Transcript
0:05 Hey, this is Steve Eisman and people always ask me, what is the next big scandal out there? And I think today's guest is going to really explore with us what that scandal could be. It involves life insurance, involves your annuities, involves your policies, involves private equity and how private equity has taken over the life insurance industry. This is a slow brewing scandal which could be one day a great financial crisis. And my guest today is Tom Gober who will be speaking to. He's a forensic accountant. He's been involved with the life insurance industry for decades.
0:43 He's a real expert and we are going to learn a ton. And afterwards I'll come back and tell you what I think we've learned. >> [music] >> Hi, this is Steve Eisman and welcome to another episode of the Real Eisman Playbook. So today we're going to change gears a little bit and we're going to talk about what is potentially a long-standing brewing scandal in the life insurance industry. Um this is a little complicated, so bear with us. We're going to try and make it as simplified as possible, but there's some technical things that we're going to have to talk about. And here my guest today is Tom Gober. Gober, correct.
1:21 >> And um Tom, why don't you talk about your background first and then we'll walk into this both complex yet incredibly important story. Thank you so much. It is a privilege to to be here. Thank you. Um yeah, I started as right after I got my master's degree in business, I went to work for Merrill Lynch. What year would that be? 82 is when I graduated, so it would have been 82, 83 Okay. with Merrill Lynch. But they just wanted me to cold call and I just gotten my master's degree and I thought I need to use my brain. So I went back to Millsaps College, where I went to school. And I said, "I want to use my brain." And she said, "You know, there's this new position open. It's called an insurance examiner, where you would examine or audit the insurance companies in the state." And she said, "You know, they've got all the money, and they're complicated. I bet you'd use your brain." I applied, got the job, and that was 41 years ago.
2:23 I began as a young insurance examiner. And how long were you an insurance examiner? 7 years. >> Okay. First 2 years to get accredited and pass seven examinations, another 2 years to get certified, five more exams I had to pass, and then I became the state examiner in charge. Okay. >> Which meant I >> And what state was this? Mississippi. >> Mississippi. Let's pause for a second, cuz I think most people don't understand this. Um banks are regulated by the federal government.
2:51 >> Absolutely. >> are regulated by mostly by the Fed. Yes. >> And they're pretty professional. Yes, indeed. >> The regulators at the Fed, they know they Certainly today they know what they're doing after had the the crap beaten out of them from the great financial crisis. >> But the insurance industry has an entirely different regulatory apparatus. It's state regulation. So, you could be a an insurance company that's incorporated in Mississippi. Mhm. Your regulator is the state regulator Mississippi.
3:22 >> You could be a insurance company that's that's incorporated in Delaware or in O- Ohio. Depending upon where you are incorporated, that is who is going to be your state regulator. And I would say the overall quality, no offense to your history, of state of insurance state regulators is not great. Um there's a long history of insurance companies playing one state off against another. >> No doubt. >> And also having the ability to move stuff offshore, which we're going to talk about, but um the the entire I I would argue the entire regulatory apparatus of insurance in the United States is not good. I agree totally, and I lived through it.
4:02 >> Right. The state departments of insurance are underfunded, understaffed, >> Yes. under sophisticated. >> They are not sophisticated. >> that they are attempting to regulate >> sophisticated. >> Exactly. I mean, today, as we'll point out, much of the life insurance industry, which is the industry we're going to focus on, is owned by private equity firms. Yeah. You cannot talk about more sophisticated people than that. So, you're talking about private insurance companies run by incredibly sophisticated private equity people who are being regulated by, as you said, underfunded, unsophisticated state regulators.
4:39 >> about it. >> Okay. Plus, [snorts] it's worldwide. You've got a lot of the holding companies and reinsurers are in Barbados, the Cayman Islands, right? >> Bermuda. And so, how is a a young state insurance examiner going to keep up with all of that? >> Yes. Right? >> Okay, so let's boil this down, you know, we're at a cocktail party, and I've just met you, and you're you're going to tell me what this story is all about. We're going to get into detail cuz cuz the devil is in the details, as as you know.
