BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 2160 (Blumenfield) Hearing Date: June 27, 2012
As Amended:June 12, 2012
Fiscal: No
Urgency: No
VOTES: Asm. Floor(05/25/12)63-04/Pass
Asm. Ins. (05/02/12)08-03/Pass
SUMMARY: This bill would deem an investment by a domestic
insurer in specified companies as a nonadmitted asset for the
purposes of meeting the insurer's capital requirements.
Specifically, the targeted investment activities involve
companies included on the list of companies prepared by the
Department of General Services pursuant to the Iran Contracting
Act of 2010.
DIGEST
Existing law
1. Prohibits domestic insurers from acquiring foreign investments
from or located in foreign jurisdictions designated as state
sponsors of terrorism by the United States Secretary of State;
2. The Iran Contracting Act of 2010, provides that a person
whose name appears on a list developed or contracted for
development by the Department of General Services as a
person determined by the department to be engaged in
investment activities in Iran is ineligible to bid on,
submit a proposal for, enter into, or renew a contract with
a public entity.
This bill
1. Would require that above-referenced investments by a
domestic insurer in companies that are included on the list
maintained by the Department of General Services be treated
as non-admitted assets on the financial statements of the
domestic insurer;
AB 2160 (Blumenfield), Page 2
2. Would deem use of the list developed for purposes of the
Iran Contracting Act of
2010 as automatic compliance with these requirements;
3. Would require the insurer to provide the department with
specified information, on an annual basis, including a list
of the investments the insurer has in companies included on
the list and a detailed summary of the business operations
the listed company has in Iran.
COMMENTS
1. Purpose of the bill
According to the author:
Although current California law prohibits California-based
insurance companies from acquiring direct investments in
Iran and other countries that are designated as state
sponsors of terrorism by the United Sates Secretary of
State, it allows insurance companies to invest in companies
that help spur Iran's nuclear weapon capabilities. In June
2009, the California Insurance Commissioner uncovered
billions of dollars of such indirect investments. AB 2160
will explicitly allow the Commissioner to disallow these
investments.
On September 9, 2009, American intelligence agencies
concluded that Iran has already created enough nuclear fuel
to develop a nuclear weapon, and United States Ambassador to
the International Atomic Energy Agency declared that Iran
had achieved "possible breakout capacity." On September 21,
Iran acknowledged that it is considering a previously
undeclared "new pilot fuel enrichment plan."
In addition, the human rights situation in Iran has steadily
deteriorated, highlighted by transparently fraudulent
elections and the brutal repression and murder, arbitrary
arrests, and show trials of peaceful dissidents. Most
recently, President Obama signed into law a bill that places
the Iran's central bank under unilateral sanctions.
The serious and urgent nature of the threat from Iran
demands that states, together with the federal government,
AB 2160 (Blumenfield), Page 3
do everything possible diplomatically, politically, and
economically to prevent Iran from acquiring a nuclear
weapons capability.
It is the responsibility of the Insurance Commissioner to
decide whether or not insurance companies that do business
in the state have financially sound investments and have
enough capital to cover their claims. It is then the
prerogative of California not to engage in business with
foreign companies or help facilitate the efforts of foreign
states, such as Iran, that place those companies at risk
from the impact of economic sanctions imposed upon the
Government of Iran for committing egregious violations of
human rights, proliferating nuclear weapons capabilities,
and supporting terrorism.
2. Background . An insurer assumes liability or risk of loss by
selling policies. California law limits the aggregate
amount of insurance an insurer can sell according to a cap
defined, in part, by its available reliable assets. Those
reliable assets are called "admitted assets." The more
admitted assets an insurer has, the more risk it can accept.
a. Standards for Admitted Assets. The Insurance Code
sets basic standards for the types of investments held by
domestic insurers. The standards apply to different
types of assets (loans, real estate, securities, etc.).
(Investments outside the U.S. have their own special set
of regulations.)
For instance, when evaluating debt securities, the
Insurance Code considers assessments by nationally
recognized statistical rating organizations approved by
the Securities and Exchange Commission as Nationally
Recognized Statistical Rating Organizations ("NRSROs")
(Moody's Investors Service, Standard & Poor's Ratings
Services, etc.) and the NAIC's Securities Valuations
Office (SVO). (See Ins. Code §§ 922.5, 922.7, 1192.10,
1196.1. 1240, 1211, 1781.2, and 12100.)
