of Bear Stearns by JPMorgan
94
Baird Webel
Chase in March 2008. Two LLCs were set up for AIGMaiden Lane II for
residential mortgage-backed securities (RMBS) and Maiden Lane III for
collateralized debt obligations (CDO).43
Residential Mortgage-Backed Securities/Maiden Lane II

Under the November 2008 restructuring, the RMBS LLC/Maiden Lane II
could receive loans up to $22.5 billion by the Fed and $1 billion from AIG to
purchase RMBS from AIGs securities lending portfolio. The previous $37.8
billion securities lending loan facility was repaid and terminated following the
creation of this LLC. The Fed was credited with interest from its loan to
Maiden Lane II at a rate of LIBOR plus 1% for a term of six years, extendable
by the Fed. The $1 billion loan from AIG was credited with interest at a rate of
LIBOR plus 3%. The AIG loan, however, was subordinate to the Feds. Any
proceeds from Maiden Lane II were to be distributed in the following order:
(1) operating expenses of the LLC, (2) principal due to the Fed, (3) interest
due to the Fed, and (4) deferred payment and interest due to AIG. Should
additional funds remain at the liquidation of the LLC, these remaining funds
were to be shared by the Fed and AIG with AIG receiving one-sixth of the
value. Ultimately the securities in Maiden Lane II were sufficient to fully
repay the loans, with interest. The Fed received approximately $2.3 billion in
capital gains, with AIG receiving approximately $460 million.
The actual amount of Fed loan made to Maiden Lane II totaled $19.5
billion of the $22.5 billion maximum. Maiden Lane II purchased RMBS with
this amount along with the $1 billion loan from AIG. The securities purchased
had a face value of nearly double the purchase price ($39.3 billion).44
Collateralized Debt Obligations/Maiden Lane III
Under the November 2008 restructuring, the CDO LLC/Maiden Lane III
could receive loans up to $30 billion from the Fed and $5 billion from AIG to
purchase CDOs on which AIG had written credit default swaps. At the same
time that the CDOs were purchased, the CDS written on these CDOs were
terminated, relieving financial pressure on AIG. The Fed and AIG were to be
credited with interest from the loans at a rate of LIBOR plus 3% until repaid.
The proceeds from Maiden Lane III were to be distributed in the following
order: (1) operating expenses of the LLC, (2) principal due to the Fed, (3)
interest due to the Fed, and (4) deferred payment and interest due to AIG.
Should any funds remain after this distribution, they were to go two-thirds to
the Fed and one-third to AIG. Ultimately the securities in Maiden Lane III
were sufficient to fully repay the loans, with interest. The Fed received
95
approximately $5.9 billion in capital gains, with AIG receiving approximately

$2.9 billion.
The actual amount of the Fed loan to Maiden Lane III was $24.3 billion of
the $30 billion maximum, while AIG loaned the LLC $5 billion. In addition to
these loans, Maiden Lane III purchase of CDOs was also funded by
approximately $35 billion in cash collateral previously posted to holders of
CDS by AIGFP. In return for the use of this collateral, AIGFP received
approximately $2.5 billion from the LLC. The total par value of CDOs
purchased by Maiden Lane III was approximately $62.1 billion.
A summary of the assistance under the November 2008 plan is presented
in Table A-2.
March 2009 Revision of Assistance to AIG

On March 2, 2009, the Treasury and Fed announced another revision of
the financial assistance to AIG. On the same day, AIG announced a loss of
more than $60 billion in the fourth quarter of 2008. In response to the poor
results and ongoing financial turmoil, private credit ratings agencies were
reportedly considering further downgrading AIG, which would most likely
have resulted in further significant cash demands due to collateral calls.45
According to the Treasury, AIG continues to face significant challenges,
driven by the rapid deterioration in certain financial markets in the last two
months of the year and continued turbulence in the markets generally. The
revised assistance was intended to enhance the companys capital and
liquidity in order to facilitate the orderly completion of the companys global
divestiture program.46
The announced revised assistance included the following:
Exchange of the previous $40 billion in preferred shares purchased

through the TARP program for $41.6 billion in preferred shares that
more closely resembled common equity, thus improving AIGs
financial position. Dividends paid on these new shares remained at
10%, but were non-cumulative and only paid when declared by AIGs
Board of Directors. Should dividends not be paid for four consecutive
quarters, the government would have had the right to appoint at least
two new directors to the board.
96
Baird Webel
Table A-2. Summary of AIG Assistance Under November 2008 Plan
(amounts as of March 2009)
Maximum
Committed
Amount of
Government
Assistance
$40 billion
Government
Assistance
Outstanding
Program
TARP Share
$40 billion
Purchase
(principal); $1.6
billion
(dividends)
Federal Reserve $60 billion
$42.0 billion
Loan
(includes
principal and
interest)
$20.9 billion $12.2 billion
Commercial
Paper Funding
Facility
$18.4 billion
Maiden Lane II $22.5 billion (principal);
Maiden Lane III $30 billion
$91 million
(interest)
$24.0 billion
(principal);
$127 million
(interest)
Recompense to the
Government
10% quarterly
dividend; warrants
for 2% of AIG
equity;
3 month
LIBOR+3%; 77.9%
of AIG equity
OIS rate+1%;
OIS+3%
Expiration Date
Preferred shares
outstanding until
repurchased.
September 2013
October 2009
5/6 of equity
November 2014
remaining after loan (loan); assets held
repayment
until disposed of.
2/3 of equity
November 2014
remaining after loan (loan); assets held
repayment
until disposed of.
Source: Federal Reserve weekly H.1.4 statistical release; Federal Reserve Bank of NY
website; U.S. Treasury TARP reports; AIG SEC filings; CRS calculations.
Notes: CPFF and TARP values as of March 31, 2009, other Fed values as of March 25,
2009. The loan amounts to Maiden Lane II and III were from these entities to the
Fed, and were not to be repaid by AIG. AIG also had outstanding loans Maiden
Lane II and III, which were junior in priority to the Fed loans. The dividends on
the TARP share purchase and the interest on the loans were generally allowed to
accrue rather than being immediately paid.
Commitment of up to $29.8 billion47 in additional preferred share

purchases from TARP. Timing of these share purchases was at the
discretion of AIG.
Reduction of interest rate on the existing Fed loan facility by
removing the floor of 3.5% over the LIBOR portion of the rate. The
97
rate became three-month LIBOR plus 3%, which was approximately

