Show Notes
Last week we showed you the $2 trillion time bomb sitting inside America's life insurance companies, and in Episode 2 of our series with Tom Gober, we start naming names.
Tom calls it the cash cow: premiums pour into an insurance company 365 days a year, and when a private equity owner sits on both sides of the table, he can steer that money into his own businesses while the policyholders pay him a fee for the privilege.
Here's what we're going over in Episode 2 “Sports Empires & the Liquidity Trap” of The Insurance Reckoning with Tom Gober:
* The billionaire who owns the Dodgers is under a federal criminal investigation in New York, and Tom shows how his insurers ended up with roughly 400% of their surplus in his own paper when the NAIC suggests a cap of 50%. * Tom called out this exact scheme back in 2014 as the expert on a complaint that exposed a straw man buying the reinsurer so it wouldn't look affiliated, and the case settled almost immediately. In the 12 years since, none of the state regulators raised it, and it took a federal prosecutor in a criminal case to bring it back up. * South Carolina just moved to put 2 companies into receivership, and their private equity owner is the same group that sued its own rating agency to stop a downgrade. That group has 3 more carriers in Utah, and Tom says the exact same playbook is running at the other private equity controlled carriers. Since we filmed, Florida has suspended the life insurer's license in the state. * If your insurer moves its money to an affiliate offshore, you have no legal claim on it, and Tom puts the liabilities that have already left US life insurers for offshore reinsurers and secret captives at more than $1.6 trillion.
I got angry in this one. I believe the zombie companies need to go bankrupt and the people running them need to go to jail, because not a single big bank CEO did time after 2008 and look at the mess we have now. I also made a promise on camera to every state insurance regulator in America, and I intend to keep it.
Figures don't lie, but liars figure.
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Last episode, we left off with Tom Gober about to reveal a secret document he found in a company president’s personal files, and Episode 3 opens with what it said. A CFO in a criminal case was recorded calling these offshore deals “a little bit like morphine,” and Tom explains why: once you start, the hole gets bigger and you need a bigger dose. Here’s what we’re going over in Episode 3 “The Secret Side Letter”: * Tom tells you what was in the side letter hidden behind a reinsurance contract that looked perfect to an examiner, from a case that sent the man in control to prison for 18 and a half years, and you’ll hear what happened when the FBI knocked on his door in Del Mar. * Tom puts the cushion of the entire US life and annuity industry at about $650 billion, and he says more than that sits in secret captives alone, while more than $1 trillion has gone offshore, out of sight. * Tom shows what happened at a big insurance group after KKR took it over from Goldman Sachs, including a carrier with about $3.7 billion in affiliated investments sitting on roughly $200 million of surplus, where a 6% haircut would wipe out its entire surplus. * Big institutions hold more than $500 billion of short-term notes issued through these insurers, and at one of those companies, a legal opinion puts those investors on equal footing with policyholders like you, which Tom says means they’ll see trouble coming first and get to the exit before you do. Tom also names the two insurers he loves, so stay for that. In my world, if you sell a stock through one broker and buy it right back through another, that’s painting the tape, and you’re not allowed to do it because it kills true price discovery. When the same owner sits on both sides of an insurance company’s investments, it looks eerily similar to me. Tom ends this one with a simple message for the offshore reinsurers and secret captives: if the $1.5 trillion is really there, show us.
Our long/short spread widened to 67.4% today, with our longs up 25.9% on average and our shorts down 41.6%.