BILL ANALYSIS �
AB 2160
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Date of Hearing: May 2, 2012
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 2160 (Blumenfield & Feuer) - As Amended: April 30, 2012
SUBJECT : Insurers' Financial Statements: Investments in Iran
SUMMARY : Prohibits the use of investments in companies doing
business in the energy and military sectors of Iran to satisfy
an insurer's capital requirements. Specifically, this bill :
1)Finds and declares that:
a) The Securities and Exchange Commission has determined
that business activities in foreign states sponsoring
terrorism, such as Iran, that are subject to sanctions by
the United States may materially harm the share value of
foreign companies. Shares in these foreign companies may be
held in the portfolio of insurance companies issuing
policies to California consumers.
b) Publicly traded companies in the United States are
substantially restricted in doing business in or with
foreign states sponsoring terrorism, such as Iran.
c) Insurers in this state may currently invest premiums
paid by Californians in publicly traded foreign companies
that may be at risk due to business ties with foreign
states such as Iran that sponsor terrorism and are involved
in the proliferation of weapons of mass destruction.
d) Investments in publicly traded foreign companies that
have business operations in or with foreign states such as
Iran are liable for sanctions under United States law and
increase the financial risk contained in the investment
portfolios of insurers doing business in this state.
e) Identifying companies with business activities in
foreign states such as Iran that sponsor terrorism and
ensuring that those investments are financially sound is an
important public policy priority.
f) The federal government has imposed numerous sanctions on
Iran and on entities that have invested at least twenty
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million dollars ($20,000,000) in any year since 1996 to
develop petroleum or natural gas resources of Iran.
g) Direct investments in Iran and investments in companies
doing business with the Iranian energy sector are subject
to financial risk as a result of Iran's pursuit of nuclear
weapons, sponsorship of international terrorism, and
consequent international isolation.
h) It is the Government of Iran, and not the people of
Iran, that is responsible for Iran's support of terrorism
and which commits egregious violations of human rights
under which its own citizens are required to live.
2)Defines "business operations" as maintaining, selling, or
leasing equipment, facilities, personnel, or any other
apparatus of business or commerce in Iran, including the
ownership or possession of real or personal property located
in Iran.
3)Defines "company" as a sole proprietorship, organization,
association, corporation, partnership, venture, or other
entity, its subsidiary or affiliate, including a company owned
or controlled, either directly or indirectly, by the
government of Iran, that is established or organized under the
laws of or has its principal place of business in the Islamic
Republic of Iran.
4)Defines "Government of Iran" as the government of Iran or its
instrumentalities or political subdivisions including an
individual, company, or public agency located in Iran that
provides material or financial support to the Islamic Republic
of Iran.
5)Defines "invest" or "investment" as the purchase, ownership,
or control of stock of a company, association, or corporation,
the capital stock of a mutual water company or corporation,
bonds issued by the government or a political subdivision of
Iran, corporate bonds or other debt instruments issued by a
company, or the commitment of funds or other assets to a
company, including a loan or extension of credit to that
company.
6)Defines "Iran" as the Islamic Republic of Iran or a territory
under the administration or control of Iran.
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7)Provides that any indirect investment of a domestic insurer in
any company that has business operations in Iran shall be
treated as a nonadmitted asset on financial statements filed
with the Insurance Commissioner (commissioner).
8)Requires domestic insurers doing business in California to
determine if they have investments in companies that are doing
business with or are invested in (a) the Iranian military or
nuclear sectors, or (b) the development of Iranian energy
resources, and (c) are subject to sanctions by the federal
government.
9)Permits domestic insurers to utilize the list published by the
Department of General Services (DGS) to determine whether it
has investments in Iran.
10)Provides that use of the DGS list by a domestic insurer shall
be deemed automatic compliance by the Department of Insurance
(department).
11)Requires domestic insurers to determine which companies in
their investment portfolios would be treated as nonadmitted
assets before June 30, 2013.
12)Requires domestic insurers to annually provide the department
a list of investments the insurer has in companies on the DGS
list and a detailed summary of the business operations these
companies have in Iran.
13)Provides that if an insurer sells or transfers all of its
investments in companies with business operations in Iran, the
insurer is not subject to the requirements in this bill.
14)Specifies that the bill shall cease to be operative if both
of the following occur:
a) Iran is removed from the State Department's list of
countries that provide support for acts of international
terrorism.
b) The President determines and certifies to Congress that
Iran has ceased its efforts to design, develop,
manufacture, or acquire a nuclear explosive device or
related materials and technology.
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EXISTING LAW :
1)Prohibits a person that provides goods or services of $20
million or more in the energy sector of Iran, as identified in
the list created by DGS, or a financial institution that
extends $20 million or more in credit to such a person, from
bidding on or entering into a contract for goods or services
of $1 million or more with a public entity.
2)Defines "person" as a natural person, corporation, company,
limited liability company, business association, partnership,
society trust, or any other nongovernmental entity,
organization or group, any governmental entity or
instrumentality of a government, including a multilateral
development institute, or any successor, parent entity, or
subsidiary of any of these entities.
3)Requires DGS to develop, or contract to develop, a list of
persons it determines engage in investment activities in Iran
and update the list at least every 180 days. DGS is required
to develop this list using credible information available to
the public.
4)Provides that under specified circumstances a public entity
may permit a person engaged in investment activities in Iran
to be eligible to enter into a contract for goods and services
of $1 million or more. These circumstances include that the
investments were made before July 1, 2010, or the investments
have not been expanded after July 1, 2010, or the awarding
body determines that it is in the best interest of the state
or local public entity to contract with the person.
5)Prohibits domestic insurers from acquiring any investment
respecting a foreign jurisdiction, or any investment
denominated in the currency of that foreign jurisdiction, if
that jurisdiction is designated as a state sponsor of
terrorism by the US Secretary of State pursuant to federal
laws.
