Town mutuals are well aware that they are required by the OCI to maintain an adequate level of Type 1 investments. Once the required Type 1 amount has been satisfied, most town mutuals venture into utilizing some Type 2 investment opportunities in order to enhance returns. However, in our work with town mutuals we have found there to be some confusion regarding the Type 2 investment limitations found in the Wisconsin Administrative Code, Ins 6.20(6)(d)(3) and Ins 6.20(6)(d)(5).
Both (d)(3) and (d)(5) contain limits of 25% of admitted assets. (d)(3) deals with stock investments (including Wisconsin Reinsurance stock where applicable) and (d)(5) generally deals with bond investments other than individual bonds. The confusion stems from the fact that the Annual Report form seems to suggest that these limits are a combined limit – that is, you can have at most 25% of admitted assets in BOTH categories combined – rather than separate limits, which would permit you to have 25% in each category.
The problem is further complicated by the fact that many town mutuals have Wisconsin Reinsurance stock that exceeds the 25% (d)(3) limit. Most companies in this situation have applied for and received an increase in their stock limitation to accommodate their ownership of WRC stock. With that in mind, another question arises as to whether the increased limit applies to the combination of (d)(3) and (d)(5) investments or whether it applies only to (d)(3) limitations with (d)(5) being a separate limitation.
During the course of recent conversations with the OCI on investment-related topics, we have received clarification that (d)(3) and (d)(5) are indeed to be read as two separate limitations. That is good news, as it opens up the world of investment opportunities for companies who are in compliance with their Type 1 requirement and are looking for investments with a modicum of additional risk but which are seeking higher returns.
As an aside, it is noteworthy to point out that this is what sets fiduciary advisors apart from other financial advisors and it is an important lesson for all of us. Instead of assuming we think we know all the answers, we go to the source to get clarification (you know what they say about making assumptions). In turn, we pass this knowledge on to you, our valued clients!