In addition, different regulations apply to risk-based
capital versus excess funds; the purpose for which the
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investment is used determines the standards applied.
Risk-based capital requirements (the amount of admitted
assets necessary to assume so much in risk) are
determined by a formula designed for the type of
insurance offered and are used to make sure that the
insurer has sufficient assets to cover claims. Excess
funds, those over the amount required by the risk-based
capital requirements, would not be affected by SB 2160.
AB 2160 Standard for Admitted Asset. AB 2160 would test
an asset against a list compiled by the Department of
General Services (DGS) pursuant to the Iran Contracting
Act of 2010. Under Public Contract Code section 2203,
DGS must "using credible information available to the
public, develop, or contract to develop, a list of
persons it determines engage in investment activities in
Iran." These investment activities include providing
"goods or services of twenty million dollars
($20,000,000) or more in the energy sector of Iran,
including a person that provides oil or liquefied natural
gas tankers, or products used to construct or maintain
pipelines used to transport oil or liquefied natural gas,
for the energy sector of Iran." (Public Contract Code §
2202.5.) The May 23, 2012 list includes 39 companies
identified by DGS that are prohibited from contracting
with public entities in California per the Iranian
Contracting Act, 2010. The method proposed by AB 2160 to
regulate admitted assets does not evaluate the value or
relative reliability of the company, but deems and
investment in it as nonadmitted by virtue its presence on
the DGS contracting list.
b. Prior and Related Federal and State Legislation and
CDI Regulations.
i. Comprehensive Iran Sanctions, Accountability,
and Divestment Act of 2010 (CISADA).
A. Presidential duties and powers are defined
in Section 102 that also directs the President to
impose, and authorizes the President to waive,
sanctions for activities related to commerce with
AB 2160 (Blumenfield), Page 5
Iran, as specified.
B. State authority to act is granted in
Section 202 that authorizes a state or local
government to adopt and enforce measures to divest
its assets from or prohibit the investment of assets
it controls in any person that: (1) has an
investment of $20 million or more in Iran's energy
sector, including in a person that provides oil or
liquified natural gas tankers, or products used to
construct or maintain pipelines used to transport
oil or liquefied natural gas, for Iran's energy
sector; or (2) is a financial institution that
extends $20 million or more in credit to another
person for at least 45 days if that person will use
the credit for investment in Iran's energy sector.
It also defines "assets" as public monies including
any pension, retirement, annuity, endowment fund, or
similar instrument that is controlled by a state or
local government. Excludes from such definition
employee benefit plans covered by title I of the
Employee Retirement Income Security Act of 1974
(ERISA). (See AB 221 and 1650 below.)
i. AB 1650 (Feuer), the Iran Contracting Act of
2010 (enacted as Chapter 573, Statutes of 2010), in
part, prohibits a person from bidding or renewing a
contract with a public entity for goods and services of
$1 million or more who is identified on a list
maintained by the Department of General Services (DGS)
and engaging in investment activities in Iran, as
specified (see discussion above).
ii. AB 221 (Anderson) (enacted as Chapter 671,
Statutes of 2007) prohibits the Board of Administration
of the Public Employees Retirement System or the
Teachers Retirement System from investing public
employee retirement funds in a company with "business
operations" in the defense or nuclear sector of Iran or
that are involved in the development of Iranian
petroleum or natural gas resources and are subject to
federal sanctions.
