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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

June 2013: 

Insurance Markets: 

Impacts of and Regulatory Response to the 2007-2009 Financial Crisis: 

GAO-13-583: 

GAO Highlights: 

Highlights of GAO-13-583, a report to congressional requesters. 

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. 

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 policyholders—-banks and other commercial entities—-received 
partial claims or faced decreased availability of coverage. 

Figure: Life and Property Casualty Insurers’ Net Income and Capital, 
2002-2011: 

[Refer to PDF for image: combined vertical bar and line graph] 

Year: 2002; 
Net income life: $3.9 billion; 
Net income P/C: $8.9 billion; 
Capital PC: $303.0 billion; 
Capital Life: $199.4 billion. 

Year: 2003; 
Net income life: $25.9 billion; 
Net income P/C: $30.1 billion; 
Capital PC: $364.5 billion; 
Capital Life: $222.2 billion. 

Year: 2004; 
Net income life: $32.4 billion; 
Net income P/C: $38.7 billion; 
Capital PC: $407.6 billion; 
Capital Life: $236.5 billion. 

Year: 2005; 
Net income life: $36.8 billion; 
Net income P/C: $46.7 billion; 
Capital PC: $438.0 billion; 
Capital Life: $244.4 billion. 

Year: 2006; 
Net income life: $37.2 billion; 
Net income P/C: $66.4 billion; 
Capital PC: $502.6 billion; 
Capital Life: $254.3 billion. 

Year: 2007; 
Net income life: $31.9 billion; 
Net income P/C: $63.6 billion; 
Capital PC: $531.6 billion; 
Capital Life: $268.1 billion. 

Year: 2008; 
Net income life: -$52.2 billion; 
Net income P/C: $3.7 billion; 
Capital PC: $466.6 billion; 
Capital Life: $253.0 billion. 

Year: 2009; 
Net income life: $21.4 billion; 
Net income P/C: $32.1 billion; 
Capital PC: $520.8 billion; 
Capital Life: $291.9 billion. 

Year: 2010; 
Net income life: $27.9 billion; 
Net income P/C: $37.2 billion; 
Capital PC: $563.8 billion; 
Capital Life: $307.0 billion. 

Year: 2011; 
Net income life: $14.2 billion; 
Net income P/C: $20.1 billion; 
Capital PC: $560.2 billion; 
Capital Life: $310.o billion. 

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

Note: Data are shown in nominal dollars (i.e., unadjusted for 
inflation). 

[End of figure] 

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 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. 

View [hyperlink, http://www.gao.gov/products/GAO-13-583]. For more 
information, contact Alicia Puente Cackley (202) 512-8678 or 
cackleya@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Effects of the Crisis Were Limited Largely to Certain Products and 
Lines of Insurance: 

Actions by State Regulators, Federal Programs, and Insurance Business 
Practices Helped Mitigate Some Effects of the Crisis: 

Regulators Have Continued Efforts to Strengthen the Regulatory System 
since the Crisis: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Additional Data on Life and P/C Industry Financial 
Performance, 2002-2011: 

Appendix III: Profiles of Distressed Insurers: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Number of Receiverships and Liquidations for Life and 
Property/Casualty Companies, 2002-2011: 

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: 

Table 3: Variable Annuity Sales and GLB Election Rates, 2002-2012: 

Table 4: Financial and Mortgage Guaranty Insurers' Average Loss and 
Combined Ratios, 2002-2011: 

Table 5: Net Effects of All Prescribed and Permitted Practices on Life 
and Property/Casualty Insurers' Net Income and Capital, 2006-2011: 

Table 6: Life Insurers with $1 Billion or More in Realized Losses, 
2008 and 2009: 

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

Table 8: Property/Casualty Insurers with $1 Billion or More in 
Realized Losses, 2008 and 2009: 

Table 9: Property/Casualty Insurers with $1 Billion or More in 
Unrealized Losses, 2008 and 2009: 

Table 10: Average Assets and Net Equity (Assets Minus Liabilities) of 
Life Insurance Companies in Liquidation, 2002-2011: 

Table 11: Average Assets and Net Equity (Assets Minus Liabilities) of 
Property/Casualty Companies in Liquidation, 2002-2011: 

Table 12: Distressed Market Default Rates and Percentage of Insurer's 
Total Underwritten Risk, 2007-2011: 

Figures: 

Figure 1: Premiums Written for Selected Lines of Life Insurance 
Business as a Percentage of Total Premiums Written, 2002-2011: 

Figure 2: Premiums Written for Selected Lines of Property/Casualty 
Insurance Business, as a Percentage of Total Premiums Written, 2002-
2011: 

Figure 3: Life and Property/Casualty Insurers' Net Income and Capital, 
2002-2011: 

Figure 4: Major Activities Affecting Life Insurers' Capital, 2002-2011: 

Figure 5: Month-End Closing Stock Levels for Publicly Traded Life and 
Property/Casualty Companies, December 2004-December 2011: 

Figure 6: Major Activities Affecting Capital of Property/Casualty 
Insurers, 2002-2011: 

Figure 7: Life and Property/Casualty Insurers' Net Investment Income, 
2002-2011: 

Figure 8: Life Insurers' Benefits and Losses Incurred Compared to Net 
Premiums Written, 2002-2011: 

Figure 9: Average Property/Casualty Industry Loss Ratios and Combined 
Ratios, 2002-2011: 

Figure 10: Life Insurers' Net Investment and Underwriting Gains/ 
(Losses), 2002-2011: 

Figure 11: Property/Casualty Insurers' Net Investment and Underwriting 
Gains/(Losses), 2002-2011: 

Figure 12: Net Premiums Written for Group and Individual Life and 
Annuities Products, 2002-2011: 

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: 

Figure 15: Life and Property/Casualty Insurers' Net Cash Flows from 
Financing and Miscellaneous Sources, 2002-2011: 

Figure 16: Net Premiums Written for Selected Property/Casualty Lines 
of Business, 2002-2011: 

Figure 17: Month-End Closing Stock Levels for Publicly Traded Life and 
Property/Casualty Companies and NYSE Companies, December 2004-December 
2011: 

Figure 18: Key Events in the Financial Crisis and Stock Indices for 
Publicly Traded Life and Property/Casualty Insurers for 2007: 

Figure 19: Key Events in the Financial Crisis and Stock Indices for 
Publicly Traded Life and Property/Casualty Insurers for 2008: 

Figure 20: Key Events in the Financial Crisis and Stock Indices for 
Publicly Traded Life and Property/Casualty Insurers for 2009: 

Abbreviations: 

ABS: asset-backed securities: 

ACL: authorized control level: 

AIG: American International Group, Inc. 

AMBUL: A.M. Best's U.S. Life Insurance Index: 

AMBUPC: A.M. Best's U.S. Property Casualty Insurance Index: 

CDO: collateralized debt obligations: 

CFPB: Bureau of Consumer Financial Protection: 

CMBS: commercial mortgage-backed security: 

DTA: deferred tax asset: 

EESA: Emergency Economic Stabilization Act of 2008: 

FAWG: Financial Analysis Working Group: 

FIO: Federal Insurance Office: 

FHFA: Federal Housing Finance Agency: 

GLB: guaranteed living benefits: 

IAIS: International Association of Insurance Supervisors: 

MBS: mortgage-backed securities: 

NAIC: National Association of Insurance Commissioners: 

NYA: NYSE Composite Index: 

NYSE: New York Stock Exchange: 

ORSA: Own Risk and Solvency Assessment: 

P/C: property and casualty: 

RBC: risk-based capital: 

RMBS: residential mortgage-backed security: 

SIFI: systemically important financial institution: 

SMI: Solvency Modernization Initiative: 

SPV: special purpose vehicle: 

SSAP: Statement of Statutory Accounting Principles: 

TARP: Troubled Asset Relief Program: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

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.[Footnote 1] Some other insurance companies also took advantage 
of federal assistance, raising concerns about 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.[Footnote 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. 
Best's 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, NAIC's 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.[Footnote 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.[Footnote 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.[Footnote 5] In the P/C industry, financial and 
mortgage guaranty insurance represented less than 2 percent of 
premiums written on average during the period.[Footnote 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. 

Figure 1: Premiums Written for Selected Lines of Life Insurance 
Business as a Percentage of Total Premiums Written, 2002-2011: 

[Refer to PDF for image: stacked vertical bar graph] 

Fiscal year: 2002; 
Individual Annuities: 34%; 
Individual Life: 22%; 
Group Annuities: 20%; 
Group Life: 5%; 
All Other Lines: 19%. 

Fiscal year: 2003; 
Individual Annuities: 34%; 
Individual Life: 22%; 
Group Annuities: 20%; 
Group Life: 5%; 
All Other Lines: 19%. 

Fiscal year: 2004; 
Individual Annuities: 34%; 
Individual Life: 22%; 
Group Annuities: 19%; 
Group Life: 5%; 
All Other Lines: 20%. 

Fiscal year: 2005; 
Individual Annuities: 32%; 
Individual Life: 22%; 
Group Annuities: 20%; 
Group Life: 5%; 
All Other Lines: 21%. 

Fiscal year: 2006; 
Individual Annuities: 32%; 
Individual Life: 21%; 
Group Annuities: 19%; 
Group Life: 6%; 
All Other Lines: 22%. 

Fiscal year: 2007; 
Individual Annuities: 31%; 
Individual Life: 22%; 
Group Annuities: 19%; 
Group Life: 6%; 
All Other Lines: 23%. 

Fiscal year: 2008; 
Individual Annuities: 33%; 
Individual Life: 20%; 
Group Annuities: 19%; 
Group Life: 5%; 
All Other Lines: 24%. 

Fiscal year: 2009; 
Individual Annuities: 31%; 
Individual Life: 19%; 
Group Annuities: 17%; 
Group Life: 5%; 
All Other Lines: 27%. 

Fiscal year: 2010; 
Individual Annuities: 30%; 
Individual Life: 20%; 
Group Annuities: 17%; 
Group Life: 5%; 
All Other Lines: 28%. 

Fiscal year: 2011; 
Individual Annuities: 31%; 
Individual Life: 19%; 
Group Annuities: 18%; 
Group Life: 5%; 
All Other Lines: 26%. 

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

Note: Data for some years do not add up to 100 percent due to rounding. 

[End of figure] 

Figure 2: Premiums Written for Selected Lines of Property/Casualty 
Insurance Business, as a Percentage of Total Premiums Written, 2002-
2011: 

[Refer to PDF for image: stacked vertical bar graph] 

Calendar year: 2002; 
Private passenger auto liability: 21%; 
Auto physical damage: 17%; 
Home owners multiple peril: 11%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 6%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 32%. 

Calendar year: 2003; 
Private passenger auto liability: 21%; 
Auto physical damage: 16%; 
Home owners multiple peril: 11%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 7%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 32%. 

Calendar year: 2004; 
Private passenger auto liability: 21%; 
Auto physical damage: 16%; 
Home owners multiple peril: 11%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 7%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 32%. 

Calendar year: 2005; 
Private passenger auto liability: 20%; 
Auto physical damage: 16%; 
Home owners multiple peril: 12%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 7%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 32%. 

Calendar year: 2006; 
Private passenger auto liability: 20%; 
Auto physical damage: 15%; 
Home owners multiple peril: 12%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 7%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 33%. 

Calendar year: 2007; 
Private passenger auto liability: 19%; 
Auto physical damage: 15%; 
Home owners multiple peril: 13%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 7%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 33%. 

Calendar year: 2008; 
Private passenger auto liability: 20%; 
Auto physical damage: 15%; 
Home owners multiple peril: 13%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 7%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 1%; 
All other lines: 32%. 

Calendar year: 2009; 
Private passenger auto liability: 21%; 
Auto physical damage: 15%; 
Home owners multiple peril: 14%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 6%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 0; 
All other lines: 32%. 

Calendar year: 2010; 
Private passenger auto liability: 21%; 
Auto physical damage: 15%; 
Home owners multiple peril: 15%; 
Commercial multiple peril: 7%; 
Other liability (claims-made): 4%; 
Other liability (occurrence): 6%; 
Financial Guaranty: 1%; 
Mortgage Guaranty: 0; 
All other lines: 31%. 

Calendar year: 2011; 
Private passenger auto liability: 21%; 
Auto physical damage: 14%; 
Home owners multiple peril: 15%; 
Other liability (claims-made): 7%; 
Other liability (occurrence): 4%; 
Financial Guaranty: 6%; 
Mortgage Guaranty: 1%; 
All other lines: 33%. 

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

Note: Data for some years do not add up to 100 percent due to rounding. 

[End of figure] 

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 companies invest more heavily in longer-term assets, such as 
high-grade corporate bonds with 30-year maturities. P/C insurers, 
however, have shorter-term 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. 

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 
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.[Footnote 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. NAIC's 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 
NAIC's 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 
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.[Footnote 
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 
insurers--particularly 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 insurers--a small subset of the P/C industry.[Footnote 9] 
Finally, the crisis had a generally minor effect on policyholders, but 
some mortgage and financial guaranty 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.[Footnote 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.[Footnote 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.[Footnote 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 again--to $14.2 billion--in 2011, reflecting 
increased underwriting losses and expenses. 

Figure 3: Life and Property/Casualty Insurers' Net Income and Capital, 
2002-2011: 

[Refer to PDF for image: combined vertical bar and line graph] 

Year: 2002; 
Net income life: $3.9 billion; 
Net income P/C: $8.9 billion; 
Capital PC: $303.0 billion; 
Capital Life: $199.4 billion. 

Year: 2003; 
Net income life: $25.9 billion; 
Net income P/C: $30.1 billion; 
Capital PC: $364.5 billion; 
Capital Life: $222.2 billion. 

Year: 2004; 
Net income life: $32.4 billion; 
Net income P/C: $38.7 billion; 
Capital PC: $407.6 billion; 
Capital Life: $236.5 billion. 

Year: 2005; 
Net income life: $36.8 billion; 
Net income P/C: $46.7 billion; 
Capital PC: $438.0 billion; 
Capital Life: $244.4 billion. 

