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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of The Odd Lots Podcast.

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Speaker 3: I'm Tracy Alloway and I'm joll Wisenthal.

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Speaker 4: Joe.

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Speaker 2: There's a key tenant of finance and investing, and I

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Speaker 2: think it's like essentially the thing that makes finance and

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Speaker 2: investing work go on. It is the idea that you

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Speaker 2: can invest in pretty much anything, the world's most stupid thing,

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Speaker 2: I don't care, doge coin, whatever. But the key thing

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Speaker 2: is if you do that and the investment doesn't work

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Speaker 2: out and it goes belly up, you should bear that loss.

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Speaker 4: Yeah.

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Speaker 3: I think that's rightly.

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Speaker 2: Ideally by the way you invest in something that doesn't

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Speaker 2: have negative externalities for other people. But you know, let's

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Speaker 2: just focus on the lost portion for a second. Yeah.

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Speaker 3: I like this framing. I think the way you could

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Speaker 3: say that financial structures overall, whether we're talking about a bank,

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Speaker 3: whether we're talking about a multi strategy, multiplatform hedge fund,

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Speaker 3: whether we're talking about whatever, is an exercise in trying

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Speaker 3: to establish this purpose, right, because everyone wants to make

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Speaker 3: the investment that they don't bear the loss in, right,

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Speaker 3: That's like and we should all to some extent. We

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Speaker 3: should all be striving for that constantly. You want to

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Speaker 3: build up these things that more or less create that

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Speaker 3: that happens principle, agent alignment problems and so forth.

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Speaker 2: Right, and so when you get moments in financial history

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Speaker 2: where losses are not purely born by investors, yeah, people

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Speaker 2: often get very upset. And as you know, two thousand

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Speaker 2: and eight was one of those moments.

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Speaker 5: Right.

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Speaker 2: One of the reasons the two thousand and eight financial

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Speaker 2: crisis was such a huge deal was because we had

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Speaker 2: banks who made a bunch of risky investments and then

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Speaker 2: ended up getting effectively bailed out by tax payers, even

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Speaker 2: though taxpayers arguably we're not the ones deciding to invest

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Speaker 2: in synthetic CDOs and things like.

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Speaker 3: That totally, even in the absence of bailouds. This always

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Speaker 3: bothers people. When someone makes money on a risk and

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Speaker 3: then someone else holds the bag from the bailoud example,

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Speaker 3: to people who promoted SPACs and made a lot of

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Speaker 3: money just on the transaction but didn't participate in the downside.

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Speaker 3: It upsets people, right, And so all across finance you

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Speaker 3: see in situations where people are upset when it turns

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Speaker 3: out that the person doesn't have the requisite quote skin

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Speaker 3: in the game unquote.

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Speaker 2: No one wants to be an unwilling bag holder. That

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Speaker 2: sounds bad, but I want everyone else to be like, Okay, okay,

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Speaker 2: but wait. The reason I bring up two thousand and

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Speaker 2: eight is because it's actually a very important component of

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Speaker 2: this conversation because we're going to be talking about private credit,

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Speaker 2: and private credit to a large extent, has grown into

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Speaker 2: this massive industry. And the reason it's grown so much.

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Speaker 2: One of the reasons is because after two thousand and eight,

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Speaker 2: after the banks went belly up and had to be

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Speaker 2: bailed out, et cetera, you had policymakers make an active

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Speaker 2: decision saying that they wanted to move risk out of

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Speaker 2: the regulated banking system into investment vehicles, where if things

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Speaker 2: went wrong, the investment vehicles themselves would bear the losses

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Speaker 2: without having those losses socialized through deposit insurance or taxpayer

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Speaker 2: funded bailouts and all of that. And that's what basically happened, right.

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Speaker 3: Yeah, I would say there are sort of in the

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Speaker 3: financial system we have sort of I would say, two

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Speaker 3: types of creditors, like we're cool with like people losing

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Speaker 3: their money when they give money to an institution, they

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Speaker 3: take a risk. But I think there's essentially two types

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Speaker 3: of entities for which we don't find that to be

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Speaker 3: fully acceptable. We don't find it to be fully acceptable

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Speaker 3: when someone deposits their money in a bank and we

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Speaker 3: you know, we could say this is a loan, right,

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Speaker 3: but we don't really want to accept that this is

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Speaker 3: a loan, Like we don't we want people to have

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Speaker 3: the confidence they're putting money in the bank. I'm not

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Speaker 3: really making a loan to the bank. And then I

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Speaker 3: would say the other category is insurance holders, and we

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Speaker 3: don't really like the idea. And as someone who owns

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Speaker 3: a policy, it's a little bit different than a loan.

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Speaker 3: But I think the idea of like an insurance holder

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Speaker 3: as a bag holder does not sit well with people

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Speaker 3: at a sort of democratic, sort of societal level.

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Speaker 2: All right, you have totally anticipated the next thing I

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Speaker 2: was going to say, which was we moved risk out

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Speaker 2: of the regulated banking system into private credit. Yeah, which

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Speaker 2: seems fine, Like, all right, risky loans, all that middle

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Speaker 2: company deposit holders don't have to worry, right exactly if

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Speaker 2: risk is now migrating back into another regulated financial industry

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Speaker 2: that we do care about for the reasons you just stated,

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Speaker 2: which would be insurance. That doesn't seem ideal either, right,

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Speaker 2: having credit risk migrate out of the banks into private credit,

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Speaker 2: and then having private credit migrate into insurers.

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Speaker 3: Yeah, and you know, like I think, insurers and banks

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Speaker 3: aren't really that different. It's sort of the difference is

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Speaker 3: the timing and the liquidity with which you can get

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Speaker 3: the money back out of your whether if you're a depositor,

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Speaker 3: can you get your money out on demand, if you're

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Speaker 3: a policy holder, can you get your money out either

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Speaker 3: at a certain time or on an event in which

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Speaker 3: the policy triggers. But fundamentally, I've always thought it is

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Speaker 3: kind of the same different the same business with a

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Speaker 3: different sort of redemption schedule.

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Speaker 2: There are differences between insurers and banks, which we're going

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Speaker 2: to talk about for sure, But one thing I should

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Speaker 2: just say is we have discovered in the course of

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Speaker 2: this podcast that one of the driving forces behind the

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Speaker 2: private credit boom has been its linkages with insurers for

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Speaker 2: some of the reasons that you just said. So, insurers

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Speaker 2: famously have long dated liabilities, right, they have patient capital.

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Speaker 2: They can take in a liquid asset and sit on

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Speaker 2: it for ages and ages and capture that illiquidity premium,

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Speaker 2: that higher yield, so they would seem to be a

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Speaker 2: natural place for private credit to actually end up. But

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Speaker 2: as we mentioned before, it does open up this whole

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Speaker 2: new can of worms about losses and who actually bars

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Speaker 2: those losses. So this is what we're going to be discussing, right,

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Speaker 2: the insurance private equity private credit nexus in excruciating detail.

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Speaker 2: And I'm very happy to say that we do, in

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Speaker 2: fact have the perfect guests. We're going to be speaking

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Speaker 2: with Andrew Gnado. He is assistant Professor of law at

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Speaker 2: UT Austin as well as Pranjel Drawl. He is a

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Speaker 2: jd PhD Candidate in financial economics at Yale University, and

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Speaker 2: they just published a really good paper. It is called

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Speaker 2: Private Credit State Backstop. How private equity socializes risk through insurers.

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Speaker 2: So truly the perfect guests. Andrew and Pronjall, thank you

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Speaker 2: so much for coming on all thoughts.

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Speaker 4: Thanks for having us, thanks for having us.

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Speaker 2: So we know that insurance has teamed up with private

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Speaker 2: equity in various ways. Some private equity firms own insurers outright,

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Speaker 2: others have like minority investments or like different business relationships.

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Speaker 2: What is the attraction or the allure of insurers for

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Speaker 2: private credit slash pe.

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Speaker 6: Yeah, so you can think of this as being so

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Speaker 6: McKinsey's this a flywheel. So imagine you have like a

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Speaker 6: private equity firm with three subsidiaries. You have a traditional

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Speaker 6: like buy out subsidiary that buys up companies and uses

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Speaker 6: leverage to do so, you have a private credit fund

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Speaker 6: which issues these high risk, high yield loans, and then

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Speaker 6: you also have a life insurance entity. There are theoretically

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Speaker 6: all these different synergies between all of these actors. So

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Speaker 6: if I go and I need to buy some sort

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Speaker 6: of company, well, someone has to issue debt in order

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Speaker 6: for me to be able to do that. Maybe a

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Speaker 6: different part of my p firm can issue that debt

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Speaker 6: and maybe I can get better terms that way. But

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Speaker 6: then there's also this aspect of you know, if I

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Speaker 6: have a private credit fund, you know, these are funds

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Speaker 6: where you know, I have LPs, we're constantly you know,

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Speaker 6: making demands off for returns. But if I have a

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Speaker 6: life insured I have these very long dated liabilities where

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Speaker 6: arguably the capital is like what we're told is permanent.

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Speaker 6: So if you can hold these private credit loans that

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Speaker 6: are highly liquid on the balance of the life insurer

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Speaker 6: that you're issuing to other firms in your portfolio. You

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Speaker 6: can imagine that this is like a scenario in which

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Speaker 6: you kind of theoretically get the best of all three worlds.

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Speaker 5: One more way to think about it is that private

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Speaker 5: credit has become a large asset class. Insurers warn't access

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Speaker 5: to that private credit, and instead of having an in

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Speaker 5: house team that just learns how to do private credit investment,

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Speaker 5: they go outsource that to a big pe shop which

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Speaker 5: has developed this business over two decades in some cases,

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Speaker 5: and essentially outsource and use these economies of scale to

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Speaker 5: outsource part of the lending so they can still do

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Speaker 5: the you know, publicly traded sort of boring credit that

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Speaker 5: they've always done, and outsourced part of the lending do

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Speaker 5: more specialized shops.

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Speaker 3: Well, this sort of realization that these things could merge

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Speaker 3: has just made people an extraordinary amount of money. It

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Speaker 3: should be noted, you know, one of the most infamous

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Speaker 3: investors of all time, Warren Buffett, utilize this core insight

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Speaker 3: an insurance having an insurance arm would be an extraordinary

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Speaker 3: source of patient capital. You know, we talked like mutual

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Speaker 3: fund managers and one of the questions we always ask

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Speaker 3: them is like, isn't it tough that at a market

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Speaker 3: draw down you can't actually hold it because your clients

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Speaker 3: all move on to the next fund. I mean, this

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Speaker 3: is already for a very long time, just been an

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Speaker 3: extraordinary fruitful partnership.

