INSURANCE 

MARKETS

Impacts of and 

Regulatory Response 

to the 2007-2009 

Financial Crisis

Report to Congressional Requesters

June 2013

GAO-13-583

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-583, a report to 

congressional requesters

June 2013

INSURANCE MARKETS

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

Why GAO Did This Study

Insurance plays an important role in 

ensuring the smooth functioning of the 

economy. Concerns about the 

oversight of the $1 trillion life and 

property/casualty insurance industry 

arose during the 2007-2009 financial 

crisis, when one of the largest holding 

companies, AIG, suffered severe 

losses that threatened to affect its 

insurance subsidiaries. GAO was 

asked to examine any effects of the 

financial crisis on the insurance 

industry. 

This report addresses (1) what is 

known about how the financial crisis of 

2007-2009 affected the insurance 

industry and policyholders, (2) the 

factors that affected the impact of the 

crisis on insurers and policyholders, 

and (3) the types of actions that have 

been taken since the crisis to help 

prevent or mitigate potential negative 

effects of future economic downturns 

on insurance companies and their 

policyholders. 

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.

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

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

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 GAO-13-583. For more information, 

contact Alicia Puente Cackley (202) 512-8678 

or cackleya@gao.gov.
Page i GAO-13-583 State-Based Insurance

Letter 1

Background 3

Effects of the Crisis Were Limited Largely to Certain Products and 

Lines of Insurance 9

Actions by State Regulators, Federal Programs, and Insurance 

Business Practices Helped Mitigate Some Effects of the Crisis 34

Regulators Have Continued Efforts to Strengthen the Regulatory 

System since the Crisis 50

Agency Comments 58

Appendix I Objectives, Scope, and Methodology 60

Appendix II Additional Data on Life and P/C Industry Financial 

Performance, 2002-2011 66

Appendix III Profiles of Distressed Insurers 80

Appendix IV GAO Contact and Staff Acknowledgments 84

Tables

Table 1: Number of Receiverships and Liquidations for Life and 

Property/Casualty Companies, 2002-2011 17

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 20

Table 3: Variable Annuity Sales and GLB Election Rates, 2002-2012 29

Table 4: Financial and Mortgage Guaranty Insurers’ Average Loss 

and Combined Ratios, 2002-2011 31

Table 5: Net Effects of All Prescribed and Permitted Practices on 

Life and Property/Casualty Insurers’ Net Income and 

Capital, 2006-2011 40

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

2008 and 2009 66

Contents
Page ii GAO-13-583 State-Based Insurance

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

2008 and 2009 67

Table 8: Property/Casualty Insurers with $1 Billion or More in 

Realized Losses, 2008 and 2009 68

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

Unrealized Losses, 2008 and 2009 68

Table 10: Average Assets and Net Equity (Assets Minus Liabilities) 

of Life Insurance Companies in Liquidation, 2002-2011 73

Table 11: Average Assets and Net Equity (Assets Minus Liabilities) 

of Property/Casualty Companies in Liquidation, 2002-2011 74

Table 12: Distressed Market Default Rates and Percentage of 

Insurer’s Total Underwritten Risk, 2007-2011 81

Figures

Figure 1: Premiums Written for Selected Lines of Life Insurance 

Business as a Percentage of Total Premiums Written, 

2002-2011 5

Figure 2: Premiums Written for Selected Lines of Property/Casualty 

Insurance Business, as a Percentage of Total Premiums 

Written, 2002-2011 6

Figure 3: Life and Property/Casualty Insurers’ Net Income and 

Capital, 2002-2011 11

Figure 4: Major Activities Affecting Life Insurers’ Capital, 2002-2011 13

Figure 5: Month-End Closing Stock Levels for Publicly Traded Life 

and Property/Casualty Companies, December 2004-

December 2011 14

Figure 6: Major Activities Affecting Capital of Property/Casualty 

Insurers, 2002-2011 16

Figure 7: Life and Property/Casualty Insurers’ Net Investment 

Income, 2002-2011 19

Figure 8: Life Insurers’ Benefits and Losses Incurred Compared to 

Net Premiums Written, 2002-2011 22

Figure 9: Average Property/Casualty Industry Loss Ratios and 

Combined Ratios, 2002-2011 24

Figure 10: Life Insurers’ Net Investment and Underwriting 

Gains/(Losses), 2002-2011 25

Figure 11: Property/Casualty Insurers’ Net Investment and 

Underwriting Gains/(Losses), 2002-2011 26

Figure 12: Net Premiums Written for Group and Individual Life and 

Annuities Products, 2002-2011 27
Page iii GAO-13-583 State-Based Insurance

Figure 13: Admitted Deferred Tax Assets as a Percentage of Capital 

for the Life Insurance Industry 44

Figure 14: Admitted Deferred Tax Assets as a Percentage of Capital 

for the Property/Casualty Insurance Industry 45

Figure 15: Life and Property/Casualty Insurers’ Net Cash Flows 

from Financing and Miscellaneous Sources, 2002-2011 70

Figure 16: Net Premiums Written for Selected Property/Casualty 

Lines of Business, 2002-2011 72

Figure 17: Month-End Closing Stock Levels for Publicly Traded Life 

and Property/Casualty Companies and NYSE Companies, 

December 2004-December 2011 75

Figure 18: Key Events in the Financial Crisis and Stock Indices for 

Publicly Traded Life and Property/Casualty Insurers for 

2007 77

Figure 19: Key Events in the Financial Crisis and Stock Indices for 

Publicly Traded Life and Property/Casualty Insurers for 

2008 78

Figure 20: Key Events in the Financial Crisis and Stock Indices for 

Publicly Traded Life and Property/Casualty Insurers for 

2009 79
Page iv GAO-13-583 State-Based Insurance

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

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Page 1 GAO-13-583 State-Based Insurance

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.1

 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.

Some other insurance companies also took 

advantage of federal assistance, raising concerns about their financial 
Page 2 GAO-13-583 State-Based Insurance

position and regulators’ response to and preparation for future financial 

crises that might affect insurers and their policyholders.