AB 2160 (Blumenfield), Page 6
iii. CDI Settlement. In 2010, CDI announced
that it had compiled a list of foreign entities doing
business with the Iranian oil and natural gas, nuclear,
and defense sectors (CDI List). The CDI also intended
to treat investments held by insurance companies doing
business in California in those entities on the CDI
List as non-admitted, and that insurance companies
holding those investments should report those
investments as non-admitted assets. CDI did not adopt
this policy through the Administrative Procedure Act
and eventually entered into a settlement agreement that
provides that CDI may continue to maintain and post the
list on its website and, as specified, identify
insurers with those investments. CDI may not, under
the agreement, use the information to take disciplinary
action against the insurer (other than publication as
specified) and it may not treat investments in entities
on the CDI List as nonadmitted.
a. Impact on the California Department of Insurance
(CDI). Opponents argue that SB 2160 is preempted by
federal law, a subject treated in more detail below, which
will give rise to significant litigation. CDI is no
stranger to litigation, but the results are unpredictable
and the impact on the agency has ranged from putting the
department on the brink of significant staff cutbacks (see
Insurance Cutbacks: 95 Are Out State Department Exec
Blames Lawsuits, Budget, the Sacramento Bee, Aug 13, 1996)
to no significant impact on daily activities. One large
factor is whether CDI loses a case and is ordered to pay
attorney's costs or fees.
b. Federal Cooperation and Preemption. The following
restates the arguments for preemption on each side, the
standards and issues the court may consider, practical
problems with the structure of the bill, and an evaluation
by the Legislative Counsel.
i. Submitted Arguments. To further orderly
discussion and to ensure that both positions have an
opportunity to state their case, Committee staff
requested representatives from supporters and
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opposition to provide their basic arguments on the
preemption issue. These are summarized below, albeit
edited and abridged, but the substance of the argument
preserved.
A. Arguments Against Preemption (in support of
AB 2061).
Arguments that AB 2160 is preempted by federal law
are (1) speculative and (2) clearly contradicted by
the facts surrounding United States policy and
legislative history on Iran sanctions, including the
enactment of the Iran Sanctions Act of 2010 (which
passed the U.S. Senate 99-0 on June 24, 2010, and the
House 408-8) and CISADA that broadens and intensifies
U.S. sanctions policy against Iran. CISADA
specifically authorizes state action in concert with
U.S. government policy to impose and expand the
economic sanctions on Iran.
The California Legislature enacted AB 221 (divestment
of state pension systems of companies with business
operations in the Iranian defense and energy sectors)
three years prior to the passage of CISADA. Congress
and the President specifically and retroactively
approved the sanctions passed by more than 20 states
and specifically rejected federal preemption. In
addition, CISADA includes financial institutions
rendering arguments that the federal act is limited
to state agencies unclear.
Issues addressed in AB 2160 are distinct from those
in American Insurance Association v Garamendi, where
California enacted a program in conflict with the
federal policy. This case specified that state
action is pre-empted when the federal government has
taken no action on a particular foreign policy issue
- this is different with respect to Iran. AB 2160
enacts sanctions consistent with federal law and
Presidential executive order. It is already illegal
for any American company to have business operations,
as defined, in Iran.
AB 2160 (Blumenfield), Page 8
Congress has taken a clear stand against companies
that invest in Iran. Congress has established
specific criteria to be used in order to create a
list of companies that invest in Iran in order to ban
them from the U.S. market altogether. This list of
companies, published by the State Department of
General Services, is of foreign oil and energy
companies primarily from the old Soviet Union,
Communist China and Southeast Asia. These companies
are subject to U.S. and Western European sanctions,
cannot do business with the State of California, and
are prohibited investments for the state retirement
system. Congress will continue to identify
additional companies to be added to the list. This
can have grave consequences for California-based
companies that invest in businesses that will be
phased out of the U.S. market.
B. Arguments in Favor of Preemption (in
opposition to AB 2061)
Both Congress and the President have already acted to
sanction the government of Iran. In fact, the U.S.
Department of Treasury, Office of Foreign Assets, has
compiled a list of Iranian businesses in which no
U.S. business may invest. The delegation of
responsibility to a federal agency to execute the
terms of CISAD serves as strong factor in favor of
preemption.
The purpose and effect of AB 2160 declaring assets to
be non-admitted strongly discourages insurers'
investments in those foreign companies. Insurers'
capacity to write insurance is limited by their
admitted assets. Hence, the purpose of AB 2160 is to
penalize insurers with such investments by seeking to
limit their capacity to write insurance. That is a
powerful incentive to cause those insurers to drop
those investments. Hence, the effect of the
non-admitted provision is essentially the same as an
"Investment Prohibition" and a clear conflict with
AB 2160 (Blumenfield), Page 9
federal law.