4.25% at the time.
Limit on Fed revolving credit facility was reduced from $60 billion to
as low as $25 billion.
Up to $34.5 billion of the approximately $38 billion outstanding on
the Fed credit facility was to be repaid by asset transfers from AIG to
the Fed. Specifically, (1) $8.5 billion in ongoing life insurance cash
flows were to be securitized by AIG and transferred to the Fed; and
(2) approximately $26 billion in equity interests in two of AIGs large
foreign life insurance subsidiaries (ALICO and AIA) are to be issued
to the Fed. This would effectively transfer a majority stake in these
companies to the Fed, but the companies would still be managed by
AIG.
A $25 billion repayment of the Fed loan through the transfer of equity
interest worth $16 billion in AIA and $9 billion in ALICO was completed on
December 1, 2009, with a corresponding reduction in the Fed loan maximum
to $35 billion. According to AIGs 2009 annual 10-K filing with the SEC, the
repayment through securitization of life insurance cash flows was no longer
expected to occur and has not occurred.
Separately, AIG continued to access the Feds Commercial Paper Funding
Facility, which was extended to February 2010.
A summary of assistance under the March 2009 plan is presented in Table
A-3.
September 2010 Revision of Assistance for AIG

The structure under which AIGs assistance was ultimately wound down
was announced in September 2010 with the multiple transactions involved
closing on January 14, 2011. The essence of this restructuring was to (1) end
the Feds direct involvement with AIG through loan repayment and transfer of
the Feds equity interests to the Treasury and (2) convert the governments
preferred shares into common shares, which could then be more easily sold.
98
Baird Webel
Table A-3. Summary of AIG Assistance Under March 2009 Plan
(amounts as of September 2010)
Program
TARP Share
Purchase
Federal Reserve
Loan
Maximum
Committed
Amount of
Government
Assistance
$69.8 billion
$35 billion
Government
Assistance
Outstanding
$47.5 billion
(principal); $1.6
billion (dividends)
Recompense to
the Government
10% quarterly
dividend;
warrants for 2%
of AIG equity
3 month
$18.9 billion:
(includes principal LIBOR+3%;
77.9% of AIG
and interest)
equity
5% quarterly
$25 billion
dividends
(principal); $1
billion (dividends)
$25 billion
AIG Subsidiary
Equity (accepted
as repayment for
Fed Loan)
Commercial Paper $15.9 billion $0 (facility
Funding Facility
expired)
Maiden Lane II
$22.5 billion $13.7 billion
(principal); $408
million (interest)
Maiden Lane III $30 billion $14.6 billion
(principal); $499
million (interest)
OIS rate+1%;
OIS+3%
5/6 of equity
remaining after
loan repayment
2/3 of equity
remaining after
loan repayment
Expiration Date
March 2014;
preferred shares
outstanding until
repurchased
September 2013
none
February 2010
November 2014
(loan); assets hel
until disposed of
November 2014
(loan); assets hel
until disposed of
website; U.S. Treasury TARP reports; AIG SEC filings; CRS calculations.
Notes: Fed amounts as of September 29, 2010; Treasury amounts as of September 30,
2010. The loan amounts to Maiden Lane II and III were from these entities to the
Fed, and were not to be repaid by AIG. AIG also has outstanding loans Maiden
Lane II and III which were junior in priority to the Fed loans. Quarterly TARP
dividends were non-cumulative and paid at AIGs discretion. The dividends on the
TARP share purchase and the interest on the loans were generally allowed to
accrue rather than being immediately paid.
The specific steps included the following:
Repayment and termination of the Fed loan facility. AIG repaid $19.5
billion to the Fed with cash from the disposal of various assets.
99
Table A-4. Summary of AIG Assistance Under Final September 2010 Plan
(after closing in mid-January 2011)
Agency
Treasury
Federal
Reserve
Planned
Amount
Disposition
Original Source
1.655 billion shares Open market sales $49.1 billion in
(worth approximately
TARP preferred
$71.5 billion)
shares were
converted to 1.1
billion shares;
563 million shares
were compensation
for Fed loan to AIG
(transferred
through AIG Credit
Trust)
AIG subsidiary $20.3 billion
Redemption by
Fed loan to AIG
equity AIG
$0 (of up to $2
AIG through
(transferred using
preferred
billion)
equity sales
TARP preferred
shares
Redemption by
shares) Purchased
AIG or conversion through TARP
to common equity
Maiden Lane II $12.8 billion
Hold to maturity or Fed loan to Maiden
(principal);
open market sale Lane II
$460 million
(interest);
$1.4 billion (equity)
Maiden Lane III $12.7 billion
Hold to maturity or Fed loan to Maiden
(principal); $555
open market sale Lane III
million (interest);
$2.6 billion (equity)
Holdings
AIG common
equity
website; U.S. Treasury TARP reports and press releases; AIG SEC filings; CRS
calculations.
Note: Values from January 20, 2011.
Transfer to the Treasury of the Feds preferred equity interests