The report responds to your request to examine any effects of the 

financial crisis on the insurance industry and policyholders. The report 

addresses (1) what is known about how the financial crisis affected 

insurance industry and policyholders, (2) the factors that affected the 

impact of the crisis on insurers and policyholders, and (3) the types of 

actions that have been taken since the crisis to help prevent or mitigate 

potential negative effects of future economic downturns on insurance 

companies and their policyholders.2

For all objectives, we reviewed relevant laws and regulations, conducted 

a literature search and reviewed literature and past GAO reports on the 

financial crisis. To address how the financial crisis affected the insurance 

industry and policyholders, we consulted academic papers, government 

reports, industry representatives, and regulatory officials to identify the 

key characteristics associated with the financial crisis. We obtained and 

analyzed financial data from a variety of data sources including SNL 

Financial, a private financial database that contains publicly filed 

regulatory and financial reports, the Global Receivership Information 

Database from the National Association of Insurance Commissioners

(NAIC), and A.M. 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 

 2

This report focuses on the life and property/casualty (P/C) insurance sectors and does 

not review activities within the health insurance industry.
Page 3 GAO-13-583 State-Based Insurance

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.

Generally, insurers offer several lines, or types, of insurance to 

consumers and others. Some types of insurance include life and annuity 

products and P/C.3 An insurance policy can include coverage for 

individuals or families, (“personal lines,”) and coverage for businesses, 

(“commercial lines”). Personal lines include home owners, renters, and 

automobile coverage. Commercial lines may include general liability, 

commercial property, and product liability insurance. The U.S. life and 

P/C industries wrote, or sold, an annual average of $601 billion and $472 

billion, respectively, in premiums from 2002 through 2011. Figures 1 and 

2 illustrate the percentage of premiums written for selected lines of 

insurance, compared to total premiums written in the life and P/C 

industries, for that time period.4

 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.

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 

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.

Background

Insurance Industry 

Overview
Page 4 GAO-13-583 State-Based Insurance

percent) in the P/C industry.5 In the P/C industry, financial and mortgage 

guaranty insurance represented less than 2 percent of premiums written 

on average during the period.6

 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.

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.

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. 
Page 5 GAO-13-583 State-Based Insurance

Figure 1: Premiums Written for Selected Lines of Life Insurance Business as a 

Percentage of Total Premiums Written, 2002-2011

Note: Data for some years do not add up to 100 percent due to rounding.
Page 6 GAO-13-583 State-Based Insurance

Figure 2: Premiums Written for Selected Lines of Property/Casualty Insurance 

Business, as a Percentage of Total Premiums Written, 2002-2011

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

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 
Page 7 GAO-13-583 State-Based Insurance

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.

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 

Regulatory Overview
Page 8 GAO-13-583 State-Based Insurance

the International Association of Insurance Supervisors (IAIS), while NAIC 

and the states represent the interests of the insurance regulators at IAIS.7

Additionally, some insurance companies are owned by thrift holding 

companies that are regulated by the Federal Reserve System.

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.8

 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.

Generally, 

insolvencies are funded by the remaining assets of the insolvent insurer 

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.

Risk-Based Capital 

Requirements and 

Guaranty Funds
Page 9 GAO-13-583 State-Based Insurance

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.

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.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.

 9

A variable annuity is an insurance contract in which a consumer makes payments that 

are held in a separate account of the insurer. While the insurance company is the owner 

of the separate account assets, the assets are held for the benefit of consumers. In return, 

the insurer agrees to make periodic payments beginning immediately or at some future 

date. The consumer bears the risk of investment losses in the separate account. However, 

GLBs generally guarantee certain benefit amounts should the account value fall below a 

given level or fail to achieve certain performance levels. There are several types of GLBs, 

including guaranteed lifetime withdrawal benefits, guaranteed minimum income benefits, 

guaranteed minimum accumulation benefits, and others. GAO reviewed certain aspects of 

guaranteed lifetime withdrawal benefits in GAO, Retirement Security: Annuities with 

Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies 

across States, GAO-13-75, (Washington, D.C.: Dec. 10, 2012).

Effects of the Crisis 

Were Limited Largely 

to Certain Products 

and Lines of 

Insurance
Page 10 GAO-13-583 State-Based Insurance

Many life insurance companies experienced capital deterioration in 2008, 

reflecting declines in net income and increases in unrealized losses on 

investment assets.10 Realized losses of $59.6 billion contributed to steep 

declines in life insurers’ net income that year. The realized losses 

stemmed from other-than-temporary impairments on long-term bonds 

(primarily mortgage-backed securities, or MBS) and from the sale of 

equities whose values had recently declined.11 A dozen large life 

insurance groups accounted for 77 percent of the total realized losses in 

2008, with AIG alone, accounting for 45 percent of the realized losses.12

 10For 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.

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 

11An 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.

12See 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.

The Financial Crisis Had a 

Limited Effect on Most 

Insurers’ Operations

Insurers Experienced Some 

Capital and Liquidity Pressure, 

but Insolvencies Were Limited
Page 11 GAO-13-583 State-Based Insurance

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

Note: Data are shown in nominal dollars.

Total unrealized losses of $63.8 billion in the life insurance industry, 

combined with the decline in net income, contributed to a modest capital 

decline of 6 percent, to $253.0 billion, in 2008.13

 13Throughout 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.

As with realized losses, 

AIG accounted for 47 percent of total unrealized losses, and seven large 

insurance groups accounted for another 35 percent (see app. II). The 

majority of the unrealized losses occurred in common stocks and other 

invested assets (e.g., investments in limited partnerships and joint 
Page 12 GAO-13-583 State-Based Insurance

venture entities).14 However, the unrealized losses and declines in net 

income were addressed by a substantial increase in capital infusions from 

issuance of company stock or debt in the primary market, transfer of 

existing assets from the holding company, or, notably, from agreements 

with the U.S. Treasury or Federal Reserve (see paid in capital or surplus 

in fig. 4). AIG accounted for more than half (55 percent) of the capital 

infusions in 2008, reflecting an agreement with the U.S. Treasury for the 

Treasury’s purchase of about $40 billion in equity.15

 14Common stock is a security representing equity ownership of a company’s assets. 

Voting rights are normally accorded to holders of common stock.

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.

15This was part of AIG’s TARP assistance. See GAO, Troubled Asset Relief Program: 

Status of Government Assistance Provided to AIG, GAO-09-975, (Washington, D.C.: 

Sept. 21, 2009). 
Page 13 GAO-13-583 State-Based Insurance

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

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.

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.
Page 14 GAO-13-583 State-Based Insurance

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

December 2011

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.

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 fig. 