Year: 2006; 
Net income life: $37.2 billion; 
Net income P/C: $66.4 billion; 
Capital PC: $502.6 billion; 
Capital Life: $254.3 billion. 

Year: 2007; 
Net income life: $31.9 billion; 
Net income P/C: $63.6 billion; 
Capital PC: $531.6 billion; 
Capital Life: $268.1 billion. 

Year: 2008; 
Net income life: -$52.2 billion; 
Net income P/C: $3.7 billion; 
Capital PC: $466.6 billion; 
Capital Life: $253.0 billion. 

Year: 2009; 
Net income life: $21.4 billion; 
Net income P/C: $32.1 billion; 
Capital PC: $520.8 billion; 
Capital Life: $291.9 billion. 

Year: 2010; 
Net income life: $27.9 billion; 
Net income P/C: $37.2 billion; 
Capital PC: $563.8 billion; 
Capital Life: $307.0 billion. 

Year: 2011; 
Net income life: $14.2 billion; 
Net income P/C: $20.1 billion; 
Capital PC: $560.2 billion; 
Capital Life: $310.o billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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. 
[Footnote 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 appendix 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).[Footnote 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 figure 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 Treasury's purchase of about 
$40 billion in equity.[Footnote 15] Some other large life insurance 
companies--through their holding companies--were 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. 

Figure 4: Major Activities Affecting Life Insurers' Capital, 2002-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Dividends to Stockholders: -$13.2 billion; 
Paid in Capital or Surplus: $13.3 billion; 
Net Income/(Loss): $3.9 billion. 

Calendar year: 2003; 
Dividends to Stockholders: -$11.8 billion; 
Paid in Capital or Surplus: $7.8 billion; 
Net Income/(Loss): $25.9 billion. 

Calendar year: 2004; 
Dividends to Stockholders: -$15.2 billion; 
Paid in Capital or Surplus: $5.9 billion; 
Net Income/(Loss): $32.4 billion. 

Calendar year: 2005; 
Dividends to Stockholders: -$24.4 billion; 
Paid in Capital or Surplus: -$0.9 billion; 
Net Income/(Loss): $36.8 billion. 

Calendar year: 2006; 
Dividends to Stockholders: -$24.9 billion; 
Paid in Capital or Surplus: $3.0 billion; 
Net Income/(Loss): $37.2 billion. 

Calendar year: 2007; 
Dividends to Stockholders: -$23.7 billion; 
Paid in Capital or Surplus: $4.9 billion; 
Net Income/(Loss): $31.9 billion. 

Calendar year: 2008; 
Dividends to Stockholders: -$20.9 billion; 
Paid in Capital or Surplus: $42.3 billion; 
Net Income/(Loss): -$52.2 billion. 

Calendar year: 2009; 
Dividends to Stockholders: -$8.3 billion; 
Paid in Capital or Surplus: $16.9 billion; 
Net Income/(Loss): $21.4 billion. 

Calendar year: 2010; 
Dividends to Stockholders: -$21.8 billion; 
Paid in Capital or Surplus: -$19.9 billion; 
Net Income/(Loss): $27.9 billion. 

Calendar year: 2011; 
Dividends to Stockholders: -$23.0 billion; 
Paid in Capital or Surplus: $1.1 billion; 
Net Income/(Loss): $14.2 billion. 

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

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. 

[End of figure] 

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. 

Figure 5: Month-End Closing Stock Levels for Publicly Traded Life and 
Property/Casualty Companies, December 2004-December 2011: 

[Refer to PDF for image: multiple line graph] 

2004: 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,000; 
A.M. Best U.S. Life Index: 1,000; 
NYSE Composite Index: 7,250.06. 

2005: 

31-January; 
A.M. Best U.S. Property Casualty Index: 994.9; 
A.M. Best U.S. Life Index: 970.89; 
NYSE Composite Index: 7,089.83. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,015.1; 
A.M. Best U.S. Life Index: 994.06; 
NYSE Composite Index: 7,321.23. 

31-March; 
A.M. Best U.S. Property Casualty Index: 986.93; 
A.M. Best U.S. Life Index: 997.35; 
NYSE Composite Index: 7,167.53. 

29-April; 
A.M. Best U.S. Property Casualty Index: 969.89; 
A.M. Best U.S. Life Index: 977.8; 
NYSE Composite Index: 7,008.32. 

31-May; 
A.M. Best U.S. Property Casualty Index: 999.15; 
A.M. Best U.S. Life Index: 1,022.35; 
NYSE Composite Index: 7,134.33. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,012.26; 
A.M. Best U.S. Life Index: 1,061.07; 
NYSE Composite Index: 7,217.78. 

29-July; 
A.M. Best U.S. Property Casualty Index: 1,038.68; 
A.M. Best U.S. Life Index: 1,109.81; 
NYSE Composite Index: 7,476.66. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,016.81; 
A.M. Best U.S. Life Index: 1,111.26; 
NYSE Composite Index: 7,496.09. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,036.53; 
A.M. Best U.S. Life Index: 1,145.88; 
NYSE Composite Index: 7,632.98. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,060.92; 
A.M. Best U.S. Life Index: 1,162.97; 
NYSE Composite Index: 7,433.12. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,108.08; 
A.M. Best U.S. Life Index: 1,239.5; 
NYSE Composite Index: 7,645.28. 

30-December; 
A.M. Best U.S. Property Casualty Index: 1,089.22; 
A.M. Best U.S. Life Index: 1,222.24; 
NYSE Composite Index: 7,753.95. 

2006: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,089.64; 
A.M. Best U.S. Life Index: 1,251.58; 
NYSE Composite Index: 8,106.55. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,075.56; 
A.M. Best U.S. Life Index: 1,287.5; 
NYSE Composite Index: 8,060.61. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,072.83; 
A.M. Best U.S. Life Index: 1,274.68; 
NYSE Composite Index: 8,233.2. 

28-April; 
A.M. Best U.S. Property Casualty Index: 1,089.27; 
A.M. Best U.S. Life Index: 1,315.23; 
NYSE Composite Index: 8,471.43. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,088.41; 
A.M. Best U.S. Life Index: 1,301.17; 
NYSE Composite Index: 8,189.11. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,080.06; 
A.M. Best U.S. Life Index: 1,293.38; 
NYSE Composite Index: 8,169.07. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,083.83; 
A.M. Best U.S. Life Index: 1,283.19; 
NYSE Composite Index: 8,242.12. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,109.75; 
A.M. Best U.S. Life Index: 1,306.73; 
NYSE Composite Index: 8,388.56. 

29-September; 
A.M. Best U.S. Property Casualty Index: 1,136.08; 
A.M. Best U.S. Life Index: 1,322.64; 
NYSE Composite Index: 8,469.65. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,196.28; 
A.M. Best U.S. Life Index: 1,340.57; 
NYSE Composite Index: 8,774.98. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,210.38; 
A.M. Best U.S. Life Index: 1,371.47; 
NYSE Composite Index: 8,969. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,244.28; 
A.M. Best U.S. Life Index: 1,401.47; 
NYSE Composite Index: 9,139.02. 

2007: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,218.68; 
A.M. Best U.S. Life Index: 1,436.53; 
NYSE Composite Index: 9,254.73. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,205.41; 
A.M. Best U.S. Life Index: 1,442.09; 
NYSE Composite Index: 9,124.54. 

30-March; 
A.M. Best U.S. Property Casualty Index: 1,219.56; 
A.M. Best U.S. Life Index: 1,449.4; 
NYSE Composite Index: 9,261.82. 

30-April; 
A.M. Best U.S. Property Casualty Index: 1,251.47; 
A.M. Best U.S. Life Index: 1,517.4; 
NYSE Composite Index: 9,627.73. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,274.29; 
A.M. Best U.S. Life Index: 1,563.85; 
NYSE Composite Index: 9,978.64. 

29-June; 
A.M. Best U.S. Property Casualty Index: 1,271.09; 
A.M. Best U.S. Life Index: 1,529.74; 
NYSE Composite Index: 9,873.02. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,204.63; 
A.M. Best U.S. Life Index: 1,433.76; 
NYSE Composite Index: 9,554.5 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,239.46; 
A.M. Best U.S. Life Index: 1,462.69; 
NYSE Composite Index: 9,596.98. 

28-September; 
A.M. Best U.S. Property Casualty Index: 1,260.03; 
A.M. Best U.S. Life Index: 1,571.99; 
NYSE Composite Index: 10,039.3. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,306.17; 
A.M. Best U.S. Life Index: 1,630.22; 
NYSE Composite Index: 10,311.6. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,325.24; 
A.M. Best U.S. Life Index: 1,525.55; 
NYSE Composite Index: 9,856.85. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,328.43; 
A.M. Best U.S. Life Index: 1,501.67; 
NYSE Composite Index: 9,740.32. 

2008: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,280.55; 
A.M. Best U.S. Life Index: 1,391.6; 
NYSE Composite Index: 9,126.16. 

29-February; 
A.M. Best U.S. Property Casualty Index: 1,260.45; 
A.M. Best U.S. Life Index: 1,337.27; 
NYSE Composite Index: 8,962.46. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,213.87; 
A.M. Best U.S. Life Index: 1,350.55; 
NYSE Composite Index: 8,797.29. 

30-April; 
A.M. Best U.S. Property Casualty Index: 1,248.02; 
A.M. Best U.S. Life Index: 1,365.71; 
NYSE Composite Index: 9,299.6. 

30-May; 
A.M. Best U.S. Property Casualty Index: 1,257.38; 
A.M. Best U.S. Life Index: 1,347.53; 
NYSE Composite Index: 9,401.08. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,119.01; 
A.M. Best U.S. Life Index: 1,155.49; 
NYSE Composite Index: 8,660.48. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,106.01; 
A.M. Best U.S. Life Index: 1,192.35; 
NYSE Composite Index: 8,438.64. 

29-August; 
A.M. Best U.S. Property Casualty Index: 1,121.71; 
A.M. Best U.S. Life Index: 1,221.55; 
NYSE Composite Index: 8,382.08. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,195.24; 
A.M. Best U.S. Life Index: 1,162.12; 
NYSE Composite Index: 7,532.8. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,064.08; 
A.M. Best U.S. Life Index: 632.97; 
NYSE Composite Index: 6,061.09. 

28-November; 
A.M. Best U.S. Property Casualty Index: 1,008.91; 
A.M. Best U.S. Life Index: 528.28; 
NYSE Composite Index: 5,599.3. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,006.3; 
A.M. Best U.S. Life Index: 623.85; 
NYSE Composite Index: 5,757.05. 

2009: 

30-January; 
A.M. Best U.S. Property Casualty Index: 890.74; 
A.M. Best U.S. Life Index: 532.52; 
NYSE Composite Index: 5,195.79. 

27-February; 
A.M. Best U.S. Property Casualty Index: 801.05; 
A.M. Best U.S. Life Index: 345.28; 
NYSE Composite Index: 4,617.03. 

31-March; 
A.M. Best U.S. Property Casualty Index: 875.63; 
A.M. Best U.S. Life Index: 397.99; 
NYSE Composite Index: 4,978.98. 

30-April; 
A.M. Best U.S. Property Casualty Index: 925.31; 
A.M. Best U.S. Life Index: 558.85; 
NYSE Composite Index: 5,513.36. 

29-May; 
A.M. Best U.S. Property Casualty Index: 907.76; 
A.M. Best U.S. Life Index: 695.81; 
NYSE Composite Index: 6,004.07. 

30-June; 
A.M. Best U.S. Property Casualty Index: 907.02; 
A.M. Best U.S. Life Index: 628.63; 
NYSE Composite Index: 5,905.15. 

31-July; 
A.M. Best U.S. Property Casualty Index: 986.12; 
A.M. Best U.S. Life Index: 780.97; 
NYSE Composite Index: 6,424.28. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,052.83; 
A.M. Best U.S. Life Index: 794.78; 
NYSE Composite Index: 6,643.24. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,060.23; 
A.M. Best U.S. Life Index: 819.55; 
NYSE Composite Index: 6,910.88. 

30-October; 
A.M. Best U.S. Property Casualty Index: 1,034.72; 
A.M. Best U.S. Life Index: 741.31; 
NYSE Composite Index: 6,739.45. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,055.36; 
A.M. Best U.S. Life Index: 749.29; 
NYSE Composite Index: 7,092.36. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,051.02; 
A.M. Best U.S. Life Index: 770.48; 
NYSE Composite Index: 7,184.96. 

2010: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,107.82; 
A.M. Best U.S. Life Index: 777.52; 
NYSE Composite Index: 6,883.78. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,151.38; 
A.M. Best U.S. Life Index: 796.52; 
NYSE Composite Index: 7,035.04. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,180.91; 
A.M. Best U.S. Life Index: 911.85; 
NYSE Composite Index: 7,447.8. 

30-April; 
A.M. Best U.S. Property Casualty Index: 1,149.15; 
A.M. Best U.S. Life Index: 898.07; 
NYSE Composite Index: 7,474.4. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,080.15; 
A.M. Best U.S. Life Index: 820.5; 
NYSE Composite Index: 6,791.57. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,134.06; 
A.M. Best U.S. Life Index: 747.3; 
NYSE Composite Index: 6,469.65. 

30-July; 
A.M. Best U.S. Property Casualty Index: 1,148.57; 
A.M. Best U.S. Life Index: 810.55; 
NYSE Composite Index: 6,998.99. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,151.8; 
A.M. Best U.S. Life Index: 693.12; 
NYSE Composite Index: 6,704.15. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,220.8; 
A.M. Best U.S. Life Index: 751.05; 
NYSE Composite Index: 7,281.07. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,207.5; 
A.M. Best U.S. Life Index: 773.02; 
NYSE Composite Index: 7,513.35. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,204.66; 
A.M. Best U.S. Life Index: 770; 
NYSE Composite Index: 7,430.94. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,233.2; 
A.M. Best U.S. Life Index: 889.99; 
NYSE Composite Index: 7,964.02. 

2011: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,244.82; 
A.M. Best U.S. Life Index: 920.09; 
NYSE Composite Index: 8,139.16. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,310.02; 
A.M. Best U.S. Life Index: 970.75; 
NYSE Composite Index: 8,438.55. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,285.7; 
A.M. Best U.S. Life Index: 924.11; 
NYSE Composite Index: 8,404.98. 

