Summary: GAO testified on the financial characteristics of four large insurance companies--Executive Life, its subsidiary Executive Life of New York, First Capital, and Fidelity Bankers--that were taken over by state regulators. These insurers have more than 900,000 policies with policyholders and annuitants in every state in the union. GAO notes that the reckless growth pursued by the four firms was supported by questionable business strategies. They were heavily invested in poor-quality assets and relied on phony financial reinsurance and money borrowed from parent companies to artificially inflate their surplus and mask their true financial condition. Without surplus relief reinsurance and borrowed surplus, the two Executive Life insurers would have been insolvent in the early 1980s while First Capitol and Fidelity Bankers would have been undercapitalized. Despite untimely, incomplete, and inaccurate information, state regulators were aware of the troubled condition of the four insurers before the companies were taken over but did not act to effectively stem the financial deterioration of the companies or minimize losses. State regulators moved to take over the insurers only after the companies were plagued by policyholder runs. GAO is still reviewing the performance and capabilities of the state regulators, so these observations do not represent the agency's final assessment.