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Speaker 6: Yeah, it's not something that's new. What's new about private

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Speaker 6: equity in the last fifteen years or so is the

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Speaker 6: degree to which that they have kind of ramped up

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Speaker 6: the aggression of the investment strategy that they are pursuing

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Speaker 6: with one by purchasing these life insurans at such high volumes.

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Speaker 6: Recent estimates have maybe like something like seven hundred and

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Speaker 6: fifty billion dollars or so of life insurance assets kind

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Speaker 6: of within private equities purview. And then the degree to

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Speaker 6: which they are shifting the portfolios of their life insurance firms.

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Speaker 6: Until quite recently, life insurans were famous for having these

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Speaker 6: you know, protrects says, very kind of stodgy triple A

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Speaker 6: rated AT and T bond portfolios. And that becomes less

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Speaker 6: and less true across the industry in general. And that's

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Speaker 6: a trend that's being led by private equity, particularly with

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Speaker 6: regard to these like affiliated private credit investments and their

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Speaker 6: other portfolio companies.

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Speaker 2: Yeah, so this is the key thing. I think. So

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Speaker 2: insurance has transformed private credit by supercharging its growth, but

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Speaker 2: at the same time, insures themselves are being transformed by

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Speaker 2: private credit. Can you talk about exactly, like, what does

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Speaker 2: that relationship look like in practice? So you mentioned affiliated assets,

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Speaker 2: which have been in the news recently for reasons we

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Speaker 2: can definitely get into. But if I'm a private credit

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Speaker 2: you know, originator, and now I have bought an insurer,

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Speaker 2: what does that relationship look like. Am I dictating that

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Speaker 2: am I telling them what they actually need to buy?

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Speaker 2: Am I making polite suggestions? Am I making sales pitches

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Speaker 2: and saying, well, you got first crack at these very elite,

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Speaker 2: previously exclusive private assets.

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Speaker 4: That's a great question.

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Speaker 5: So, as you can imagine, there's a lot of nuance

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Speaker 5: there where certain asset managers. So just to set the

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Speaker 5: stage a bit, Alliance for example, owns Pinco and Alliance

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Speaker 5: to insure and this happened in like thirty two thousand.

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Speaker 5: So the idea of having an asset manager make investments

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Speaker 5: on the behalf of the insurer, it's not new. The

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Speaker 5: second point there is there's a lot of variation in

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Speaker 5: how that contract works out. So the most in our

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Speaker 5: parlance problematic or concerned we should be is about when

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Speaker 5: the insure balance sheet is effectively in control of a

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Speaker 5: bigger asset manager. So the idea there would be that

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Speaker 5: the insurer doesn't have as much discretion, they're just at

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Speaker 5: the behest of the broader asset manager. Or you can

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Speaker 5: imagine an insurer goes out shopping. I want the best

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Speaker 5: private credit shop to invest money on my behalf so

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Speaker 5: I can make capture the liquid premium, offer better terms

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Speaker 5: to my policy holders by making more money. And in

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Speaker 5: that case, you know, there's like a lineup of really

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Speaker 5: sophisticated pe shops that will like try to earn that business.

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Speaker 5: And in that case, you can imagine the this called

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Speaker 5: like a third party agreement where you're outsourcing party of

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Speaker 5: balance sheet to an assa manager, and that's totally like

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Speaker 5: you can imagine a very competitive marketplace for that service,

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Speaker 5: because insures, as you said, manage large pools of money.

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Speaker 5: So there's like a big spectrum there, one where the

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Speaker 5: insurer has effectively given up full control of the balance

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Speaker 5: sheet and the other where the insurer is thenually looking

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Speaker 5: for who's going to offer me the best terms to

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Speaker 5: invest my money in this very specific segment. And you

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Speaker 5: can imagine a spectrum of possible arrangements there.

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Speaker 2: So if I'm an insurer who's owned by a pe shop,

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Speaker 2: I'm paying them management fees as well for those assets.

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Speaker 5: Right, that's right, Okay, And you're so you're paying management

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Speaker 5: fees in both cases. Usually it's just in the third

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Speaker 5: party context, since you don't own the insurer, you'd imagine

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Speaker 5: the insurer has better bargaining incentives exactly.

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Speaker 6: Oh yeah, And there's also many cases where the insurer

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Speaker 6: is part of a private equity kind of like sponsored

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Speaker 6: platform is not just paying out fees for management, but

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Speaker 6: it's also paying out fees for essentially all sorts of

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Speaker 6: other affiliated services, like you know, you could imagine accounting,

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Speaker 6: you can imagine valuation, consulting, all sorts of things where

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Speaker 6: the it t Yeah, where like the insurer is kind

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Speaker 6: of like the balance sheet of the insurre is a

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Speaker 6: holding pen for a lot of the assets, but all

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Speaker 6: the action is actually outside of the insurance corporate form

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Speaker 6: and the rest of the kind of keys.

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Speaker 3: Author So one of the questions then is how much

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Speaker 3: competition is there among insurers together assets because it's like, Okay,

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Speaker 3: here's insurance company A, and they're going to pay me,

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Speaker 3: you know, five thousand dollars a month for life, because

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Speaker 3: I've bought this annuity every month for the rest of

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Speaker 3: my life after I turn x age. And here's another one,

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Speaker 3: but this one is paying all these like it services

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Speaker 3: and all these little things that maybe like come out

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Speaker 3: of the return, et cetera. Does the end market of

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Speaker 3: insurance purchasers have much clarity on what they're buying and

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Speaker 3: the economics of two different policies.

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Speaker 4: It's a hard empirical question.

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Speaker 5: So there's this thing called in finance called the annuity puzzle,

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Speaker 5: where imperiannuities are the perfect investment, but society as a

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Speaker 5: whole under buys them. And a lot of finance professors

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Speaker 5: have spent decades puzzling out why that is the case.

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Speaker 4: So we're not going to solve it here.

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Speaker 5: But the one of the lessons from that literture is

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Speaker 5: that people aren't invest in annuities because they don't get

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Speaker 5: a good deal. Prices are too high, the policies aren't

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Speaker 5: that good. There's competition, but there's the end consumer doesn't

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Speaker 5: get a great deal, or they at least perceive they

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Speaker 5: are not getting a good deal. So there's always been

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Speaker 5: this concern that for some reason, the annuity market isn't

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Speaker 5: very competitive.

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Speaker 4: Now, you might.

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Speaker 5: Imagine if an insurer is owned by a p shop

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Speaker 5: and they make a lot of money on the private

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Speaker 5: credit in liquidity and all this, you know, because high

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Speaker 5: returning and all this stuff, and they're in fees. So

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Speaker 5: in some ways a PE shop that owns and ensure

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Speaker 5: might offer better terms to policyholders because they have all

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Speaker 5: these other ways to make money from the business. So

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Speaker 5: we've seen some averacle data that like the be owned

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Speaker 5: insurance companies compete better in the product market, so you

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Speaker 5: can imagine the consumers might benefit. The problem there is,

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Speaker 5: of course, that you know, you might get a good

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Speaker 5: deal on the short run, but you know, decades down

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Speaker 5: the line when things come due, there might be problems.

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Speaker 3: If I'm in the market for an annuity, should I

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Speaker 3: or do I have any capacity to take into account

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Speaker 3: credit risk. As someone who grew up became an adult

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Speaker 3: kind of during the GFC, I was like, I don't know,

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Speaker 3: like I'm going to retire in like twenty years. Who knows?

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Speaker 3: Who's going to be around to what degree either does

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Speaker 3: that or should that be part of the information that

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Speaker 3: the buyer the purchase of the annuity has.

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Speaker 6: Yeah, so it's very difficult, I think for retail policy

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Speaker 6: holders to meaningfully grasp like the degree of solvency risk

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Speaker 6: that the kind of counter party annuity provider or life

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Speaker 6: insurance provider has. And so something that we think is

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Speaker 6: really fundamental is that, you know, the investors in say

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Speaker 6: a private credit fund, nonprofits, you know, endowments, big institutional investors,

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Speaker 6: pension funds, they're in a very different position than just

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Speaker 6: like normal people who like don't all about anything, you know,

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Speaker 6: what this insured is doing with all of the money.

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Speaker 6: As far as they know, they just bought a life

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Speaker 6: insurance policy, and I'm willing about most people haven't even

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Speaker 6: thought about what happens like kind of on the other

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Speaker 6: side of that balance sheet. And that asymmetry is what

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Speaker 6: drives a lot of the like I think the results

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Speaker 6: that we're going to speak about.

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Speaker 2: Yeah, so, okay, speaking of asymmetry, the McKinsey's of the

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Speaker 2: world out there, who will talk about this being a

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Speaker 2: virtuous flywheel where you know, pe slash PC gets access

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Speaker 2: to these big pools of permanent capital, and then the

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Speaker 2: insurers themselves maybe get access to higher yielding assets that

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Speaker 2: then generate better returns for investors, better products, et cetera.

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Speaker 2: On the other hand, you also have critics of this

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Speaker 2: practice who will point out that because of the nature

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Speaker 2: of private credit, because these aren't publicly traded bonds with

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Speaker 2: you know, double A I guess now, or maybe triple

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Speaker 2: A ratings for some corporates, you don't necessarily have the

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Speaker 2: level of insight into what these things are and what

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Speaker 2: their true riskiness is. Talk to us about what we

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Speaker 2: know about the actual private credit assets on insurer balance

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Speaker 2: sheets and what regulators can actually see and know about

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Speaker 2: these things.

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Speaker 5: So this has been a topic of discussion for the

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Speaker 5: last two years. I feel like this almost obsession of

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Speaker 5: how much should we trust private credit valuations. And that's

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Speaker 5: a problem in BDCs, which are like, you know, publicly

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Speaker 5: traded and you can see the quarterly marks on these

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Speaker 5: loans and you can see, you know, there's a privately

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Speaker 5: traded BDC and the public traded BDC, and the public

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Speaker 5: one trades at a discount. So there's always been this

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Speaker 5: concern that the valuations aren't kosher or they're or valued

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Speaker 5: in some ways. So those same kind of intuitions apply here,

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Speaker 5: except the crucial difference is the regulator in case, NAISE,

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Speaker 5: which is an association of regulators, essentially has visibility on

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Speaker 5: insurer's balance sheet and they look at everything they invest in.

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Speaker 5: This could be equity, cash safe bonds whatever that means,

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Speaker 5: and private credit bonds, and all the insure regulator sees

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Speaker 5: is the value reported to them, which is usually outsourced

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Speaker 5: to a third party rating agency. And then they see,

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Speaker 5: like this private credit loan is valued. It's like a

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Speaker 5: double A, and then they give you a notch on

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Speaker 5: a scale of one to ten, and you get this.