29-April; 
A.M. Best U.S. Property Casualty Index: 1,301.32; 
A.M. Best U.S. Life Index: 947.44; 
NYSE Composite Index: 8,671.41. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,264.06; 
A.M. Best U.S. Life Index: 918.67; 
NYSE Composite Index: 8,477.28. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,225.46; 
A.M. Best U.S. Life Index: 899.63; 
NYSE Composite Index: 8,319.1. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,187.31; 
A.M. Best U.S. Life Index: 827.98; 
NYSE Composite Index: 8,079.44. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,154.41; 
A.M. Best U.S. Life Index: 715.58; 
NYSE Composite Index: 7,528.39. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,111.08; 
A.M. Best U.S. Life Index: 617.01; 
NYSE Composite Index: 6,791.65. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,235.98; 
A.M. Best U.S. Life Index: 721.63; 
NYSE Composite Index: 7,563.38. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,238.66; 
A.M. Best U.S. Life Index: 653.86; 
NYSE Composite Index: 7,484.5. 

30-December; 
A.M. Best U.S. Property Casualty Index: 1,232.86; 
A.M. Best U.S. Life Index: 656.14; 
NYSE Composite Index: 7,477.03. 

Source: GAO analysis of A.M. Best data on the A.M. Best U. S. Life and 
Property Casualty 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. 

[End of figure] 

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 
industry's net income remained positive at $3.7 billion (see previous 
figure 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.[Footnote 16] The realized 
losses resulted primarily from other-than-temporary impairments taken 
on certain bonds and preferred and common stocks.[Footnote 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 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. 

Figure 6: Major Activities Affecting Capital of Property/Casualty 
Insurers, 2002-2011: 

[Refer to PDF for image: stacked vertical bar graph] 

Calendar year: 2002; 
Dividends to Stockholders: -$8.0 billion; 
Paid in Capital or Surplus: $17.6 billion; 
Net Income/(Loss): $8.9 billion. 

Calendar year: 2003; 
Dividends to Stockholders: -$10.5 billion; 
Paid in Capital or Surplus: $13.7 billion; 
Net Income/(Loss): $29.8 billion. 

Calendar year: 2004; 
Dividends to Stockholders: -$15.0 billion; 
Paid in Capital or Surplus: $8.2 billion; 
Net Income/(Loss): $38.6 billion. 

Calendar year: 2005; 
Dividends to Stockholders: -$15.2 billion; 
Paid in Capital or Surplus: $13.1 billion; 
Net Income/(Loss): $46.7 billion. 

Calendar year: 2006; 
Dividends to Stockholders: -$24.7 billion; 
Paid in Capital or Surplus: $3.1 billion; 
Net Income/(Loss): $66.5 billion. 

Calendar year: 2007; 
Dividends to Stockholders: -$33.3 billion; 
Paid in Capital or Surplus: $1.1 billion; 
Net Income/(Loss): $63.6 billion. 

Calendar year: 2008; 
Dividends to Stockholders: -$26.8 billion; 
Paid in Capital or Surplus: $16.7 billion; 
Net Income/(Loss): $3.7 billion. 

Calendar year: 2009; 
Dividends to Stockholders: -$18.8 billion; 
Paid in Capital or Surplus: $9.0 billion; 
Net Income/(Loss): $32.1 billion. 

Calendar year: 2010; 
Dividends to Stockholders: -$32.9 billion; 
Paid in Capital or Surplus: $24.6 billion; 
Net Income/(Loss): $37.2 billion. 

Calendar year: 2011; 
Dividends to Stockholders: -$27.7 billion; 
Paid in Capital or Surplus: $2.9 billion; 
Net Income/(Loss): $20.2 billion. 

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

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. 

[End of figure] 

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 insurers--as well as banks 
and other financial services companies--to 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 
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 failed--less 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). 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 
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. 

Table 1: Number of Receiverships and Liquidations for Life and 
Property/Casualty Companies, 2002-2011: 

Life: 
Receiverships (10-year average: 6); 
2002: 11; 
2003: 4; 
2004: 8; 
2005: 4; 
2006: 3; 
2007: 4; 
2008: 6; 
2009: 12; 
2010: 4; 
2011: 2. 

Liquidations (10-year average: 4); 
2002: 7; 
2003: 4; 
2004: 5; 
2005: 3; 
2006: 4; 
2007: 3; 
2008: 3; 
2009: 6; 
2010: 3; 
2011: 2. 

P/C: 

Receiverships (10-year average: 15); 
2002: 24; 
2003: 19; 
2004: 16; 
2005: 10; 
2006: 17; 
2007: 15; 
2008: 4; 
2009: 15; 
2010: 17; 
2011: 15. 

Liquidations (10-year average: 13); 
2002: 16; 
2003: 16; 
2004: 11; 
2005: 11; 
2006: 15; 
2007: 7; 
2008: 4; 
2009: 13; 
2010: 15; 
2011: 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 receivership--in 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. 

[End of table] 

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.[Footnote 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.[Footnote 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 figure 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.[Footnote 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.[Footnote 21] 

Figure 7: Life and Property/Casualty Insurers' Net Investment Income, 
2002-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Life: $141.0 billion; 
P/C: $39.4 billion. 

Calendar year: 2003; 
Life: $143.7 billion; 
P/C: $39.4 billion. 

Calendar year: 2004; 
Life: $147.7 billion; 
P/C: $40.8 billion. 

Calendar year: 2005; 
Life: $155.9 billion; 
P/C: $50.1 billion. 

Calendar year: 2006; 
Life: $161.7 billion; 
P/C: $53.1 billion. 

Calendar year: 2007; 
Life: $168.3 billion; 
P/C: $56.5 billion. 

Calendar year: 2008; 
Life: $162.3 billion; 
P/C: $53.1 billion. 

Calendar year: 2009; 
Life: $156.6 billion; 
P/C: $48.4 billion. 

Calendar year: 2010; 
Life: $164.1 billion; 
P/C: $48.1 billion. 

Calendar year: 2011; 
Life: $167.4 billion; 
P/C: $50.9 billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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 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.[Footnote 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. 

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: 

Life; 
2002: 15.4%; 
2003: 14.7%; 
2004: 14.3%; 
2005: 13.6%; 
2006: 13.1%; 
2007: 12.8%; 
2008: 13.5%; 
2009: 13.5%; 
2010: 12.5%; 
2011: 12.3%. 

P/C; 
2002: 4.2%; 
2003: 4.2%; 
2004: 4.0%; 
2005: 3.3%; 
2006: 3.1%; 
2007: 3.2%; 
2008: 3.5%; 
2009: 3.8%; 
2010: 3.7%; 
2011: 3.7%. 

Equities: 

Life; 
2002: 2.8%; 
2003: 2.6%; 
2004: 2.8%; 
2005: 3.1%; 
2006: 3.4%; 
2007: 4.7%; 
2008: 3.6%; 
2009: 2.1%; 
2010: 2.2%; 
2011: 2.2%. 

P/C; 
2002: 15.3%; 
2003: 14.6%; 
2004: 12.8%; 
2005: 12.9%; 
2006: 12.8%; 
2007: 12.3%; 
2008: 13.3%; 
2009: 12.6%; 
2010: 11.8%; 
2011: 12.2%. 

Bonds: 

Life; 
2002: 73.8%; 
2003: 74.3%; 
2004: 74.3%; 
2005: 73.5%; 
2006: 72.1%; 
2007: 70.6%; 
2008: 73.3%; 
2009: 77.7%; 
2010: 76.5%; 
2011: 75.7%. 

P/C; 
2002: 72.7%; 
2003: 70.1%; 
2004: 71.5%; 
2005: 64.3%; 
2006: 66.6%; 
2007: 67.0%; 
2008: 71.5%; 
2009: 76.5%; 
2010: 74.3%; 
2011: 69.8%. 

Derivatives: 

Life; 
2002: -0.6%; 
2003: -0.3%; 
2004: -0.2%; 
2005: -0.3%; 
2006: 0.8%; 
2007: 0.3%; 
2008: -1.2%; 
2009: -1.7%; 
2010: 0.4%; 
2011: 0.9%. 

P/C; 
2002: 0.2%; 
2003: 0.4%; 
2004: 0.1%; 
2005: 0.0%; 
2006: -0.1%; 
2007: 0.0%; 
2008: -0.1%; 
2009: -0.1%; 
2010: 0.0%; 
2011: 0.0%. 

All other investments[A]: 

Life; 
2002: 8.5%; 
2003: 8.7%; 
2004: 8.8%; 
2005: 10.1%; 
2006: 10.5%; 
2007: 11.6%; 
2008: 10.8%; 
2009: 8.3%; 
2010: 8.3%; 
2011: 8.9%. 

P/C; 
2002: 7.6%; 
2003: 10.7%; 
2004: 11.5%; 
2005: 19.4%; 
2006: 17.6%; 
2007: 17.4%; 
2008: 11.8%; 
2009: 7.2%; 
2010: 10.2%; 
2011: 14.3%. 

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

[A] All other investments include contract loans, cash and short-term 
investments, other invested assets, and investment write-ins. 

[End of table] 

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 figure 8).[Footnote 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. 

Figure 8: Life Insurers' Benefits and Losses Incurred Compared to Net 
Premiums Written, 2002-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Net premiums written: $488.8 billion; 
Benefits and losses: $504.5 billion. 

Calendar year: 2003; 
Net premiums written: $477.8 billion; 
Benefits and losses: $478.1 billion. 

Calendar year: 2004; 
Net premiums written: $507.3 billion; 
Benefits and losses: $496.0 billion. 

Calendar year: 2005; 
Net premiums written: $520.2 billion; 
Benefits and losses: $517.2 billion. 

Calendar year: 2006; 
Net premiums written: $575.0 billion; 
Benefits and losses: $555.5 billion. 

Calendar year: 2007; 
Net premiums written: $609.4 billion; 
Benefits and losses: $568.1 billion. 

Calendar year: 2008; 
Net premiums written: $622.1 billion; 
Benefits and losses: $674.1 billion. 

Calendar year: 2009; 
Net premiums written: $506.7 billion; 
Benefits and losses: $570.1 billion. 

Calendar year: 2010; 
Net premiums written: $577.6 billion; 
Benefits and losses: $558.2 billion. 

Calendar year: 2011; 
Net premiums written: $619.8 billion; 
Benefits and losses: $631.6 billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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 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. 

From 2007 to 2008, the P/C industry's underwriting losses increased as 
a percentage of their earned premiums (loss ratio), and the average 
combined ratio--a measure of insurer underwriting performance--rose 
from 95 percent to 104 percent, indicating that companies incurred 
more in claims and expenses than they received from premiums.[Footnote 
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 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 AIG's 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 
industry's 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, 2002-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Loss ratios: 80.7%; 
Combined ratios: 107.9%. 

Calendar year: 2003; 
Loss ratios: 74.5%; 
Combined ratios: 100.8%. 

Calendar year: 2004; 
Loss ratios: 72.5%; 
Combined ratios: 98.7%. 

Calendar year: 2005; 
Loss ratios: 74.5%; 
Combined ratios: 101.0%. 

Calendar year: 2006; 
Loss ratios: 65.3%; 
Combined ratios: 92.1%. 

Calendar year: 2007; 
Loss ratios: 68.1%; 
Combined ratios: 95.1%. 

Calendar year: 2008; 
Loss ratios: 77.5%; 
Combined ratios: 104.5%. 

Calendar year: 2009; 
Loss ratios: 72.3%; 
Combined ratios: 99.7%. 

Calendar year: 2010; 
Loss ratios: 73.6%; 
Combined ratios: 101.9%. 

Calendar year: 2011; 
Loss ratios: 79.4%; 
Combined ratios: 108.0%. 

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

[End of figure] 

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.[Footnote 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. 

Figure 10: Life Insurers' Net Investment and Underwriting Gains/ 
(Losses), 2002-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Net investment: $157.4 billion; 
Net underwriting: -$100.2 billion. 

Calendar year: 2003; 
Net investment: $149.9 billion; 
Net underwriting: -$89.4 billion. 

Calendar year: 2004; 
Net investment: $148.9 billion; 
Net underwriting: -$92.8 billion. 

Calendar year: 2005; 
Net investment: $154.7 billion; 
Net underwriting: -$100.4 billion. 

Calendar year: 2006; 
Net investment: $156.7 billion; 
Net underwriting: -$105.7 billion. 

Calendar year: 2007; 
Net investment: $170.7 billion; 
Net underwriting: -$107.3 billion. 

Calendar year: 2008; 
Net investment: $213.4 billion; 
Net underwriting: -$146.1 billion. 

Calendar year: 2009; 
Net investment: $185.1 billion; 
Net underwriting: -$80.9 billion. 

Calendar year: 2010; 
Net investment: $181.1 billion; 
Net underwriting: -$97.9 billion. 

Calendar year: 2011; 
Net investment: $178.1 billion; 
Net underwriting: -$127.0 billion. 

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

Notes: 

Data are shown in nominal dollars. 

[End of figure] 

Unlike NAIC's 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 11: Property/Casualty Insurers' Net Investment and Underwriting 
Gains/(Losses), 2002-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Net investment gains: $42.5 billion; 
Net underwriting losses: -$28.8 billion. 

Calendar year: 2003; 
Net investment gains: $45.9 billion; 
Net underwriting losses: -$3.4 billion. 

Calendar year: 2004; 
Net investment gains: $49.9 billion; 
Net underwriting losses: $5.3 billion. 

Calendar year: 2005; 
Net investment gains: $62.2 billion; 
Net underwriting losses: -$3.9 billion. 

Calendar year: 2006; 
Net investment gains: $56.7 billion; 
Net underwriting losses: $34.8 billion. 

Calendar year: 2007; 
Net investment gains: $65.5 billion; 
Net underwriting losses: $21.6 billion. 

Calendar year: 2008; 
Net investment gains: $33.0 billion; 
Net underwriting losses: -$19.6 billion. 

Calendar year: 2009; 
Net investment gains: $40.6 billion; 
Net underwriting losses: $1.5 billion. 

