In virtually unprecedented fashion, the Senate Tuesday night shoved through legislation that would clarify that the Federal Reserve Board can apply insurance-based capital standards to the insurance portion of any insurance holding company it oversees.

The bill is S. 2270, “the Insurance Capital Standards Clarification Act of 2014.”

That bill would revise Sec. 171, the so-called “Collins Amendment,” a provision of the Dodd-Frank financial services reform law. The Fed says its lawyers interpret the Collins amendment to require the Federal Reserve to apply bank capital rules to insurance companies it supervises.

Companion legislation, H.R. 4510, has been introduced in the House by Rep. Gary Miller, R-Calif., and Carolyn McCarthy, D-N.Y. It has 51 additional co-sponsors in the House.

The Senate passed the bill just hours after the leadership of the Senate Banking Committee signaled that, because there was no known opposition to S. 2270, panel chairman Sen. Tim Johnson, D-S.D. and Sen. Mike Crapo, R-Idaho, would try to push it through the Senate using the so-called “hotlining” procedure.

“Hotlining is a streamlined Senate procedure that allows non-controversial legislation to bypass the usual Senate floor debate and voting process, instead moving it with the unanimous consent of the Senate,” said Ryan Schoen of Washington Analysis in an investment note. 

This occurred around 6:30 p.m. on Tuesday. S. 2270 was amongst a group of bills approved through the accelerated procedure before adjourning for the night, an industry official said.

Schoen speculated in an investment note issued earlier in the day that, if the bill passed the Senate quickly, the House might decide to push it through on the suspension calendar because it is also “expected to attract broad bipartisan from the House Financial Services Committee, including Chairman Jeb Hensarling, R-Texas.”  

Before the Collins amendment

The Collins amendment was sponsored by Sen. Susan Collins, R-Maine, as Congress acted to strengthen insurance supervision in the wake of the catastrophic failure of American International Group. AIG’s consolidated regulator, the Office of Thrift Supervision, was cited as responsible for overseeing the holding company subsidiary of AIG that speculated in issuing credit default swaps that sent the company into turmoil. The CDS was issued through AIG’s Financial Products unit.

While OTS was cited, states had full authority to oversee the subsidiary that issued the CDS. In fact, then-New York attorney general Eliot Spitzer cited the pricing of AIG CDS in 2005 as one of the accounting inadequacies he found in examining the company. AIG later settled with the SEC and paid more than $800 million to investors through the SEC settlement of the Spitzer probe.

It got into trouble after issuing $2.77 trillion of CDS as insurance on mortgage-backed securities of various grades.

As AIG’s credit rating declined, holders of the CDS demanded more collateral, which AIG was not in the position to provide. It forced a government takeover and Fed supervision. Moreover, federal regulators found that AIG had used its insurance subsidiaries as cross-collateral for the activities of AIGFP. The Federal Reserve acquired 79 percent of AIG in September 2005 in return for a huge capital contribution that later grew through one loan or another to an estimated $300 billion. The government liquidated its position in AIG at a profit in 2012.

A victory for life insurers

The decision to hotline the measure is a significant victory for the American Council of Life Insurers. (ACLI)

The ACLI took out a full-page advertisement in Roll Call May 28 that will be repeated in Politico June 4 highlighting the life insurance industry’s support for S. 2270 and the House companion legislation, H.R. 4510.

“This issue is vitally important to ACLI and its member companies,” the advertisements say.

In a statement issued by the ACLI this evening, the group said the ACLI “believes consumers, life insurance companies, the economy and the nation overall benefit from a strong insurance regulatory system.”

But, the statement said, rules governing life insurers on all issues must be appropriate for life insurers.

“There is broad agreement on this position,” the ACLI statement said. “The Obama administration, Democrats and Republicans in the House and the Senate, state and federal regulators and private industry all agree that life insurers should not be subject to capital standards more suited for the business of banking,” and S. 2270 addresses this concern, the statement said.

The bill was sponsored by Collins and Sens. Sherrod Brown, D-Ohio, and Mike Johanns, R-Neb.

It would impact insurers such as American International Group and Prudential Financial that have been designated as systemically significant financial institutions (SIFI), and perhaps MetLife, which is being evaluated as a potential SIFI, from bank-like capital regulation by the Fed, Schoen said.

It would also impact insurers such as State Farm and USAA which the Fed oversees as their consolidated regulator because they operate savings and loan holding companies (SLCC). The Fed has never disclosed a list of insurers it oversees as SLCCs.

S. 2270 and the companion House bill, H.R. 4510, clarifies that the Fed can apply insurance-based capital standards to the insurance portion of the business, while still keeping banking capital standards for the banking portion of the business.

It also prevents the Fed from requiring mutual insurance companies, such as State Farm and USAA, from preparing financial statements in accordance with generally accepted accounting principles, when they are already preparing financial statements in accordance with state-based statutory accounting principles.