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Speaker 4: Picture as an ensure, these private credit assets are x

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Speaker 4: amount of safe.

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Speaker 5: These private credit assets are less safe, and there's like

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Speaker 5: a spectrum, and then the regulator says, this is a

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Speaker 5: good portfolio.

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Speaker 4: It's safe, and like.

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Speaker 2: Banks, they have to hold certain amounts of capital.

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Speaker 6: There's a whole risk rating regime through the NAIC that

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Speaker 6: is like somewhat analogous to that of banks. And I

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Speaker 6: think a lot of the concern applies here as well

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Speaker 6: to like you were concerns two thousand and eight about

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Speaker 6: what are the incentives of the credit rating providers. The

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Speaker 6: incentives for what are often called private letter ratings and

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Speaker 6: for life insurance are kind of particularly skewed. These are

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Speaker 6: ratings where the rating itself is actually not kind of

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Speaker 6: publicly visible. So a credit rating agency, someone like Egan

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Speaker 6: Jones might report to the nai C, you know, here

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Speaker 6: is our rating for this asset, and you know, how

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Speaker 6: was that rating obtained? Can anybody else like investigate is

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Speaker 6: there any sort of track record to compare this against?

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Speaker 6: It's just extremely difficult, and so there's a variety of

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Speaker 6: new empirical literature and economics that's coming out basically every

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Speaker 6: week where people will do various sorts of tests and

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Speaker 6: they'll just continually find over valuation and a lot of

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Speaker 6: these assets.

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Speaker 3: Just we're talking about two thousand and eight for a second.

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Speaker 3: You know, one of the sub dramas with the bank

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Speaker 3: bailouds was this idea that the bond holders of banks

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Speaker 3: didn't take any haircuts, and so it was like there

382
00:20:07,440 --> 00:20:10,400
Speaker 3: were losses that quite substantial losses, but they were all

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Speaker 3: born on the equity side, and we saw like how

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Speaker 3: you know, the city groups of the world like not

385
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Speaker 3: lost ninety five percent their money was part of the

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Speaker 3: reason that regulators or policymakers were so reluctant to let

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Speaker 3: some of the bondholders take losses is because you just

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Speaker 3: described the classic normy insurance holding. I'm sure in two

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Speaker 3: thousand and six you know it's like, oh, yeah, we

390
00:20:32,720 --> 00:20:35,159
Speaker 3: have a highly rated bond from a city group in

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Speaker 3: our portfolio. It's like the of the AT and T

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Speaker 3: bond was part of the concern with bondholder haircuts essentially

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Speaker 3: that then it could create an issue with the insurance channel.

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Speaker 6: Yeah, I think that a lot of the same logic applies.

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Speaker 6: What insurance has that banking doesn't have is essentially is

396
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Speaker 6: a different form of a public backstop that indicates different

397
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Speaker 6: kinds of agency problems and also a differing way that

398
00:21:02,560 --> 00:21:06,360
Speaker 6: taxpayers and kind of other like non investor actors can

399
00:21:06,400 --> 00:21:09,320
Speaker 6: be put on the hook for an insurer's losses. So

400
00:21:09,480 --> 00:21:12,480
Speaker 6: all of that interacts in like kind of very complex

401
00:21:12,520 --> 00:21:15,560
Speaker 6: ways with the actual direct capital structure of the insurer,

402
00:21:15,840 --> 00:21:19,919
Speaker 6: which is partially you know, these policy holders who are

403
00:21:19,960 --> 00:21:22,359
Speaker 6: technically you know, creditors to the ensure they show up

404
00:21:22,359 --> 00:21:24,760
Speaker 6: with liabilities on the insurer balance sheet, and then there's

405
00:21:24,840 --> 00:21:29,240
Speaker 6: also kind of direct creditors to insurers, they're not covered

406
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Speaker 6: by the socialized backstop, but there is this kind of

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Speaker 6: like endless relationship that keeps shifting when you have what

408
00:21:38,040 --> 00:21:40,680
Speaker 6: we call it or what is that uninsurance guarantee fund.

409
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Speaker 2: Yeah, so this is actually the real subject of the paper.

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Speaker 2: As much as we talk about ratings, arbitrage and opacity

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00:21:48,480 --> 00:21:50,920
Speaker 2: of private credit assets and things like that, the point

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Speaker 2: that you make is that because of the way that

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Speaker 2: insurers are regulated and I guess administered when they go

414
00:21:58,640 --> 00:22:01,560
Speaker 2: belly up, although they don't really go through traditional corporate

415
00:22:01,600 --> 00:22:04,640
Speaker 2: bankruptcy proceedings, but the way they're dealt with if there's

416
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Speaker 2: a failure is fundamentally different to the way banks are

417
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Speaker 2: dealt with in our system. Talk about those differences for us.

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Speaker 6: Yeah, So I think when people think about what does

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Speaker 6: a public backstop look like, if they're familiar with one,

420
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Speaker 6: they're familiar with Federal deposit insurance. And Federal deposit insurance

421
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Speaker 6: is a pre funded risk based system. So if you're

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00:22:26,040 --> 00:22:30,960
Speaker 6: a bank and your depositors get Federal deposit insurance, every

423
00:22:31,040 --> 00:22:34,439
Speaker 6: quarter you get an assessment from the FDIC, which basically

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Speaker 6: says you have to cough up some money as a

425
00:22:36,520 --> 00:22:39,960
Speaker 6: kind of risk premium. The FDIC has a deposit insurance

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Speaker 6: fund which holds that money, and in the event that

427
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Speaker 6: a bank ever goes down and payouts ever need to

428
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Speaker 6: be made to keep a depositors whole and to administer

429
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Speaker 6: the insolvency of a bank, you know, they spend down

430
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Speaker 6: that fund, and in the event that that fund is

431
00:22:55,600 --> 00:22:59,080
Speaker 6: ever fully depleted, there is the kind of full faith

432
00:22:59,119 --> 00:23:02,480
Speaker 6: and credit backs of the United States government, So that

433
00:23:02,560 --> 00:23:07,480
Speaker 6: would be truly a kind of taxpayer funded bailout. In

434
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Speaker 6: two thousand and eight, we also had, of course, like TARP,

435
00:23:10,800 --> 00:23:13,160
Speaker 6: so that was you know, like legislators had to go

436
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Speaker 6: and vote say like hey, we're going to individually appropriate money,

437
00:23:16,720 --> 00:23:18,840
Speaker 6: We're going to appropriate loans, we're gonna appropriate all sorts

438
00:23:18,880 --> 00:23:22,080
Speaker 6: of investments, because like the scale of the problem was

439
00:23:22,240 --> 00:23:25,679
Speaker 6: just too large to deal with through the FDIC on

440
00:23:25,720 --> 00:23:30,240
Speaker 6: its own. Insurers are subject to a different form of

441
00:23:30,280 --> 00:23:33,680
Speaker 6: public backstop that we argue in the paper is kind

442
00:23:33,720 --> 00:23:38,639
Speaker 6: of essentially structurally worse. The way that a guarantee fund

443
00:23:38,680 --> 00:23:42,560
Speaker 6: works is if a life insurer goes bankrupt, it does

444
00:23:42,600 --> 00:23:45,040
Speaker 6: not go into bankruptcy, similarly to how a bank does

445
00:23:45,080 --> 00:23:49,840
Speaker 6: not go into bankruptcy. Instead, the domiciliary state of that

446
00:23:49,880 --> 00:23:55,120
Speaker 6: insurre takes the lead on a simultaneous and valuncy proceeding

447
00:23:55,160 --> 00:23:58,960
Speaker 6: across every single state. Insurance is regulated at the state level.

448
00:23:59,240 --> 00:24:03,199
Speaker 6: There is no kind of federal regulator of insurance. There

449
00:24:03,280 --> 00:24:05,879
Speaker 6: is no equivalent to the FDIC. You just go into

450
00:24:06,080 --> 00:24:08,960
Speaker 6: state court and then we have to resolve this across

451
00:24:09,000 --> 00:24:12,679
Speaker 6: every state simultaneously, and within every single state, there's a

452
00:24:12,720 --> 00:24:16,239
Speaker 6: guarantee fund that says, you know, if you are a

453
00:24:16,240 --> 00:24:20,360
Speaker 6: policy holder of this insurer, we're going to guarantee that

454
00:24:20,400 --> 00:24:24,080
Speaker 6: you get up to some statutory cap of your money,

455
00:24:24,359 --> 00:24:27,199
Speaker 6: similarly to how for the FDIC you get up to

456
00:24:27,240 --> 00:24:29,720
Speaker 6: two hundred and fifty K, and theory potentially you could

457
00:24:29,720 --> 00:24:32,800
Speaker 6: be far more, but statutorily you get to your first

458
00:24:32,840 --> 00:24:34,760
Speaker 6: two hundred and fifty K, and every account is insured.

459
00:24:35,720 --> 00:24:38,800
Speaker 6: It depends on the state law for each every individual

460
00:24:38,800 --> 00:24:40,960
Speaker 6: state coverage, but you can think of it as being

461
00:24:41,160 --> 00:24:43,800
Speaker 6: roughly three hundred K. So if I have a life

462
00:24:43,800 --> 00:24:47,280
Speaker 6: insurance policy that's supposed to pay out for two hundred

463
00:24:47,359 --> 00:24:50,800
Speaker 6: thousand dollars when I die and my insurer goes down,

464
00:24:51,080 --> 00:24:56,040
Speaker 6: I can just keep paying premiums and the policy backstop

465
00:24:56,119 --> 00:24:59,199
Speaker 6: fund will make sure that I get or that my

466
00:24:59,240 --> 00:25:01,639
Speaker 6: beneficiary gain that's two hundred K in the event that

467
00:25:01,680 --> 00:25:04,480
Speaker 6: I die, and that I've maintained my end of the contract.

468
00:25:05,240 --> 00:25:09,600
Speaker 6: The way that a guarantee fund pays for this protection

469
00:25:09,760 --> 00:25:12,800
Speaker 6: in the first instance is by levying an assessment on

470
00:25:12,960 --> 00:25:17,800
Speaker 6: every surviving insurer in that state. But this assessment is

471
00:25:17,840 --> 00:25:22,040
Speaker 6: only levied after the insolvency has already happened. So if

472
00:25:22,119 --> 00:25:29,000
Speaker 6: I'm the insurer that went down, I've actually contributed zero dollars.