5:10 But if we were just at a cocktail party, and you wanted to tell this story in 5 minutes, simplified version, what is the nature of the potential scandal that's going on in life insurance? I would say that the life and annuity insurance industry has radically changed over the last couple of decades. Yes. Their promises are extremely long-term. People timely pay their entire life. So, you take out a life insurance policy, you pay premium Your whole life, >> life. You could You could pay it for decades on based on the promise that maybe if I live to 85, 90 which would be 50 years from now >> Exactly.
5:58 my family will get paid what it what it is promised. It's a very very very long-term promise annuities as well. >> totally. So because of that unique nature of the policy holder being totally at the whim of the industry the regulators have to apply fairly strict scrutiny, right? On these companies. But over the last several decades that has eroded significantly.
6:28 So that not only is there substantial risk taking in the industry, not just in investments, but going we'll talk later about reinsurance offshore, that sort of thing. It's not just that, it's the lack of transparency and that it used to be that the 50 insurance commissioners, 51 with Washington they were >> Washington D.C.? >> Washington D.C. has its own. So the 51 tended to have the same rules.
6:59 But not anymore. Now certain states that are especially industry-friendly are allowing >> Like like like who? Name them. What states? Vermont, South Carolina, Delaware, Arizona, Iowa. Okay, thanks. >> Those are the five. They're the five most most five, okay. Yes. And what they do there is they grant these things called permitted practices. Well, a permitted practice simply means they're allowing them to do things that the statutory accounting guidelines that they're supposed to follow would not allow.
7:35 So a lot of companies form these secret captives, these small captive reinsurers. they're they're really just an SPV, right? They're just >> Special purpose vehicle. Yeah. There's no building, there are no employees, right? And they're dumping liabilities into these states where the the rules are much looser. And they're underfunding with real money. So, I would say, you know, if you send them 5 billion in liabilities, you should send 5 billion in assets, right? It's supposed to be commensurate.
8:11 But I'm finding sometimes they may only send 2 billion in assets to cover 5 billion. And and I've been screaming about that literally for 7 years. And finally people are starting to wake up. So, I I probably went too long, but let me >> So, but so the bottom line, and then we're going to really dig down into this, is that the two areas that have changed over the last, call it, 20 years would be that the industry is taking more investment risk, no doubt.
8:44 >> Than than it used to take. So, the call it the credit quality of the portfolios that they're investing in are riskier. Definitely. >> And number two, they have these captive reinsurance deals, which you know, trust trust me, people's eyes glaze glaze over when you talk about captive reinsurance deals, but the bottom line is by by having these captive reinsurance deals, the industry is able to leverage itself much more than it should be able to.
9:16 >> And without you being able to tell it because it's secretive. You go to Vermont captive or you go to Barbados or Bermuda or, you know, anywhere offshore, you cannot get the financial information you need. They should require that the companies file with the US. But they don't. Right. Because they're not Cayman Islands citizens, we transfer the liabilities. It's still the Mississippi commissioner's job to protect that Mississippi policy holder. And just because it goes offshore doesn't mean you can suddenly fund it with far less money.
9:51 >> Right. Okay, so let's dig down for a second. 30 years ago the life insurance industry was mostly a nonprofit mutual industry. Absolutely. >> Fair statement. >> Beautiful. And then in the 2000s much of the industry went public. So Lincoln National, MetLife, Prudential, these were all massive IPOs in the call them pre-Great Financial Crisis. This all happened. >> Exactly. Since then and this is where I want you to walk people through there have been major changes in that a lot of the life insurance industry has been moved into the hands of private equity. So let's just start with that because that's that's a that's a sea change in terms of who actually owns some of the major life insurance companies. So just tell us the story.
10:37 What happened? Sure. I I'm glad you said 30 years ago because a lot of this did start about 30 years ago. They started using these captives in Vermont about 20 years ago. It was after that private equity came in and took control of a group of life and annuity carriers. >> So Apollo bought Athene. >> Apollo bought Athene. >> KKR bought who? Who? Bought the Global Atlantic four insurers. >> Right. Yeah, Brookfield has now bought two life and annuity carriers. The private equity has come in and the difficulty there is that it used to not be allowed for someone who didn't have a good grasp of what life and annuity accounting is about. If we're talking about who knows life insurance accounting, private equity guys, they know it better than the life insurance guys know it.
