Clearing up the Confusion About Fixed Income Alternatives for Town Mutuals

questionmarkTown 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!

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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