3). Realized losses of $25.5 billion contributed to the decline in net 

income. Seven P/C insurance groups, including six large groups and one 

smaller financial guaranty insurance group, accounted for 47 percent of 
Page 15 GAO-13-583 State-Based Insurance

the realized losses in 2008.16 The realized losses resulted primarily from 

other-than-temporary impairments taken on certain bonds and preferred 

and common stocks.17

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. 

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.

 16See 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.

17Preferred 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.
Page 16 GAO-13-583 State-Based Insurance

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

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.

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 
Page 17 GAO-13-583 State-Based Insurance

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.

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

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life Receiverships (10-year average: 6) 11 4 8 4 3 4 6 12 4 2

Liquidations (10-year average: 4) 7 4 5 3 4 3 3 6 3 2

P/C Receiverships (10-year average: 15) 24 19 16 10 17 15 4 15 17 15

Liquidations (10-year average: 13) 16 16 11 11 15 7 4 13 15 17

Source: GAO analysis of NAIC data.

Notes: 

Receiverships comprise conservatorships, rehabilitations, and liquidations. An order of liquidation 

typically accompanies a declaration of insolvency. Although it is not possible to determine whether 

the order of insolvency happened in the same year as liquidation in every case, guaranty association 

representatives stated that liquidation date was generally a good proxy for the insolvency date.

The Insurance Industry 

Experienced Relatively Few 

Receiverships and Insolvencies
Page 18 GAO-13-583 State-Based Insurance

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.

Some regulators and insurance industry representatives we interviewed 

stated that receiverships and liquidations that occurred during and 

immediately after the financial crisis were generally not related directly to 

the crisis. While one regulator stated that the crisis might have 

exacerbated insurers’ existing solvency issues, regulators said that most 

companies that were placed under receivership during that time had been 

experiencing financial issues for several years. Regulators and industry 

officials we interviewed noted two exceptions to this statement; both were 

life insurance companies that had invested heavily in Fannie Mae and 

Freddie Mac securities and in other troubled debt securities.18 See 

appendix III for a profile of one of these companies.

Investment Income

As noted above, for most insurers investment income is one of the two 

primary revenue streams. Insurers’ net investment income declined 

slightly during the crisis but had rebounded by 2011.19

 18Congress 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. 

In the life and P/C 

19Net 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.

Effects on Insurers’ Investment 

Portfolios, Underwriting 

Performance, and Premium 

Revenues Were Limited
Page 19 GAO-13-583 State-Based Insurance

industries in 2008 and 2009, insurers’ net income from investments 

declined by 7 percent and 15 percent respectively from the previous year 

(see fig. 7). For life insurers, these declines primarily reflected declines in 

income on certain common and preferred stock, derivatives, cash and 

short term investments, and other invested assets.20 For P/C insurers, the 

declines primarily reflected declines in income on U.S. government 

bonds, certain common stock, cash and short-term investments, and 

other invested assets.21

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

Note: Data are shown in nominal dollars.

 20NAIC defines cash and short-term investments as investments whose maturities (or 

repurchase dates) at the time of acquisition were 1 year or less. 

21Changes to net investment income for life and P/C insurers might also have reflected 

changes to their asset allocations. 
Page 20 GAO-13-583 State-Based Insurance

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.22

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 

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.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Real estate Life 15.4% 14.7% 14.3% 13.6% 13.1% 12.8% 13.5% 13.5% 12.5% 12.3%

P/C 4.2% 4.2% 4.0% 3.3% 3.1% 3.2% 3.5% 3.8% 3.7% 3.7%

Equities Life 2.8 2.6 2.8 3.1 3.4 4.7 3.6 2.1 2.2 2.2

P/C 15.3 14.6 12.8 12.9 12.8 12.3 13.3 12.6 11.8 12.2

Bonds Life 73.8 74.3 74.3 73.5 72.1 70.6 73.3 77.7 76.5 75.7

P/C 72.7 70.1 71.5 64.3 66.6 67.0 71.5 76.5 74.3 69.8

Derivatives Life -0.6 -0.3 -0.2 -0.3 0.8 0.3 -1.2 -1.7 0.4 0.9

P/C 0.2 0.4 0.1 0.0 -0.1 0.0 -0.1 -0.1 0.0 0.0

All other investments Life a 8.5 8.7 8.8 10.1 10.5 11.6 10.8 8.3 8.3 8.9

P/C 7.6 10.7 11.5 19.4 17.6 17.4 11.8 7.2 10.2 14.3

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

 22MBS 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. 
Page 21 GAO-13-583 State-Based Insurance

a

Underwriting Performance

All other investments include contract loans, cash and short-term investments, other invested assets, 

and investment write-ins.

Life and P/C insurers’ underwriting performance declined modestly during 

the crisis. In the life industry, benefits and losses that life insurers incurred 

in 2008 and 2009 outweighed the net premiums they wrote (see fig. 8).23

 23Benefits 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.

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.
Page 22 GAO-13-583 State-Based Insurance

Figure 8: Life Insurers’ Benefits and Losses Incurred Compared to Net Premiums 

Written, 2002-2011

Note: Data are shown in nominal dollars.

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, 
Page 23 GAO-13-583 State-Based Insurance

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.24

 24The 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.

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 crisisrelated 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.
Page 24 GAO-13-583 State-Based Insurance

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

2002-2011

As noted previously, a few industry representatives and a regulator we 

interviewed stated that decreased investment returns may place more 

pressure on insurers to increase the profitability of their underwriting 

operations. As shown in figures 10 and 11, life and P/C insurers’ net 

investment gains have historically outweighed their net underwriting 

losses.25

 25For 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 noninvestment income to establish a comparable measure.

As shown in figure 10, life insurers experienced net underwriting 
Page 25 GAO-13-583 State-Based Insurance

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

Notes: 

Data are shown in nominal dollars.

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 noninvestment income.
Page 26 GAO-13-583 State-Based Insurance

Figure 11: Property/Casualty Insurers’ Net Investment and Underwriting 

Gains/(Losses), 2002-2011

Note: Data are shown in nominal dollars.

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 fig. 12).
Page 27 GAO-13-583 State-Based Insurance

Figure 12: Net Premiums Written for Group and Individual Life and Annuities 

Products, 2002-2011

Note: Data are shown in nominal dollars.

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.
Page 28 GAO-13-583 State-Based Insurance

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.

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.