Calendar year: 2010; 
Net investment gains: $55.8 billion; 
Net underwriting losses: -$8.3 billion. 

Calendar year: 2011; 
Net investment gains: $58.4 billion; 
Net underwriting losses: -$35.2 billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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 reviewed--
group and individual life insurance and group and individual annuities-
-with the largest decline in individual annuities (see figure 12). 

Figure 12: Net Premiums Written for Group and Individual Life and 
Annuities Products, 2002-2011: 

[Refer to PDF for image: combined vertical bar and line graph] 

Net premiums: 

Calendar year: 2002; 
Individual annuities: $158.5 billion; 
Group annuities: $100.8 billion; 
Individual life insurance: $105.0 billion; 
Group life insurance: $26.9 billion; 
Total all lines: $478.0 billion. 

Calendar year: 2003; 
Individual annuities: $151.7 billion; 
Group annuities: $102.6 billion; 
Individual life insurance: $97.1 billion; 
Group life insurance: $25.1 billion; 
Total all lines: $467.1 billion. 

Calendar year: 2004; 
Individual annuities: $154.2 billion; 
Group annuities: $104.5 billion; 
Individual life insurance: $107.0 billion; 
Group life insurance: $27.5 billion; 
Total all lines: $492.6 billion. 

Calendar year: 2005; 
Individual annuities: $149.1 billion; 
Group annuities: $110.1 billion; 
Individual life insurance: $108.2 billion; 
Group life insurance: $28.9 billion; 
Total all lines: $505.0 billion. 

Calendar year: 2006; 
Individual annuities: $171.9 billion; 
Group annuities: $115.6 billion; 
Individual life insurance: $110.2 billion; 
Group life insurance: $34.0 billion; 
Total all lines: $562.5 billion. 

Calendar year: 2007; 
Individual annuities: $179.0 billion; 
Group annuities: $121.9 billion; 
Individual life insurance: $100.6 billion; 
Group life insurance: $37.8 billion; 
Total all lines: $598.5 billion. 

Calendar year: 2008; 
Individual annuities: $195.3 billion; 
Group annuities: $118.9 billion; 
Individual life insurance: $113.4 billion; 
Group life insurance: $28.5 billion; 
Total all lines: $611.6 billion. 

Calendar year: 2009; 
Individual annuities: $112.8 billion; 
Group annuities: $102.7 billion; 
Individual life insurance: $95.0 billion; 
Group life insurance: $25.1 billion; 
Total all lines: $495.6 billion. 

Calendar year: 2010; 
Individual annuities: $171.9 billion; 
Group annuities: $103.7 billion; 
Individual life insurance: $76.4 billion; 
Group life insurance: $24.2 billion; 
Total all lines: $565.3 billion. 

Calendar year: 2011; 
Individual annuities: $196.3 billion; 
Group annuities: $117.1 billion; 
Individual life insurance: $97.8 billion; 
Group life insurance: $25.8 billion; 
Total all lines: $606.9 billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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 decreases in that area from 2008 to 2009. By 2011, net premiums in 
individual annuities had rebounded beyond their precrisis levels. 

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. 

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. 

Table 3: Variable Annuity Sales and GLB Election Rates, 2002-2012: 

Year: 2002; 
Total variable annuity sales: $116.6 billion; 
New variable annuity sales: NA; 
Percentage of new variable annuities sales for which GLB was 
available: NA; 
GLB election rate for new variable annuities sales: NA. 

Year: 2003; 
Total variable annuity sales: $129.4 billion; 
New variable annuity sales: NA; 
Percentage of new variable annuities sales for which GLB was 
available: NA; 
GLB election rate for new variable annuities sales: NA. 

Year: 2004; 
Total variable annuity sales: $132.9 billion; 
New variable annuity sales: NA; 
Percentage of new variable annuities sales for which GLB was 
available: NA; 
GLB election rate for new variable annuities sales: NA. 

Year: 2005; 
Total variable annuity sales: $136.9 billion; 
New variable annuity sales: NA; 
Percentage of new variable annuities sales for which GLB was 
available: NA; 
GLB election rate for new variable annuities sales: NA. 

Year: 2006; 
Total variable annuity sales: $160.4 billion; 
New variable annuity sales: $116.9 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 86%; 
GLB election rate for new variable annuities sales: 76%. 

Year: 2007; 
Total variable annuity sales: $184.0 billion; 
New variable annuity sales: $141.5 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 91%; 
GLB election rate for new variable annuities sales: 77%. 

Year: 2008; 
Total variable annuity sales: $155.7 billion; 
New variable annuity sales: $122.0 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 91%; 
GLB election rate for new variable annuities sales: 83%. 

Year: 2009; 
Total variable annuity sales: $128.0 billion; 
New variable annuity sales: $94.0 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 90%; 
GLB election rate for new variable annuities sales: 89%. 

Year: 2010; 
Total variable annuity sales: $140.5 billion; 
New variable annuity sales: $107.9 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 89%; 
GLB election rate for new variable annuities sales: 88%. 

Year: 2011; 
Total variable annuity sales: $157.9 billion; 
New variable annuity sales: $121.8 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 90%; 
GLB election rate for new variable annuities sales: 88%. 

Year: 2012; 
Total variable annuity sales: $147.4 billion; 
New variable annuity sales: $112.3 billion; 
Percentage of new variable annuities sales for which GLB was 
available: 85%; 
GLB election rate for new variable annuities sales: 88%. 

Source: GAO analysis of LIMRA data. 

Notes: Data are shown in nominal dollars. 

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. 

[End of table] 

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 
industry's 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.[Footnote 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.[Footnote 27] 

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 characteristics-
-namely, 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 association's 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 shown in table 4, combined ratios--a 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: 

Financial Guaranty: 

Loss Ratio; 
2002: 89%; 
2003: 77%; 
2004: 75%; 
2005: 83%; 
2006: 65%; 
2007: 69%; 
2008: 90%; 
2009: 77%; 
2010: 83%; 
2011: 80%. 

Combined Ratio; 
2002: 118%; 
2003: 104%; 
2004: 101%; 
2005: 111%; 
2006: 92%; 
2007: 97%; 
2008: 118%; 
2009: 105%; 
2010: 113%; 
2011: 109%. 

Mortgage Guaranty: 

Loss Ratio; 
2002: 84%; 
2003: 72%; 
2004: 79%; 
2005: 88%; 
2006: 68%; 
2007: 82%; 
2008: 102%; 
2009: 105%; 
2010: 110%; 
2011: 103%. 

Combined Ratio; 
2002: 110%; 
2003: 96%; 
2004: 103%; 
2005: 112%; 
2006: 93%; 
2007: 103%; 
2008: 123%; 
2009: 123%; 
2010: 135%; 
2011: 135%. 

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

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. 

[End of table] 

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 & Poor's placed Ambac's AAA rating on a negative rating 
watch. Standard & Poor's 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 insurers--from 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 insurer's guaranty was 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.[Footnote 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 borrower's 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 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.[Footnote 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.[Footnote 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 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 low-interest-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 group's purpose was 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.[Footnote 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 NAIC's 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 
NAIC's 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.[Footnote 32] 
Another state regulator stated that it also enacted legislation 
extending to all insurers certain securities lending provisions. Both 
states took these actions after AIG's 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 regulators--for instance, 
maintaining a range of databases and coordinating regulatory efforts. 
NAIC officials said that they identified potential risks and other 
trends through their regular analyses of statutory financial statement 
filings, which contain detailed investment data. For example, during 
the crisis NAIC's 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 NAIC's 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 insurer's 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.[Footnote 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 industry's 
investments, such as exposure to potential market volatility, said 
NAIC officials. According to NAIC's 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 AIG's securities lending program, which was a major 
source of its liquidity problems in 2008. According to an NAIC report, 
AIG's problems in 2008 highlighted the lack of transparency of 
securities lending collateral--specifically when the collateral was 
cash.[Footnote 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.[Footnote 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. 103--Accounting 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 insurer's statutory financial 
statements. 

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.[Footnote 36] As discussed earlier, life 
insurance companies saw a decline of almost 6 percent in capital in 
2008. Prior to the change, NAIC's 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.[Footnote 37] NAIC 
contracts with BlackRock and PIMCO to conduct these analyses.[Footnote 
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 industry's 
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 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. 
[Footnote 39] These practices included allowing alternative methods of 
calculating an insurer's assets or liabilities that differ from 
statutory accounting rules and can result in a higher amount of assets 
admitted to an insurer's 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 industry's 
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. 

Table 5: Net Effects of All Prescribed and Permitted Practices on Life 
and Property/Casualty Insurers' Net Income and Capital, 2006-2011: 

Year: 2006; 
Net effect (positive and negative) in net income: 
Life: $15,903,000; 
P/C: -$1,256,824,000;
Net effect (positive and negative) in capital: 
Life: -$1,504,098,000; 
P/C: $1,225,426,000. 

Year: 2007; 
Net effect (positive and negative) in net income: 
Life: -$160,886,000; 
P/C: $530,013,000; 
Net effect (positive and negative) in capital: 
Life: $377,626,000; 
P/C: $6,628,204,000. 

Year: 2008; 
Net effect (positive and negative) in net income: 
Life: $1,515,952,000; 
P/C: $2,533,518,000; 
Net effect (positive and negative) in capital: 
Life: $8,904,224,000; 
P/C: $11,060,723,000. 

Year: 2009; 
Net effect (positive and negative) in net income: 
Life: -$1,014,710,000; 
P/C: $5,242,658,000; 
Net effect (positive and negative) in capital: 
Life: $2,048,691,000; 
P/C: $8,192,046,000. 

Year: 2010; 
Net effect (positive and negative) in net income: 
Life: $68,327,000; 
P/C: $3,018,482,000; 
Net effect (positive and negative) in capital: 
Life: $2,477,606,000; 
P/C: $12,641,458,000. 

Year: 2011; 
Net effect (positive and negative) in net income: 
Life: -$331,882,000; 
P/C: $167,375,000; 
Net effect (positive and negative) in capital: 
Life: $2,658,653,000; 
P/C: $13,611,375,000. 

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

Notes: Data are shown in nominal dollars. 

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. 

[End of table] 

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.[Footnote 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.[Footnote 41] Specifically, insurers requested that the limits 
for determining the percentage of DTAs that could be classified as 
admitted assets be raised.[Footnote 42] NAIC officials said that more 
than half of the 119 permitted practices that states granted to 
insurers in 2008 were 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. 

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. 

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.[Footnote 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.[Footnote 44] However, SSAP 101 has 
tiered eligibility requirements, which provide a more gradual 
reduction in the portion of an insurer's DTA that can be included as 
an insurer's admitted assets.[Footnote 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 insurer's 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, 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: 

[Refer to PDF for image: vertical bar graph] 

Net investment: 

Calendar year: 2006; 
Net investment: 4.59%. 

Calendar year: 2007; 
Net investment: 4.72%. 

Calendar year: 2008; 
Net investment: 7.46%. 

Calendar year: 2009; 
Net investment: 9.36%. 

Calendar year: 2010; 
Net investment: 9.15%. 

Calendar year: 2011; 
Net investment: 9.17%. 

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

[End of figure] 

Figure 14: Admitted Deferred Tax Assets as a Percentage of Capital for 
the Property/Casualty Insurance Industry: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2006; 
PC: 2.91%. 

Calendar year: 2007; 
PC: 2.82%. 

Calendar year: 2008; 
PC: 4.26%. 

Calendar year: 2009; 
PC: 4.3%. 

Calendar year: 2010; 
PC: 3.9%. 

Calendar year: 2011; 
PC: 4.16%. 

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

[End of figure] 

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 agency's 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 association's 
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 companies--benefited from these 
federal programs. 

* Troubled Asset Relief Program, the Capital Purchase Program. The 
U.S. Department of the Treasury's 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. 
[Footnote 46] Eligibility was based on the applicant's 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 
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.[Footnote 47] 

* Commercial Paper Funding Facility. The Federal Reserve's 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 Reserve's 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 industry's largest company in 
terms of premiums written, accessed $18.9 billion in short-term 
funding through the Term Auction Facility.[Footnote 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 Facility. These 
loans were intended to spur the issuance of asset-backed securities to 
enhance the consumer and commercial credit markets. 

* Federal Reserve Bank of New York's Revolving Credit Facility and 
Treasury's 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 Treasury's 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 AIG's life insurance companies. 
[Footnote 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 interviewed credited the industry's 
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 NAIC's 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 insure--namely, 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 products--fixed 
and variable--longer than they might otherwise have done. In 2008 and 
2009, 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 NAIC's 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 NAIC's 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 NAIC's 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 
NAIC's SMI as a broad effort to improve the solvency regulation 
framework for U.S. insurers. 

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 insurer's 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.[Footnote 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 insurer's 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.[Footnote 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. 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 AIG--
and 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.[Footnote 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.[Footnote 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.[Footnote 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;[Footnote 
55] 

* enhancements to regulators' rights to access information (including 
books and records), especially regarding the examinations of 
affiliates, to better ascertain the insurer's 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.[Footnote 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 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.[Footnote 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 state's 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. [Footnote 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 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 NAIC's 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 re-evaluate 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 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 expert's view, among other things. In our previous work, we 
noted that the act created the Federal Insurance Office and the 
Financial Stability Oversight Council.[Footnote 59] The act also seeks 
to address systemically important financial institutions (SIFIs) and 
end bailouts of large, complex financial institutions.[Footnote 60] 
The Dodd-Frank 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. 
[Footnote 61] The Federal Insurance Office's 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 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.[Footnote 
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 expert's 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 
Treasury--Office of Financial Research and the Federal Insurance 
Office--that were established by the act. The Dodd-Frank Act requires 
that the council meet at least once a quarter.[Footnote 63] One 
industry association we spoke to stated that Financial Stability 
Oversight Council members provided benefits--for 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, certain consumer 
financial protection functions from seven existing federal agencies 
were transferred to CFPB.[Footnote 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.[Footnote 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. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the Chief 
Executive Officer of the National Association of Insurance 
Commissioners. In addition, the report will be made available at no 
charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions regarding this report, please 
contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff that made major 
contributions to this report are listed in appendix IV. 