resulting from AIG subsidiaries AIA and Alico. AIG drew $20.3
billion of TARP funds to purchase the Feds equity in AIGs
subsidiaries. This equity was transferred to the Treasury to redeem the
TARP funds. The remaining equity (approximately $5.7 billion) was
redeemed by funds from sales of other AIG assets. As was the plan
when the Fed held the assets, the equity interests held by the Treasury
100
Baird Webel
following the transfer were to be redeemed by AIG following further

asset sales.
Conversion of TARP preferred shares into common equity. $49.1
billion in TARP preferred share holdings were converted into
approximately 1.1 billion common shares worth approximately $43
billion in September 2010.48 After combining this with the
approximately 562.9 million shares (then worth $22 billion) resulting
from the initial Fed loan,49 the Treasury held 1.655 billion shares of
AIG common stock, or 92.1% of the AIG common stock.
Reduced TARP funding facility. At AIGs discretion, $2 billion of
new Series G preferred shares could be issued by AIG and purchased
by the Treasury. These shares would have paid a 5% dividend and any
outstanding shares were to convert to common shares at the end of
March 2012. None of these shares were issued and this facility was
cancelled.
Issuance of warrants to private shareholders. Through an exceptional
dividend, AIG issued warrants to existing private shareholders. They
extend for 10 years and allow for the purchase of up to 75 million new
shares of common stock at the price of $45 a share. These warrants
provided a direct benefit to private AIG stockholders while potentially
reducing the return on the governments assistance to AIG. This
benefit was approximately $1.2 billion at the warrants initial trading
price.50
Table 5 summarizes the assistance for AIG after the latest restructuring
plan was completed in January 2011, but before any further asset sales or loan
repayments.
APPENDIX B. EXECUTIVE COMPENSATION

RESTRICTIONS UNDER TARP
By accepting TARP assistance, AIG became subject to the executive
compensation standards for their senior executive officers (SEOs, generally
the chief executive officer, the chief financial, and the three next most highly
compensated officials) generally required under Section 111 of EESA. In
addition to these general restrictions, Treasury imposed additional executive
compensation restrictions on AIG that are more stringent than for other
101
participants in TARP in recognition of the special assistance received by

AIG.51
The TARP executive compensation restrictions were amended and
strengthened by the 111th Congress in the American Recovery and
Reinvestment Act of 2009,52 which amended Section 111 of EESA to further
limit executive compensation for financial institutions receiving assistance
under that act. Among other things, for applicable companies, the new
language requires the adoption of standards by Treasury that
1. prohibit paying certain executives any bonus, retention, or incentive
compensation other than certain long-term restricted stock that has a
value not greater than one-third of the total annual compensation of
the employee receiving the stock (the determination of how many
executives will be subject to these limitations depends on the amount
of funds received by the TARP recipient);
2. require the recovery of any bonus, retention award, or incentive
compensation paid to SEOs and the next 20 most highly compensated
employees based on earnings, revenues, gains, or other criteria that
are later found to be materially inaccurate;
3. prohibit any compensation plan that would encourage manipulation of
the reported earnings of the firm to enhance the compensation of any
of its employees;
4. prohibit the provision of golden parachute payment to an SEO and
the next five most highly compensated employees for departure from
a company for any reason, except for payments for services performed
or benefits accrued; and
5. prohibit any compensation plan that would encourage manipulation of
the reported earnings of the firm to enhance the compensation of any
of its employees.
Although Section 111(b)(1) of the amended EESA indicated that these
standards applied all TARP recipients until they repay TARP funding, later
language (Section 111(b)(3)(iii)) specifically allows bonuses required to be
paid under employment contracts executed before February 11, 2009, to go
forward notwithstanding the new requirements. The Special Master for TARP
Executive Compensation released several specific determinations for AIG
compensation.53
102
Baird Webel
End Notes
1
Statistics from The I.I.I. Insurance Fact Book 2009, (New York: Insurance Information
Institute, 2009).
2
P.L. 79-15, 15 U.S.C. 1011-1015.
3
In 2005, amid accounting irregularities that ultimately led to the resignation of then-CEO
Maurice Greenberg, AIG was downgraded by S&P from AAA to AA+. Further downgrades
followed in June 2005 and May 2008. In September 2008, S&P downgraded AIG to A-.
4
See, for example, U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as
Credit Dries Up, Wall Street Journal, September 17, 2008, pp. A1-A6.
5
Institutions that are too big to fail are ones that are deemed to be big enough, or interconnected
enough, that their failure could create systemic risk, the risk that the financial system as a
whole would cease to function smoothly. See CRS Report R40877, Financial Regulatory
Reform: Systemic Risk and the Federal Reserve, by Marc Labonte and CRS Report
R40417, Macroprudential Oversight: Monitoring Systemic Risk in the Financial System, by
Darryl E. Getter for more information on systemic risk and too big to fail.
6
The revisions point to a fundamental trade-off between making the terms of the assistance
undesirable enough to deter other firms from seeking government assistance and making the
terms of assistance so punitive that they exacerbate the financial problems of the recipient
firm. It also points to the risk that once a firm has been identified as too big to fail,
government assistance to the firm can become open-ended.
7
P.L. 111-203.
8
The AIGFP derivatives operation was wound down and largely discontinued. If AIG were to
again undertake such an operation, it would fall under the oversight of the Fed.
9
American International Group, Inc., AIG Statement Regarding Receipt of Financial Stability
Oversight Council Notice of Consideration, press release, October 2, 2112, http://www.
aig.com/press-releases_3171_438003.html.
10
See the committee website at http://oversight.house.gov/hearings/?committees=subcommitteeon-economic-growthjob-creation-and-regulatory-affairs.
11
For additional detail, please see the section entitled Who Has Benefited from Assistance to
AIG?, in CRS Report R40438, Federal Government Assistance for American International
Group (AIG), by Baird Webel, pp. 14-15.
12
For more information on the Starr lawsuits see CRS Sidebar WSLG271, AIGs Former CEOs
$20 Billion Illegal Exaction Claim Based on Federal Reserves Illegal Financial
Assistance, by M. Maureen Murphy and CRS Report WSLG366, AIGs Board Will Not
Join Shareholder Suits Against Treasury and Federal Reserve, by M. Maureen Murphy.
13
American International Group, AIG Repurchases Warrants from U.S. Treasury, press
release, March 1, 2013, http://www.aig.com/press-releases_3171_438003.html.
14
The rate varied between 12% and 12.55% before it was reduced after November 2008.
15
See CRS Report RL30354, Monetary Policy and the Federal Reserve: Current Policy and
Conditions, by Marc Labonte for more information on the Federal Reserve.
16
A similar LLC, known simply as Maiden Lane, was created to address the failure of the
investment bank Bear Stearns in March 2008. The name Maiden Lane derives from one
of the streets bordering the Federal Reserve Bank of New York headquarters in Manhattan.
17
AIG also contributed a total of $6 billion to the LLCs and they were structured so that AIGs
contribution would bear initial losses, should losses occur. Because of this contribution,
AIG shared in the gains that eventually occurred as well. AIGs share was one-sixth of the
gains in Maiden Lane II and one-third in Maiden Lane III.

