Commentary on New Commission Ruling Regarding Variable Coupon Bonds

commentaryAs a mutual insurance company, you may be aware of a new initiative by the Commissioner’s office to provide guidelines regarding the purchase and retention of variable coupon bonds. In a nutshell, these rules require variable coupon instruments to adjust their interest rates based on a simple mathematical formula relating to LIBOR. In certain situations the OCI has indicated they may accept CPI or Constant Maturity Treasuries as acceptable benchmarks as well, but those are typically the exception rather than the rule.

The other, and perhaps more significant rule, as it relates to the utility of variable coupon instruments in town mutual portfolios, is the bond requirement for a minimum issue size of $250 million. While the exact details regarding the percentage of the total bond market meeting the $250 million minimum issue size requirement is hard to come by, it is our opinion that a very small percentage of all bonds in circulation (certainly less than 5% and probably much less than 5%) actually meet this criteria.

As a result, it is our recommendation for town mutuals to adopt the policy of not purchasing variable coupon bonds for their portfolio. The investment opportunity they present is not significantly better than the opportunities presented by standard bonds and does not justify the extra work and due diligence required to invest in these types of instruments under the rules the OCI has decided to impose.

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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