473
00:25:27,760 --> 00:25:31,040
Speaker 2: Of my very ironic for insurers themselves to not be

474
00:25:31,200 --> 00:25:34,600
Speaker 2: like paying something towards ensuring their own deaths.

475
00:25:34,800 --> 00:25:37,000
Speaker 6: Yes, fine, yeah, they so like you you know, well,

476
00:25:37,040 --> 00:25:38,760
Speaker 6: of course you know, the company's gone down, so it's

477
00:25:38,760 --> 00:25:40,440
Speaker 6: not a happy ending for them, but like, they don't

478
00:25:40,440 --> 00:25:43,239
Speaker 6: have to cough up anything. Meanwhile, you know, some other

479
00:25:43,440 --> 00:25:45,920
Speaker 6: random insurer who had nothing to do with this, they

480
00:25:46,040 --> 00:25:49,080
Speaker 6: have to pay some sort of bill, and that bill

481
00:25:49,560 --> 00:25:53,040
Speaker 6: is weighted by the percentage of premiums that they sold

482
00:25:53,480 --> 00:25:57,439
Speaker 6: in recent years in that line of business. So, you know,

483
00:25:57,560 --> 00:26:00,440
Speaker 6: the other life insurers in the state of Oregon or whatever.

484
00:26:00,480 --> 00:26:03,879
Speaker 6: If I have a life insurance policy and I'm in Oregon, like,

485
00:26:03,920 --> 00:26:08,240
Speaker 6: they have to pay up. But then what happens afterwards

486
00:26:08,680 --> 00:26:12,119
Speaker 6: depends on the state exactly. But in the vast majority

487
00:26:12,119 --> 00:26:15,800
Speaker 6: of states, you can, as the insurer, get a tax

488
00:26:15,880 --> 00:26:21,240
Speaker 6: credit against that assessment liability. And in about thirty four

489
00:26:21,280 --> 00:26:24,840
Speaker 6: states you get a full tax credit that you can

490
00:26:24,880 --> 00:26:27,280
Speaker 6: take twenty percent a year over five years, and then

491
00:26:27,320 --> 00:26:30,320
Speaker 6: in another ten states it's roughly ten years. It's only

492
00:26:30,359 --> 00:26:32,720
Speaker 6: about six states where you don't get any tax credit.

493
00:26:33,240 --> 00:26:35,639
Speaker 6: So of course, if you have a fully offsetting tax credit,

494
00:26:35,880 --> 00:26:39,679
Speaker 6: this is economically equivalent to a taxpayer bailout of the

495
00:26:39,720 --> 00:26:44,080
Speaker 6: insurance policy holders. But nobody ever votes on this. There

496
00:26:44,280 --> 00:26:47,720
Speaker 6: just happens automatically by operation of law, and the insurer

497
00:26:47,760 --> 00:26:49,800
Speaker 6: is stuck with losing what we might call it kind

498
00:26:49,840 --> 00:26:52,080
Speaker 6: of just like time value of money because they have

499
00:26:52,160 --> 00:26:55,200
Speaker 6: to float this in the meantime. But it is a

500
00:26:55,520 --> 00:26:56,880
Speaker 6: stealth taxpayer bailout.

501
00:26:57,080 --> 00:27:00,600
Speaker 5: And beyond the sort of structural issues, I imagine some

502
00:27:00,640 --> 00:27:04,960
Speaker 5: practical problems with this setup. Number one, the statutory cap

503
00:27:05,000 --> 00:27:07,320
Speaker 5: in fdi C is to fifty K is considered a

504
00:27:07,320 --> 00:27:10,440
Speaker 5: fairly high amount for like just someone having a check account.

505
00:27:10,600 --> 00:27:12,280
Speaker 5: In this case, you know, close to two hundred k

506
00:27:12,359 --> 00:27:16,280
Speaker 5: for life insurance. That's about the fortieth percentile of life

507
00:27:16,320 --> 00:27:18,920
Speaker 5: insuran policies. A lot of policies are way.

508
00:27:18,720 --> 00:27:19,240
Speaker 4: Bigger than that.

509
00:27:19,359 --> 00:27:22,360
Speaker 5: As you can imagine, people usually buy life insurance, are

510
00:27:22,440 --> 00:27:25,040
Speaker 5: usually richer, and they're putting a lot of money into

511
00:27:25,160 --> 00:27:30,040
Speaker 5: into premiums. So the coverage of this bailout is way

512
00:27:30,080 --> 00:27:31,080
Speaker 5: lower than sort.

513
00:27:30,880 --> 00:27:31,560
Speaker 4: Of bank failure.

514
00:27:31,880 --> 00:27:35,240
Speaker 5: And the other sort of big concern is that just

515
00:27:35,359 --> 00:27:39,639
Speaker 5: practically speaking, Iowa and Oregon and New York and Tennessee

516
00:27:40,160 --> 00:27:44,760
Speaker 5: sort of doing this at the same time is a

517
00:27:44,880 --> 00:27:48,880
Speaker 5: very challenging task. We haven't really had major insured failure

518
00:27:49,119 --> 00:27:52,040
Speaker 5: in this way, like in obviously EDUS bailed out.

519
00:27:52,160 --> 00:27:53,280
Speaker 4: So the idea is that.

520
00:27:53,359 --> 00:27:55,960
Speaker 2: Have we ever had a big insurance.

521
00:27:55,640 --> 00:27:58,080
Speaker 6: Not on the scale. So it's as actually it's completely

522
00:27:58,160 --> 00:28:03,120
Speaker 6: untested to have a large, large national insure with assets

523
00:28:03,160 --> 00:28:06,000
Speaker 6: and something like you know, the hundreds of billions of

524
00:28:06,040 --> 00:28:08,280
Speaker 6: dollars range go in solvent in a way that would

525
00:28:08,280 --> 00:28:10,880
Speaker 6: require administration through the guarantee fund.

526
00:28:11,040 --> 00:28:14,159
Speaker 3: So is it fair to say it's like structurally suboptimal

527
00:28:14,240 --> 00:28:17,440
Speaker 3: on multiple levels. So it's suboptimal in this sense that

528
00:28:17,760 --> 00:28:21,360
Speaker 3: there is this implicit taxpayer backstop in a way that's

529
00:28:21,359 --> 00:28:25,000
Speaker 3: a little different from the FDIC, but it's also suboptimal

530
00:28:25,040 --> 00:28:28,240
Speaker 3: that the backstop isn't actually that good for the policy

531
00:28:28,280 --> 00:28:31,280
Speaker 3: holders potentially, because it's like, all right, if we're gonna

532
00:28:31,280 --> 00:28:33,919
Speaker 3: have a backstop, at least we can rest easy. That

533
00:28:33,960 --> 00:28:37,000
Speaker 3: the policy holders like, maybe there's a little bit of misalignment.

534
00:28:37,080 --> 00:28:39,880
Speaker 3: The backstop encourages the ensured to take on due risk.

535
00:28:40,120 --> 00:28:42,200
Speaker 3: But look, it's okay. It's good in the end because

536
00:28:42,200 --> 00:28:45,680
Speaker 3: at least policy holders can sleep easy. But you're saying,

537
00:28:45,760 --> 00:28:47,959
Speaker 3: is we don't even have that. We have the taxpayer

538
00:28:48,600 --> 00:28:52,000
Speaker 3: part and we don't really even have the FDIC equivalent

539
00:28:52,080 --> 00:28:54,000
Speaker 3: that can make everyone sleep easy exactly.

540
00:28:54,040 --> 00:28:57,960
Speaker 5: And since you're not being as you're solvent, you're paying

541
00:28:58,440 --> 00:28:59,360
Speaker 5: post insolvency.

542
00:29:00,080 --> 00:29:00,200
Speaker 4: More.

543
00:29:00,280 --> 00:29:04,680
Speaker 5: Thing that the regime encourages is as you head into distress,

544
00:29:04,960 --> 00:29:06,360
Speaker 5: you want to take on more risk.

545
00:29:06,720 --> 00:29:09,160
Speaker 2: It seems good for an immoral insurer.

546
00:29:09,400 --> 00:29:12,320
Speaker 5: Right, So there's self a rational sure, Right, It's like

547
00:29:12,320 --> 00:29:14,920
Speaker 5: a homesy and bad man insure is going to just

548
00:29:14,960 --> 00:29:18,560
Speaker 5: simply invest more risky, invest more risky things. Try to

549
00:29:18,600 --> 00:29:21,959
Speaker 5: give really good deals to policyholders to make premiums. Today

550
00:29:22,160 --> 00:29:23,880
Speaker 5: you're not paying for it because you're not paying for

551
00:29:23,920 --> 00:29:25,920
Speaker 5: it in the end, so at least in like an

552
00:29:25,960 --> 00:29:30,320
Speaker 5: equilibrium sense, and you know, the rivals, knowing that one

553
00:29:30,320 --> 00:29:33,760
Speaker 5: of my rivals is going to go bankrupt soon, they're

554
00:29:33,760 --> 00:29:34,840
Speaker 5: going to want to pull out.

555
00:29:34,880 --> 00:29:38,160
Speaker 3: Because with FDIC deposit insurance they put a cap on

556
00:29:38,200 --> 00:29:41,680
Speaker 3: how much rates you can offer, like that's part of

557
00:29:41,720 --> 00:29:45,280
Speaker 3: their trade, so that you can't a desperate bank can't say, oh,

558
00:29:45,280 --> 00:29:48,520
Speaker 3: we're paying fifteen percent on saving these accounts right now,

559
00:29:48,720 --> 00:29:52,400
Speaker 3: but there's no in insurance. That mechanism doesn't exist exactly.

560
00:29:52,200 --> 00:29:52,520
Speaker 4: I gues.

561
00:30:08,680 --> 00:30:12,360
Speaker 2: So you suggest in the paper that this might be

562
00:30:12,440 --> 00:30:15,960
Speaker 2: the real reason that private equity slash private credit has

563
00:30:16,040 --> 00:30:19,040
Speaker 2: been so interested in the insurance space because it provides

564
00:30:19,080 --> 00:30:23,840
Speaker 2: them an avenue to basically a socialized backstop, which you

565
00:30:23,880 --> 00:30:25,640
Speaker 2: know makes sense. But I guess I wonder, in the

566
00:30:25,680 --> 00:30:28,720
Speaker 2: course of your research and actually talking to private equity

567
00:30:28,760 --> 00:30:32,560
Speaker 2: and private credit, how aware are people of the current

568
00:30:32,600 --> 00:30:37,400
Speaker 2: regulation scheme for bankrupt failed insurance. Does it come up

569
00:30:37,400 --> 00:30:37,800
Speaker 2: a lot?