18
103
See CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc
Labonte for more information on CPFF.
19
The CPFF interest rates ranged from 2% to 3% compared with as high as 12.5% on the regular
Fed loan facility.
20
This reporting can be found on the Federal Reserve webpage at http://www.federalreserve.
gov/newsevents/ reform_cpff.htm and the figures presented here are based on this data.
21
Preferred equity is a hybrid form of equity that confers no management rights with respect to
the company and pays some form of dividend. It performs similarly to a loan in economic
terms, but is accounted for as equity, thus improves the capital position of an institution
more than a loan. As equity, preferred shares would be junior to debt, thus holdings in
preferred equity would be riskier than the equivalent amount of a loan.
22
The second large tranche of TARP assistance was used to transfer to the Treasury the AIG
subsidiary equity, which the Fed had previously accepted as partial loan repayment and to
partially repay the outstanding cash balance on the Fed loan.
23
Warrants were issued in 2008 and 2009. According to AIG, The warrant issued in 2008
provided the right to purchase approximately 2.7 million shares of AIG common stock at
$50.00 per share, and the warrant issued in 2009 provided the right to purchase up to 150
shares of AIG common stock at $0.00002 per share. See http://www.aig.com/ pressreleases_3171_438003.html.
24
The IRS issued several notices on this issue, including Notice 2008-100, I.R.B. 2008-44,
October 14, 2008; Notice 2009-14, I.R.B. 2009-7, January 30, 2009; Notice 2009-38, I.R.B.
2009-18, April 13, 2009; and Notice 2010-2, I.R.B. 2010-2, December 14, 2009.
25
The tax code generally does not permit such assumption of tax losses in order to discourage
companies from making acquisitions solely for the purpose of assuming tax losses.
26
American International Group, Inc., 2011 Annual Report (SEC Form 10-K, February 23, 2012,
p. 62
27
See, for example, http://www.treasury.gov/connect/blog/Pages/AIG-wrapup.aspx.
28
2 U.S.C. 661 et.seq; more information available in CRS Report RL30346, Federal Credit
Reform: Implementation of the Changed Budgetary Treatment of Direct Loans and Loan
Guarantees, by James M. Bickley (out of print, but available from the author). This law
requires the present value of the full long-term cost of loans and loan guarantees be
recognized in the federal budget when the loans or loan guarantees are made.
29
These requirements were contained in the Emergency Economic Stabilization Act (P.L. 110343, codified at 12 U.S.C. 5233) and apply to all TARP assistance.
30
CBO, Report on the Troubled Asset Relief ProgramOctober 2012, October 11, 2012, p. 6,
available at http://cbo.gov/sites/default/files/cbofiles/attachments/TARP10-2012_0.pdf.
31
CBO, The Budgetary Impact And Subsidy Costs Of The Federal Reserves Actions During
The Financial Crisis, May 24, 2010, p. 8, available at http://www.cbo.gov/sites/default/files/
cbofiles/ftpdocs/115xx/doc11524/05-24- federalreserve.pdf.
32
See http://www.newyorkfed.org/newsevents/news/markets/2009/an090116.html.
33
The regulated subsidiaries were primarily the state-chartered insurance subsidiaries. Thus, if
AIG had defaulted on the loan, the Fed could have seized the insurance subsidiary stock
held by the holding company, but not the actual assets held by the insurance companies.
34
Federal Reserve, Factors Affecting Reserve Balances, Statistical Release H.4.1, September
18, 2008. See http://www.federalreserve.gov/releases/h41/20080918/; and Report Pursuant
to Section 129 of the Emergency Economic Stabilization Act of 2008: Restructuring of the
Governments Financial Support to the American International Group, Inc. on November
104
Baird Webel
10, 2008, p. 4. See http://www.federalreserve.gov/monetarypolicy/files/ 129aigrestructure.

