Sidley Life Insurance Company Failures

BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

Life Insurance Company Failures: Separating Fact from Fiction April 21, 2009

Robert D. Aicher Jonathan L. Freedman Kenneth R. Wylie

Today’s Presentation 1. Introduction and Background 2. What Happens When an Insurance Company Fails? 3. Examples: Executive Life and Mutual Benefit Life 4. Practical Considerations 5. Issues Facing the Life Insurance Industry 6. Unique Features of Mutual Companies

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Introduction and Background 1. Distinctions between traditional U.S. bankruptcy and insurance company receivership.

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Priority of distributions: Policyholder super-priority!

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Purpose is to maximize distributions to policyholders.

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Reorganizing as a going concern is rare.

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More similar to bank failures than corporate failures.

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Avoidance powers – preferences and fraudulent conveyances – are based on old U.S. Bankruptcy Code.

Introduction and Background (cont’d.) 2. Interplay of holding company bankruptcy and insurance company receivership. •

Separate tracks, but substantial practical overlap.

3. AIG as an example.

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Many non-insurance operations (including AIG Financial Products)

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Numerous U.S. life insurance companies

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16 U.S. commercial property and casualty insurance companies

What Happens When an Insurance Company Fails? 1. An insurance company in trouble 2. Role of the state insurance commissioner •

Exclusive role

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No third parties can institute proceedings (including policyholders)

3. Receivership proceedings and triggers •

Corrective orders/supervision

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Rehabilitation

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Liquidation

4. Timelines for receiverships

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What Happens When an Insurance Company Fails? (cont’d.) 5. State insurance guaranty associations •

Typical statutory limits -

$300,000 death benefits

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$100,000 cash surrender value

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$100,000 annuity withdrawal

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Funded by member insurance companies (2% of written premium)

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Potential maximum annual assessments $8 billion

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Sales and transfers of books of business

6. Role of National Organization of Life & Health Insurance Guaranty Association (NOLHGA) www.nolhga.com 6

Examples of Large Life Insurance Company Receiverships 1. Executive Life Insurance Company (CA) •

1991 – Rehabilitation

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Cause of financial difficulty (Junk Bonds)

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The French drama

2. Mutual Benefit Life Insurance Company (NJ)

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1993 – Rehabilitation

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Cause of financial difficulty (Real Estate)

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Time can solve problems

Practical Considerations for Life Insurance Company Receiverships 1. Contrast of life insurance vs. property and casualty insurance 2. Transfers of books of business to healthy companies •

Provides coverage for policies greater than statutory limits

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Avoids payouts and guarantees by state insurance guaranty associations

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>90% of policyholder benefits covered in full

3. Appointment of NOLHGA Task Force for insurance company receivership •

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Multi-state insolvencies (greater than 3 states)

Issues Facing the U.S. Life Insurance Industry 1. Mergers and acquisitions 2. Receipt of TARP money 3. Surplus and regulatory developments

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Unique Features of Mutual Life Insurance Companies 1. Stock vs. mutual life insurance companies •

Differences

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Complexities

2. Demutualization and “re-mutualization” 3. Mutual holding companies

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