570
00:30:38,240 --> 00:30:40,880
Speaker 6: I think one of the main ways that this ends

571
00:30:40,960 --> 00:30:44,400
Speaker 6: up playing out is that what people are often thinking

572
00:30:44,440 --> 00:30:47,640
Speaker 6: about is, you know, turning back to the permanent capital angle,

573
00:30:48,320 --> 00:30:51,040
Speaker 6: Am I allowed to just like make my investments without

574
00:30:51,080 --> 00:30:54,400
Speaker 6: somebody yelling at me about them. And one of the

575
00:30:54,440 --> 00:30:57,680
Speaker 6: reasons why if you have a life insured you can

576
00:30:57,760 --> 00:31:00,840
Speaker 6: make kind of whatever investments you want without like nominally

577
00:31:00,880 --> 00:31:03,239
Speaker 6: the creditors of your company or the investors in your

578
00:31:03,240 --> 00:31:06,880
Speaker 6: company coming and yelling at you, is because you have not.

579
00:31:06,800 --> 00:31:09,840
Speaker 2: Having people yell at you is like a very underrated

580
00:31:10,120 --> 00:31:12,680
Speaker 2: incentive in the world, but I think it's one that

581
00:31:12,720 --> 00:31:14,840
Speaker 2: probably is very important, yeah, is that.

582
00:31:14,760 --> 00:31:18,720
Speaker 6: You have this widely dispersed retail base of policy holders,

583
00:31:19,120 --> 00:31:22,880
Speaker 6: a large fraction of whom are totally insured, and so

584
00:31:23,240 --> 00:31:26,240
Speaker 6: even you can do whatever you want and like in theory,

585
00:31:26,400 --> 00:31:30,400
Speaker 6: they shouldn't care because no matter what, they have full coverage.

586
00:31:30,920 --> 00:31:34,280
Speaker 6: Obviously that's not true for everyone, but it's just the

587
00:31:34,480 --> 00:31:37,720
Speaker 6: level of kind of examination that you're going to get

588
00:31:37,760 --> 00:31:40,920
Speaker 6: from your creditors is so much lower if you are

589
00:31:41,000 --> 00:31:43,960
Speaker 6: running the private credit through the life insured balance sheet

590
00:31:44,440 --> 00:31:47,720
Speaker 6: rather than through kind of a standard private credit fund.

591
00:31:48,320 --> 00:31:50,120
Speaker 5: One more point I want to make is that I've

592
00:31:50,160 --> 00:31:53,280
Speaker 5: spoken to some people who you know, work in this space,

593
00:31:53,320 --> 00:31:55,880
Speaker 5: and one thing they say is that say there's a

594
00:31:55,920 --> 00:31:59,240
Speaker 5: good insurance manager a bad insurance manager to both use

595
00:31:59,280 --> 00:32:02,240
Speaker 5: private credit. One of them uses investment grade private credit

596
00:32:02,280 --> 00:32:05,560
Speaker 5: on the balance sheet. The other one uses rating inflated

597
00:32:06,240 --> 00:32:10,280
Speaker 5: bad private credit, and since evaluation regime is sort of

598
00:32:10,280 --> 00:32:12,960
Speaker 5: opaque and sort of hard to tell what's like a

599
00:32:12,960 --> 00:32:16,440
Speaker 5: truly good private credit loan versus not, it actually penalizes

600
00:32:16,440 --> 00:32:20,240
Speaker 5: an equilibrium sort of good asset managers because they might

601
00:32:20,280 --> 00:32:24,160
Speaker 5: have access to like at and T private credit, and

602
00:32:24,320 --> 00:32:27,520
Speaker 5: if they're getting the same ratings for Megan Jones as

603
00:32:27,520 --> 00:32:30,320
Speaker 5: someone who's investing in like a middle market SaaS company

604
00:32:30,360 --> 00:32:33,680
Speaker 5: in Chicago, obviously those who are extreme examples they get

605
00:32:33,680 --> 00:32:36,360
Speaker 5: different notches in the NIC system. But you can imagine

606
00:32:36,360 --> 00:32:40,480
Speaker 5: at the margin, the high quality private credits also suffer

607
00:32:41,080 --> 00:32:44,080
Speaker 5: just by ratings inflation, because you're not just hiding risk,

608
00:32:44,120 --> 00:32:46,960
Speaker 5: you're also competing in this dynamic market. So the insurer

609
00:32:47,000 --> 00:32:50,560
Speaker 5: who has access to investment get private credit might also suffer.

610
00:32:50,760 --> 00:32:54,040
Speaker 6: And the design of the guarantee funds actually amplifies this

611
00:32:54,200 --> 00:32:58,440
Speaker 6: problem because then banking, the assessment premiums that banks pay

612
00:32:58,480 --> 00:33:01,479
Speaker 6: are risk weighted, they're not purely sized way to Obviously

613
00:33:01,520 --> 00:33:04,920
Speaker 6: size is a major important component of risk, but for

614
00:33:05,000 --> 00:33:08,480
Speaker 6: guarantee funds it's purely the premium volume. So you can

615
00:33:08,480 --> 00:33:12,280
Speaker 6: imagine two identical ensures with the same premium volume, except

616
00:33:12,320 --> 00:33:15,720
Speaker 6: that one of them, you know, invests very conservatively, the

617
00:33:15,800 --> 00:33:18,440
Speaker 6: other one invests, you know, like a madman. You know,

618
00:33:18,480 --> 00:33:21,600
Speaker 6: the expected value of the public backstop is much greater,

619
00:33:22,160 --> 00:33:23,640
Speaker 6: you know, for one than the other. And so you

620
00:33:23,680 --> 00:33:26,320
Speaker 6: have this kind of implicit subsidy that is being routed

621
00:33:26,520 --> 00:33:29,320
Speaker 6: through this like underlying backstop.

622
00:33:29,160 --> 00:33:31,320
Speaker 3: In the event of like a failure, like there is

623
00:33:31,360 --> 00:33:33,400
Speaker 3: not you know, as you said, it's only the fortieth

624
00:33:33,400 --> 00:33:36,160
Speaker 3: percentile policy holders. There are a lot of potential lawses

625
00:33:36,800 --> 00:33:40,840
Speaker 3: in the literature, in your work, et cetera. Is there

626
00:33:40,880 --> 00:33:45,200
Speaker 3: a certain expectation that there exists in the world, certain

627
00:33:45,360 --> 00:33:49,040
Speaker 3: other implicit backstops that aren't formalized in law for those

628
00:33:49,200 --> 00:33:51,520
Speaker 3: premium holders or could it only be the type of

629
00:33:51,560 --> 00:33:53,480
Speaker 3: thing where it's like, if they're going to get quote

630
00:33:53,480 --> 00:33:56,240
Speaker 3: bailed out unquote, it would be some sort of tarp

631
00:33:56,400 --> 00:33:58,960
Speaker 3: like vote again where politicians have to stick their next out.

632
00:33:59,040 --> 00:34:00,680
Speaker 4: I think that's the exact to think about it.

633
00:34:00,680 --> 00:34:05,400
Speaker 5: So this the fortieth percentile person is just by operation

634
00:34:05,480 --> 00:34:08,000
Speaker 5: of law, going to get a bailout. And then you

635
00:34:08,040 --> 00:34:12,160
Speaker 5: can imagine particians, especially local potiticians. You might imagine don't

636
00:34:12,160 --> 00:34:15,839
Speaker 5: want their state's policyholders to lose out on you know,

637
00:34:16,080 --> 00:34:18,879
Speaker 5: people who are life insurance policies and their insurer goes

638
00:34:18,880 --> 00:34:21,360
Speaker 5: insolvent are some of the most sympathetic people on the planet.

639
00:34:21,600 --> 00:34:24,879
Speaker 5: So I'm assuming that would be an easy yes at

640
00:34:24,880 --> 00:34:27,920
Speaker 5: the state level to make them hold. Obviously it's impossible

641
00:34:27,920 --> 00:34:30,840
Speaker 5: to break the future, but it's almost hard to imagine

642
00:34:31,080 --> 00:34:33,000
Speaker 5: them not getting some protection in the future.

643
00:34:33,120 --> 00:34:36,840
Speaker 6: There's also the potential, especially in states that actually don't

644
00:34:36,840 --> 00:34:42,239
Speaker 6: have the tax credit, for a perverse feedback loop. So

645
00:34:42,280 --> 00:34:46,640
Speaker 6: you if there is a bad macroeconomic environment and some

646
00:34:46,760 --> 00:34:50,920
Speaker 6: large insurers go down that Levy's assessments on other insurers

647
00:34:50,960 --> 00:34:53,800
Speaker 6: that are already hurting, and that comes at the worst

648
00:34:53,840 --> 00:34:57,879
Speaker 6: possible time, and if that pushes other insurers into insolvency,

649
00:34:58,200 --> 00:35:00,920
Speaker 6: you know, then you have this very vicious se That

650
00:35:01,080 --> 00:35:03,520
Speaker 6: cycle is ameliorated of course by the fact that in

651
00:35:03,800 --> 00:35:07,440
Speaker 6: most states you do have these tax credits, but also

652
00:35:07,800 --> 00:35:10,440
Speaker 6: you know, interest rates are spiking during this time. Then

653
00:35:10,440 --> 00:35:12,680
Speaker 6: you run into kind of more serious time value of

654
00:35:12,719 --> 00:35:14,600
Speaker 6: money problems with the fact that the tax front has

655
00:35:14,640 --> 00:35:16,520
Speaker 6: to be taken over five to ten years.

656
00:35:16,800 --> 00:35:19,560
Speaker 2: Can we just do a quick history detour for a second,

657
00:35:19,560 --> 00:35:23,560
Speaker 2: because hearing you describe this system, it does not sound ideal,

658
00:35:23,880 --> 00:35:25,840
Speaker 2: to say the least, How did we end up with

659
00:35:26,000 --> 00:35:31,120
Speaker 2: this particular organizational structure for regulating insurers.

660
00:35:31,320 --> 00:35:35,200
Speaker 6: So the kind of history of state based regulation of

661
00:35:35,280 --> 00:35:39,120
Speaker 6: life insureds goes back to when the Supreme Court had

662
00:35:39,160 --> 00:35:43,200
Speaker 6: a much kind of stricter interpretation of the Commerce Clause,

663
00:35:43,520 --> 00:35:45,960
Speaker 6: and so it did in like a famous case in

664
00:35:46,040 --> 00:35:48,640
Speaker 6: the eighteen hundreds, the Supreme Court said that insurance did

665
00:35:48,640 --> 00:35:52,800
Speaker 6: not constitute commerce for the purposes of the interstate Commerce Clause.