pdf.
35
Terms detailed by the Federal Reserve in Report Pursuant to Section 129 of the Emergency
Economic Stabilization Act of 2008: Securities Borrowing Facility for American
International Group, Inc., available at http://www.federalreserve.gov/monetarypolicy /
files/129aigsecborrowfacility.pdf.
36
Liam Pleven et al, AIG Bailout Hit by New Cash Woes, Wall Street Journal, October 9,
2008, p. A1.
37
A repo is an agreement for the sale and repurchase of a particular security, with an overnight
repo being a short term example of such a contract.
38
N.Y. Ins. Law, Section 1410.
39
Commercial paper is an unsecured promissory note with relatively short term maturity,
typically 1 to 15 days, sold by corporations to meet immediate funding needs.
40
American International Group, Inc., 2008 Annual Report (SEC Form 10-K), March 2, 2009.
41
American International Group, Inc., AIG Reports Fourth Quarter and Full Year 2009
Results, press release, February 26, 2010, p. 5, available at http://phx.corporateir.net/External.File?item=
UGFyZW50SUQ9MzM3MjR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1.
42
Full details of the preferred shares can be found on the Treasury website at http://ustreas.gov
/press/releases/reports/ 111008aigtermsheet.pdf.
43
The headquarters of the Federal Reserve Bank of New York sits between Maiden Lane and
Liberty Street in downtown New York City.
44
Maiden Lane Transactions on the webpage of the Federal Reserve Bank of New York,
available at http://www.newyorkfed.org/markets/maidenlane.html#maidenlane2.
45
See, for example, A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid, New York
Times, March 2, 2009, p. A1.
46
U.S. Treasury, U.S. Treasury and Federal Reserve Board Announce Participation in AIG
Restructuring Plan, press release, March 2, 2009.
47
The amount was reduced from $30 billion following controversy over $165 million in
employee bonuses paid to AIGFP employees in March 2009.
48
According to The Wall Street Journal, AIGs common stock closed at a price of $39.10 on
September 30, 2010.
49
This equity was previously held by the AIG Credit Trust and was transferred to the Treasury
with the dissolution of the trust.
50
The warrants were trading for approximately $16.05 on January 20, 2011. See http://dealbook.
nytimes.com/2011/01/ 20/about-a-i-g-s-stock-price/.
51
U.S. Treasury, Treasury to Invest in AIG Restructuring under the Emergency Economic
Stabilization Act, hp-1261, November 10, 2008, available at http://www.ustreas.gov
/press/releases/hp1261.htm.
52
Section 7001 of P.L. 111-5.
53
See Executive Compensation on the Treasury Financialstability.gov website available at
http://www.financialstability.gov/about/executivecompensation.html.
INDEX
A
access, 5, 41, 45, 47, 55, 60, 84, 92, 93, 97
accounting, ix, 11, 30, 33, 35, 36, 43, 55,
77, 82, 88, 89, 90, 102
accounting standards, 43
accreditation, 9, 45
ACL, 3, 78
acquisitions, 103
adjustment, 76
advocacy, 39, 51
agencies, 49, 50, 51, 79, 83, 84, 95
aggregation, 14, 65, 70
AIG, v, vii, viii, ix, 1, 3, 4, 11, 21, 31, 33,
40, 41, 45, 51, 55, 73, 75, 78, 81, 82, 83,
84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94,
95, 96, 97, 98, 99, 100, 101, 102, 103,
104
American Recovery and Reinvestment Act,
101
American Recovery and Reinvestment Act
of 2009, 101
amortization, 22, 76
anger, 84
assessment, ix, 3, 44, 45, 82, 89
assets, 3, 7, 10, 11, 13, 17, 19, 28, 31, 32,
35, 36, 37, 39, 40, 41, 42, 50, 53, 56, 62,
63, 64, 71, 72, 73, 74, 75, 76, 77, 79, 80,
85, 86, 88, 91, 93, 96, 98, 99, 103
audit, 5, 56
authority(s), 37, 45, 49, 72, 73, 76, 80, 84

Automobile, 59
B
balance sheet, 74, 77
bank holding companies, 49, 50, 78, 79
banking, viii, 42, 43, 79, 82
bankrupt, vii, 4
bankruptcy, viii, 82, 84, 85
banks, 2, 15, 25, 50, 75, 76, 78, 80, 83, 88,
91
base, 23
benefits, 2, 3, 10, 19, 49, 55, 74, 75, 77, 80,
88, 101
bonds, 7, 11, 13, 17, 42, 74, 76, 80
bonuses, 84, 101, 104
borrowers, 25, 26, 71, 87
businesses, 6
C
capital adequacy, 3, 52
capital gains, ix, 76, 82, 94, 95
capital markets, 6, 41
Capital Purchase Program, 39, 78
cash, ix, 7, 17, 19, 28, 33, 43, 56, 60, 75, 79,
82, 84, 86, 88, 89, 90, 91, 93, 95, 97, 98,
103
cash flow, 28, 56, 60, 93, 97
106
Index
challenges, 15, 18, 27, 28, 95