Signed by: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 

[End of section] 

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 states--California, 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. 

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 documents--including NAIC's annual 
analyses of the life and P/C industries--to identify commonly used 
financial measures for insurance companies.[Footnote 66] 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 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 NAIC's 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.[Footnote 67] 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.[Footnote 68] 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 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 (appendix 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. Best's 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).[Footnote 69] 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 LIMRA--was 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 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 SNL's, because intercompany 
transactions would be rare in this field.[Footnote 70] In addition, we 
compared the results of our analysis of key measures--such as net 
income, capital, net investment income, and surrender benefits and 
withdrawals--to NAIC's 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 NAIC's 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 System's 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 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 group's 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. 

[End of section] 

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.[Footnote 71] 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 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: 

2008: 

Insurer: American International Group; 
Realized losses: -$27,032,295,000; 
Percentage of all realized losses: 45.3%. 

Insurer: TIAA-CREF; 
Realized losses: -$4,562,314,000; 
Percentage of all realized losses: 7.6%. 

Insurer: MetLife Inc.; 
Realized losses: -$2,107,802,000; 
Percentage of all realized losses: 3.5%. 

Insurer: New York Life Insurance Group; 
Realized losses: -$1,828,390,000; 
Percentage of all realized losses: 3.1%. 

Insurer: CNO Financial Group Inc.; 
Realized losses: -$1,767,840,000; 
Percentage of all realized losses: 3.0%. 

Insurer: Northwestern Mutual Life Insurance Company; 
Realized losses: -$1,519,738,000; 
Percentage of all realized losses: 2.5%. 

Insurer: Prudential Financial Inc.; 
Realized losses: -$1,377,951,000; 
Percentage of all realized losses: 2.3%. 

Insurer: Allstate Corporation; 
Realized losses: -$1,175,618,000; 
Percentage of all realized losses: 2.0%. 

Insurer: Allianz Group; 
Realized losses: -$1,142,726,000; 
Percentage of all realized losses: 1.9%. 

Insurer: ING Groep N.V.; 
Realized losses: -$1,098,560,000; 
Percentage of all realized losses: 1.8%. 

Insurer: Massachusetts Mutual Life Insurance Company; 
Realized losses: -$1,092,727,000; 
Percentage of all realized losses: 1.8%. 

Insurer: Lincoln National Corporation; 
Realized losses: -$1,053,231,000; 
Percentage of all realized losses: 1.8%. 

2009: 

Insurer: TIAA-CREF; 
Realized losses: -$3,451,216,000; 
Percentage of all realized losses: 10.6%. 

Insurer: ING Groep N.V.; 
Realized losses: -$3,373,625,000; 
Percentage of all realized losses: 10.3%. 

Insurer: American International Group; 
Realized losses: -$2,864,587,000; 
Percentage of all realized losses: 8.8%. 

Insurer: Hartford Financial Services; 
Realized losses: -$2,192,781,000; 
Percentage of all realized losses: 6.7%. 

Insurer: MetLife Inc.; 
Realized losses: -$1,985,188,000; 
Percentage of all realized losses: 6.1%. 

Insurer: Jackson National Life Group; 
Realized losses: -$1,679,803,000; 
Percentage of all realized losses: 5.1%. 

Insurer: AEGON NV; 
Realized losses: -$1,644,108,000; 
Percentage of all realized losses: 5.0%. 

Insurer: Prudential Financial Inc.; 
Realized losses: -$1,544,248,000; 
Percentage of all realized losses: 4.7%. 

Insurer: AXA; 
Realized losses: -$1,391,188,000; 
Percentage of all realized losses: 4.3%. 

Insurer: Genworth Financial Inc.; 
Realized losses: -$1,057,640,000; 
Percentage of all realized losses: 3.2%. 

Insurer: Allstate Corporation; 
Realized losses: -$1,056,030,000; 
Percentage of all realized losses: 3.2%. 

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

Note: Data are shown in nominal dollars. 

[End of table] 

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

2008: 

Insurer: American International Group; 
Unrealized losses: -$30,189,534,000; 
Percentage of all unrealized losses: 47.33%. 

Insurer: MetLife, Inc.; 
Unrealized losses: -$5,002,128,000; 
Percentage of all unrealized losses: 7.84%. 

Insurer: AXA; 
Unrealized losses: -$4,931,978,000; 
Percentage of all unrealized losses: 7.73%. 

Insurer: Northwestern Mutual Life Insurance Company; 
Unrealized losses: -$4,368,554,000; 
Percentage of all unrealized losses: 6.85%. 

Insurer: New York Life Insurance Group; 
Unrealized losses: -$3,027,290,000; 
Percentage of all unrealized losses: 4.75%. 

Insurer: TIAA-CREF; 
Unrealized losses: -$2,317,339,000; 
Percentage of all unrealized losses: 3.63%. 

Insurer: Western & Southern Mutual Holding Company; 
Unrealized losses: -$1,364,643,000; 
Percentage of all unrealized losses: 2.14%. 

Insurer: Hartford Financial Services Group; 
Unrealized losses: -$1,338,845,000; 
Percentage of all unrealized losses: 2.10%. 

2009: 

Insurer: MetLife, Inc.; 
Unrealized losses: -$4,322,365,000; 
Percentage of all unrealized losses: 22.51%. 

Insurer: Hartford Financial Services Group; 
Unrealized losses: -$3,390,195,000; 
Percentage of all unrealized losses: 17.66%. 

Insurer: American International Group; 
Unrealized losses: -$2,053,011,000; 
Percentage of all unrealized losses: 10.69%. 

Insurer: Ameriprise Financial, Inc.; 
Unrealized losses: -$1,837,537,000; 
Percentage of all unrealized losses: 9.57%. 

Insurer: Pacific Mutual Holding Company; 
Unrealized losses: -$1,150,169,000; 
Percentage of all unrealized losses: 5.99%. 

Insurer: AEGON N.V.; 
Unrealized losses: -$1,087,585,000; 
Percentage of all unrealized losses: 5.66%. 

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

Note: Data are shown in nominal dollars. 

[End of table] 

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: 

2008: 

Insurer: Ambac Financial Group, Inc.; 
Realized Losses: -$4,371,589,000; 
Percentage of all realized Losses: 17.13%. 

Insurer: American International Group; 
Realized Losses: -$1,697,065,000; 
Percentage of all realized Losses: 6.65%. 

Insurer: Allstate Corporation; 
Realized Losses: -$1,280,299,000; 
Percentage of all realized Losses: 5.02%. 

Insurer: Hartford Financial Services Group; 
Realized Losses: -$1,268,082,000; 
Percentage of all realized Losses: 4.97%. 

Insurer: CNA Financial Corporation; 
Realized Losses: -$1,196,010,000; 
Percentage of all realized Losses: 4.69%. 

Insurer: Erie Insurance Group; 
Realized Losses: -$1,125,560,000; 
Percentage of all realized Losses: 4.41%. 

Insurer: Berkshire Hathaway, Inc.; 
Realized Losses: -$1,036,242,000; 
Percentage of all realized Losses: 4.06%. 

2009: 

Insurer: Ambac Financial Group, Inc.; 
Realized Losses: -$3,022,767,000; 
Percentage of all realized Losses: 25.53%. 

Insurer: Berkshire Hathaway, Inc.; 
Realized Losses: -$2,770,133,000; 
Percentage of all realized Losses: 23.40%. 

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

Note: Data are shown in nominal dollars. 

[End of table] 

Table 9: Property/Casualty Insurers with $1 Billion or More in 
Unrealized Losses, 2008 and 2009: 

2008: 

Insurer: Berkshire Hathaway, Inc.; 
Unrealized Losses: -$23,456,610,000; 
Percentage of all unrealized Losses: 27.41%. 

Insurer: State Farm Mutual Automobile Insurance Company; 
Unrealized Losses: -$17,182,241,000; 
Percentage of all unrealized Losses: 20.08%. 

Insurer: Liberty Mutual; 
Unrealized Losses: -$6,193,138,000; 
Percentage of all unrealized Losses: 7.24%. 

Insurer: American International Group; 
Unrealized Losses: -$4,014,608,000; 
Percentage of all unrealized Losses: 4.69%. 

Insurer: Allstate Corporation; 
Unrealized Losses: -$3,158,281,000; 
Percentage of all unrealized Losses: 3.69%. 

Insurer: CNA Financial Corporation; 
Unrealized Losses: -$2,671,781,000; 
Percentage of all unrealized Losses: 3.12%. 

Insurer: Nationwide Mutual Group; 
Unrealized Losses: -$1,983,859,000; 
Percentage of all unrealized Losses: 2.32%. 

Insurer: Cincinnati Financial Corporation; 
Unrealized Losses: -$1,734,113,000; 
Percentage of all unrealized Losses: 2.03%. 

Insurer: Hartford Financial Services; 
Unrealized Losses: -$1,565,621,000; 
Percentage of all unrealized Losses: 1.83%. 

Insurer: FM Global; 
Unrealized Losses: -$1,053,450,000; 
Percentage of all unrealized Losses: 1.23%. 

Insurer: 2009. 

Insurer: Nationwide Mutual Group; 
Unrealized Losses: -$1,998,528,000; 
Percentage of all unrealized Losses: 47.10%. 

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

Note: Data are shown in nominal dollars. 

[End of table] 

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: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2002; 
Net investment: $44.5 billion; 
Net underwriting: $13.6 billion. 

Calendar year: 2003; 
Net investment: $35.4 billion; 
Net underwriting: $17.7 billion. 

Calendar year: 2004; 5 billion; 
Net underwriting: -$10.2 billion. 

Calendar year: 2005; 
Net investment: -$7.4 billion; 
Net underwriting: $6.6 billion. 

Calendar year: 2006; 
Net investment: -$1.0 billion; 
Net underwriting: -$17.7 billion. 

Calendar year: 2007; 
Net investment: $9.1 billion; 
Net underwriting: -$22.1 billion. 

Calendar year: 2008; 
Net investment: -$18.3 billion; 
Net underwriting: -$16.5 billion. 

Calendar year: 2009; 
Net investment: -$38.7 billion; 
Net underwriting: -$8.2 billion. 

Calendar year: 2010; 
Net investment: -$22.0 billion; 
Net underwriting: -$29.4 billion. 

Calendar year: 2011; 
Net investment: -$24.2 billion; 
Net underwriting: -$20.2 billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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 2009--a 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 figure16). 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 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. 
[Footnote 72] 

Figure 16: Net Premiums Written for Selected Property/Casualty Lines 
of Business, 2002-2011: 

[Refer to PDF for image: multiple line graph] 

Net premiums: 

Calendar year: 2002; 
Private Passenger Auto Physical Damage: $64.7 billion; 
Commercial Multiple Peril: $24.7 billion; 
Financial Guaranty: $2.6 billion; 
Home owners Multiple Peril: $39.5 billion; 
Mortgage Guaranty: $4.0 billion; 
Other liability (Claims): $10.7 billion; 
Other Liability (Occurrence): $18.4 billion; 
Other Private Passenger Auto Liability: $81.9 billion. 

Calendar year: 2003; 
Private Passenger Auto Physical Damage: $68.9 billion; 
Commercial Multiple Peril: $26.6 billion; 
Financial Guaranty: $3.5 billion; 
Home owners Multiple Peril: $45.2 billion; 
Mortgage Guaranty: $4.3 billion; 
Other liability (Claims): $14.1 billion; 
Other Liability (Occurrence): $21.4 billion; 
Other Private Passenger Auto Liability: $89.1 billion; 
All other lines: $9.8 billion. 

Calendar year: 2004; 
Private Passenger Auto Physical Damage: $71.8 billion; 
Commercial Multiple Peril: $28.1 billion; 
Financial Guaranty: $3.1 billion; 
Home owners Multiple Peril: $49.0 billion; 
Mortgage Guaranty: $4.3 billion; 
Other liability (Claims): $14.8 billion; 
Other Liability (Occurrence): $24.2 billion; 
Other Private Passenger Auto Liability: $92.8 billion; 
All other lines: $5.2 billion. 

Calendar year: 2005; 
Private Passenger Auto Physical Damage: $71.8 billion; 
Commercial Multiple Peril: $28.6 billion; 
Financial Guaranty: $3.0 billion; 
Home owners Multiple Peril: $51.7 billion; 
Mortgage Guaranty: $4.4 billion; 
Other liability (Claims): $15.5 billion; 
Other Liability (Occurrence): $23.2 billion; 
Other Private Passenger Auto Liability: $94.7 billion; 
All other lines: $0.4 billion. 

Calendar year: 2006; 
Private Passenger Auto Physical Damage: $72.0 billion; 
Commercial Multiple Peril: $30.7 billion; 
Financial Guaranty: $3.1 billion; 
Home owners Multiple Peril: $54.2 billion; 
Mortgage Guaranty: $4.6 billion; 
Other liability (Claims): $15.4 billion; 
Other Liability (Occurrence): $25.9 billion; 
Other Private Passenger Auto Liability: $95.2 billion; 
All other lines: $5.2 billion. 

Calendar year: 2007; 
Private Passenger Auto Physical Damage: $71.1 billion; 
Commercial Multiple Peril: $30.1 billion; 
Financial Guaranty: $3.0 billion; 
Home owners Multiple Peril: $54.7 billion; 
Mortgage Guaranty: $5.2 billion; 
Other liability (Claims): $14.4 billion; 
Other Liability (Occurrence): $25.9 billion; 
Other Private Passenger Auto Liability: $95.0 billion; 
All other lines: -$0.5 billion. 

Calendar year: 2008; 
Private Passenger Auto Physical Damage: $69.9 billion; 
Commercial Multiple Peril: $29.1 billion; 
Financial Guaranty: $3.2 billion; 
Home owners Multiple Peril: $55.6 billion; 
Mortgage Guaranty: $5.4 billion; 
Other liability (Claims): $14.2 billion; 
Other Liability (Occurrence): $24.3 billion; 
Other Private Passenger Auto Liability: $94.4 billion; 
All other lines: -$1.6 billion. 