11:30 >> They're creative with it. They don't know what's what. >> they're creative about it. >> Yes. So, once they come in and take control, it is literally from the inception of taking control. They cause the insurance companies to enter into investment management agreements so that suddenly a private equity crew who's used to gambling, taking high risks, making profits is >> Now in their defense, you know, if you were to sit down with Mark Rowan of Apollo, he would he would argue that well, let's back up for a second.
12:08 Apollo owns Athene. Athene is their captive life insurance company. Apollo generates a tremendous number of private credits which it basically sells to Athene that now owns it. So, from Apollo's perspective, it basically has a captive company to buy its own paper. It does. And now what what Apollo would argue is that they're great underwriters. That when you do a private credit versus a public bond, the spread is higher. So, they're making more money and they would argue that they're not really taking on any more risk other than other than some liquidity risk, but I would argue you're not even really taking on that much more liquidity risk because corporate bonds don't trade that well to begin with anyway.
12:57 >> Sure. So, in their defense, you know, if if if we were you know, putting Mark Rowan on the witness stand, he'd say, "What are you complaining about? All my bonds are still good." What What would you How would you respond to that? And And And And Brookfield would say the same and KKR would say the same. And in in their defense, nothing really has blown up. So, what's your response to that? I agree with most of what you said. Apollo has selected some good investments for Athene to invest in.
13:29 >> Right. But it is not an apparent conflict of interest that the private equity group can cause policy holders to invest in whatever they wanted to invest in. So where you have a conflict there, you have potential for abuse. >> Yes. You don't have arms length transactions. >> I've learned recently that a lot of the more complex internal like investments within the Apollo group and other private equity groups are not as publicly traded, don't have the same sort of ratings, right? So it would be difficult to know for sure how quickly the insurer could sell a given investment because it it was came from an internal private equity group rather than public.
14:21 >> not they're not selling them. These are private credits. So I mean they would say we're not this is this is long-term stuff. We are taking They They would say admit upfront, we are taking liquidity risk in exchange for a higher yield. I have a great answer for that. My real concern recently Athene very significantly ratcheted up the amount of deposit type contracts they've issued. In other words >> that mean? >> It means that they are borrowing money short-term and using the proceeds to invest long-term.
14:59 >> Uh okay. There is a mismatch obviously there. >> It's duration mismatch. But where they used to be 12 billion, 15 billion, they're suddenly 37.9 billion. Of deposits? >> Of deposit type contracts that the institutional investors, you know, we're talking the Vanguards and big pension plans of the world. >> money from them. >> And if they said, of this I'm certain, if the head of Vanguard called Mark Rowan and said, we've got 3 billion parked with you. You know, it's a funding agreement, they call it. Used to know them as GICs, guaranteed interest contracts, right?
15:41 >> So, it I want you to get me my money back. Rowan might say to himself, gosh, I hate to give up all this liquidity because we have policy holders that'll be counting on it. But I'm afraid if he said no, and Vanguard talks to the other investors and says, I can't get my cash back, then you might start a domino chain, right? The problem is they don't have nearly enough short-term investments to match that 37 billion in short-term debt.
16:18 >> I see. Okay. So, they would have to sell some long-term, um, not very publicly mark-to-market, that sort of thing. Fair. I mean, a lot of what I want to get to to reinsurance now to because I think that's where the the leverage is. It is. But, you know, part of the issue as to you know what This is one thing I learned from the great financial crisis. Human beings do very badly with crises that unfold very slowly.
16:48 Ooh. Excellent point. It's like, you know, here you are, you're complaining about this stuff, and the private equity guys are going to would just say, "Dude, you've been talking about this for years and nothing's happened." >> Yep. And they're right, nothing's happened. Now, one of the reasons why nothing's happened, it's been a a bull market for in credit for over 10 years. Spreads are still at all-time heights. >> You can lever yourself up to your eyeballs as long as no nothing bad happens. Exactly. So nothing bad has happened yet, but if you are way over leveraged like we learned from the great financial crisis and something bad happens, then you're screwed.