City, 104
classes, 42
clients, 77
collateral, 28, 33, 41, 74, 83, 91, 95
Collateralized Debt Obligations, 94
colleges, 45, 47
commercial, 2, 3, 6, 18, 24, 40, 41, 52, 73,
76, 80, 83, 92
communication, 31, 45
community, 41, 78
compensation, ix, 80, 82, 85, 86, 99, 100,
101
competition, 21
complexity, 44
composition, 14
conference, 45
confidentiality, 46
Congress, ix, 48, 75, 81, 82, 85, 101
Congressional Budget Office, ix, 82, 89
consensus, 46
conservation, 53
consulting, 26
consumer advocates, 46
consumer protection, 48, 50
consumers, 6, 23, 24, 29, 52, 73, 74
contingency, 27, 71, 78, 80
coordination, 47, 48, 49
corporate governance, 86
cost, ix, 82, 89, 103
covering, 31, 51
credit market, 41
credit rating, 16, 28, 40, 51, 55, 83, 95
creditworthiness, 27
crises, 5, 49
currency, 73
customers, 28
D
data analysis, 46, 52
data collection, 5
database, 5, 52, 56
deficit, 72, 80
depository institutions, 74, 83
depth, 32
derivatives, viii, 17, 18, 82, 102
directors, 49, 76, 95
disbursement, 87, 89
disclosure, 33, 45
distribution, 94
District of Columbia, 9, 28, 70
diversity, 51
divestiture, 95
dividend payments, ix, 82
Dodd-Frank Wall Street Reform and
Consumer Protection Act, 9, 51, 73
double counting, 16, 53, 79
draft, 50
drawing, 85
E
earnings, 75, 101
economic cycle, 80
economic downturn, vii, viii, 1, 5, 51, 56
EESA, 3, 73, 92, 93, 100, 101
election, 26
emergency, 73
Emergency Economic Stabilization Act, 3,
73, 103, 104
employee compensation, 84
employees, ix, 82, 84, 101, 104
employment, 28, 71, 101
enforcement, 45, 49
environment, 3, 30
equity(s), viii, 2, 11, 17, 25, 42, 52, 53, 54,
56, 60, 62, 63, 64, 72, 75, 81, 85, 86, 87,
88, 89, 92, 93, 95, 96, 97, 98, 99, 100,
103, 104
European market, 32
evidence, 6, 56
examinations, 8, 39, 45
exchange rate, 73
execution, 6
expertise, 49
exposure, 15, 18, 25, 31, 32, 33, 71
Index
F
families, 6, 75
Fannie Mae, viii, 17, 72, 75, 80, 82
FDIC, viii, 82, 83
federal assistance, 4, 40, 41, 85
federal funds, 85
federal government, vii, 4, 9, 102
Federal Housing Finance Agency (FHFA),
3, 80
Federal Reserve, vii, viii, ix, 4, 9, 11, 40,
41, 49, 50, 55, 73, 78, 79, 81, 82, 83, 84,
85, 86, 87, 89, 90, 91, 92, 93, 96, 98, 99,
102, 103, 104
Federal Reserve Board, 90, 104
FHFA, 3
financial condition, 3, 37, 45, 53, 72, 80
financial crisis, vii, viii, 1, 2, 4, 5, 10, 17,
29, 30, 35, 39, 40, 41, 43, 45, 47, 50, 51,
52, 53, 54, 70, 71, 77, 81, 87, 88, 89
financial data, viii, 2, 5, 52, 54, 63, 64, 78,
80
financial distress, 32
financial firms, 50
financial institutions, viii, 39, 41, 48, 50, 74,
78, 82, 83, 84, 88, 101
financial markets, viii, 30, 33, 82, 84, 95
financial performance, 14, 56, 65
financial reports, 5, 52
financial stability, ix, 48, 50, 74, 82
financial system, 9, 48, 49, 50, 80, 102
flexibility, 47
formula, 10
fragility, viii, 82
Freddie Mac, viii, 17, 72, 75, 80, 82
funding, viii, 40, 45, 81, 84, 100, 101, 104
funds, 10, 28, 39, 42, 60, 74, 85, 89, 91, 93,
94, 99, 101
G
GAO, vii, viii, 1, 2, 5, 7, 8, 12, 13, 14, 15,
16, 18, 19, 20, 21, 22, 23, 24, 26, 27, 36,
107
38, 57, 58, 59, 60, 61, 63, 64, 65, 66, 68,
69, 71, 74, 75, 79
Georgia, 79
governance, 43, 46
government assistance, viii, 81, 85, 86, 88,
89, 102
government securities, 41
governments, 73
grades, 42
gross investment, 17, 42
growth, 41
guidance, 5, 9, 34, 44, 45, 55, 77
Gulf Coast, 21
H
health, 52, 72, 73, 80, 88
health insurance, 73
hedging, 25
holding company, viii, 3, 11, 40, 43, 45, 46,
47, 51, 53, 78, 81, 83, 84, 91, 103
homeowners, 24, 62, 83
House, 4, 84
House of Representatives, 4
housing, 26, 32, 41, 42
Housing and Urban Development, 79
hurricanes, 21
hybrid, 103
I
impairments, 11, 13, 37, 74
improvements, 12, 31, 46
income, 2, 6, 11, 13, 15, 17, 22, 28, 35, 36,
42, 55, 71, 73, 74, 75, 76, 77, 79, 91
income tax, 77
individuals, 6, 73
inflation, 2
information sharing, 30, 31, 49
infrastructure, 73
injections, 39
institutions, viii, 29, 39, 40, 48, 50, 74, 82,
84
108
Index
insurance industry, vii, viii, 1, 2, 4, 5, 9, 10,

