PLP Advisors, LLC

Financial Advisor Talks About Insurance Company's Strength


Grand Rapids, MI -- (SBWIRE) -- 07/18/2013 -- Do you have trouble keeping up with what is going on in the U.S. economy?

Dennis Tubbergen, a financial advisor, author, radio show host and CEO of PLP Advisors, LLC can help out. Whether people enjoy his monthly newsletter at or his blog at, Tubbergen is dedicated to sharing his viewpoints and opinions. On July 19, 2013 his blog was titled How Safe is Your Insurance Company?

"I recently read a piece describing how some insurance companies may be engaging in transactions to make their financial strength look greater than reality," began Tubbergen. "While the piece is moderately complex, if you do business with an insurance company, it’s worth a read."

Tubbergen goes on to quote below from the June 12, 2013 article in The New York Times.

New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout.

Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm.

These complex private deals allow the companies to describe themselves as richer and stronger than they otherwise could in their communications with regulators, stockholders, the ratings agencies and customers, who often rely on ratings to buy insurance.

Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He issued a report about the investigation late Tuesday.

The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents.

Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.

Insurance regulation is based squarely on the concept of solvency — the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need — called their surplus — as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.

Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends.

The most frequent use, he said, was to artificially increase companies’ risk-based capital ratios, an important measurement of solvency that was instituted after a series of life-insurance failures and near misses in the 1980s.

Mr. Lawsky said he was struck by similarities between what the life insurers were doing now and the issuing of structured mortgage securities in the run-up to the financial crisis of 2008.

“Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices,” Mr. Lawsky said. “And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multitrillion-dollar taxpayer bailout.”

The transactions at issue are modeled after reinsurance, a business in which an insurance company pays another company, a reinsurer, to take over some of its obligations to pay claims. Reinsurance is widely used and is considered beneficial because it allows insurers to spread their risks and remain stable as they grow.

Conventional reinsurance deals are negotiated at arm’s length by independent companies; both sides understand the risk and can agree on a fair price for covering it. The obligations drop off the original insurer’s books because the reinsurer has picked them up.

Mr. Lawsky’s investigators found, though, that life insurance groups, including some of the best known, were creating their own shell companies in other states or countries — outside the regulators’ view — and saying that these so-called captives were selling them reinsurance. The value of policies reinsured through all affiliates, including captives, rose to $5.46 trillion in 2012, from $2.82 trillion in 2007.

The chief problem with captive reinsurance, Mr. Lawsky said, is that the risk is not being transferred to an independent reinsurer. Also, the deal is not at arm’s length. And confidentiality rules make it difficult to see what secures the obligations.

The New York State investigators subpoenaed this information and discovered that some states were approving deals backed by assets that would not be allowed in New York; Mr. Lawsky referred to “hollow assets,” “naked parental guarantees” and “conditional letters of credit.”

“Weaker collateral requirements mean the policyholders are at greater risk,” he said.

Insurers, unlike banks, have no prepaid fund like the Federal Deposit Insurance Corporation to make customers whole in the event of a collapse. That’s why Mr. Lawsky said he feared that taxpayers might have to be called to the rescue again.

To read the blog in its entirety go to and select his July 19, 2013 entry.

Tubbergen’s syndicated radio show can be heard on metro Michigan stations WTKG 1230 AM and WOOD Newsradio1300 AM and 106.9 FM.

About Dennis Tubbergen
Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in Grand Rapids, Michigan. Tubbergen is CEO of PLP Advisors, LLC and has an online blog that can be read at To view Tubbergen’s latest Moving Markets? newsletter, go to

The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.