17:28 So let's turn we'll come back to the credit in a bit. Let's talk about how does this industry leverage itself? How hidden is that leverage? Let's talk about Let's talk about what reinsurance is and what what third-party reinsurance is versus captive reinsurance. Great question. An insurance company should never write more business than it can afford to write, right? They need to have a backbone, an infrastructure, right? To handle putting a lot of new business on the books. Cuz you understand new business has all these high commissions to the agents, upfront underwriting costs. So there's a lot of expensive things that have to happen in that first year. Right.
18:14 In a typical Life insurance writes policies at a loss because they pay huge commissions generally to insurance brokers. Could be over 10%. So day one, they're in the hole. That's what you're saying. Correct. And we hope that we'll begin to make profits usually by the end of the third year on forward. >> the money, they invest it, they generally invest it in bonds, and over time they make money. That's right. So that they can pay people.
18:43 The first thing my mentor, I learned so much from the mentor that taught me as I was training as an examiner. He taught me, you know, Tom, an insurance company can never write itself out of a hole. So if an insurance company's under stress, the worst thing they can do is say, we need to sell a bunch of business, right? To get cash in. So if you want to sell more business than you can really afford, it's pretty simple.
19:13 The industry is doing it every day. As fast as business comes in, they're offloading it not to independent reinsurers >> let before we even get to that, just explain in the when things were totally legitimate how a reinsurance deal would work with a with a with a third party. Sure. Cuz cuz only if we can understand what was legitimate, can we understand what is illegitimate? So, let's go back. You're a life insurance company. You want to offload risk.
19:44 Who do you do it with? How do you do it? Okay, excellent. So, a life insurer would turn to a reinsurer an independent reinsurer that has its own money. >> Most of whom were usually in Bermuda. Uh well, actually originally in Germany, there were a lot of really big life Yeah, Munich Re. There's a lot of really strong company reinsurers that have been around centuries as opposed to decades, right? So, you would reach out to them and say can I transfer to you seed c e d e? Can I transfer to you 5 billion in liabilities? And why would you want to do that? Because if you free up some of those liabilities in reality it can free you up to either pay stockholder dividends or write more business.
20:37 >> So, you're getting you would be getting more cash up front is basically what would happen. So, when you go to seed the 5 billion, you're supposed to send 5 billion in assets with those liabilities. Now, they might take 4.99 billion because they'll earn some investment income, right? But, it has to be commensurate and that's the number one rule. And it's a third you're negotiating with a third party. So, they want to they want to write a good deal for themselves, too. They don't want to take on 5 billion in liabilities and 3 billion in assets? Who would, right?
21:10 I'll tell you who would. An affiliate. >> Okay, we're going to come to that. Okay. So that's So that's what the life insurance industry used to do. They would They would seed business to a third-party reinsurer. It could be in Europe, it could be in Bermuda. And that's how the industry acted acted forever. Okay, when did that change? Really, I would say about the same time all of the life and annuity carriers began demutualizing, about three decades ago.
21:38 Okay. And soon after they began going for profit, they realized we need to be able to pay stockholder dividends. Well, those have That money has to come out of the pot. And so if you're taking money out of the pot, something's got to be put in its place to fill that hole. If you have a great year every year, that's not a problem, but all companies have years where they have a bad year. The problem is if they had a bad year, they wouldn't be allowed to pay a stockholder dividend.
22:14 >> Right. So what they would do is when they come down to year end, the CEO says to the CFO, "Do we have enough to be able to pay a dividend this year?" He says, "No, you know, we're going to be 2 billion short." Let's do one of our affiliated reinsurance deals. We'll seed 4 billion, but we'll only seed 2 billion in assets. So this is a reinsurance deal that basically life insurance company X does with itself. Basically, what is a a division.
22:46 >> that might be housed in Bermuda. And sometimes it's literally a subsidiary, which is just an you know, it's just It's like an alter ego. You're moving money from one pocket to the other. There's no outside independent entity that's going to have the money when you need it, >> Right. Okay. So, that began mostly with the captive reinsurers in the US. I mentioned Vermont, South Carolina. They were the first two states to really push this.
23:16 And it's totally secret, literally. >> Now, what do you mean by it's secret? You cannot get any financial information, period, from any If you were to reach out to Vermont, even if you were a policy holder, and said, "Hey, my policy's been ceded to your company in Vermont, please send me the balance sheet." They'd say, "We can't." No one can see their financial statements. >> So, you can't see the financial statements of a of a of a captive reinsurer based in Vermont?
