On March 15, at the request of the state insurance department, New York legislator Morelle introduced a bill (A10259) that would relieve insurance companies of having to rely exclusively on nationally recognized credit agencies (NRSROs) to determine capital requirements for their financial investments. The bill authorizes the insurance superintendent to authorize or prescribe an analytical method that an insurer may use in lieu of a statistical rating organization and replaces the term “nationally recognized securities rating agency” with “statistical rating organization recognized by the superintendent” in the insurance law. New York Insurance Superintendent James Wrynn is co-chair of the NAIC Rating Agency Working Group which issued a report this month on insurance regulators’ reliance on NRSROs discussed in the Other Developments section below.
On March 10, Senator Jeff Merkley (D-OR) introduced the Protect our Recovery through Oversight of Proprietary Trading Act (PROP Trading Act). Similar to the so-called Volcker Rule, which is included in the Senate’s version of the regulatory financial reform bill, the PROP Trading Act limits banks and certain financial institutions from investing in or sponsoring a hedge fund or private equity fund. The Act expands the Volcker Rule by defining “banking entity” more broadly to include not only insured depository institutions, their direct and indirect parents and other companies treated as bank holding companies, but also any affiliates of such companies. Any specified nonbank financial company that engages in proprietary trading or invests in or sponsors a hedge fund or private equity fund will be subject to enhanced capital requirements and quantitative limits on such activities. This category would include broker-dealers and private equity and hedge fund managers that are not affiliated with an insured depository institution but are otherwise subject to the prudential supervision of the Federal Reserve because they have been found to be “systemically important” or otherwise. The bill also included prohibitions on conflicts of interest relating to certain securitizations. The prohibitions of this bill are self-executing, meaning they apply without any rulemaking action by federal banking agencies. The prohibitions and limitations of the bill would become effective on the earlier of (i) 18 months after the adoption of final rules under the bill and (ii) 24 months after its date of enactment.
On March 25, the parties filed a joint motion to abate the class certification briefing schedule. According to that motion, the parties have reached an agreement on the material terms of settlement. The parties have 60 days to report back to the court on the status of completing the settlement.
On March 10, Connecticut Attorney General Richard Blumenthal filed civil lawsuits against Moody’s and S&P over ratings issued on bonds backed by pools of mortgages. Many of the investments were giving top “AAA” ratings during the peak of the housing market between 2005 and 2007. Most of the ratings have since been cut severely by Moody’s and S&P. Blumenthal called the lawsuits unique and unlike others filed on behalf of specific investors or pension funds since the Connecticut lawsuits are sovereign enforcement actions brought under the Connecticut Unfair Trade Practices Act. The lawsuit alleges that the rating agencies knowingly assigned false ratings to complex investments that pushed the country into recession and is seeking substantial penalties and fines be levied against the rating agencies.
Oklahoma State University and T. Boone Pickens, an alumnus and one of its largest donors, have sued Lincoln and a number of agents over a fundraising plan that took out policies on alumni. According to court documents, under a 2007 program called a Gift of a Lifetime, 27 alumni gave Cowboy Athletics (a fundraising arm of the University) the right to insure their lives for $10M each though Lincoln Financial. Unlike traditional uses of life insurance for charity, Cowboy Athletics agreed to pay the premiums on the policies and took out a line of credit to cover the premium payments. According to Cowboy Athletics, Lincoln failed to help it secure permanent financing; conversely Lincoln asserts that it had no responsibility for helping the organization secure the loan. Mr. Pickens, who guaranteed the credit, eventually put up $10M to keep the credit line going and cover interest on it. The plaintiffs contend that Lincoln understated the costs of the program, overstated its potential financial benefits and charged the university inflated premiums, among other claims. This case highlights a number of factors that have brought financed charity-owned life insurance programs under the scrutiny of the IRS, Congress and others in the insurance industry who have questioned the suitability of such insurance programs for charities, charitable organizations’ ability to understand the products and the actual financial benefit to the charities versus the insurance companies.