11, 14, 15, 17, 21, 24, 25, 29, 30, 32, 33,
34, 35, 41, 44, 47, 48, 51, 52, 54, 56, 64,
65, 73, 74
insurance policy, 6, 76
interest rates, 18, 20, 25, 29, 52, 87, 103
internal controls, 5, 55
Internal Revenue Service, 88
intervention, ix, 10, 82, 90, 93
investment(s), 2, 5, 6, 7, 10, 11, 12, 15, 17,
19, 22, 23, 25, 29, 30, 32, 33, 34, 37, 39,
41, 42, 52, 55, 72, 73, 74, 75, 76, 77, 91,
102
investment bank, 102
investors, 6, 16, 25, 42, 74, 75
Iowa, 51
issues, vii, 3, 4, 9, 15, 17, 21, 31, 32, 33, 45,
48
J
jurisdiction, 47
L
laws, 5, 8, 9, 40, 45, 46, 51, 56, 76
laws and regulations, 5, 8, 9, 51
learning, 78
legality, 85
legislation, ix, 9, 31, 78, 82, 84
lending, vii, viii, 3, 4, 5, 31, 33, 55, 81, 82,
83, 84, 85, 86, 91, 94
liability insurance, 6
lifetime, 74
liquidate, 62
liquidity, vii, viii, 2, 4, 6, 10, 15, 21, 28, 31,
33, 39, 40, 41, 42, 44, 55, 78, 80, 81, 83,
87, 91, 92, 95
litigation, 76
loan guarantees, 89, 103
loans, viii, ix, 17, 19, 28, 40, 41, 70, 71, 76,
81, 82, 85, 86, 87, 88, 89, 90, 93, 94, 95,
96, 98, 103
Louisiana, 79
M
magnitude, 28
majority, 11, 19, 56, 89, 97
management, 77, 103
manipulation, 101
market access, 6
market capitalization, 14, 65, 70
market downturn, viii, 82
market share, 21, 51, 83
Maryland, 51, 79
median, 63, 64
medical, 80
methodology, 3, 5, 14, 16, 30, 34, 65, 77, 79
mission, 33, 75
modernization, 44
modifications, 35
mortgage-backed securities, 4, 11, 80, 94
N
negative effects, vii, viii, 1, 5, 30, 51, 56, 88
net investment, 13, 17, 22, 42, 55, 75, 76, 79
New York Stock Exchange, 4, 12, 14, 54,
65, 66, 68, 69, 70
O
Office of Thrift Supervision, viii, 79, 81, 83
officials, 3, 5, 9, 17, 28, 30, 31, 32, 33, 34,
35, 37, 43, 44, 45, 46, 47, 51, 52, 54, 56,
76, 100
OMB, 89
operations, vii, 4, 9, 22, 31, 45, 46, 60, 83,
84, 91
oversight, vii, ix, 1, 2, 3, 4, 30, 32, 43, 44,
47, 48, 51, 56, 82, 83, 84, 102
ownership, viii, 75, 81, 87, 91
P
Pacific, 58, 62
participants, viii, 2, 41, 42, 44, 46, 51, 101
Index
permission, 35, 36
permit, 103
playing, 36
policy, ix, 9, 73, 74, 75, 82, 88
policyholders, vii, 1, 2, 5, 10, 16, 19, 25, 28,
29, 30, 39, 42, 51, 52, 55, 72, 73, 74, 75,
78, 79, 80
pools, 28, 70, 74, 76
population, 53
portfolio, 71, 94
preparation, 5
present value, 89, 103
price competition, 29
principles, 36, 89
profit, 6, 75, 76
profitability, 22, 52
protection, 25, 28, 50, 70, 73, 74, 76
public finance, 73
109
reserves, 6, 25, 27, 31, 71, 78

Residential, 94
resolution, 9
resources, 44
response, 2, 5, 9, 28, 55, 89, 95
restrictions, 3, 30, 42, 55, 73, 84, 85, 86,
100, 101
restructuring, 91, 93, 94, 97, 100
retirement, 29, 73
revenue, 6, 17, 18
rights, 45, 75, 103
risk(s), 3, 4, 7, 9, 10, 18, 25, 26, 30, 31, 33,
34, 39, 43, 44, 45, 46, 47, 49, 50, 71, 73,
74, 76, 77, 78, 91, 102
risk management, 31, 33, 43, 44, 77
risk profile, 9
rules, 29, 31, 35, 55, 77
S
R
rating agencies, 51, 55
real estate, 25, 26, 41, 52
reality, 39
recession, 24
recognition, 101
recommendations, 49
recovery, 34, 101
reform(s), 9, 47, 48, 51, 73, 79, 85, 89, 102,
103
regulations, 9, 32, 42, 47, 71
regulatory agencies, 46
regulatory bodies, 45
regulatory changes, 47, 48
regulatory framework, 50
regulatory oversight, 78
rehabilitation, 28, 53, 70, 72, 73, 79, 80
reinsurance, 43, 75
reliability, 5, 54, 79
relief, 30, 37
remittances, 86
repo, 91, 92, 104
requirements, 3, 30, 33, 34, 37, 42, 43, 46,
47, 50, 73, 78, 89, 101, 103
researchers, 77
savings, 75, 78
scope, 5, 76
security(s), vii, viii, 3, 4, 5, 6, 7, 15, 17, 18,
25, 28, 30, 31, 33, 34, 40, 41, 42, 49, 55,
73, 74, 75, 76, 77, 78, 82, 83, 85, 86, 87,
91, 94, 104
securities firms, 76
sellers, 76
services, 9, 15, 26, 31, 49, 77, 101
settlements, 76
severe stress, 44
shareholders, 100
shortfall, 88
spillover effects, 84
stability, 49, 50, 80
stakeholders, 36, 52
state(s), viii, 2, 3, 5, 8, 9, 10, 21, 28, 30, 31,
32, 33, 34, 35, 36, 37, 42, 44, 45, 46, 47,
48, 49, 51, 54, 55, 70, 71, 72, 73, 74, 75,
76, 77, 78, 79, 80, 81, 82, 83, 84, 91, 103
state laws, 74
state legislatures, 46
state regulators, 3, 30, 31, 32, 34, 35, 36, 42,
44, 46, 47, 54, 56, 83
statutes, 9
110
Index
stock, 11, 12, 14, 15, 25, 54, 56, 60, 64, 65,
70, 75, 83, 88, 100, 101, 103, 104
stock exchange, 14, 54, 64, 65
stock price, 12, 15, 54, 56, 64, 70, 83
stockholders, 60, 75, 100
stress, 39
structure, 45, 47, 49, 53, 84, 93, 97
subsidy, 89
supervision, 43, 46, 48, 49, 51, 74, 79
supervisor(s), 9, 74, 78
surplus, 6, 11, 13, 15, 71, 72, 73, 75, 77, 78,
79, 80, 83
systemic risk, 48, 102
T
taxes, 76
taxpayers, 91
technical comments, 50
techniques, 44
technology, 78
territory, 40
threats, 49
thrifts, viii, 75, 80, 81, 83
time periods, 70
trade, 14, 54, 65, 70, 102
trade-off, 102
transactions, ix, 55, 77, 82, 85, 97
transparency, 2, 3, 33, 34, 45, 85
Treasury, viii, ix, 11, 41, 48, 49, 73, 81, 82,
84, 85, 86, 87, 89, 90, 93, 95, 97, 98, 99,
100, 101, 102, 103, 104
tropical storms, 21
turbulence, 95
U
U.S. Department of the Treasury, 39
U.S. economy, 51
U.S. Treasury, viii, 11, 81, 82, 86, 90, 93,
96, 98, 99, 102, 104
underwriting, 2, 10, 11, 13, 18, 19, 20, 22,
26, 28, 29, 30, 41, 44, 50, 52, 55, 75, 76,
80
unions, 50
United, v, 1, 40, 48, 83, 84
United States, v, 1, 40, 48, 83, 84
updating, 44
V
valuation, 35
vehicles, 24, 76
volatility, 33
voting, 49, 75
W
Washington, 74, 75, 79
websites, 56
withdrawal, 19, 74, 87
workers, 80
working groups, 31