23:44 >> Even right here in the US. >> Okay. And they they rode that horse hard. I mean, for the first 10 years, 2001 was when it really started, this US-based captive. >> Mhm. The first year it was 12 billion. Total nationwide, 12 billion was ceded to these captives. In 10 years, it went from 12 billion to 440 billion. >> Wow. Okay. And then I started screaming quite loud, and you know, getting interviewed in industry publications, the New York Times, and others. And I'm I made it clear, we shouldn't be letting these companies be secret.
24:26 Sure enough, they started backing off using the captives, and they started going offshore heavily. And where offshore? Bermuda, Barbados, Cayman Islands are the main the main ones. >> Okay. So, now they're seeding to basically wholly-owned subsidiaries outside the United States. >> Outside the US. So, what happens if an insurance company goes down? >> Mhm. How easy or not easy is it to get paid from an reinsurer in Bermuda or the Cayman Islands? It is a nightmare and I learned the hard way. I've been hired as a forensic accountant to come into a receivership where they had to take a company down here in the US.
25:13 And my job was to determine what are the assets really worth? Is the balance sheet true? The worst part is when they say what what's the reinsurance like? And I say almost all of it is offshore. The attorneys just, you know, grimace because that means extremely long-term and very expensive litigation trying to repatriate those assets. Even though it's owned by the same company. >> Even though it's totally under the same umbrella.
25:45 Totally. You can't get those assets back timely. You've got to get in line. One of my clients had to go through The Hague. You know, depending on which country, if it's Cayman Islands, they required them to get in line at The Hague just to try to get money back. And remember, this is not their money. This is our policy holders' money here in the US. Why should we even let the money leave? I don't understand that and it's not transparent.
26:17 You understand in the US you have to use statutory accounting. You you want it to be solvency based. Is this company strong? Will they be strong 75 years from now? GAAP, generally accepted accounting principles, looks at earnings and profits patterns over time for investors. Love GAAP. If you're an investor, GAAP's what you want to to read. But if you're a contract holder, a policy holder, an annuitant in today's >> It's a It's a difference basically between GAAP accounting and statutory accounting. It's a difference like between GAAP and cash. Yeah, very much so.
26:55 >> do you really have? Right. So, the problem is when they transfer the liabilities out of the US company, say in Iowa, and they cede 10 billion to the affiliate offshore, they subtract the whole 10 billion here in the US. But down there, they use GAAP. They don't use SAP. So, down there, the auditors say, "Oh, you can defer all those commissions, even though the commissions have been paid and the money's long gone."
27:30 >> Mhm. They get to spread it out over 25 years. >> I see. That deferred acquisition cost is monstrous. So, you end up >> [snorts] >> significantly underfunding future death claims. >> Let's press to that for a second. So, 2001 for 10 years, the the for-profit life insurance industry did this. But then private equity came in. Oh, yes. >> And now, let's talk about cuz private equity I think took this to a whole other level. You are exactly right.
28:00 >> only that is that happening, but you are also getting tremendous deals where companies are transferring their pensions from from themselves to private equity, and then private equity's doing reinsurance. Let's talk all about that. What Talk about what how private equity has taken this to another level. Yeah, so when I first learned that private equity had dived in to the industry, I didn't understand that. Because, you know, private equity is private equity and and largely unregulated by the SEC because, remember, the rule was it's your own money, you're wealthy, and you're sophisticated, right? And so, why should we have to protect you?
28:46 But suddenly, private equity is taking control of millions of policy holders premiums. Right. And do playing the same games with them. So, I said, "Oh, this is not going to go well." And it started with Goldman Sachs did some with the Global Atlantic companies, but the biggest move was by Apollo >> Apollo bought Athene. Athene, right? And >> Apollo's the trailblazer here. Everybody has seen what Apollo has done, seen how profitable it has been, and has followed. By the way, interestingly enough, there was a period where Athene was public, Mhm. and the stock did terribly because nobody in the public equity world trusts life insurance accounting.
29:33 >> [laughter] >> So, these companies sell like three to five times earnings. Mhm. And so, because no nobody trusts the accounting, and that's why Apollo bought it back in because they realized they realized that they weren't getting paid to have this entity public. Well, I'm not a goody-goody. You know, I I think the life and annuity industry is crucial to this country. >> Yes. And I champion that industry. And private equity isn't all bad. They're just more aggressive, and it's okay to be more aggressive to a point.