On March 15, Senator Chris Dodd (D-CT) introduced a 1,336 page bill entitled “Restoring American Financial Stability Act of 2010.” On March 22, the Senate Committee on Banking, Housing and Urban Affairs approved the bill by a party-line vote of 13-10. Despite all Republican amendments to the bill being withdrawn, Senators Dodd and Richard Shelby (R-AL), the banking committee’s top Republican member, said they would continue efforts to reach bipartisan agreement before the bill goes to the Senate floor. Key components of the bill include: creating a new Consumer Financial Protection Bureau within the Federal Reserve; creating a nine-member Financial Stability Oversight Council that will focus on identifying and monitoring systemic risks; incorporating “wind down” reforms for liquidating large, complex financial companies; consolidating and re-defining bank oversight; instituting oversight of over-the-counter derivatives and hedge funds; creating an Office of National Insurance to monitor the insurance industry and an Office of Credit Rating Agencies within the SEC to strengthen the regulation of credit rating agencies; expanding shareholder rights with respect to executive compensation and corporate governance; and assigning new responsibilities to the Federal Reserve. Further progress on the bill is not expected until Congress returns from the Easter and Passover recess. With the healthcare reconciliation bill being signed into law this month, it is expected that the next focus will be on financial regulatory reform. The House passed the “Wall Street Reform and Consumer Protection Act” on December 11, 2009.
On March 25, twenty-five House representatives signed a letter to Treasury Secretary Timothy Geithner expressing their opposition to the proposal in the Fiscal Year 2011 budget that would increase taxes on life insurance companies and products – specifically the dividend received deduction (DRD) for separate accounts and corporate-owned life insurance (COLI). The letter states that changing the long-established rules for the DRD would result in additional costs due to higher taxes being passed on to policyholders depressing the value of their retirement security products. Regarding COLI, the letter championed the business purposes of COLI (i.e., funding the cost of employee and retirement benefits) and made references to COLI Best Practices Act within the Pension Protection Act of 2006. To date, no legislation has been introduced on either Treasury proposal.
On March 17, the National Association of Insurance Commissioners (NAIC) Rating Agency Working Group issued its report to the NAIC Financial Condition Committee. The working group was formed on February 11, 2009 to conduct a comprehensive evaluation of state insurance regulatory use of the credit ratings of nationally recognized statistical rating organizations (NRSROs). The report focuses on the problems inherent in reliance on ratings, including impact on the filing exempt process and risk-based capital; the reasons for recent rating shortcomings, including but not limited to structured security and municipal ratings; the current and potential future impact of ratings on state insurance financial solvency regulation; and the effect of the use of NRSRO ratings on public confidence and public perceptions of regulatory oversight of the quality of insurance. The NAIC is engaged in several reform measures that will reduce regulators’ reliance on credit ratings. One such measure is NAIC’s amended treatment of residential mortgage backed securities (RMBS). The RMBS proposal replaced ratings with a model (modeling was awarded to PIMCO Advisory via a RFP) to establish price ranges for each NAIC designation for each of the approximately 21,000 different RMBS held by insurance companies. NAIC is evaluating the merits of expanding a similar credit evaluation to other structured securities.
On March 18, the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the House Committee of Financial Services held a hearing entitled “Insurance Holding Company Supervision.” The purpose of the hearing was to examine the roles of state and federal insurance regulators over holding companies with insurance operations in an effort to further improve proposed financial regulatory reform legislation. When depository institutions and insurers operate under the umbrella of the same holding company, both state and federal regulators have important supervisory roles. The hearing sought to explore whether or not the federal banking regulators are overseeing too few or too many holding companies with insurance operations and whether or not they are appropriately focused on consolidated oversight issues. The hearing also addressed whether or not consolidated supervision is diversified among too many regulators, such that it has become ineffective. Testifying before the Subcommittee were representatives from the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision and the NAIC.
The NAIC has identified the Solvency Modernization Initiative as an important focus for 2010. The initiative considers enhancements in areas including modifications to the risk-based capital (RBC) calculation and requirements; supervision of insurance companies in groups; and how companies perform statutory accounting and reporting. The SMI road map combines projects underway with new ideas on the horizon. One of the new ideas recently formulated by the creation of the Statutory Accounting and Financial Reporting Subgroup, a commissioner-level group formed to make policy decisions regarding the future of statutory accounting. Regulators also continue to evaluate evolving international developments, such as Europe’s Solvency II Framework.