The arguments in support of AB 2160 and the bill
itself focus on utilizing economic clout to impose
sanctions on the Iranian government. This
contradicts the alleged purpose of AB 2160 to assure
solvency and provides strong evidence that the
purpose of AB 2160 is to regulate foreign affairs.
The bill affects countries other than Iran. The list
of prohibited investments includes businesses based
in countries such as India, Greece, Turkey, South
Korea, and China. The United States, of course,
seeks to maintain good relations with these
countries, serving as a member of NATO with some of
them, seeking to expand trade with others, and
depending on China, for critical financing. AB 2160
conflicts with the United States' foreign policy
towards those countries. It would disrupt the
relationship by prohibiting California insurance
companies from making investments in certain
businesses based in those countries. It is those
relationships that the federal government seeks to
perpetuate and no doubt contributes to its reluctance
to do nationally what AB 2160 proposes to do in
California.
i. The Court will ultimately consider the
actual purpose of a statute, regardless of stated goal,
in determining whether AB 2160 is preempted. "Courts
have consistently struck down state laws which purport
to regulate an area of traditional state competence,
but in fact, affect foreign affairs." (Mousesian v.
Victoria Versicherung AG (9th Cir. 2012) 670 F3.d 1067,
1074 quoting Von Saher v. Norton Simon Museum of Art at
Pasadena (9th Cir. 2010) 592 F.3d 954, 964; see also
American Insurance Association v. Garamendi (2003) 539
U.S. 396, 425-26; Crosby v. National Foreign Trade
Council (2000) 530 U.S. 363, 373; and Zschernig v.
Miller (1968) 389 U.S. 429, 437-38).
ii. The Court will consider whether SB 2160
AB 2160 (Blumenfield), Page 10
exceeds the authority granted to California under
CASIDA to divest its public assets if it determines
that penalizing private entities constitutes an
exercise authority reserved for the President. As the
Court noted in Crosby v National Foreign Trade Council
noted: "Sanctions are drawn not only to bar what they
prohibit but to allow what they permit" (530 U.S. 363,
380 (2000)) and "the state statute penalizes some
private action that the federal Act (as administered by
the President) may allow, and pulls levers of influence
that the federal Act does not reach." (Id. at 376.)
iii. This bill would codify its terms without
an effective fail-safe provision. This mechanism
leaves the possibility that California's position might
conflict with federal foreign policy if diplomatic
positions change or the federal government chooses a
different diplomatic strategy. On its own terms, the
bill would become inoperative if: (1) Iran is removed
from the United States Department of State's list of
countries that have been determined to repeatedly
provide support for acts of international terrorism.
(2) Pursuant to the appropriate federal statute, the
President of the United States determines and certifies
to the appropriate committee of the Congress of the
United States that Iran has ceased its efforts to
design, develop, manufacture, or acquire a nuclear
explosive device or related materials and technology.
This mechanism poses several problems:
A. Codifies foreign policy statements found in
the legislative findings and declarations such as
Iran's support of terrorism and egregious violations
of human rights. Unlike a resolution or AB 1650, the
findings in this bill will be repeated every time the
Insurance Code is published and distributed,
regardless whether the language is operative.
B. Renders the section inoperative, rather than
repealing it. The proposed language would remain in
the Insurance Code until repealed by another statute
AB 2160 (Blumenfield), Page 11
regardless of whether the terminating conditions are
satisfied.
C. Lacks specificity and clarity. The bill
incorporates by reference the "Department of State's
list of countries that have been determined to
repeatedly provide support for acts of international
terrorism," "the appropriate federal statute" or
"appropriate committee of Congress," but it does not
designate who should interpret and apply this
section.
i. Legislative Counsel Opinion. The
Legislative Counsel, by oral opinion, has confirmed
that in its view, AB 2160 would constitute an intrusion
on the field of foreign affairs, which the United
States Constitution entrusts to the President and the
Congress (Sec. 2, Art. VI, U.S. Const.).
a. Indirect Investments. Some concerns have been raised
regarding the issue of "indirect investments." This
concern may be based on prior versions of the bill that
would have granted the commissioner's authority to treat
as nonadmitted "any indirect investment of a domestic
insurer in any company that has business operations in
Iran." That language was amended out of the bill on May
9, 2012.