30:05 But I'm seeing trajectories like this, and suddenly almost vertical in all of the categories of risk that were Athene's. >> Like what? Investment concentration. So, a good example is Athene in the last 5 years went from, say, 10 billion in affiliated paper to 40 billion. So, when you say affiliated paper, you mean paper that Apollo itself has originated and gives to Athene. Yes.
30:38 >> As opposed to Athene buying paper from somebody else. >> Somebody else. They're internal IOUs right back and forth, right? The problem is it's so easy because private equity controls the decision-making of the policyholders, the people that look after the policyholders. And so if they say, "Hey, type up another $2 billion note, we owe a $2 billion, and you take $2 billion out in cash or treasuries.
31:11 What I've seen over the last 5 years is a dramatic shift from much more traditional investments that you can get a quote on that have great ratings, you know, true ratings, independent ratings, things that you can count on to very exotic, highly illiquid investments like joint ventures, limited partnerships with affiliates in the Cayman Islands, right? So you mentioned ratings for a second. Let's talk about ratings for a second because because in traditional public bond fixed income world, most of the stuff is rated by Moody's and S&P.
31:57 That's right. Um but I would read in some of the pieces that you sent me that the games that private equity are playing is they're using much smaller rating agencies. So we'll talk about that. What's going on there? I was disturbed to find out fairly recently >> disturbed quite frequently. Well, [laughter] well, I I care. I truly care. And for 41 years I've championed the the policyholder. >> Right. Um and what I'm seeing are small rating agencies that are Like Egan Jones.
32:27 >> Egan Jones is the most publicly recognized right now. I think there's even a criminal investigation. All right. And and they are giving ratings that don't appear to be accurate. What do you mean by that? I've seen investments where not only was the rating did the rate receive an investment grade rating when it shouldn't have, but also it mischaracterized what the investment itself was. Like they said investment grade bond in the US when it was an SPV in Ireland.
33:04 >> Special purpose vehicle in Ireland. In Ireland. Okay. That kind of stuff bothered me, but then when it came out publicly, apparently a very small staff you know, what? 18 or 20 analysts gave out thousands of rating >> ratings and you got to wonder how they were able to do that. >> do. Let's talk about Let's go back to leverage for a second. There's the stated leverage from GAAP and then there are all these deals and there's statutory leverage. How much leverage is is is the do you think the industry really has as opposed to what it's it's GAAP accounting is showing?
33:45 Hard question to answer. It is. I can say that it is very substantial. >> Well, give give us some numbers like like like what? So, if you look at one of the big life insurers that does a lot of offshore reinsurance >> Mhm. they show roughly 200 billion in liabilities. Okay. >> So, that's future death claims and annuity payouts, Okay. 200 billion. But if you dig down, if you dive deep into the financials, and by the way, these annual statements are 7,700 pages.
34:21 >> The statutory statements. >> statements. When you get down to schedule S part three section one where you can see that reinsurance being moved there's a 195 billion having been seated offshore to an affiliate rather than to an independent reinsurer that has its own money. The question is how much of that is money good? 195 billion in assets to cover those liabilities.
34:57 And I begged the the regulators, why don't you just force them to tell you what their assets are? >> regulator. >> Yeah, the state regulators. Because again, they're supposed to protect US policy holders. Just because the promise is somewhere else, it doesn't mean we no longer need to worry about our policy holders. So, if they're not money good, and I'm certain they're not, because when I have been able to see, it's been substantially less than assets and liabilities. When you've been able to get to them? When I and it's only been a few times.
35:33 I give give one example of what the liabilities were and what the assets were. One company had taken reserve credit, meaning we've laid off 7 billion to these three captives of ours. And that implies they'll be able to collect that 7 billion back. In fact, if you know they can't make those payments, you're not supposed to take credit. They shouldn't subtract the liabilities. They subtract the entire seven. I actually get to see those captives annual statements because they were accidentally posted publicly.