FISCAL EFFECT : Unknown, but potentially significant litigation
costs.
COMMENTS :
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1)Purpose. According to the author, although 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's Insurance Commissioner
uncovered billions of dollars of such indirect investments. AB
2160 will explicitly allow the Commissioner to target these
investments by withholding credit for these investments on the
financial statements submitted by domestic insurers.
The serious and urgent nature of the threat from Iran demands
that states, together with the federal government, do
everything possible diplomatically, politically, and
economically to prevent Iran from acquiring a nuclear weapons
capability. It is the responsibility of the commissioner to
decide whether or not domestic insurance companies 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 the Government of Iran that place those
companies at risk from the impact of economic sanctions for
committing egregious violations of human rights, proliferating
nuclear weapons capabilities, and supporting terrorism.
2)Sanctions. The Comprehensive Iran Sanctions, Accountability,
and Divestment Act of 2010 (CISADA), built on prior federal
legislation imposing sanctions on Iran by adding new economic
penalties aimed at persuading Iran to change its conduct.
CISADA sanctions target a range of business activity including
businesses involved in the sale of refined petroleum products
to Iran, support for Iran's domestic refining efforts,
international banking institutions involved with Iran's
military, with Iran's nuclear program, and its support for
terrorism. CISADA imposed restrictions on foreign financial
institutions doing business with key Iranian banks or the
Iranian military.
3)Divestment. CISADA authorizes states and local governments to
prohibit investment of state or local government assets in, or
to divest the assets of the state or local government from,
any person that the state or local government determines
engages in investment activities in Iran of $20 million or
more in the energy sector of Iran or is a financial
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institution that extends $20 million or more in credit for
investment in the energy sector of Iran.
In response, the California Legislature enacted AB 1650 (Feuer),
Statutes of 2010, Chapter 573, to prohibit a person that
provides goods or services of $20 million or more in the
energy sector of Iran, as identified in the list created by
the DGS, or a financial institution that extends $20 million
or more in credit to such a person, from bidding on or
entering into a contract for goods or services of $1 million
or more with a public entity. The DGS reports that this state
list is expected to be completed in August of this year.
4)Federal preemption . Federal law generally reserves the
conduct of foreign policy for the President and Congress. A
series of decisions from the Supreme Court have clearly
established that actions by state and local governments that
infringe on the conduct of foreign policy by the federal
government are pre-empted by federal law. In fact, Courts
have ruled that state action is pre-empted even when the
federal government has taken no action on a particular foreign
policy issue. One notable case (American Insurance
Association, et al., v. John Garamendi, Insurance
Commissioner, 539 U.S. 396; 123 S. Ct. 2374) in this line of
decisions overturned California's Holocaust Victim Insurance
Relief Act (HVIRA). HVIRA was enacted in California and
required insurance companies doing business in California to
disclose policies sold in Europe from 1920 to 1945. The Court
ruled that HVIRA was pre-empted by federal law.
In February, the Ninth Circuit Court of Appeals overturned a
California statute that extended the statute of limitations
for, and allowed California courts to hear, cases regarding
insurance claims brought by victims of the Armenian Genocide
(Movsesian v. Victoria Versicherung AG, 670 F.3d 1067). The
Court ruled, in a unanimous en-banc decision, that the statute
was pre-empted by federal law. In its opinion, the court
described the fate of state actions related to foreign policy
concerns as follows, "Courts have consistently struck down
state laws which purport to regulate an area of traditional
state competence, but in fact, affect foreign affairs." The
case law is not limited to these two California efforts that
seek to remedy problems involving foreign countries. A number
of states have sought to enact well-reasoned efforts to
respond to the past or present activities of foreign
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governments. These efforts have been consistently struck
down. There is substantial similarity between this bill and
other state legislation that has been overturned by the
courts. If this bill becomes law and subject to a legal
challenge, it is reasonable to expect it would be overturned
as well.
5)Settlement. The department recently settled litigation
regarding actions taken by the previous commissioner that,
among other things, would have (like this bill) treated
indirect investments in Iran's energy and military sectors as
non-admitted assets. The settlement agreement resulted in the
department abandoning that policy. The settlement allows the
department to continue publishing a list of companies that do
business with Iran's energy and military sectors, and
identifying those insurance companies with investments in
those companies, on the department's website. The settlement
agreement also prohibits the department from using any
administrative action to pressure or punish insurance
companies with investments in listed companies, and favoring
any insurance company that divests from listed companies.
Given the history of litigation leading to this settlement, it
is reasonable to expect this bill, should it become law, would
be subject to a legal challenge as well. The Department is
required by the State Constitution to defend state law against
a federal preemption challenge to the Court of Appeals. The
cost of such a defense is expected to be several hundred
thousand dollars assuming the department is represented by the
Attorney General (AG). However, since the AG represented the
Department in the litigation concluding in the recent
settlement, the AG may decide against representing the
Department in another lawsuit on the same subject. Should the
Department have to retain private counsel for litigation
relating to this bill, the costs would be substantially
higher.
The committee may wish to consider whether more litigation on
this issue merits the time and financial resources required in
light of the many compelling issues before the department.
While the Government of Iran's conduct is abhorrent, resources
allocated to regulate insurance may not be the most
appropriate means to express that abhorrence.
REGISTERED SUPPORT / OPPOSITION :
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Support
Jewish Public Affairs Committee
Opposition
State Farm Insurance Companies
American Council of Life Insurers
American Insurance Association
Association of California Life and Health Insurance Companies
Pacific Association of Domestic Insurance Companies
Personal Insurance Federation of California
National Association of Mutual Insurance Companies
Association of California Insurance Companies
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086