666
00:35:53,440 --> 00:35:56,440
Speaker 6: In the nineteen forties, the Supreme Court reversed that decision

667
00:35:56,440 --> 00:35:59,680
Speaker 6: as part of its general trend towards being more permissive

668
00:35:59,680 --> 00:36:04,120
Speaker 6: of or regulation. But Congress immediately like disclaimed its new

669
00:36:04,200 --> 00:36:07,160
Speaker 6: power to regulate life insurans in an act called by

670
00:36:07,280 --> 00:36:11,440
Speaker 6: Karen Ferguson and Mcaren. Ferguson says that, you know, unless

671
00:36:11,520 --> 00:36:15,799
Speaker 6: Congress explicitly passes a law that says we're regulating insurers,

672
00:36:16,600 --> 00:36:20,600
Speaker 6: all other regulatory authority is reserved to the states. So

673
00:36:21,000 --> 00:36:23,320
Speaker 6: it's just pretty much been like that the whole time.

674
00:36:23,840 --> 00:36:27,759
Speaker 6: There are periodic waves in which there's like activism for

675
00:36:27,800 --> 00:36:31,440
Speaker 6: federal insurance regulation. Usually because of a wave of insurance

676
00:36:31,440 --> 00:36:34,840
Speaker 6: solvencies or some other like you know, alleged mouthfeasance in

677
00:36:35,120 --> 00:36:38,239
Speaker 6: the industry. And then what will typically happen is that

678
00:36:38,280 --> 00:36:41,960
Speaker 6: the NAIICE and which is the kind of association of

679
00:36:42,000 --> 00:36:45,040
Speaker 6: state regulators that formally operates actually through a nonprofit it's

680
00:36:45,080 --> 00:36:47,840
Speaker 6: not it's not formally a public entity at all, will

681
00:36:48,080 --> 00:36:52,120
Speaker 6: act to try to forestall that federal push by kind

682
00:36:52,160 --> 00:36:54,840
Speaker 6: of doing it on its own. And that's what happened

683
00:36:54,840 --> 00:36:58,239
Speaker 6: with guarantee funds. In the nineteen sixties and the nineteen seventies,

684
00:36:58,520 --> 00:37:01,960
Speaker 6: there was a wave of insolvency and property and casualty insurance,

685
00:37:02,360 --> 00:37:04,719
Speaker 6: and there were bills introduced in Congress to create a

686
00:37:04,719 --> 00:37:08,319
Speaker 6: federal backstop that was kind of similar and you know

687
00:37:08,400 --> 00:37:13,120
Speaker 6: to to the FDIC and the the NAIC and various

688
00:37:13,120 --> 00:37:16,640
Speaker 6: states quickly responded to create these state level backstops instead.

689
00:37:17,000 --> 00:37:19,799
Speaker 5: And one of the interesting ways the NIC operates is

690
00:37:19,840 --> 00:37:23,719
Speaker 5: that most states actually defer rulemaking to the n C

691
00:37:23,880 --> 00:37:27,359
Speaker 5: fully into the future. So I think Indiana is one

692
00:37:27,400 --> 00:37:31,680
Speaker 5: of these states where they self incorporate the model law

693
00:37:32,239 --> 00:37:35,640
Speaker 5: that the NIC puts out, even prospective changes.

694
00:37:36,040 --> 00:37:38,080
Speaker 2: So they just like see control entirely.

695
00:37:38,360 --> 00:37:40,560
Speaker 6: Yeah, So there's there's state laws that say if the

696
00:37:40,680 --> 00:37:44,120
Speaker 6: nai C says this, it will be automatically incorporated into

697
00:37:44,160 --> 00:37:47,640
Speaker 6: our own state law, which is like a very distinctive arrangement.

698
00:37:48,200 --> 00:37:48,880
Speaker 2: So it the curse to me.

699
00:37:48,960 --> 00:37:52,040
Speaker 3: There is one a difference between banks and insurance is

700
00:37:52,120 --> 00:37:55,959
Speaker 3: that banks have the possibility of correlation on two front.

701
00:37:56,239 --> 00:37:58,200
Speaker 3: So all the loan if you hear the sick banks

702
00:37:58,239 --> 00:38:00,200
Speaker 3: make a lot of housing loans, Like banks all could

703
00:38:00,239 --> 00:38:02,520
Speaker 3: go the loans could all go sour at the same time,

704
00:38:02,840 --> 00:38:05,680
Speaker 3: but then also their depositor base could be correlated.

705
00:38:05,760 --> 00:38:05,880
Speaker 1: Right.

706
00:38:06,120 --> 00:38:07,640
Speaker 3: We saw this with s if you be but you

707
00:38:07,680 --> 00:38:10,319
Speaker 3: could also just imagine in any other environment people get

708
00:38:10,320 --> 00:38:13,240
Speaker 3: anxious about a bank and they all withdraw their deposits.

709
00:38:13,560 --> 00:38:16,440
Speaker 3: That can't quite happen the same way with an insurance company,

710
00:38:16,520 --> 00:38:19,400
Speaker 3: at least if we're talking about vanilla insurance where you

711
00:38:19,560 --> 00:38:22,800
Speaker 3: only get paid out either on an event or retirement

712
00:38:23,200 --> 00:38:25,239
Speaker 3: or something like that and you stagger it, does that

713
00:38:25,520 --> 00:38:29,600
Speaker 3: change the dynamics or the fact that insurers could still

714
00:38:29,800 --> 00:38:33,440
Speaker 3: have correlated failure. They're all maybe making loans to software

715
00:38:33,480 --> 00:38:36,279
Speaker 3: companies at the same time, but they don't really have

716
00:38:36,440 --> 00:38:40,160
Speaker 3: the risk of correlated withdraws in the same way that

717
00:38:40,200 --> 00:38:40,719
Speaker 3: a bank would.

718
00:38:40,880 --> 00:38:42,880
Speaker 4: Great, that's a pitch for our next paper.

719
00:38:44,320 --> 00:38:46,520
Speaker 6: That's the fall up though, or insurance.

720
00:38:46,560 --> 00:38:49,440
Speaker 5: So you can imagine conceptually there's runs on the acid

721
00:38:49,520 --> 00:38:52,360
Speaker 5: side of the liability side. I'll speak a libout the assets,

722
00:38:52,640 --> 00:38:56,200
Speaker 5: and Andrew's more an expert on the differences in possing liabilities.

723
00:38:56,480 --> 00:38:58,880
Speaker 5: But on the asset side, as you said, all of

724
00:38:58,960 --> 00:39:02,200
Speaker 5: them make loans to Chicago's SAS company in the middle market,

725
00:39:02,560 --> 00:39:05,080
Speaker 5: and then they all go calling back and there's no

726
00:39:05,280 --> 00:39:07,759
Speaker 5: you know, there's not not enough cashless. So in that

727
00:39:07,960 --> 00:39:12,440
Speaker 5: paradigmatic sense, since banking has very good you know, like

728
00:39:12,520 --> 00:39:14,960
Speaker 5: on the floor of a bank, there's officials in the

729
00:39:15,000 --> 00:39:18,560
Speaker 5: federal government that say, don't invest in this type of

730
00:39:18,880 --> 00:39:22,080
Speaker 5: risky asset, usually about credit, but also I'm sure they

731
00:39:22,160 --> 00:39:23,239
Speaker 5: think about industry risk.

732
00:39:23,320 --> 00:39:25,680
Speaker 2: Yeah, we're watching your SaaS exposure yeah.

733
00:39:25,840 --> 00:39:26,400
Speaker 4: Or something like that.

734
00:39:26,560 --> 00:39:29,839
Speaker 5: And insurance since that regime is much weaker because it's

735
00:39:29,840 --> 00:39:35,000
Speaker 5: dispurs the NEIIC is less. They have way less resources

736
00:39:35,120 --> 00:39:37,880
Speaker 5: and power than the federal government. So just on the

737
00:39:37,920 --> 00:39:40,480
Speaker 5: asset side, the monitoring is much worse, So you might

738
00:39:40,560 --> 00:39:44,759
Speaker 5: imagine there's more possibility of colorate exposure than there is

739
00:39:44,840 --> 00:39:47,680
Speaker 5: in banking, and you can imagine, you know, like the

740
00:39:47,760 --> 00:39:50,080
Speaker 5: last year or so, a lot of the private credit

741
00:39:50,520 --> 00:39:53,320
Speaker 5: pain has been due to a very specific kind of exposure.

742
00:39:53,840 --> 00:39:56,160
Speaker 5: Insurance or something like fifteen percent of the assets are

743
00:39:56,200 --> 00:39:58,520
Speaker 5: in private credit ten to fifteen depending how you measure.

744
00:39:58,840 --> 00:40:01,719
Speaker 5: And the idea that a third of private credits to

745
00:40:01,800 --> 00:40:03,920
Speaker 5: software is not a stretch, So you can imagine, like

746
00:40:03,960 --> 00:40:07,759
Speaker 5: you know, of that fifteen percent is in one industry. Again,

747
00:40:07,800 --> 00:40:09,400
Speaker 5: I don't have the specific numbers because they also do

748
00:40:09,440 --> 00:40:12,439
Speaker 5: infrastructure and all these longer term things, but the idea

749
00:40:12,520 --> 00:40:15,080
Speaker 5: is like it's more possible in the insurance contestant banking,

750
00:40:15,320 --> 00:40:16,880
Speaker 5: and the liabilities is a completely different end.

751
00:40:16,920 --> 00:40:19,600
Speaker 6: Yeah, liabilities is fascinating and that's going to be like

752
00:40:19,640 --> 00:40:22,040
Speaker 6: one of the primary subjects of our next article. So

753
00:40:22,160 --> 00:40:24,880
Speaker 6: like one preview would be things depend a lot on

754
00:40:24,960 --> 00:40:28,000
Speaker 6: the kind of life insurance policy that you hold. So

755
00:40:28,280 --> 00:40:30,879
Speaker 6: for example, you could have let's say, if you hold

756
00:40:31,120 --> 00:40:34,200
Speaker 6: a whole life policy and you have a cash value

757
00:40:34,239 --> 00:40:37,400
Speaker 6: reserve account inside of that policy, this is like essentially

758
00:40:37,480 --> 00:40:40,120
Speaker 6: a tax preferred you know, kind of a raw IRA

759
00:40:40,440 --> 00:40:43,239
Speaker 6: being that's inside of a life insurance policy, and you

760
00:40:43,440 --> 00:40:47,560
Speaker 6: have rights of withdrawal on that account, and so that

761
00:40:48,120 --> 00:40:50,719
Speaker 6: is a demand deposit like and so if you had

762
00:40:50,760 --> 00:40:53,919
Speaker 6: a life insurer that had sold a ton of cash

763
00:40:54,000 --> 00:40:57,480
Speaker 6: value life policies and people tend to store a lot

764
00:40:57,520 --> 00:40:59,960
Speaker 6: of money in those policies, you know you can run

765
00:41:00,080 --> 00:41:00,279
Speaker 6: on that.