36:13 Temporarily, as soon as they realized they'd put them out, they they took them back. But you saw them. I got to see them and it had roughly 200 million with an M in real assets. So, 7 billion liabilities, 200 million in assets. 200 million in assets, the rest were plugged with these things that are contingent. Contingent in They called it an XOL asset. And I knew the second I read what they purported it to be that it can't be carried at any value because it's it's no different from a lottery ticket. If an insurance company buys a lottery ticket and I examine them, I ask, "Has the drawing occurred yet?"
37:00 If they say no, then I say, "Well, expense the $2, right?" But if they can prove it has been drawn and they have the winning ticket, great asset. But it's contingent on that win, right? That they win. Assets under statutory and GAAP can't even be called assets if there is a contingent nature there. >> So, what's the contingent nature of this of this asset? >> XOL assets that perhaps this reinsurer, if they were to pay us something in the future, even though the footnotes say they will not ever pay, right? It's clearly they're trying to plug a hole with something that couldn't be sold.
37:46 You can't take an XOL asset and transfer it to someone. You can't sell it. So, if you had to pay claims, how are you going to sell it to convert it to cash? And I know that's complicated, but it it's an important aspect here. So, when you said earlier that people are starting to listen to you, who's starting to listen to you? The US Senate Banking Committee invited me to present to the chief counsel and his staff. Um that was outstanding. They took copious notes. They listened.
38:17 And and I said, "I hope you know I really do know what I'm talking about. They said that's why we asked you to come share with us. Right after that, I got invited to testify oral and written to the US Department of Labor on these very issues, private equity, too much risk-taking, offshore reinsurance, all the things that I've been concerned about. And then publications have been reaching out to me more, Bloomberg, not just the industry journals, but Financial Times, you know, The problem is the cat's out of the bag.
38:53 It's already happened. You know, I I I I guarantee you that um if you're Let's go back for a second. If we had to summarize your thesis, it's that this industry takes more risk than it used to take. In terms of if it's >> And that's easily correct. >> portfolio, and I think that's the fair statement, but nothing's really blown up yet because we've been in a bull market of credit for a very, very long time.
39:20 And at the same time, because of all these captive reinsurance deals, um the industry's a lot more levered than it appears. Correct. >> And so sounds like the great financial crisis in a in sort of a different format, different uniform, but >> Something you saw. >> same but same concept. >> No doubt. >> And if if and there's always it'll always eventually happen, there's a recession and we get credit blow-ups, the life insurance industry is in big trouble.
39:52 >> Big trouble. >> That's your basic story. But but but the problem is I go back to my point that I said before, human beings deal with glacial crises very bad very badly. So nothing So you're screaming and yelling, but nothing bad has happened. And so, you know, the the people who who you're talking about, the KKR's and the and the the Apollos of the world, will say, listen, you know, I hear what you're saying, but uh we're great underwriters and nothing bad has happened. So go away and until unfortunately until something bad happens, nothing will happen. I do want to say this.
40:31 Several companies have failed recently. A number of them actually. They're not really big ones. They're medium-sized. PHL which used to be Phoenix Life part of the Nassau Group. They failed terribly just a year ago. Okay. And >> were they? I can't remember exactly. The whole is 2 and 1/2 billion. That's small potatoes. More potatoes in this world. But the lesson learned from there is the exact lesson we will learn with the larger ones. In fact, the rehabilitator for PHL in a court filing said "It turns out the whole was much bigger than we anticipated because the commissioner had allowed an XL asset as an asset and upon further review turned out to have no value. And so [clears throat] the whole got bigger without us seeing the whole getting bigger because it was hidden, right?
41:36 The [snorts] exact same activities are happening in the larger companies, but they are able they're sophisticated. You've said that. They're able to delay action longer than a medium-sized company. Yes. >> They have more money to move around and shell games and and they keep doing more and more insurance. >> you were talking about the most sophisticated financial people maybe on planet Earth. No doubt. Now control life insurance companies. Mhm. I mean, there is nobody more sophisticated than Apollo and KKR and and Brookfield.
42:10 No one. There is a solution, though. Okay. I would ask that private equity for all of their reinsurers, they control those reinsurers, they're affiliates. Just have them file the same statutory filing in the US that their US companies >> good luck getting them to do that. Why wouldn't they? >> Because they're not they're not they're not interested in catering to you. Well, because >> people to know what they're doing. It would show that they are not funding >> They're much more levered than you think.