1. Questions and Issues
a. Would independent action by California undermine the
President's status as the primary voice of foreign policy
in the United States? If so, how might that impact U.S.
national security overall?
b. Is Congress carrying legislation to provide the states
the power to exercise the powers granted in AB 2160? If
so, would that imply that Congress does not believe that
the states currently have that power?
AB 2160 (Blumenfield), Page 12
c. The efficacy of AB 2160 relies on an assumption that
domestic insurers who make these investments actually need
the credit for admitted assets and would rather divest
then have the investments treated as nonadmitted assets.
Targeted insurers might carry sufficient excess funds as
to not be impacted. What evidence supports the conclusion
that insurers who have these assets will actually divest
the targeted assets if AB 2160 is enacted and enforceable?
2. Summary of Arguments in Support
a. The Jewish Public Affairs Committee for California
(JPAC) and Jewish Community Relations Council (JCRC) and
American Jewish Committee (AJC) write that AB 2160 is an
important part of national and international efforts to
ratchet up economic pressure on the government of Iran to
comply with demands to cease its dangerous drive to
develop a nuclear weapon.
b. Many supporters note that AB 2160 does not require
divestment nor does it impose any penalty on the insurer.
This legislation is completely consistent with the policy
of the United States government and prior legislation
enacted by the California Legislature.
c. United Against Nuclear Iran (UANI) explains that it
has sought to use the purchasing power of the federal
government and the U.S. state governments to have
international businesses choose between doing business
with the United State and the individual states or Iran.
AB 2160 presents insurers with just such a choice: do
business in California or do business in Iran.
d. JPAC, Jewish Federation LA, and AMVETS write that the
target of this bill is not the Insurance industry, it is
the Iranian government.
e. 30 Years After states that AB 2160 builds on the
important momentum of AB 1151 (which increased the
AB 2160 (Blumenfield), Page 13
transparency of California's largest public pension funds
with respect to their investments in Iran) and AB 1650
(which prohibited state and local governments from
pursuing contracts with companies that do business in
Iran's energy sector). AB 2160 is also consistent with
prior California legislation that placed economic pressure
on the apartheid regime in South Africa and the human
rights violating regime in Sudan.
f. 30 Years After strongly supports AB 2160 because it
will prevent California insurance companies from
continuing to help finance Iran's illicit nuclear weapons
program, sponsorship of terrorism, and brutal suppression
of its citizens. Passage of AB 2160 will force insurance
companies to choose between doing business in the State of
California and with Iran's rogue regime.
g. The Legislative Black Caucus writes AB 2160 would
simply keep consumers informed about who their insurers
are using their hard earned dollars to do business with if
those assets are invested in Iranian energy programs.
This is a common-sense, pro-peace bill that will help
inform consumers and honor the traditions of supporting
governments that advocate for justice rather than those
who advance hate.
1. Summary of Arguments in Opposition
Several representatives of the insurance industry state that
the federal bill only authorizes state and local government
entities to divest their own assets, or prohibit their
investment in Iran investment activities. Indeed, this
Legislature has already passed legislation that relies on
that provision. However, as a clear reading of Section 202
of CASIDA indicates, the federal bill does NOT authorize the
states to control, ban or otherwise affect the activities of
private business as proposed by AB 2160.
POSITIONS
AB 2160 (Blumenfield), Page 14
Support
30 Years After
Anti-Defamation League
American Jewish Committee
American Veterans of California (AMVETS)
Legislative Black Caucus
Jewish Community Relations Council
Jewish Federation of Greater Los Angeles
Jewish Public Affairs Committee of California
United Against a Nuclear Iran
Opposition
American Council of Life Insurers
American Insurance Association
Association California Insurance Companies
Association of California Life and Health Insurance Companies
California Chamber of Commerce
Pacific Association of Domestic Insurance Companies
Personal Insurance Federation of California
National Association of Mutual Insurance Companies
Consultant: Hugh Slayden, (916) 651-4773