Paul A Drockton M.A.
Insurance Companies and Derivatives
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The Buffet Effect:

Traditionally, Insurance companies made their money in two different ways:

1. Charging premiums that were higher than company expenses.

2. Conservative risk in their investment portfolios.

All of that changed when Warren Buffet started investing GEICO monies into the stock market. Since insurance companies are considered institutional investors, there are no limits on the risk they can take with your money. The results of poor investments have been catastrophic to the industry. Weiss Research, a major ratings agency for Insurance Companies, shows that 31 Insurance companies failed in 2009 alone. (Source)


AIG received more than 69 billion dollars in TARP money from US taxpayers. Hartford took 3.4 billion and Lincoln Financial received almoist 1 billion. In essence, the American taxpayer subsidized unacceptable risk. (Source)

Derivative Exposure:

As of Dec. 31, 2010, a total of 223 insurance companies participated in the derivatives market.  Of this number, 140 were life insurance companies, 63 were property/casualty insurance companies, 14 were health insurance companies and 6 were fraternal insurance companies. The insurance companies with derivatives exposure were domiciled in 39 states, with New York, Connecticut, Michigan and Iowa having the largest exposures. Furthermore, there were approximately 48,600 individual derivative positions across the insurance industry. (Source)

Corporate Bonds and Insurance Industry

According to the Federal Reserve, Insurance Companies are the largest buyer of Corporate Debt. In 2010, 54% of all Life Insurance Company Assets ($5.3 Trillion) were held in Corporate Bonds. (Source)

According to the Fed's recommendation, Insurance companies can use these investments to meet margin requirements for investing in derivatives (futures, options, credit swaps, etc) (Ibid)

Insurance Company Investment Exposure

Corporate Bonds carry with them a variety of risks in a bad economy:

1. Company revenue risk. Bonds are paid from corporate earnings. In a recession, corporate earnings decline.

2. Interest Rate Risk. Interest rates increase with inflation and quickly devalue bond portfolios.

3. Default Risk. Corporations go bankrupt and their bonds become worthless.

The additional exposure of derivatives bets will be catastrophic for the American Insurance Industry. The result will be higher premiums, fewer people buying insurance and a declining investment pool. This will be followed by massive industry failure and lost cash values on life insurance and annuities.


Liquidate annuities and purchase physical precious metals. Borrow against cash values in life insurance policies and do the same. 

Buy food, clothes, seeds, firearms and fuel. Then invest the rest in precious metals. You can thank me later. Buy silver or gold by emailing pdrockton@aol.com
Derivatives Exposure in the Insurance Industry
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