Annuity Products and Financial 

and Mortgage Guaranty Lines 

Experienced Greater Financial 

Difficulties during the Crisis
Page 29 GAO-13-583 State-Based Insurance

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

Dollars in billions

Year

Total variable 

annuity sales

New variable 

annuity sales

Percentage of new 

variable annuities 

sales for which 

GLB was available

GLB election 

rate for new 

variable 

annuities sales

2002 $116.6 NA NA NA

2003 129.4 NA NA NA

2004 132.9 NA NA NA

2005 136.9 NA NA NA

2006 160.4 $116.9 86% 76%

2007 184.0 141.5 91 77

2008 155.7 122.0 91 83

2009 128.0 94.0 90 89

2010 140.5 107.9 89 88

2011 157.9 121.8 90 88

2012 147.4 112.3 85 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.

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.26

 26CDOs 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. 

These insurers guaranteed 
Page 30 GAO-13-583 State-Based Insurance

continued payment of interest and principal to investors if borrowers did 

not pay. These credit protection products included credit default swaps.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.

 27Financial 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.
Page 31 GAO-13-583 State-Based Insurance

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

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Financial Guaranty Loss Ratio 89% 77% 75% 83% 65% 69% 90% 77% 83% 80%

Combined Ratio 118% 104% 101% 111% 92% 97% 118% 105% 113% 109%

Mortgage Guaranty Loss Ratio 84% 72% 79% 88% 68% 82% 102% 105% 110% 103%

Combined Ratio 110% 96% 103% 112% 93% 103% 123% 123% 135% 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.

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 
Page 32 GAO-13-583 State-Based Insurance

from premium payments. However, as defaults increased and resulted in 

unprecedented levels of claims in 2008 and 2009, the pace and 

magnitude of losses over time became too much for some insurers to 

overcome, regardless of their ability to raise additional capital. As a result, 

several financial and mortgage guaranty insurers ceased writing new 

business, and some entered rehabilitation plans under their state 

regulator.28

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.

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.

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.

29

 28Rehabilitation 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.

However, financial and 

29State 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. 

The Effect of the Crisis on 

Policyholders Was 

Generally Small
Page 33 GAO-13-583 State-Based Insurance

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 
Page 34 GAO-13-583 State-Based Insurance

partial claims.30 Many financial and mortgage guaranty insurers are also 

no longer writing new business. This fact, combined with tightened 

underwriting standards and practices, may have made it more difficult for 

some policyholders to obtain 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.

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.

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 

 30Industry association officials told us that financial guaranty insurers across the industry 

are engaged in litigation against banks regarding representation and warranties made 

about the underlying residential mortgages that were securitized and insured. There have 

been some settlements with banks paying financial guaranty for some of their MBSrelated losses. According to one insurer we interviewed, these and future settlements 

could allow companies that are paying partial claims, or no claims, to increase their 

payments.

Actions by State 

Regulators, Federal 

Programs, and 

Insurance Business 

Practices Helped 

Mitigate Some Effects 

of the Crisis

State Regulators Took 

Actions to Identify and 

Address Potential Risks
Page 35 GAO-13-583 State-Based Insurance

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.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.32

 31The 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.

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.

32The state regulator said it subsequently codified the 10 percent limit.
Page 36 GAO-13-583 State-Based Insurance

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 

NAIC Also Took Steps to 

Identify Potential Risks 

and Share Information 

with States
Page 37 GAO-13-583 State-Based Insurance

regulators followed up with them.33

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.

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.

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 

 33According 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.
Page 38 GAO-13-583 State-Based Insurance

lending collateral—specifically when the collateral was cash.34 The report 

stated that the statutory accounting rule that addresses cash collateral, 

among other things, was subject to liberal interpretations in the insurance 

industry and that consequently some companies had not disclosed their 

cash collateral in their statutory financial statements.35 To increase 

transparency, NAIC made changes to the statutory accounting rule in 

2010 and subsequently replaced it with the Statement of Statutory 

Accounting Principles (SSAP) No. 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.

NAIC changed the methodology it used in its guidance to state insurance 

regulators to determine the amount of risk-based capital (RBC) that state 

regulators should require insurers to hold for nonagency MBS 

investments.36

 34NAIC’s Capital Markets, Special Report, Securities Lending in the Insurance Industry, 

July 8, 2011.

As discussed earlier, life insurance companies saw a 

decline of almost 6 percent in capital in 2008. Prior to the change, NAIC’s 

35The statutory accounting rule was Statement of Statutory Accounting Principles (SSAP) 

No. 91R—Accounting for Transfers and Servicing of Financial Assets and 

Extinguishments of Liabilities.

36A 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. 

Changes to Certain RiskBased Capital Provisions 

and an Accounting 

Requirement Helped 

Reduce Pressure on 

Insurers’ Capital

NAIC Changed the Method of 

Calculating Risk-Based Capital 

Charges for MBS
Page 39 GAO-13-583 State-Based Insurance

methodology for calculating RBC charges for nonagency MBS relied on 

agency ratings. For example, capital charges were lower for RMBS with a 

relatively high agency rating than for those with a lower rating. During the 

crisis, the historically high levels of failed mortgages across the nation 

were followed by rating agency downgrades of nonagency RMBS that 

required insurers to increase their capital levels. NAIC officials told us 

that, in hindsight, using agency ratings to help determine the amount of 

capital an insurer should hold for their nonagency MBS investments was 

not appropriate because these securities were rated too highly before the 

crisis and overly pessimistic after the crisis. As a result, NAIC moved to a 

methodology for calculating RBC charges for nonagency MBS that 

determined an expected recovery value for each security based on a set 

of economic scenarios.37 NAIC contracts with BlackRock and PIMCO to 

conduct these analyses.38

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.

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.

 37NAIC changed the methodology for nonagency RMBS in 2009 and CMBS in 2010.

38Both firms, BlackRock and PIMCO, provide various investment services to their clients 

including asset management and risk management.
Page 40 GAO-13-583 State-Based Insurance

During the financial crisis, some state regulators granted some insurers 

permission to use prescribed and permitted accounting practices that 

helped the insurers improve their capital positions.39

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.

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.

Table 5: Net Effects of All Prescribed and Permitted Practices on Life and 

Property/Casualty Insurers’ Net Income and Capital, 2006-2011

Dollars in thousands

Net effect (positive and negative)

in net income

Net effect (positive and 

negative) in capital

Year Life P/C Life P/C

2006 $15,903 $-1,256,824 $-1,504,098 $1,225,426

2007 -160,886 530,013 377,626 6,628,204

 39Prescribed 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.