Calendar year: 2009; 
Private Passenger Auto Physical Damage: $67.7 billion; 
Commercial Multiple Peril: $27.8 billion; 
Financial Guaranty: $1.8 billion; 
Home owners Multiple Peril: $56.9 billion; 
Mortgage Guaranty: $4.6 billion; 
Other liability (Claims): $14.2 billion; 
Other Liability (Occurrence): $20.9 billion; 
Other Private Passenger Auto Liability: $94.7 billion; 
All other lines: -$3.9 billion. 

Calendar year: 2010; 
Private Passenger Auto Physical Damage: $67.4 billion; 
Commercial Multiple Peril: $28.0 billion; 
Financial Guaranty: $1.4 billion; 
Home owners Multiple Peril: $60.5 billion; 
Mortgage Guaranty: $4.2 billion; 
Other liability (Claims): $13.4 billion; 
Other Liability (Occurrence): $21.5 billion; 
Other Private Passenger Auto Liability: $97.7 billion; 
All other lines: $0.9 billion. 

Calendar year: 2011; 
Private Passenger Auto Physical Damage: $67.5 billion; 
Commercial Multiple Peril: $29.2 billion; 
Financial Guaranty: $1.0 billion; 
Home owners Multiple Peril: $62.7 billion; 
Mortgage Guaranty: $4.2 billion; 
Other liability (Claims): $14.1 billion; 
Other Liability (Occurrence): $21.6 billion; 
Other Private Passenger Auto Liability: $100.4 billion; 
All other lines: $3.7 billion. 

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

Note: Data are shown in nominal dollars. 

[End of figure] 

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.[Footnote 73] 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. 

Table 10: Average Assets and Net Equity (Assets Minus Liabilities) of 
Life Insurance Companies in Liquidation, 2002-2011: 

Year: 2002; 
Average assets: $228,832; 
Median assets: $85,492; 
Average net equity: ($9,174,419); 
Notes: Based on financial data available for 4 of 7 companies. 

Year: 2003; 
Average assets: $355,911; 
Median assets: $355,911; 
Average net equity: $287,136; 
Notes: Based on financial data available for 2 of 4 companies. 

Year: 2004; 
Average assets: $491,288,146; 
Median assets: $761,126; 
Average net equity: ($42,340,783); 
Notes: Based on financial data available for 3 of 5 companies. 

Year: 2005; 
Average assets: $4,771,020; 
Median assets: $3,113,824; 
Average net equity: ($2,068,372); 
Notes: [Empty]. 

Year: 2006; 
Average assets: $7,563,413; 
Median assets: $5,602,572; 
Average net equity: ($2,843,453); 
Notes: [Empty]. 

Year: 2007; 
Average assets: $25,167,723; 
Median assets: $11,899,542; 
Average net equity: $1,331,556; 
Notes: Average net equity based on financial data available for 2 of 3 
companies. 

Year: 2008; 
Average assets: $92,995,829; 
Median assets: $4,062,709; 
Average net equity: ($201,581,872); 
Notes: [Empty]. 

Year: 2009; 
Average assets: $65,110,752; 
Median assets: $3,432,952; 
Average net equity: $7,480,692; 
Notes: [Empty]. 

Year: 2010; 
Average assets: $26,472,746; 
Median assets: $11,197,352; 
Average net equity: $2,064,663; 
Notes: [Empty]. 

Year: 2011; 
Average assets: $37,919,411; 
Median assets: $37,919,411; 
Average net equity: ($160,962); 
Notes: [Empty]. 

10 year average assets: 
Average assets: $73,347,592; 
Notes: Based on financial data available for 33 of 40 companies. 

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

Notes: Data are shown in nominal dollars. 

Unless otherwise noted in the "Notes" column, figures reflect data on 
all liquidations that occurred in a given year. 

[End of table] 

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); 
Notes: Average and median assets based on financial data available for 
11 of 16 companies. Average net equity based on financial data 
available for 6 of 16 companies. 

Year: 2003; 
Average assets: $365,951,597; 
Median assets: $34,992,852; 
Average net equity: ($401,800,128); 
Notes: Average and median assets based on financial data available for 
10 of 16 companies. Average net equity based on financial data 
available for 9 of 16 companies. 

Year: 2004; 
Average assets: $34,399,196; 
Median assets: $31,518,779; 
Average net equity: ($16,199,179); 
Notes: Average and median assets based on financial data available for 
10 of 11 companies. Average net equity based on financial data 
available for 8 of 11 companies. 

Year: 2005; 
Average assets: $10,441,213; 
Median assets: $10,575,389; 
Average net equity: ($7,765,547); 
Notes: Average net equity based on financial data available for 10 of 
11 companies. 

Year: 2006; 
Average assets: $97,118,048; 
Median assets: $37,602,758; 
Average net equity: ($46,792,277); 
Notes: Based on financial data available for 11 of 15 companies. 

Year: 2007; 
Average assets: $8,793,203; 
Median assets: $4,384,739; 
Average net equity: ($7,155,768). 

Year: 2008; 
Average assets: $130,585,870; 
Median assets: $5,927,680; 
Average net equity: ($8,913,750). 

Year: 2009; 
Average assets: $12,011,297; 
Median assets: $3,678,951; 
Average net equity: ($5,093,472); 
Notes: Based on financial data available for 12 of 13 companies. 

Year: 2010; 
Average assets: $18,011,525; 
Median assets: $8,334,604; 
Average net equity: ($8,945,922); 
Notes: Average and median assets based on financial data available for 
14 of 15 companies. Average net equity based on financial data 
available for 13 of 15 companies. 

Year: 2011; 
Average assets: $27,943,467; 
Median assets: $10,997,641; 
Average net equity: ($3,521,801); 
Notes: Based on financial data available for 16 of 17 companies. 

10 year average assets: 
Average assets: $64,140,648; 
Notes: Based on financial data available for 106 of 125 companies. 

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

Notes: Data are shown in nominal dollars. 

Unless otherwise noted in the "Notes" column, figures reflect data on 
all liquidations that occurred in a given year. 

[End of table] 

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 indexes--the A.M. Best U.S. Life 
Index and the A.M. Best Property Casualty Index--as 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. 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. 

Figure 17: Month-End Closing Stock Levels for Publicly Traded Life and 
Property/Casualty Companies and NYSE Companies, December 2004-December 
2011: 

[Refer to PDF for image: multiple line graph] 

2004: 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,000; 
A.M. Best U.S. Life Index: 1,000; 
NYSE Composite Index: 7,250.06. 

2005: 

31-January; 
A.M. Best U.S. Property Casualty Index: 994.9; 
A.M. Best U.S. Life Index: 970.89; 
NYSE Composite Index: 7,089.83. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,015.1; 
A.M. Best U.S. Life Index: 994.06; 
NYSE Composite Index: 7,321.23. 

31-March; 
A.M. Best U.S. Property Casualty Index: 986.93; 
A.M. Best U.S. Life Index: 997.35; 
NYSE Composite Index: 7,167.53. 

29-April; 
A.M. Best U.S. Property Casualty Index: 969.89; 
A.M. Best U.S. Life Index: 977.8; 
NYSE Composite Index: 7,008.32. 

31-May; 
A.M. Best U.S. Property Casualty Index: 999.15; 
A.M. Best U.S. Life Index: 1,022.35; 
NYSE Composite Index: 7,134.33. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,012.26; 
A.M. Best U.S. Life Index: 1,061.07; 
NYSE Composite Index: 7,217.78. 

29-July; 
A.M. Best U.S. Property Casualty Index: 1,038.68; 
A.M. Best U.S. Life Index: 1,109.81; 
NYSE Composite Index: 7,476.66. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,016.81; 
A.M. Best U.S. Life Index: 1,111.26; 
NYSE Composite Index: 7,496.09. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,036.53; 
A.M. Best U.S. Life Index: 1,145.88; 
NYSE Composite Index: 7,632.98. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,060.92; 
A.M. Best U.S. Life Index: 1,162.97; 
NYSE Composite Index: 7,433.12. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,108.08; 
A.M. Best U.S. Life Index: 1,239.5; 
NYSE Composite Index: 7,645.28. 

30-December; 
A.M. Best U.S. Property Casualty Index: 1,089.22; 
A.M. Best U.S. Life Index: 1,222.24; 
NYSE Composite Index: 7,753.95. 

2006: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,089.64; 
A.M. Best U.S. Life Index: 1,251.58; 
NYSE Composite Index: 8,106.55. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,075.56; 
A.M. Best U.S. Life Index: 1,287.5; 
NYSE Composite Index: 8,060.61. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,072.83; 
A.M. Best U.S. Life Index: 1,274.68; 
NYSE Composite Index: 8,233.2. 

28-April; 
A.M. Best U.S. Property Casualty Index: 1,089.27; 
A.M. Best U.S. Life Index: 1,315.23; 
NYSE Composite Index: 8,471.43. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,088.41; 
A.M. Best U.S. Life Index: 1,301.17; 
NYSE Composite Index: 8,189.11. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,080.06; 
A.M. Best U.S. Life Index: 1,293.38; 
NYSE Composite Index: 8,169.07. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,083.83; 
A.M. Best U.S. Life Index: 1,283.19; 
NYSE Composite Index: 8,242.12. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,109.75; 
A.M. Best U.S. Life Index: 1,306.73; 
NYSE Composite Index: 8,388.56. 

29-September; 
A.M. Best U.S. Property Casualty Index: 1,136.08; 
A.M. Best U.S. Life Index: 1,322.64; 
NYSE Composite Index: 8,469.65. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,196.28; 
A.M. Best U.S. Life Index: 1,340.57; 
NYSE Composite Index: 8,774.98. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,210.38; 
A.M. Best U.S. Life Index: 1,371.47; 
NYSE Composite Index: 8,969. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,244.28; 
A.M. Best U.S. Life Index: 1,401.47; 
NYSE Composite Index: 9,139.02. 

2007: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,218.68; 
A.M. Best U.S. Life Index: 1,436.53; 
NYSE Composite Index: 9,254.73. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,205.41; 
A.M. Best U.S. Life Index: 1,442.09; 
NYSE Composite Index: 9,124.54. 

30-March; 
A.M. Best U.S. Property Casualty Index: 1,219.56; 
A.M. Best U.S. Life Index: 1,449.4; 
NYSE Composite Index: 9,261.82. 

30-April; 
A.M. Best U.S. Property Casualty Index: 1,251.47; 
A.M. Best U.S. Life Index: 1,517.4; 
NYSE Composite Index: 9,627.73. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,274.29; 
A.M. Best U.S. Life Index: 1,563.85; 
NYSE Composite Index: 9,978.64. 

29-June; 
A.M. Best U.S. Property Casualty Index: 1,271.09; 
A.M. Best U.S. Life Index: 1,529.74; 
NYSE Composite Index: 9,873.02. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,204.63; 
A.M. Best U.S. Life Index: 1,433.76; 
NYSE Composite Index: 9,554.5 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,239.46; 
A.M. Best U.S. Life Index: 1,462.69; 
NYSE Composite Index: 9,596.98. 

28-September; 
A.M. Best U.S. Property Casualty Index: 1,260.03; 
A.M. Best U.S. Life Index: 1,571.99; 
NYSE Composite Index: 10,039.3. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,306.17; 
A.M. Best U.S. Life Index: 1,630.22; 
NYSE Composite Index: 10,311.6. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,325.24; 
A.M. Best U.S. Life Index: 1,525.55; 
NYSE Composite Index: 9,856.85. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,328.43; 
A.M. Best U.S. Life Index: 1,501.67; 
NYSE Composite Index: 9,740.32. 

2008: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,280.55; 
A.M. Best U.S. Life Index: 1,391.6; 
NYSE Composite Index: 9,126.16. 

29-February; 
A.M. Best U.S. Property Casualty Index: 1,260.45; 
A.M. Best U.S. Life Index: 1,337.27; 
NYSE Composite Index: 8,962.46. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,213.87; 
A.M. Best U.S. Life Index: 1,350.55; 
NYSE Composite Index: 8,797.29. 

30-April; 
A.M. Best U.S. Property Casualty Index: 1,248.02; 
A.M. Best U.S. Life Index: 1,365.71; 
NYSE Composite Index: 9,299.6. 

30-May; 
A.M. Best U.S. Property Casualty Index: 1,257.38; 
A.M. Best U.S. Life Index: 1,347.53; 
NYSE Composite Index: 9,401.08. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,119.01; 
A.M. Best U.S. Life Index: 1,155.49; 
NYSE Composite Index: 8,660.48. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,106.01; 
A.M. Best U.S. Life Index: 1,192.35; 
NYSE Composite Index: 8,438.64. 

29-August; 
A.M. Best U.S. Property Casualty Index: 1,121.71; 
A.M. Best U.S. Life Index: 1,221.55; 
NYSE Composite Index: 8,382.08. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,195.24; 
A.M. Best U.S. Life Index: 1,162.12; 
NYSE Composite Index: 7,532.8. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,064.08; 
A.M. Best U.S. Life Index: 632.97; 
NYSE Composite Index: 6,061.09. 

28-November; 
A.M. Best U.S. Property Casualty Index: 1,008.91; 
A.M. Best U.S. Life Index: 528.28; 
NYSE Composite Index: 5,599.3. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,006.3; 
A.M. Best U.S. Life Index: 623.85; 
NYSE Composite Index: 5,757.05. 

2009: 

30-January; 
A.M. Best U.S. Property Casualty Index: 890.74; 
A.M. Best U.S. Life Index: 532.52; 
NYSE Composite Index: 5,195.79. 

27-February; 
A.M. Best U.S. Property Casualty Index: 801.05; 
A.M. Best U.S. Life Index: 345.28; 
NYSE Composite Index: 4,617.03. 

31-March; 
A.M. Best U.S. Property Casualty Index: 875.63; 
A.M. Best U.S. Life Index: 397.99; 
NYSE Composite Index: 4,978.98. 

30-April; 
A.M. Best U.S. Property Casualty Index: 925.31; 
A.M. Best U.S. Life Index: 558.85; 
NYSE Composite Index: 5,513.36. 

