Surplus Notes

Senator Metzenbaum: A surplus note is, in effect, as I understand it, the
10 IOU issued by the insurance company to a lender when the
11 insurance company borrows money from the lender. In other
12 words, the insurance company gets a loan from a bank or from
13 somebody else. The loan is used to make the company. look
14 economically healthy when it otherwise might be in trouble.
15 Now, what I can't believe is that insurance law allow
16 these loans to be entered on the balance sheet as an asset
17 rather than as both an asset and a liability, since the loan
18 must ultimately be paid back. I don't understand that .. They
19 call them surplus notes. By 1988, surplus notes had inflated
20 the capital of insurance companies by $4.4 billion.
21 Professor Belth of the Insurance Forum says that 35 life
22 insurance companies would be insolvent today without the use
23 of surplus notes to inflate their reserves.


Senator Metzenbaum. Mr. Lennon, I want to tell you I
19 think I read balance sheets-pretty well and P and L sheets
20 pretty well. I have looked-at insurance company statements
21 and I never had any idea what a surplus note was until I got
22 into the intricacies of this hearing, and I am just amazed at
23 what a surplus note is and the fact that it is permitted. I
24 think it comes pretty close to fraudulent misrepresentation.

1990/12/19 - GOV/NAIC Testimony -

    • TRANSCRIPT OF PROCEEDINGS UNITED STATES SENATE Subcommittee on Antitrust, Monopolies and Business Rights, of the COMMITTEE ON THE JUDICIARY HEARING ON INSURANCE COMPANY SOLVENCY