Some States Allowed Certain 

Modifications to a Statutory 

Accounting Rule on Deferred 

Tax Assets
Page 41 GAO-13-583 State-Based Insurance

Dollars in thousands

Net effect (positive and negative)

in net income

Net effect (positive and 

negative) in capital

Year Life P/C Life P/C

2008 1,515,952 2,533,518 8,904,224 11,060,723

2009 -1,014,710 5,242,658 2,048,691 8,192,046

2010 68,327 3,018,482 2,477,606 12,641,458

2011 -331,882 167,375 2,658,653 13,611,375

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.

One permitted practice in particular that was sought during the crisis 

could generally help insurers increase the amount of admitted assets that 

could be included in their statement of financial position by increasing the 

percentage of deferred tax assets (DTA) that could be classified as an 

admitted asset.40 Admitted assets are those that are available for paying 

policyholder obligations and are counted as capital for regulatory 

purposes. Statutory accounting provisions do not allow insurers to include 

assets in their statutory statements of financial position unless they are 

admitted assets.41

 40Deferred 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.

Specifically, insurers requested that the limits for 

determining the percentage of DTAs that could be classified as admitted 

41According 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.”
Page 42 GAO-13-583 State-Based Insurance

assets be raised.42

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 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.

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 

 42During 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.

NAIC Expanded the Limits 

That Were Used to Calculate 

Admitted Assets from DTA
Page 43 GAO-13-583 State-Based Insurance

eligible to apply SSAP 10R, insurers were to exceed 250 to 300 percent 

of these thresholds.43 As a result, only companies at or above certain 

minimum capital standards were eligible to include expanded portions of 

DTAs in their admitted assets. NAIC officials said that troubled insurance 

companies that had violated the threshold for regulatory action were 

typically troubled and would not be eligible to include higher portions of 

their DTAs as admitted assets. However, they added that state insurance 

regulators have the authority to determine if the financial conditions of a 

troubled company affect the recoverability of any admitted assets, 

including admitted DTAs, and may disallow the company from classifying 

certain ones as admitted assets. On January 1, 2012, the Statement of 

Statutory Accounting Principles No. 101, Income Taxes, a Replacement 

of SSAP No. 10R and SSAP No. 10 (SSAP 101) went into effect. It 

permanently superseded the original principle and generally codified the 

increased limits of SSAP 10R.44 However, SSAP 101 has tiered eligibility 

requirements, which provide a more gradual reduction in the portion of an 

insurer’s DTA that can be included as an insurer’s admitted assets.45

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 

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.

 43Specifically, 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.

44SSAP 101 allows up to a possible limitation based upon 15 percent of statutory surplus 

and a 3 years reversal test.

45To 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.
Page 44 GAO-13-583 State-Based Insurance

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
Page 45 GAO-13-583 State-Based Insurance

Figure 14: Admitted Deferred Tax Assets as a Percentage of Capital for the 

Property/Casualty Insurance Industry

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 nonliquid 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.
Page 46 GAO-13-583 State-Based Insurance

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.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.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. 

 46Qualifying 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.

47Generally, 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. 

Federal Programs Have 

Increased Access to 

Capital
Page 47 GAO-13-583 State-Based Insurance

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.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 assetbacked 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 

 48On 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.
Page 48 GAO-13-583 State-Based Insurance

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.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 estaterelated 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.

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 

 49The 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. 

Insurance Business Practices, 

Regulatory Restrictions, and a 

Low Interest Rate Environment 

May Have Helped to Mitigate 

Effects of the Crisis
Page 49 GAO-13-583 State-Based Insurance

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.
Page 50 GAO-13-583 State-Based Insurance

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.

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.

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 2015.50

 50ORSA 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.

ORSA will require insurers to analyze all reasonably 

foreseeable and relevant material risks (i.e., underwriting, credit, market, 

Regulators Have 

Continued Efforts to 

Strengthen the 

Regulatory System 

since the Crisis

Solvency Modernization 

Initiative Places Increased 

Emphasis on Insurer Risks 

and Group Holding 

Company Oversight

Own Risk and Solvency 

Assessment
Page 51 GAO-13-583 State-Based Insurance

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.51

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 

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.

 51States 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.

Insurance Holding Company 

System Regulatory Act
Page 52 GAO-13-583 State-Based Insurance

December 2010, NAIC amended the Insurance Holding Company System 

Regulatory Act to address the way regulators determined risk at holding 

companies.52 As part of this process, between May 2009 and June 2010,

NAIC held 16 public conference calls, five public meetings, and one 

public hearing on the Insurance Holding Company System Regulatory 

Act.53 Additionally, NAIC officials told us they also share regulatory and 

supervisory information with federal regulators such as the Federal 

Reserve, including information on the amended model act revisions, at 

the Annual Regulatory Data Workshop.54

According to NAIC, the U.S. statutory holding company laws apply 

directly to individual insurers and indirectly to noninsurance holding 

companies. The revised model act includes changes to (1) 

communication among regulators; (2) access to and collection of 

information; (3) supervisory colleges; (4) enforcement measures; (5) 

group capital assessment; and (6) accreditation. Some specific changes 

include:

• expanded ability for regulators to look at any entity in an insurance 

holding company system that may not directly affect the holding 

company system but could pose reputational or financial risk to the 

insurer through a new Form F-Enterprise Risk Report;55

• enhancements to regulators’ rights to access information (including 

books and records), especially regarding the examinations of 

affiliates, to better ascertain the insurer’s financial condition; and

 52NAIC’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.

53NAIC, Amendments to the Insurance Holding Company System Model Act & Model 

Regulation, Powerpoint presentation, February 7, 2013.

54The 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. 

55According 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.
Page 53 GAO-13-583 State-Based Insurance

• introduction of and funding for supervisory colleges to enhance the 

regulators’ ability to participate in the colleges and provide guidance 

on how to conduct, effectively contribute to, and learn from them.56

One state regulator stated that the revised Insurance Holding Company 

System Regulatory Act was expected to make group-level holding 

company data more transparent to state insurance regulators. Regulators 

also told us that the amended model act gave them greater authority to 

participate in supervisory colleges. U.S. state insurance regulators both 

participate in and convene supervisory colleges. State insurance 

commissioners may participate in a supervisory college with other 

regulators charged with supervision of such insurers or their affiliates, 

including other state, federal, and international regulatory agencies. For 

instance, the same state regulator stated that the authority allowed for 

international travel, with the insurers paying the costs. The act also 

increases the regulators’ ability to maintain the confidentiality of records 

that they receive or share with other regulators.