29-May; 
A.M. Best U.S. Property Casualty Index: 907.76; 
A.M. Best U.S. Life Index: 695.81; 
NYSE Composite Index: 6,004.07. 

30-June; 
A.M. Best U.S. Property Casualty Index: 907.02; 
A.M. Best U.S. Life Index: 628.63; 
NYSE Composite Index: 5,905.15. 

31-July; 
A.M. Best U.S. Property Casualty Index: 986.12; 
A.M. Best U.S. Life Index: 780.97; 
NYSE Composite Index: 6,424.28. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,052.83; 
A.M. Best U.S. Life Index: 794.78; 
NYSE Composite Index: 6,643.24. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,060.23; 
A.M. Best U.S. Life Index: 819.55; 
NYSE Composite Index: 6,910.88. 

30-October; 
A.M. Best U.S. Property Casualty Index: 1,034.72; 
A.M. Best U.S. Life Index: 741.31; 
NYSE Composite Index: 6,739.45. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,055.36; 
A.M. Best U.S. Life Index: 749.29; 
NYSE Composite Index: 7,092.36. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,051.02; 
A.M. Best U.S. Life Index: 770.48; 
NYSE Composite Index: 7,184.96. 

2010: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,107.82; 
A.M. Best U.S. Life Index: 777.52; 
NYSE Composite Index: 6,883.78. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,151.38; 
A.M. Best U.S. Life Index: 796.52; 
NYSE Composite Index: 7,035.04. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,180.91; 
A.M. Best U.S. Life Index: 911.85; 
NYSE Composite Index: 7,447.8. 

30-April; 
A.M. Best U.S. Property Casualty Index: 1,149.15; 
A.M. Best U.S. Life Index: 898.07; 
NYSE Composite Index: 7,474.4. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,080.15; 
A.M. Best U.S. Life Index: 820.5; 
NYSE Composite Index: 6,791.57. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,134.06; 
A.M. Best U.S. Life Index: 747.3; 
NYSE Composite Index: 6,469.65. 

30-July; 
A.M. Best U.S. Property Casualty Index: 1,148.57; 
A.M. Best U.S. Life Index: 810.55; 
NYSE Composite Index: 6,998.99. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,151.8; 
A.M. Best U.S. Life Index: 693.12; 
NYSE Composite Index: 6,704.15. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,220.8; 
A.M. Best U.S. Life Index: 751.05; 
NYSE Composite Index: 7,281.07. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,207.5; 
A.M. Best U.S. Life Index: 773.02; 
NYSE Composite Index: 7,513.35. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,204.66; 
A.M. Best U.S. Life Index: 770; 
NYSE Composite Index: 7,430.94. 

31-December; 
A.M. Best U.S. Property Casualty Index: 1,233.2; 
A.M. Best U.S. Life Index: 889.99; 
NYSE Composite Index: 7,964.02. 

2011: 

31-January; 
A.M. Best U.S. Property Casualty Index: 1,244.82; 
A.M. Best U.S. Life Index: 920.09; 
NYSE Composite Index: 8,139.16. 

28-February; 
A.M. Best U.S. Property Casualty Index: 1,310.02; 
A.M. Best U.S. Life Index: 970.75; 
NYSE Composite Index: 8,438.55. 

31-March; 
A.M. Best U.S. Property Casualty Index: 1,285.7; 
A.M. Best U.S. Life Index: 924.11; 
NYSE Composite Index: 8,404.98. 

29-April; 
A.M. Best U.S. Property Casualty Index: 1,301.32; 
A.M. Best U.S. Life Index: 947.44; 
NYSE Composite Index: 8,671.41. 

31-May; 
A.M. Best U.S. Property Casualty Index: 1,264.06; 
A.M. Best U.S. Life Index: 918.67; 
NYSE Composite Index: 8,477.28. 

30-June; 
A.M. Best U.S. Property Casualty Index: 1,225.46; 
A.M. Best U.S. Life Index: 899.63; 
NYSE Composite Index: 8,319.1. 

31-July; 
A.M. Best U.S. Property Casualty Index: 1,187.31; 
A.M. Best U.S. Life Index: 827.98; 
NYSE Composite Index: 8,079.44. 

31-August; 
A.M. Best U.S. Property Casualty Index: 1,154.41; 
A.M. Best U.S. Life Index: 715.58; 
NYSE Composite Index: 7,528.39. 

30-September; 
A.M. Best U.S. Property Casualty Index: 1,111.08; 
A.M. Best U.S. Life Index: 617.01; 
NYSE Composite Index: 6,791.65. 

31-October; 
A.M. Best U.S. Property Casualty Index: 1,235.98; 
A.M. Best U.S. Life Index: 721.63; 
NYSE Composite Index: 7,563.38. 

30-November; 
A.M. Best U.S. Property Casualty Index: 1,238.66; 
A.M. Best U.S. Life Index: 653.86; 
NYSE Composite Index: 7,484.5. 

30-December; 
A.M. Best U.S. Property Casualty Index: 1,232.86; 
A.M. Best U.S. Life Index: 656.14; 
NYSE Composite Index: 7,477.03. 

Source: GAO analysis of A.M. Best data on the A.M. Best U. S. Life and 
Property Casualty 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 
Best's rating, or that have an insurance subsidiary with an 
interactive Best's 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. 

[End of figure] 

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 figure18). 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. 

Figure 18: Key Events in the Financial Crisis and Stock Indices for 
Publicly Traded Life and Property/Casualty Insurers for 2007: 

[Refer to PDF for image: 4 line graphs] 

Date: 6/1; 
A.M. Best U.S. Property Casualty Index: 1,277.43; 
A.M. Best U.S. Life Index: 1,571.94; 
NYSE Composite Index: 9,978.74. 

Date: 6/14; 
A.M. Best U.S. Property Casualty Index: 1,271.16; 
A.M. Best U.S. Life Index: 1,541.53; 
NYSE Composite Index: 9,863.54. 

Date: 6/27; 
A.M. Best U.S. Property Casualty Index: 1,259.43; 
A.M. Best U.S. Life Index: 1,527.68; 
NYSE Composite Index: 9,774.28. 

Date: 7/10; 
A.M. Best U.S. Property Casualty Index: 1,270.63; 
A.M. Best U.S. Life Index: 1,514.45; 
NYSE Composite Index: 10,099.4. 

Date: 7/23; 
A.M. Best U.S. Property Casualty Index: 1,243.82; 
A.M. Best U.S. Life Index: 1,530.79; 
NYSE Composite Index: 10,073.3. 

Date: 8/3; 
A.M. Best U.S. Property Casualty Index: 1,181.33; 
A.M. Best U.S. Life Index: 1,398.81; 
NYSE Composite Index: 9,619.37. 

Date: 8/16; 
A.M. Best U.S. Property Casualty Index: 1,217.91; 
A.M. Best U.S. Life Index: 1,374.42; 
NYSE Composite Index: 9,089.04. 

Date: 8/29; 
A.M. Best U.S. Property Casualty Index: 1,244.81; 
A.M. Best U.S. Life Index: 1,461.08; 
NYSE Composite Index: 9,289.5. 

Date: 9/11; 
A.M. Best U.S. Property Casualty Index: 1,233.95; 
A.M. Best U.S. Life Index: 1,455.03; 
NYSE Composite Index: 9,457.68. 

Date: 9/24; 
A.M. Best U.S. Property Casualty Index: 1,236.65; 
A.M. Best U.S. Life Index: 1,525.92; 
NYSE Composite Index: 9,981.82. 

Date: 10/5; 
A.M. Best U.S. Property Casualty Index: 1,297.34; 
A.M. Best U.S. Life Index: 1,616.43; 
NYSE Composite Index: 10,142.9. 

Date: 10/18; 
A.M. Best U.S. Property Casualty Index: 1,297.2; 
A.M. Best U.S. Life Index: 1,583.49; 
NYSE Composite Index: 10,165.2. 

Date: 10/31; 
A.M. Best U.S. Property Casualty Index: 1,306.17; 
A.M. Best U.S. Life Index: 1,630.22; 
NYSE Composite Index: 10,165.5. 

Date: 11/13; 
A.M. Best U.S. Property Casualty Index: 1,312.03; 
A.M. Best U.S. Life Index: 1,570.1; 
NYSE Composite Index: 9,570.71. 

Date: 11/26; 
A.M. Best U.S. Property Casualty Index: 1,271; 
A.M. Best U.S. Life Index: 1,441.55; 
NYSE Composite Index: 9,582.94. 

Date: 12/7; 
A.M. Best U.S. Property Casualty Index: 1,371.79; 
A.M. Best U.S. Life Index: 1,538.02; 
NYSE Composite Index: 10,030.2. 

Date: 12/20; 
A.M. Best U.S. Property Casualty Index: 1,284.53; 
A.M. Best U.S. Life Index: 1,485.68; 
NYSE Composite Index: 9,586.07. 

Date: 12/31; 
A.M. Best U.S. Property Casualty Index: 1,328.43; 
A.M. Best U.S. Life Index: 1,501.67; 
NYSE Composite Index: 9,803.83. 

Fall of 2007: 
As conditions in the U.S. housing market deteriorate, American 
International Group Financial Products Corporation begins to lose 
massive amounts of money on credit default swaps issued on 
collaterized debt obligations. 

A.M. Best U.S. Life Index: 
Closing level: 
11/6: 1,591; 
11/7: 1,533; 
11/8: 1,563. 

A.M. Best U.S. Property Casualty Index: 
Closing level: 
11/20: 1,286; 
11/21: 1,265; 
11/22: 1,265. 

NYSE Composite Index: 
Closing level: 
11/6: 9,959; 
11/7: 10,102; 
11/8: 9,830. 

Source: GAO analysis of A.M. Best data on the A.M. Best U.S. Life and 
Property Casualty Indexes and the New York Stock Exchange Composite 
Index. 

[End of figure] 

Figure 19: Key Events in the Financial Crisis and Stock Indices for 
Publicly Traded Life and Property/Casualty Insurers for 2008: 

[Refer to PDF for image: 7 line graphs] 

Date: 1/1; 
A.M. Best U.S. Property Casualty Index: 1,328.43; 
A.M. Best U.S. Life Index: 1,501.67. 

Date: 1/15; 
A.M. Best U.S. Property Casualty Index: 1247.53; 
A.M. Best U.S. Life Index: 1,403.87; 
NYSE Composite index: 9,439.33. 

Date: 1/28; 
A.M. Best U.S. Property Casualty Index: 1,276.31; 
A.M. Best U.S. Life Index: 1,358.4; 
NYSE Composite index: 8,827.63. 

Date: 2/8; 
A.M. Best U.S. Property Casualty Index: 1,274.54; 
A.M. Best U.S. Life Index: 1,315.08; 
NYSE Composite index: 8,859.04. 

Date: 2/21; 
A.M. Best U.S. Property Casualty Index: 1,275.52; 
A.M. Best U.S. Life Index: 1,340.24; 
NYSE Composite index: 9,074.05. 

Date: 3/5; 
A.M. Best U.S. Property Casualty Index: 1,244.42; 
A.M. Best U.S. Life Index: 1,317.65; 
NYSE Composite index: 8,891.44. 

Date: 3/18; 
A.M. Best U.S. Property Casualty Index: 1,197.83; 
A.M. Best U.S. Life Index: 1,298.34; 
NYSE Composite index: 8,489.39. 

Date: 3/31; 
A.M. Best U.S. Property Casualty Index: 1,213.87; 
A.M. Best U.S. Life Index: 1,350.55; 
NYSE Composite index: 8,761.87. 

Date: 4/11; 
A.M. Best U.S. Property Casualty Index: 1,214.71; 
A.M. Best U.S. Life Index: 1,337.59; 
NYSE Composite index: 9,096.86. 

Date: 4/24; 
A.M. Best U.S. Property Casualty Index: 1,225.13; 
A.M. Best U.S. Life Index: 1,348.42; 
NYSE Composite index: 9,237.33. 

Date: 5/7; 
A.M. Best U.S. Property Casualty Index: 1,222.61; 
A.M. Best U.S. Life Index: 1,351.39; 
NYSE Composite index: 9,510.97. 

Date: 5/20; 
A.M. Best U.S. Property Casualty Index: 1,212.34; 
A.M. Best U.S. Life Index: 1,355.63; 
NYSE Composite index: 9,602.78. 

Date: 6/2; 
A.M. Best U.S. Property Casualty Index: 1,244.03; 
A.M. Best U.S. Life Index: 1,329.42; 
NYSE Composite index: 9,401.1. 

Date: 6/16; 
A.M. Best U.S. Property Casualty Index: 1,203.78; 
A.M. Best U.S. Life Index: 1,303.81; 
NYSE Composite index: 9,063.1. 

Date: 6/27; 
A.M. Best U.S. Property Casualty Index: 1,130.1; 
A.M. Best U.S. Life Index: 1,185.33; 
NYSE Composite index: 8,640.73. 

Date: 7/10; 
A.M. Best U.S. Property Casualty Index: 1,102.45; 
A.M. Best U.S. Life Index: 1,148.62; 
NYSE Composite index: 8,371.51. 

Date: 7/24; 
A.M. Best U.S. Property Casualty Index: 1,092.62; 
A.M. Best U.S. Life Index: 1,192.34; 
NYSE Composite index: 8,580.67. 

Date: 8/7; 
A.M. Best U.S. Property Casualty Index: 1,106.25; 
A.M. Best U.S. Life Index: 1,171.46; 
NYSE Composite index: 8,501.7. 

Date: 8/20; 
A.M. Best U.S. Property Casualty Index: 1,104.03; 
A.M. Best U.S. Life Index: 1,170.38; 
NYSE Composite index: 8,212.46. 

Date: 9/2; 
A.M. Best U.S. Property Casualty Index: 1,137.04; 
A.M. Best U.S. Life Index: 1,232.21; 
NYSE Composite index: 8,382.77. 

Date: 9/15; 
A.M. Best U.S. Property Casualty Index: 1,121.8; 
A.M. Best U.S. Life Index: 1,175.14; 
NYSE Composite index: 8,091.57. 