42:43 >> Exactly. They're not fully funded. Right. Uh and I understand and appreciate that. >> And by the way, the people it's interesting the people who um I know sell-side analysts very well. The people who cover Apollo, KKR, Brookfield are not insurance analysts. They have really not much understanding about what goes on in the insurance company. >> I I just learned something important. >> Yeah, the the the analysts who cover life insurance, they're entirely different group of people. Not bad. And you know, they have an entirely different background. They look at things completely differently. You know, when you read reports sell-side analyst reports when Apollo and KKR reports, they talk about what the fee revenue was, what the realizations were. They talk about a theme spread, but they're not digging There isn't I There is not one sell-side analyst who covers Apollo, KKR who even They may know what a statutory filing is, but they've never looked at it.
43:39 >> way. They've never looked at them. I'm afraid you're right, and that's the problem. >> the problem. Let's let's sum it up. Sure. Um I'll let let you have the last word. Just sum up for me what what you what your story is and and what what you think the catalyst is to make bad stuff really happen. In my professional opinion, the biggest threat is lack of transparency. Mhm. You can have the slightest bit of opacity and it be a massive problem.
44:16 What you can't see, what you can't confirm is deadly. And now those amounts are huge. Offshore secret captors in the US, we can't confirm is the money there. But all of the other activities that worry me, borrowing short-term and investing long-term, those have skyrocketed in the last 5 years. Affiliated investments have skyrocketed in the last 5 years. All of the private equity groups are doing basically the same thing with their insurers, taking way more risk with way less transparency.
44:55 And all I'm asking is, look, the statutes exist today to prevent this sort of activity, the secrecy. All we'd have to do is uphold the statutes and we'd see how big the hole is. That's the real message, I think. Tom, thank you very much. >> Thank you so much for having me. And thanks for understanding. >> Oh, well. And it's truly I've been around. >> [laughter] >> All right. Thank you very much. Thank you.
45:25 Well, that was an incredible interview. And let me tell you what my takeaways are. First of all, like I said in the interview, human beings do really badly with crises that unfold really, really slowly. Because as long as nothing really bad happens, everybody figures, "Eh, what's the big deal?" But this is a really big deal. And the problem here is on several fronts. Number one, as private equity has taken over the life insurance industry, they have treated their life insurance divisions as captives, where they are selling their own private credit paper to their life insurance companies.
46:04 And so the risk that the industry is taking is much higher than it used to be when it was just investing in plain vanilla bonds. That's problem one. That problem has not erupted though because we have been living through a massive bull market in credit and as long as that's the case this problem is going to get pushed off. That's problem one. Problem two is that the insurance industry especially in the hands of private equity is transferring much of its risk to captive reinsurers offshore and is using that as a method to increase the leverage that life insurance industry companies have.
46:40 But all that is under the table, you can't see it. So you really don't know how leveraged the life insurance industry really is. The only thing I can guarantee is that it's a hell of a lot more leveraged than it looks. Third thing is that this is an industry from a sell-side analyst perspective that is covered by people who are very good analysts, but who cover investment banks, asset managers, and they cover the alternative asset managers, and the alternative asset managers are Apollo and KKR who own the life insurance companies, but the analysts are not life insurance analysts. And all of the secrets of this industry are in what's called statutory filings. And I guarantee you that the sell-side analysts do not look at the statutory filings of these companies. So no one is really looking at this. Problem number four is that this is an industry that is regulated state by state. And there's a couple of states, five states as our guest showed, that are extremely lenient and that are not forcing this industry to disclose what their real risks are.
47:46 So my conclusion is this is a problem. It's like a slow boiling frog that one day is just going to explode. And the reason why you should all care is that all of you have life insurance policies, you have annuities, and if this industry ever blows up, you may not get paid. And then where will you be? And the regulators are not doing anything here, just like they didn't do anything before the great financial crisis. And I don't expect these regulators to do anything. And the problem is that you know when they're going to do something?
48:19 They'll do something after it blows up, but by then it'll just be too late. >> [music] >> This podcast is for informational purposes only and does not constitute investment advice. The host and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial advisor before making any investment decisions. >> [music]