According to NAIC officials, as of April 2013, 16 states have adopted the 

model law revisions.57

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 

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.

 56A 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.

57As 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.
Page 54 GAO-13-583 State-Based Insurance

instance, the officials stated that they were looking to implement P/C 

catastrophe risk data analysis later this year and would then consider how 

to integrate their findings into RBC requirements. As mentioned earlier, 

ORSA is not expected to be operational until 2015. Also, most states 

have yet to adopt revisions to the Insurance Holding Company System 

Regulatory Act. NAIC officials told us that getting changes adopted at the 

state level was challenging because of the amount of time needed to get 

all 50 states on-board. For instance, the adoption of model laws requires 

state legislative change and is dependent on the frequency of state 

legislative meetings. The officials explained that some states legislatures

meet only every 2 years, limiting the possibility of immediate legislative 

change. As we have previously reported, NAIC operations generally 

require a consensus among a large number of regulators, and NAIC 

seeks to obtain and consider the input of industry participants and 

consumer advocates. 58 Obtaining a wide range of views may create a 

more thoughtful, balanced regulatory approach, but working through the 

goals and priorities of a number of entities can result in lengthy processes 

and long implementation periods for regulatory improvements. As noted 

in our other work earlier, continued progress in a timely manner is critical 

to improving the efficiency and effectiveness of the insurance regulatory 

system.

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.

 58GAO, Insurance Reciprocity and Uniformity: NAIC and State Regulators Have Made 

Progress in Producer Licensing, Product Approval, and Market Conduct Regulation, but 

Challenges Remain, GAO-09-372 (Washington, D.C.: Apr. 6, 2009).

Views Varied on Increased 

Oversight Efforts
Page 55 GAO-13-583 State-Based Insurance

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 noninsurance 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.

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.59

 59GAO, Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the 

Dodd-Frank Act, GAO-13-180 (Washington D.C.: Jan. 16, 2013).

Some Dodd-Frank 

Provisions That Address 

Financial Stability Include 

Insurance Oversight
Page 56 GAO-13-583 State-Based Insurance

The act also seeks to address systemically important financial institutions 

(SIFIs) and end bailouts of large, complex financial institutions.60

• 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.

The 

Dodd-Frank Act has not yet been fully implemented; thus, its impacts 

have not fully materialized.

61

• 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.

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.

62 The council 

includes some representation with insurance expertise. Some 

authorities given to the Financial Stability Oversight Council allow it to

 60While 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.

6131 U.S.C. §313.

62The 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.
Page 57 GAO-13-583 State-Based Insurance

• 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.63

• 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.

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.

64

 63GAO, Financial Stability: New Council and Research Office Should Strengthen the 

Accountability and Transparency of Their Decisions, 

Consumer financial 

products and services over which CFPB has primary authority include 

GAO-12-886 (Washington D.C.: 

Sept. 11, 2012).

64These 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.
Page 58 GAO-13-583 State-Based Insurance

deposit taking, mortgages, credit cards and other extensions of credit, 

loan servicing, and debt collection. CFPB is authorized to supervise 

certain nonbank financial companies and large banks and credit 

unions with over $10 billion in assets and their affiliates for consumer 

protection purposes.

The financial crisis also revealed weaknesses in the existing regulatory 

framework for overseeing large, interconnected, and highly leveraged 

financial institutions and their potential impacts on the financial system 

and the broader economy in the event of failure. The Dodd-Frank Act 

requires the Board of Governors of the Federal Reserve System (Reserve 

Board) to supervise and develop enhanced capital and other prudential 

standards for these large, interconnected financial institutions, which 

include bank holding companies with $50 billion or more in consolidated 

assets and any nonbank financial company that the Financial Stability 

Oversight Council designates.65 The act requires the enhanced prudential 

standards to be more stringent than standards applicable to other bank 

holding companies and financial firms that do not present similar risks to 

U.S. financial stability. The act further allows the enhanced prudential 

standards to be more stringent than standards applicable to other bank 

holding companies and financial firms that do not present similar risks to 

U.S. financial stability. In April 2013, the Federal Reserve issued a final 

rule that establishes the requirements for determining when an entity is 

“predominantly engaged in financial activities.” Among the criteria is 

whether an institution is primarily engaged in financial activities, which 

can include insurance underwriting. As of May 2013, the Financial 

Stability Oversight Council had yet to publicly make any such 

designations.

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

 65Dodd-Frank Act, § 165, 124 Stat. at 1423–1432, codified at 12 U.S.C. § 5365. 

Agency Comments
 

Page 59 GAO-13-583 State-Based Insurance

addition, the report will be made available at no charge on the GAO 

website at 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.

Alicia Puente Cackley

Director, Financial Markets 

 and Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 60 GAO-13-583 State-Based Insurance

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.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 61 GAO-13-583 State-Based Insurance

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.1

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.

These measures help demonstrate insurers’ financial health 

in a number of areas including investment performance, underwriting 

performance, capital adequacy, and profitability.

We obtained the financial data from insurers’ annual statutory financial 

statements, which insurance companies must submit to NAIC after the 

 1

Our selected measures included gross and net investment income, total invested assets, 

capital and paid in surplus, net cash from financing and miscellaneous sources, net 

income, capital and surplus and policyholders’ surplus (“capital”), net premiums written, 

surrenders, lapses, and other measures. 

Determining the Effect of 

Crisis on Insurance 

Companies and 

Policyholders
Appendix I: Objectives, Scope, and 

Methodology

Page 62 GAO-13-583 State-Based Insurance

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.

2

 2

NAIC counted the earliest instance of conservatorship, rehabilitation, or liquidation within 

the 2002-2011 period as a receivership for a given year. For example, a company could 

have gone into conservatorship in 2002 and into liquidation in 2004. In that case, it would 

be counted as a receivership in 2002, but not in 2004, to avoid double counting. As a 

result of this methodology, liquidations we reported in table 1 were not necessarily 

included in the total number of receiverships for the year in which they occurred.

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 63 GAO-13-583 State-Based Insurance

immediately after being placed into receivership and replaced the missing 

data. This was the case for 5 of 58 life insurance companies and 27 of 

152 P/C companies.3

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 

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 (app. II) when data were not available. 

Our analysis of assets at liquidation included 33 life insurers and 106 P/C 

insurers, and our analysis of net equity at liquidation included 32 life 

insurers and 96 P/C insurers.