(Business Economics in A Rapidly-Changing World - Global Recession - Causes, Impacts and Remedies) Johnson B. Powell-U.S. Insurance Industries After The 2007-2009 Financial Crisis-Nova Science Pub Inc

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(Business Economics in A Rapidly-Changing World - Global Recession - Causes, Impacts and Remedies) Johnson B. Powell-U.S. Insurance Industries After The 2007-2009 Financial Crisis-Nova Science Pub Inc

Uploaded by

Copyright:

Available Formats

BUSINESS ECONOMICS IN A RAPIDLY-CHANGING WORLD

U.S. INSURANCE INDUSTRIES

Additional E-books in this series can be found on Novas website

GLOBAL RECESSION - CAUSES,

Additional E-books in this series can be found on Novas website

BUSINESS ECONOMICS IN A RAPIDLY-CHANGING WORLD

U.S. INSURANCE INDUSTRIES

Copyright 2013 by Nova Science Publishers, Inc.

NOTICE TO THE READER

Library of Congress Cataloging-in-Publication Data

Published by Nova Science Publishers, Inc. New York

Insurance Markets: Impacts of and Regulatory

The AIG rescue produced unexpected financial returns for the

In: U.S. Insurance Industries

INSURANCE MARKETS: IMPACTS OF AND

This is an edited, reformatted and augmented version of United States Government

United States Government Accountability Office

To do this work, GAO analyzed insurance industry financial data from

WHAT GAO FOUND

Source: GAO analysis of statutory financial statement data in SNL Financial.

Actions by state and federal regulators and the National Association of

issues highlighted by American International Group, Inc.s securities lending

United States Government Accountability Office

June 27, 2013

United States Government Accountability Office

appropriate evidence to provide a reasonable basis for our findings and

companies invest more heavily in longer-term assets, such as high-grade

Source: GAO analysis of statutory financial statement data in SNL Financial.

United States Government Accountability Office

Source: GAO analysis of statutory financial statement data in SNL Financial.

generally carry out market conduct examinations in response to specific

Risk-Based Capital Requirements and Guaranty Funds

United States Government Accountability Office

regulatory intervention when an insurer is financially troubled. RBC limits the

EFFECTS OF THE CRISIS WERE LIMITED LARGELY TO

policyholders received partial claims or faced decreased availability of

The Financial Crisis Had a Limited Effect on Most Insurers

United States Government Accountability Office

Source: GAO analysis of statutory financial statement data in SNL Financial.

Source: GAO analysis of statutory financial statement data in SNL Financial.

United States Government Accountability Office

losses. Capital infusions mitigated the decline in capital, as illustrated in figure

Source: GAO analysis of statutory financial statement data in SNL Financial.

Aggregated stock prices of publicly traded P/C companies declined less

United States Government Accountability Office

important for insurers to meet minimum capital standards to maintain their

The Insurance Industry Experienced Relatively Few Receiverships and

Source: GAO analysis of NAIC data.

Specifically, throughout the 10-year review period, life insurance

liquidations averaged about 15 and 13 per year, respectively; in 2009, there

Effects on Insurers Investment Portfolios, Underwriting Performance,

United States Government Accountability Office

Source: GAO analysis of statutory financial statement data in SNL Financial.

Table 2. Life and Property/Casualty Insurers Investment Income (Loss)

2002 2003 2004 2005 2006 2007

2008 2009 2010 2011

Source: GAO analysis of statutory financial statement data in SNL Financial.

United States Government Accountability Office

Source: GAO analysis of statutory financial statement data in SNL Financial.

From 2007 to 2008, the P/C industrys underwriting losses increased as a

guaranty insurers combined ratios were particularly high and contributed to

Source: GAO analysis of statutory financial statement data in SNL Financial.

United States Government Accountability Office