The Holding Company’s Financial Troubles Led to Monarch Life’s Takeover

Financial troubles of the holding company endangered the solvency of Monarch Life and led to the regulatory takeover. In effect, the pool account represented loans from Monarch Life to the holding company and other subsidiaries. Monarch Life faced additional risk by acting as a loan guarantor for some of the holding company’s real estate operations. The Massachusetts Division of Insurance Was Unaware of the Problems Endangering Monarch Life

Until the holding company’s disclosures in November 1990, the Massachusetts Division of Insurance was unaware of the interaffiliate transactions that depleted Monarch Life’s assets and undermined its solvency. Once the holding company disclosed that its inability to repay Monarch Life endangered the insurer’s solvency, Massachusetts regulators responded swiftly to protect the insurer’s policyholders. Regulatory examinations took months or even years to complete. Effective regulation of insurance holding company systems requires state regulators to review consolidated financial statements with uniform accounting standards and to examine the financial transactions among the parent holding company and its affiliates as a unitary economic enterprise.”
At the time of the Monarch Life takeover in 1991, Massachusetts lacked the authority, recommended under NAIC’s model Insurance Holding Company System Regulatory Act, to prevent abusive interaffiliate transactions. However, the regulatory approach continues to rely on a holding company system to reveal potentially abusive transactions involving an insurance subsidiary.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined the placing of Monarch Life Insurance Company in receivership, focusing on: (1) whether the actions of the parent holding company or affiliated companies endangered the solvency of Monarch Life; and (2) the adequacy of regulatory oversight leading up to the insurance receivership.

What GAO Found

GAO found that: (1) the holding company pledged Monarch Life stock as collateral on a loan which endangered its solvency and led to the regulatory takeover by the holding company's creditors; (2) the holding company diverted about $165 million from Monarch Life to fund its real estate activities, but it was unable to repay the loan; (3) Monarch Life lost $54 million in real estate investments and faced additional risk by acting as a loan guarantor for the holding company's real estate operations; (4) the Massachusetts Division of Insurance was unaware of Monarch Life's insolvency until the holding company disclosed its inability to repay its loans in 1990; (5) previous regulatory examinations of Monarch Life's financial statements did not reveal any solvency problems due to inadequate information on interaffiliate transactions; (6) once the holding company publicly announced that its financial condition endangered Monarch Life's solvency, state regulators acted quickly to protect the insurance policyholders; and (7) although Massachusetts expanded its regulatory authority to prevent abusive interaffiliate transactions between insurance companies, it continues to rely on insurer disclosure to enforce insurance holding company laws.