766
00:41:00,600 --> 00:41:03,440
Speaker 3: To be clear, would you say that historically, since these

767
00:41:03,480 --> 00:41:07,640
Speaker 3: are sort of more exotic flavors of insurance, that regulators

768
00:41:07,680 --> 00:41:11,520
Speaker 3: have approached this industry as one in which quote runs

769
00:41:11,680 --> 00:41:15,239
Speaker 3: aren't a phenomenon the same way we associate them with banking.

770
00:41:15,280 --> 00:41:19,720
Speaker 6: And banking runs is like the primary concern. It drives everything.

771
00:41:20,320 --> 00:41:22,960
Speaker 6: And in insurance, I do think, you know, kind of

772
00:41:23,040 --> 00:41:26,000
Speaker 6: per the permanent capital hypothesis.

773
00:41:25,920 --> 00:41:27,920
Speaker 2: Your stress and liability mismatch.

774
00:41:28,239 --> 00:41:31,759
Speaker 6: Yeah, like you there are good reasons to think that

775
00:41:32,480 --> 00:41:36,400
Speaker 6: insures are structurally less vulnerable to runs on average, but

776
00:41:36,560 --> 00:41:38,880
Speaker 6: it depends a lot on the nuances. And there have

777
00:41:39,040 --> 00:41:42,400
Speaker 6: been runs on life insureds before. So Executive Life in

778
00:41:42,480 --> 00:41:45,200
Speaker 6: the early nineteen nineties was a life insured that was

779
00:41:45,280 --> 00:41:47,840
Speaker 6: really struggling and there was a run on the insurer.

780
00:41:48,640 --> 00:41:52,160
Speaker 6: Now Executive Life was you know, a few billion dollars

781
00:41:52,320 --> 00:41:54,600
Speaker 6: worth of assets. This is not something that it's going

782
00:41:54,680 --> 00:41:57,360
Speaker 6: to cause the financial system to collapse. And so I

783
00:41:57,440 --> 00:42:00,759
Speaker 6: think we even very lucky that we have not had

784
00:42:00,800 --> 00:42:04,680
Speaker 6: a situation like that happen with a very large life insurer.

785
00:42:05,080 --> 00:42:08,359
Speaker 2: Well, okay, speaking of cascading risks. One thing I never

786
00:42:08,480 --> 00:42:11,600
Speaker 2: understand when it comes to insurance is reinsurance because it's

787
00:42:11,640 --> 00:42:14,359
Speaker 2: just like you have the insurers and the reinsurers insure them,

788
00:42:14,480 --> 00:42:16,919
Speaker 2: and then do you have like re reinsures who ensure

789
00:42:16,960 --> 00:42:22,359
Speaker 2: the reinsurance insurance all the way down. But you talk

790
00:42:22,400 --> 00:42:24,520
Speaker 2: a little bit about this concept in your paper of

791
00:42:24,960 --> 00:42:27,640
Speaker 2: shadow reinsurance. What exactly is that?

792
00:42:27,960 --> 00:42:32,440
Speaker 6: Yeah, shadow reinsurance. So if you are an insurer and

793
00:42:32,560 --> 00:42:35,279
Speaker 6: you would like to transfer some of the risk off

794
00:42:35,320 --> 00:42:37,759
Speaker 6: of your balance sheet, there are various ways that you

795
00:42:37,840 --> 00:42:42,800
Speaker 6: can do this. You can reinsure with a totally independent entity,

796
00:42:43,280 --> 00:42:45,440
Speaker 6: so you'll say like you're going to take on these

797
00:42:45,520 --> 00:42:48,759
Speaker 6: liabilities and I'm going to transfer you these assets. Or

798
00:42:48,840 --> 00:42:53,160
Speaker 6: you could do this with a captive it's like subsidiary reinsure,

799
00:42:53,880 --> 00:42:58,040
Speaker 6: and that captive subsidiary reinsure can be anywhere, and so

800
00:42:58,160 --> 00:43:00,759
Speaker 6: we can have different kind of corporate, state law or

801
00:43:00,840 --> 00:43:02,960
Speaker 6: tax law that applies to it. So one of the

802
00:43:03,080 --> 00:43:07,560
Speaker 6: main ways that life insures and particularly private equity back

803
00:43:07,560 --> 00:43:10,919
Speaker 6: to life insurres like to reinsure is that they use

804
00:43:11,040 --> 00:43:14,280
Speaker 6: captives that are in Bermuda or that are in certain

805
00:43:14,320 --> 00:43:17,120
Speaker 6: states that have tried to compete with Bermuda, like Iowa

806
00:43:17,360 --> 00:43:20,799
Speaker 6: or Vermont, and these are places where the tax rates

807
00:43:20,840 --> 00:43:25,239
Speaker 6: are very low. And also there is no balance sheet

808
00:43:25,400 --> 00:43:30,640
Speaker 6: visibility into the reinsurance balance sheets through the prism of

809
00:43:30,719 --> 00:43:34,759
Speaker 6: the primary insurer. So if I were to reinsure all

810
00:43:34,800 --> 00:43:37,200
Speaker 6: these assets and liabilities, I give up all the stuff

811
00:43:37,200 --> 00:43:40,040
Speaker 6: off my balance sheet and then it disappears into the

812
00:43:40,200 --> 00:43:43,719
Speaker 6: reinsure balance sheet. And on a quarterly level, you could

813
00:43:43,760 --> 00:43:46,160
Speaker 6: go into the naic data and you can see actually

814
00:43:46,200 --> 00:43:49,640
Speaker 6: at ACUSIP level what the life insurre holds in the US.

815
00:43:50,160 --> 00:43:53,239
Speaker 6: That data quality is extremely high. But once that is

816
00:43:53,520 --> 00:43:56,200
Speaker 6: reinsured into one of these quote unquote shadow reinsures, you

817
00:43:56,280 --> 00:43:58,200
Speaker 6: lose all visibility into what's going on.

818
00:43:59,239 --> 00:44:01,640
Speaker 2: I don't want this to be the typical Audlots episode

819
00:44:01,719 --> 00:44:04,000
Speaker 2: where we talk about a problem and then just go

820
00:44:04,200 --> 00:44:07,319
Speaker 2: off agreeing that it can never be solved, because part

821
00:44:07,360 --> 00:44:11,239
Speaker 2: of your paper actually talks about regulatory suggestions for how

822
00:44:11,360 --> 00:44:13,879
Speaker 2: you might fix some of these issues, or at least

823
00:44:13,920 --> 00:44:16,239
Speaker 2: try to make them better. What do you think can

824
00:44:16,280 --> 00:44:16,759
Speaker 2: be done here?

825
00:44:17,160 --> 00:44:20,560
Speaker 6: I think there's a variety of options that the nai

826
00:44:20,680 --> 00:44:23,399
Speaker 6: C can undertake, you know, kind of in the first

827
00:44:23,480 --> 00:44:29,200
Speaker 6: instance that align the downside risk with the controllers. So

828
00:44:29,600 --> 00:44:32,080
Speaker 6: you can imagine, like step one could be something like

829
00:44:32,200 --> 00:44:35,560
Speaker 6: valuation based reforms. I think a lot of people agree

830
00:44:35,600 --> 00:44:38,320
Speaker 6: at this point that the over optimism and valuation is

831
00:44:38,480 --> 00:44:43,440
Speaker 6: a structural problem, that private letter ratings are too generous,

832
00:44:43,880 --> 00:44:46,360
Speaker 6: and that also just that there is an issue with

833
00:44:46,560 --> 00:44:49,800
Speaker 6: trying to value private credit in the first place, because

834
00:44:50,120 --> 00:44:53,000
Speaker 6: these are non tradable loans that have these bespoken terms,

835
00:44:53,600 --> 00:44:58,160
Speaker 6: and so you can do a Pagouvian tax on opacity itself,

836
00:44:58,239 --> 00:45:00,720
Speaker 6: where you say, like, oh, if certain kind of assets

837
00:45:01,120 --> 00:45:03,840
Speaker 6: are just structurally hard to value, then we're going to

838
00:45:03,920 --> 00:45:07,480
Speaker 6: impose a regulatory capital surcharge on that complexity. We're not

839
00:45:07,560 --> 00:45:10,280
Speaker 6: going to look at any of the individual underlying assets

840
00:45:10,400 --> 00:45:13,800
Speaker 6: because that's extremely resource intensive to do. That's just not

841
00:45:14,000 --> 00:45:16,320
Speaker 6: feasible to do, especially if you have you know, a

842
00:45:16,400 --> 00:45:19,520
Speaker 6: private equity back ensurre with billions and billions of dollars

843
00:45:19,840 --> 00:45:21,800
Speaker 6: of these assets on your balance sheet. But we're just

844
00:45:21,840 --> 00:45:23,560
Speaker 6: going to just say, like you know what, you're just

845
00:45:23,640 --> 00:45:25,160
Speaker 6: you're just going to have to pay that surch charge.

846
00:45:25,640 --> 00:45:29,160
Speaker 6: You can also move to the guarantee fund level. You

847
00:45:29,320 --> 00:45:32,400
Speaker 6: can end the tax credits that ensures get for the

848
00:45:32,480 --> 00:45:35,520
Speaker 6: guarantee funds. You can move to prefunding. You can essentially

849
00:45:35,560 --> 00:45:38,360
Speaker 6: you could transform it into a federal deposit insurance like system.