 3

The time difference between the date of liquidation and the year from which NAIC was 

able to obtain data in these cases ranged from about 1 to 14 years for life insurance 

companies and from about 1 to 8 years for P/C companies, but the average time 

difference was about 6 years for life insurance companies and about 4 years for P/C 

companies. 
Appendix I: Objectives, Scope, and 

Methodology

Page 64 GAO-13-583 State-Based Insurance

companies).

4

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.

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.

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.5

 4

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

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.

5

We have assessed the reliability of SNL Financial data as part of previous studies related 

to banking and finance and found the data to be reliable for the purposes of our review. 

Because we had not used SNL Financial’s insurance data in the past, we took additional 

measures to ensure their reliability. 
Appendix I: Objectives, Scope, and 

Methodology

Page 65 GAO-13-583 State-Based Insurance

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.

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.

Factors That Affected the 

Impact of the Crisis on 

Insurers and Policyholders

Regulatory Actions That 

Have Been Taken to 

Protect Insurers and 

Policyholders
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 66 GAO-13-583 State-Based Insurance

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.

In 2008 and 2009, a small number of large insurance groups generally 

comprised the majority of realized and unrealized losses in the life and 

P/C industries.1

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

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.

Dollars in thousands

Insurer

Realized 

losses 

Percentage of all 

realized losses

2008

American International Group $-27,032,295 45.3%

TIAA-CREF -4,562,314 7.6

MetLife Inc. -2,107,802 3.5

New York Life Insurance Group -1,828,390 3.1

CNO Financial Group Inc. -1,767,840 3.0

Northwestern Mutual Life Insurance Company -1,519,738 2.5

Prudential Financial Inc. -1,377,951 2.3

Allstate Corporation -1,175,618 2.0

Allianz Group -1,142,726 1.9

ING Groep N.V. -1,098,560 1.8

Massachusetts Mutual Life Insurance Company -1,092,727 1.8

Lincoln National Corporation -1,053,231 1.8

2009

TIAA-CREF $-3,451,216 10.6%

 1

Realized gains/(losses) are increases or decreases in capital assets (such as stocks and 

bonds) between the date of purchase and the date of sale or impairment. Unrealized gains 

or losses represent appreciation or decline in the unsold assets’ value.

Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Realized and Unrealized 

Losses
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 67 GAO-13-583 State-Based Insurance

Dollars in thousands

Insurer

Realized 

losses 

Percentage of all 

realized losses

ING Groep N.V. -3,373,625 10.3

American International Group -2,864,587 8.8

Hartford Financial Services -2,192,781 6.7

MetLife Inc. -1,985,188 6.1

Jackson National Life Group -1,679,803 5.1

AEGON NV -1,644,108 5.0

Prudential Financial Inc. -1,544,248 4.7

AXA -1,391,188 4.3

Genworth Financial Inc. -1,057,640 3.2

Allstate Corporation -1,056,030 3.2

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

Note: Data are shown in nominal dollars.

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

Dollars in thousands

Insurer

Unrealized 

losses 

Percentage of all 

unrealized losses

2008

American International Group $-30,189,534 47.33%

MetLife, Inc. -5,002,128 7.84

AXA -4,931,978 7.73

Northwestern Mutual Life Insurance 

Company 

-4,368,554 6.85

New York Life Insurance Group -3,027,290 4.75

TIAA-CREF -2,317,339 3.63

Western & Southern Mutual Holding 

Company 

-1,364,643 2.14

Hartford Financial Services Group -1,338,845 2.10

2009

MetLife, Inc. $-4,322,365 22.51%

Hartford Financial Services Group -3,390,195 17.66

American International Group -2,053,011 10.69

Ameriprise Financial, Inc. -1,837,537 9.57

Pacific Mutual Holding Company -1,150,169 5.99

AEGON N.V. -1,087,585 5.66

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

Note: Data are shown in nominal dollars.
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 68 GAO-13-583 State-Based Insurance

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

Dollars in thousands

Insurer Realized losses 

Percentage of all 

realized losses

2008

Ambac Financial Group, Inc. $-4,371,589 17.13%

American International Group -1,697,065 6.65

Allstate Corporation -1,280,299 5.02

Hartford Financial Services Group -1,268,082 4.97

CNA Financial Corporation -1,196,010 4.69

Erie Insurance Group -1,125,560 4.41

Berkshire Hathaway, Inc. -1,036,242 4.06

2009

Ambac Financial Group, Inc. $-3,022,767 25.53%

Berkshire Hathaway, Inc. -2,770,133 23.40

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

Note: Data are shown in nominal dollars.

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

2008 and 2009

Dollars in thousands

Insurer

Unrealized 

losses 

Percentage of 

all unrealized 

losses

2008

Berkshire Hathaway, Inc. $-23,456,610 27.41%

State Farm Mutual Automobile Insurance Company -17,182,241 20.08

Liberty Mutual -6,193,138 7.24

American International Group -4,014,608 4.69

Allstate Corporation -3,158,281 3.69

CNA Financial Corporation -2,671,781 3.12

Nationwide Mutual Group -1,983,859 2.32

Cincinnati Financial Corporation -1,734,113 2.03

Hartford Financial Services -1,565,621 1.83

FM Global -1,053,450 1.23
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 69 GAO-13-583 State-Based Insurance

Dollars in thousands

Insurer

Unrealized 

losses 

Percentage of 

all unrealized 

losses

2009

Nationwide Mutual Group $-1,998,528 47.10%

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

Note: Data are shown in nominal dollars.

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.

Financing Cash Flow
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 70 GAO-13-583 State-Based Insurance

Figure 15: Life and Property/Casualty Insurers’ Net Cash Flows from Financing and 

Miscellaneous Sources, 2002-2011

Note: Data are shown in nominal dollars.

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 

fig.16). 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 

P/C Premium Revenues
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 71 GAO-13-583 State-Based Insurance

percent decline) in 2009. On the other hand, net premiums written for 

homeowners’ insurance increased in every year of the 10-year review 

period, including increases of about 2 percent annually in 2008 and 2009 

with net premiums of $56.9 billion in 2009. Net premiums written for all 

other lines of P/C insurance combined declined from $142.2 billion in 

2007 to $129.0 billion in 2009, reflecting annual decreases of less than 1 

percent in 2007, 3 percent in 2008, and 7 percent in 2009.2

 2

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. 
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 72 GAO-13-583 State-Based Insurance

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

2002-2011

Note: Data are shown in nominal dollars.