Date: 9/26; 
A.M. Best U.S. Property Casualty Index: 1,217.8; 
A.M. Best U.S. Life Index: 1,182.73; 
NYSE Composite index: 7,927.86. 

Date: 10/9; 
A.M. Best U.S. Property Casualty Index: 938.03; 
A.M. Best U.S. Life Index: 661.9; 
NYSE Composite index: 6,306.35. 

Date: 10/22; 
A.M. Best U.S. Property Casualty Index: 1003.58; 
A.M. Best U.S. Life Index: 638.51; 
NYSE Composite index: 6,051.35. 

Date: 11/4; 
A.M. Best U.S. Property Casualty Index: 1,075.08; 
A.M. Best U.S. Life Index: 747.07; 
NYSE Composite index: 6,054.98. 

Date: 11/17; 
A.M. Best U.S. Property Casualty Index: 935.11; 
A.M. Best U.S. Life Index: 494.09; 
NYSE Composite index: 5,452.63. 

Date: 11/28; 
A.M. Best U.S. Property Casualty Index: 1,008.91; 
A.M. Best U.S. Life Index: .28; 
NYSE Composite index: 5,547.38. 

Date: 12/11; 
A.M. Best U.S. Property Casualty Index: 959.5; 
A.M. Best U.S. Life Index: 539.93; 
NYSE Composite index: 5,631.18. 

Date: 12/24; 
A.M. Best U.S. Property Casualty Index: 963.62; 
A.M. Best U.S. Life Index: 572.56; 
NYSE Composite index: 5,468.28. 

February-March 2008: 
In March 2008, the Federal Reserve Bank of New York extends credit to 
Bear Stearns through JP Morgan Chase Bank to address their immediate 
liquidity needs and forestall the potential systemic disruptions of a 
default or bankruptcy. 

A.M. Best U.S. Life Index: 
Closing level: 
2/4 1,401; 
2/5: 1,333; 
2/6: 1,326. 

A.M. Best U.S. Property Casualty Index: 
Closing level: 
3/11: 1,223; 
3/12: 1,197; 
3/13: 1,200. 

NYSE Composite Index: 
Closing level: 
2/4: 9,202; 
2/5: 8,875; 
2/6: 8,818. 

May-June 2008: 
In May 2008, credit ratings agencies Standard & Poor’s, Fitch Ratings, 
and Moody’s Investor Services each downgrade their ratings on AIG. 

A.M. Best U.S. Life Index: 
Closing level: 
6/4 1,322; 
6/5: 1,337; 
6/6: 1,289. 

A.M. Best U.S. Property Casualty Index: 
Closing level: 
6/5: 1,249; 
6/6: 1,221; 
6/9: 1,211. 

NYSE Composite Index: 
Closing level: 
6/5: 9,408; 
6/6: 9,153; 
6/9: 9,149. 

[End of figure] 

Figure 20: Key Events in the Financial Crisis and Stock Indices for 
Publicly Traded Life and Property/Casualty Insurers for 2009: 

[Refer to PDF for image: 4 line graphs] 

Date: 1/1; 
A.M. Best U.S. Property Casualty Index: 1006.3; 
A.M. Best U.S. Life Index: 623.85. 

Date: 1/14; 
A.M. Best U.S. Property Casualty Index: 939.75; 
A.M. Best U.S. Life Index: 563.02; 
NYSE Composite Index: 5,538.69. 

Date: 1/27; 
A.M. Best U.S. Property Casualty Index: 894.51; 
A.M. Best U.S. Life Index: 552.22; 
NYSE Composite Index: 5,244.63. 

Date: 2/9; 
A.M. Best U.S. Property Casualty Index: 916.13; 
A.M. Best U.S. Life Index: 574.47; 
NYSE Composite Index: 5,475.28. 

Date: 2/20; 
A.M. Best U.S. Property Casualty Index: 816.12; 
A.M. Best U.S. Life Index: 379.32; 
NYSE Composite Index: 4,881.16. 

Date: 3/5; 
A.M. Best U.S. Property Casualty Index: 726.75; 
A.M. Best U.S. Life Index: 258.72; 
NYSE Composite Index: 4,464.89. 

Date: 3/18; 
A.M. Best U.S. Property Casualty Index: 861.74; 
A.M. Best U.S. Life Index: 436.64; 
NYSE Composite Index: 4,868.14. 

Date: 3/31; 
A.M. Best U.S. Property Casualty Index: 875.63; 
A.M. Best U.S. Life Index: 397.99; 
NYSE Composite Index: 4,899.05. 

Date: 4/13; 
A.M. Best U.S. Property Casualty Index: 947.98; 
A.M. Best U.S. Life Index: 532.35; 
NYSE Composite Index: 5,376.44. 

Date: 4/24; 
A.M. Best U.S. Property Casualty Index: 890.1; 
A.M. Best U.S. Life Index: 549.51; 
NYSE Composite Index: 5,372.1. 

Date: 5/7; 
A.M. Best U.S. Property Casualty Index: 911.92; 
A.M. Best U.S. Life Index: 651.14; 
NYSE Composite Index: 5,890.55. 

Date: 5/20; 
A.M. Best U.S. Property Casualty Index: 904.61; 
A.M. Best U.S. Life Index: 655.08; 
NYSE Composite Index: 5,872.23. 

Date: 6/2; 
A.M. Best U.S. Property Casualty Index: 931.02; 
A.M. Best U.S. Life Index: 723.49; 
NYSE Composite Index: 6,169.08. 

Date: 6/15; 
A.M. Best U.S. Property Casualty Index: 910.97; 
A.M. Best U.S. Life Index: 660.43; 
NYSE Composite Index: 6,148.61. 

Date: 6/25; 
A.M. Best U.S. Property Casualty Index: 889.29; 
A.M. Best U.S. Life Index: 637.95; 
NYSE Composite Index: 5,795.72. 

Date: 7/9; 
A.M. Best U.S. Property Casualty Index: 875.4; 
A.M. Best U.S. Life Index: 584.93; 
NYSE Composite Index: 5,624.57. 

Date: 7/22; 
A.M. Best U.S. Property Casualty Index: 939.46; 
A.M. Best U.S. Life Index: 687.54; 
NYSE Composite Index: 6,154.37. 

Date: 8/4; 
A.M. Best U.S. Property Casualty Index: 1,022.53; 
A.M. Best U.S. Life Index: 806.19; 
NYSE Composite Index: 6,565.65. 

Date: 8/17; 
A.M. Best U.S. Property Casualty Index: 1,012.48; 
A.M. Best U.S. Life Index: 722.7; 
NYSE Composite Index: 6,537.82. 

Date: 8/28; 
A.M. Best U.S. Property Casualty Index: 1,048.85; 
A.M. Best U.S. Life Index: 800.61; 
NYSE Composite Index: 6,722.31. 

Date: 9/10; 
A.M. Best U.S. Property Casualty Index: 1,039.53; 
A.M. Best U.S. Life Index: 786.18; 
NYSE Composite Index: 6,772.39. 

Date: 9/23; 
A.M. Best U.S. Property Casualty Index: 1,046.98; 
A.M. Best U.S. Life Index: 805.8; 
NYSE Composite Index: 7,046.91. 

Date: 10/6; 
A.M. Best U.S. Property Casualty Index: 1,065.02; 
A.M. Best U.S. Life Index: 817.86; 
NYSE Composite Index: 6,795.13. 

Date: 10/16; 
A.M. Best U.S. Property Casualty Index: 1,067.62; 
A.M. Best U.S. Life Index: 827.09; 
NYSE Composite Index: 7,204.05. 

Date: 10/26; 
A.M. Best U.S. Property Casualty Index: 1,053.92; 
A.M. Best U.S. Life Index: 779.69; 
NYSE Composite Index: 7,066.8. 

Date: 11/6; 
A.M. Best U.S. Property Casualty Index: 1,061.75; 
A.M. Best U.S. Life Index: 747.9; 
NYSE Composite Index: 6,950.14. 

Date: 11/16; 
A.M. Best U.S. Property Casualty Index: 1,076.52; 
A.M. Best U.S. Life Index: 775.4; 
NYSE Composite Index: 7,119.9. 

Date: 11/26; 
A.M. Best U.S. Property Casualty Index: 1,067.73; 
A.M. Best U.S. Life Index: 760.78. 

Date: 12/7; 
A.M. Best U.S. Property Casualty Index: 1,046.04; 
A.M. Best U.S. Life Index: 742.49; 
NYSE Composite Index: 7,182.66. 

Date: 12/17; 
A.M. Best U.S. Property Casualty Index: 1,036.56; 
A.M. Best U.S. Life Index: 750.29; 
NYSE Composite Index: 7,180.75. 

Date: 12/28; 
A.M. Best U.S. Property Casualty Index: 1,050.34; 
A.M. Best U.S. Life Index: 778.63; 
NYSE Composite Index: 7,255. 

May 2009: 
The federal government continues to provide assistance to financial 
institutions such as the Federal Reserve’s Term Asset-Backed 
Securities Loan Facility and the U.S. Treasury’s Capital Purchase 
Program. 

A.M. Best U.S. Life Index: 
Closing level: 
5/8: 731; 
5/11: 659; 
5/12: 649. 

A.M. Best U.S. Property Casualty Index: 
Closing level: 
5/8: 937; 
5/11: 895; 
5/12: 898. 

NYSE Composite Index: 
Closing level: 
5/12: 5,859; 
5/13: 5,666; 
5/14: 5,733. 

Source:GAO analysis of A.M. Best data on the A.M. Best U.S. Life and 
Property Casualty Indexes and the New York Stock Exchange Composite 
Index. 

[End of figure] 

[End of section] 

Appendix III: Profiles of Distressed Insurers: 

This appendix provides more detail on two distressed insurers--one 
mortgage guaranty insurer and one life insurer--during the financial 
crisis.[Footnote 74] 

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 run-off, 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.[Footnote 75] 

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 insurer's 
underwritten risk--the total amount of coverage for which it was at 
risk under its certificates of insurance--was 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 insurer's portfolio. 

Table 12: Distressed Market Default Rates and Percentage of Insurer's 
Total Underwritten Risk, 2007-2011: 

Calendar Year: 2007; 
Default rate in distressed markets: 5.7%; 
Coverage in distressed markets as percentage of insurer's total 
underwritten risk: 32.1%. 

Calendar Year: 2008; 
Default rate in distressed markets: 22.7%; 
Coverage in distressed markets as percentage of insurer's total 
underwritten risk: 34.4%. 

Calendar Year: 2009; 
Default rate in distressed markets: 35.4%; 
Coverage in distressed markets as percentage of insurer's total 
underwritten risk: 25.2%. 

Calendar Year: 2010; 
Default rate in distressed markets: 29.9%; 
Coverage in distressed markets as percentage of insurer's total 
underwritten risk: 23.5%. 

Calendar Year: 2011; 
Default rate in distressed markets: 26.9%; 
Coverage in distressed markets as percentage of insurer's total 
underwritten risk: 22.1%. 

Source: GAO analysis of insurer's annual Form 10-K filings. 

[End of table] 

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 insurer's 
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. 
[Footnote 76] 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. 

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 insurer's property, business, and affairs until the 
insurer's 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.[Footnote 77] In 
late 2011, the regulator approved of the insurer's acquisition by a 
third-party insurer. This transaction facilitated the insurer's 
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 insurer's capital, which declined by over 38 
percent from March 31, 2008 to September 30, 2008.[Footnote 78] 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.[Footnote 79] In receivership, the 
regulator granted the insurer an exemption from a state insurance 
statute restricting certain types of investments based on a company's 
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 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 of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Patrick A. Ward (Assistant 
Director), Emily R. Chalmers, William R. Chatlos, Janet Fong, David J. 
Lin, Angela Pun, Lisa M. Reynolds, Jessica M. Sandler, and Jena Y. 
Sinkfield made significant contributions to this report. 

[End of section] 

Footnotes: 

[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 
Treasury's 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 policyholder's own person/property. Casualty (or 
liability) insurance is coverage for a policyholder's 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. 

[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, [hyperlink, 
http://www.gao.gov/products/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 company's 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 company's 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 period--generally 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 company's 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. 

[13] 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 
company's 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 
company's assets. Voting rights are normally accorded to holders of 
common stock. 

[15] This was part of AIG's TARP assistance. See GAO, Troubled Asset 
Relief Program: Status of Government Assistance Provided to AIG, 
[hyperlink, http://www.gao.gov/products/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 for-profit, 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 insurer's 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 
insurer's 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. 

[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 SPV's 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 insurer's books, records, and assets 
and assumes all powers of the insurer's 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 MBS-related 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 
insurer's state of 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 company's 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] NAIC's 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. 91R--Accounting 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 state's 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 case-by-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 company's 
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 company's 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 insurer's 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 insurer's 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. 

[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 Bank's depository business to General Electric Capital 
on January 11, 2013. 

[49] The Federal Reserve Bank of New York created a special purpose 
vehicle--Maiden 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 NAIC's Risk Management 
and Own Risk and Solvency Assessment Model Act for the statute to be 
in effect within the states. 

[52] NAIC's 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. 

[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, [hyperlink, 
http://www.gao.gov/products/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, [hyperlink, 
http://www.gao.gov/products/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, 
[hyperlink, http://www.gao.gov/products/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 1423-1432, codified at 12 
U.S.C. § 5365. 

[66] 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. 

[67] 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. 

[68] 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. 

[69] NYA had 1,867 component companies as of February 24, 2012. 

[70] 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. Because we had not used 
SNL Financial's insurance data in the past, we took additional 
measures to ensure their reliability. 

[71] 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. 

[72] The P/C industry encompasses many lines of insurance. For 
example, other lines of P/C insurance include--but are not limited to--
fire, farmowners, ocean marine, medical professional liability, 
earthquake, group accident and health, workers' compensation, product 
liability, commercial auto liability, and credit insurance. 

[73] 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. 

[74] Although we used court documents to compile the profiles, we 
refrained from citing them in order to maintain the two insurers' 
anonymity. 

[75] 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. 

[76] Policyholders' surplus is the excess of an insurance company's 
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. 

[77] 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). 

[78] 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. 

[79] 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 
member's 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. 

[End of section] 

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