850
00:45:38,880 --> 00:45:42,280
Speaker 6: And then you can also borrow other ideas from areas

851
00:45:42,320 --> 00:45:46,440
Speaker 6: in banking. For example, we talk about this this kind

852
00:45:46,480 --> 00:45:49,080
Speaker 6: of theory in banking law that is, you know, has

853
00:45:49,120 --> 00:45:51,520
Speaker 6: not actually been operationalized very much, but it's called the

854
00:45:51,640 --> 00:45:54,839
Speaker 6: source of strength doctrine, where if a bank goes down

855
00:45:55,600 --> 00:45:58,399
Speaker 6: in theory, under the source of strength doctrine, you could

856
00:45:58,480 --> 00:46:00,680
Speaker 6: go to the affiliates of that bank and a bank

857
00:46:00,719 --> 00:46:04,200
Speaker 6: holding company and say, look, time to pay up, because

858
00:46:04,600 --> 00:46:06,239
Speaker 6: the rest of us have to pay up, and so

859
00:46:06,400 --> 00:46:09,160
Speaker 6: do you. And you could apply a similar concept to

860
00:46:09,520 --> 00:46:11,520
Speaker 6: an insurance holding group. So you could go to the

861
00:46:11,560 --> 00:46:15,520
Speaker 6: other affiliates in any insurance group, whether it's private equity

862
00:46:15,600 --> 00:46:17,520
Speaker 6: or not, and say, you know, you have to be

863
00:46:17,600 --> 00:46:21,759
Speaker 6: responsible for you know, x percent of the payouts that

864
00:46:21,960 --> 00:46:24,680
Speaker 6: have to go from the guarantee fund, and that would

865
00:46:25,080 --> 00:46:27,160
Speaker 6: align incentives in this insolvency scenario.

866
00:46:27,920 --> 00:46:29,360
Speaker 2: Source of Strength Doctor.

867
00:46:29,800 --> 00:46:30,279
Speaker 4: That's good.

868
00:46:30,440 --> 00:46:32,960
Speaker 2: Yeah, that's a good name. It has a sort of

869
00:46:33,160 --> 00:46:38,640
Speaker 2: like Chinese governmental ring is stated up the front.

870
00:46:39,280 --> 00:46:42,040
Speaker 3: It feels like it should be something that's about something

871
00:46:42,040 --> 00:46:45,720
Speaker 3: bigger than banking. Subscribed to the Source of Strength doctor

872
00:46:45,760 --> 00:46:47,040
Speaker 3: and it's like, oh, it's about.

873
00:46:46,920 --> 00:46:50,080
Speaker 2: Banking regulation, all right, Andrew and pronjall, thank you so

874
00:46:50,239 --> 00:46:53,320
Speaker 2: much for coming on Odd Laws scrape Paper. Really appreciate

875
00:46:53,360 --> 00:46:53,799
Speaker 2: you being here.

876
00:46:54,160 --> 00:46:55,240
Speaker 4: Thank you so much.

877
00:47:07,719 --> 00:47:08,080
Speaker 3: So, Joe.

878
00:47:08,160 --> 00:47:10,320
Speaker 2: I found that really fascinating. I do think like the

879
00:47:10,440 --> 00:47:14,800
Speaker 2: relationship between private equity slash private credit and insurance is

880
00:47:15,239 --> 00:47:17,760
Speaker 2: kind of an under discussed one. It's only just starting

881
00:47:17,840 --> 00:47:20,160
Speaker 2: to get a lot of attention. And again going back

882
00:47:20,200 --> 00:47:23,759
Speaker 2: to the whole original impetus for private credit becoming a thing,

883
00:47:23,840 --> 00:47:25,799
Speaker 2: which was to get some of this risky stuff out

884
00:47:25,880 --> 00:47:28,920
Speaker 2: of the regulated banking system. It doesn't seem great if

885
00:47:28,960 --> 00:47:33,520
Speaker 2: it's just landing in another different kind of regulated financial

886
00:47:33,560 --> 00:47:34,480
Speaker 2: industry totally.

887
00:47:34,960 --> 00:47:37,960
Speaker 3: I mean on this sort of like okay, core asset

888
00:47:38,200 --> 00:47:41,640
Speaker 3: asset liability management, it's a beautiful synergy.

889
00:47:41,800 --> 00:47:41,920
Speaker 6: Right.

890
00:47:42,080 --> 00:47:44,680
Speaker 2: I felt the need multiple times in that conversation to

891
00:47:44,719 --> 00:47:47,520
Speaker 2: say not all private credit. All right, No, not all

892
00:47:47,680 --> 00:47:48,799
Speaker 2: private credit private credit.

893
00:47:49,120 --> 00:47:51,279
Speaker 3: But it is a beautiful symmetry, That's what I'm saying.

894
00:47:51,320 --> 00:47:55,680
Speaker 3: They have this sort of pool of they're not depositors,

895
00:47:55,760 --> 00:47:59,200
Speaker 3: we call them policyholders, who really are They're not expecting

896
00:47:59,239 --> 00:48:01,160
Speaker 3: to get their money back for a very long time.

897
00:48:01,440 --> 00:48:04,000
Speaker 3: They can only get their money back on certain rules,

898
00:48:04,040 --> 00:48:08,000
Speaker 3: et cetera. It truly does solve that. It makes a

899
00:48:08,160 --> 00:48:11,680
Speaker 3: lot of sense to pair that with certain types of

900
00:48:12,360 --> 00:48:15,640
Speaker 3: assets whose value emerges because it can be held for

901
00:48:15,680 --> 00:48:18,080
Speaker 3: a very long time and perhaps held through a draw down.

902
00:48:18,200 --> 00:48:21,600
Speaker 3: So that makes total sense. Of course, though the question

903
00:48:21,920 --> 00:48:26,480
Speaker 3: and that arises is well, a like how much then

904
00:48:26,560 --> 00:48:30,080
Speaker 3: becomes the sort of quasi regulatory arbitrage. It's sort of

905
00:48:30,239 --> 00:48:32,960
Speaker 3: a looser environment. How do we even know these are

906
00:48:33,080 --> 00:48:37,000
Speaker 3: quality assets that will satisfy the policyholders and so forth?

907
00:48:37,280 --> 00:48:39,080
Speaker 3: And I found that to be very eye opening to

908
00:48:39,160 --> 00:48:41,759
Speaker 3: sort of like how just loose it all save how

909
00:48:41,960 --> 00:48:44,360
Speaker 3: just sort of like held together by scotch tape.

910
00:48:44,520 --> 00:48:45,080
Speaker 4: And also this.

911
00:48:45,160 --> 00:48:48,480
Speaker 2: Idea that we've never actually had a major insurance failure,

912
00:48:48,719 --> 00:48:50,920
Speaker 2: and so you could see that well, you know, maybe

913
00:48:51,040 --> 00:48:52,960
Speaker 2: one of the reasons it's all held together with scotch

914
00:48:53,040 --> 00:48:56,000
Speaker 2: tape is because it's never been an issue before, because

915
00:48:56,000 --> 00:48:58,520
Speaker 2: we haven't had a failure because insurers have been investing

916
00:48:58,560 --> 00:49:02,880
Speaker 2: in really boring ig rated bonds. But if that's changing,

917
00:49:03,200 --> 00:49:05,480
Speaker 2: then maybe we need to start thinking harder about this.

918
00:49:05,920 --> 00:49:08,400
Speaker 2: But one other thing, I'll say, we're recording this on

919
00:49:08,760 --> 00:49:12,480
Speaker 2: July thirtieth and Private credit. It's been in the news, yeah,

920
00:49:13,040 --> 00:49:15,160
Speaker 2: you know, for the past year or so for various reasons.

921
00:49:15,239 --> 00:49:18,000
Speaker 2: But it's in the news again because we have federal

922
00:49:18,120 --> 00:49:23,160
Speaker 2: prosecutors apparently investigating Mark Walters, who, in addition to being

923
00:49:23,280 --> 00:49:26,719
Speaker 2: the owner of the La Dodgers, also has Guggenheim, And

924
00:49:26,800 --> 00:49:30,440
Speaker 2: Gugenheim has affiliated insurers Delaware Life and I think the

925
00:49:30,520 --> 00:49:33,520
Speaker 2: other one was called clear Lake or not Clear like

926
00:49:33,680 --> 00:49:37,160
Speaker 2: clear spring, something clear, clear in a body of water. Yeah,

927
00:49:37,239 --> 00:49:39,120
Speaker 2: But of course the irony is that maybe it's not

928
00:49:39,200 --> 00:49:42,600
Speaker 2: so clear because it put out a revised financial disclosure

929
00:49:42,719 --> 00:49:47,120
Speaker 2: saying that the number of affiliated assets on its balance sheet,

930
00:49:47,680 --> 00:49:51,000
Speaker 2: so these are assets that come basically via Guggenheim or

931
00:49:51,160 --> 00:49:54,720
Speaker 2: that are under common control by Guggenheim. They had reported

932
00:49:54,719 --> 00:49:57,120
Speaker 2: them previously as something like three to five percent of

933
00:49:57,239 --> 00:50:02,160
Speaker 2: Delaware Life and Clear whatever total assets, and then they

934
00:50:02,239 --> 00:50:04,920
Speaker 2: went back as a result of this investigation and checked

935
00:50:05,320 --> 00:50:07,920
Speaker 2: put out a revised statement, what do you think the

936
00:50:08,000 --> 00:50:11,800
Speaker 2: proportion of affiliated assets is now? Tell me forty percent?

937
00:50:11,920 --> 00:50:15,520
Speaker 2: There you go, so move from three. Under additional scrutiny,

938
00:50:15,600 --> 00:50:17,880
Speaker 2: it moved from three to forty percent. So these are

939
00:50:17,920 --> 00:50:20,560
Speaker 2: the kind of concerns that I think are starting to

940
00:50:20,680 --> 00:50:23,319
Speaker 2: bubble up totally. But in the meantime, shall we leave

941
00:50:23,320 --> 00:50:23,480
Speaker 2: it there?

942
00:50:23,560 --> 00:50:24,200
Speaker 4: Let's leave it there.

943
00:50:24,400 --> 00:50:26,680
Speaker 2: This has been another episode of the Odd Lots podcast.

944
00:50:26,800 --> 00:50:30,080
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

945
00:50:29,800 --> 00:50:32,320
Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart.

946
00:50:32,400 --> 00:50:35,440
Speaker 3: Follow our producers Kerman Rodriguez at Kerman armand dash Ol

947
00:50:35,440 --> 00:50:38,880
Speaker 3: Bennett at Dashbot, Cale Brooks at Calebrooks, and Kevin Lozano

948
00:50:38,960 --> 00:50:41,759
Speaker 3: at Kevin Lloyd Lozano. And from our Oddlats content. Go

949
00:50:41,840 --> 00:50:44,760
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950
00:50:45,040 --> 00:50:47,120
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951
00:50:47,120 --> 00:50:49,359
Speaker 3: all of these topics twenty four to seven in our

952
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Speaker 3: discord Discord dot gig slash onlines.

953
00:50:52,520 --> 00:50:54,680
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954
00:50:54,840 --> 00:50:57,560
Speaker 2: when we talk about insurance regulation, then Please leave us

955
00:50:57,600 --> 00:51:00,760
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956
00:51:00,840 --> 00:51:03,200
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