Based on the available data that NAIC provided us on companies that 

were liquidated from 2002 through 2011, average assets and net equity of 

liquidated life and P/C insurers varied by year.3

 3

NAIC was not able to provide complete financial data for all insurers. The figures in 

tables 10 and 11 are based on the available data. We have noted the extent to which we 

were missing financial data for each year. See the Objectives, Scope and Methodology 

section for further explanation. 

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 

Assets and Net Equity of 

Companies in Liquidation
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 73 GAO-13-583 State-Based Insurance

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 Average assets Median assets Average net equity Notes

2002 $228,832 $85,492 ($9,174,419) Based on financial data available for 4 of 7 

companies.

2003 355,911 355,911 287,136 Based on financial data available for 2 of 4 

companies.

2004 491,288,146 761,126 (42,340,783) Based on financial data available for 3 of 5 

companies.

2005 4,771,020 3,113,824 (2,068,372)

2006 7,563,413 5,602,572 (2,843,453)

2007 25,167,723 11,899,542 1,331,556 Average net equity based on financial data 

available for 2 of 3 companies.

2008 92,995,829 4,062,709 (201,581,872)

2009 65,110,752 3,432,952 7,480,692 

2010 26,472,746 11,197,352 2,064,663 

2011 37,919,411 37,919,411 (160,962)

10 year average 

assets:

$73,347,592 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.
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 74 GAO-13-583 State-Based Insurance

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

Year Average assets Median assets Average net equity Notes

2002 $16,814,604 $19,119,524 ($75,550,387) 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.

2003 365,951,597 34,992,852 (401,800,128) 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.

2004 34,399,196 31,518,779 (16,199,179) 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.

2005 10,441,213 10,575,389 (7,765,547) Average net equity based on financial data 

available for 10 of 11 companies.

2006 97,118,048 37,602,758 (46,792,277) Based on financial data available for 11 of 15 

companies.

2007 8,793,203 4,384,739 (7,155,768) —

2008 130,585,870 5,927,680 (8,913,750) —

2009 12,011,297 3,678,951 (5,093,472) Based on financial data available for 12 of 13 

companies.

2010 18,011,525 8,334,604 (8,945,922) 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.

2011 27,943,467 10,997,641 (3,521,801) Based on financial data available for 16 of 17 

companies.

10 year average assets: $64,140,648 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.

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 

Stock Prices
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 75 GAO-13-583 State-Based Insurance

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

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 
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 76 GAO-13-583 State-Based Insurance

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.

We selected several key time periods or events from the financial crisis 

and identified the largest drops in life and P/C insurers’ aggregate stock 

prices during those time periods (see fig.18). While many factors can 

affect the daily movement of stock prices, we observed that changes in 

life insurers’ aggregate stock prices tended to be more correlated with 

several of the events that occurred during the crisis than P/C insurers’

aggregate stock prices.
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 77 GAO-13-583 State-Based Insurance

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

2007
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 78 GAO-13-583 State-Based Insurance

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

2008
Appendix II: Additional Data on Life and P/C 

Industry Financial Performance, 2002-2011

Page 79 GAO-13-583 State-Based Insurance

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

2009
Appendix III: Profiles of Distressed Insurers

Page 80 GAO-13-583 State-Based Insurance

This appendix provides more detail on two distressed insurers—one 

mortgage guaranty insurer and one life insurer—during the financial 

crisis.1

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 2012.2

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.

 1

Although we used court documents to compile the profiles, we refrained from citing them 

in order to maintain the two insurers’ anonymity.

2

In rehabilitation, a court gives the state insurance regulator the authority to manage a 

financially troubled insurer until its problems are corrected. A finding of insolvency means 

that an insurer is unable to meet its liabilities. 

Appendix III: Profiles of Distressed Insurers

Mortgage Guaranty Insurer
Appendix III: Profiles of Distressed Insurers

Page 81 GAO-13-583 State-Based Insurance

Table 12: Distressed Market Default Rates and Percentage of Insurer’s Total 

Underwritten Risk, 2007-2011 

Calendar Year

Default rate in distressed 

markets

Coverage in distressed markets as 

percentage of insurer’s total 

underwritten risk 

2007 5.7% 32.1%

2008 22.7 34.4

2009 35.4 25.2

2010 29.9 23.5

2011 26.9 22.1

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

This insurer rapidly depleted its capital as it set aside reserves to meet 

obligations resulting from the overall rising volume of mortgage defaults. 

Rising defaults combined with unsuccessful attempts to raise additional 

capital during the crisis adversely affected its statutory risk-to-capital ratio

starting in 2008. While state insurance regulations generally require this 

relationship of insured risk to statutory capital (in this case, the sum of 

statutory surplus and contingency reserves) to be no greater than 25 to 1, 

this 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 

1.3

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 

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.

 3

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. 
Appendix III: Profiles of Distressed Insurers

Page 82 GAO-13-583 State-Based Insurance

the regulator authority over the insurer’s property, business, and affairs 

until the insurer’s problems are corrected.

We studied a life insurer that primarily writes life, annuity, and accident 

and health business. Due to losses sustained from equity investments in 

Fannie Mae and Freddie Mac in 2008, the state regulator placed the 

insurer in rehabilitation in early 2009.4

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.

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.

5

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.

As of December 31, 2008, 

the insurer had capital of $29 million, down from about $126 million as of 

December 31, 2007.

6

 4

Fannie Mae and Freddie Mac are government-sponsored enterprises that were 

established to provide liquidity, stability, and affordability in the secondary market for both 

single- and multifamily mortgages. They purchase mortgages that meet their underwriting 

standards from primary mortgage lenders, such as banks or thrifts, and either hold the 

mortgages in their portfolios or package them into mortgage-backed securities (MBS). 

In 

receivership, the regulator granted the insurer an exemption from a state 

insurance statute restricting certain types of investments based on a 

5

On September 6, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae 

and Freddie Mac into conservatorship out of concern that their deteriorating financial 

condition would destabilize the financial system.

6

This means that the company assumed that policies would have been voluntarily 

surrendered by all policyholders and that those policyholders would therefore, have had to 

pay surrender charges on those policies. Alternatively, according to the receivership team 

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. 

Life Insurer
Appendix III: Profiles of Distressed Insurers

Page 83 GAO-13-583 State-Based Insurance

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.
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 84 GAO-13-583 State-Based Insurance

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

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.

Appendix IV: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250677)
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