The Derivative - Blending Insurance and Credit Expertise: How Obra Capital Finds Opportunities in Unique Situations

Episode Date: October 31, 2024

In this episode, Jeff Malec sits down with Peter Polanskyj, Head of Structured Credit at Obra Capital, to delve into the firm's unique approach to investing across the insurance and credit markets. Obra Capital is a $4 billion asset manager with a specialized focus on opportunities at the intersection of insurance and credit. Peter shares insights into the diverse opportunities in this space, which spans longevity investing, reinsurance, structured credit, asset based financing, and more. Peter & Jeff discuss how origination capabilities, structuring expertise, and risk management focus are key to creating value for investors getting into these differentiated markets. During the chat, we also cover the evolving dynamics in the insurance industry, particularly in hurricane ravaged regions like Florida, and the role these kinds of strategies can play in investor portfolios as sources of uncorrelated income and diversification. Time to reinsure your market knowledge – SEND IT! Chapters: 00:00-02:17= Intro 02:18-16:21= A diverse credit platform: from structured products to specialized lending 16:22-33:28= Leveraging expertise across insurance – taking the stress off 33:29-49:43= Obra’s One-stop-shop and layers upon layers 49:44-01:03:50= Talking terms, specialized credit and insurance investing 01:03:51-01:11:40= The Florida insurance market & adopting to evolving market conditions 01:11:41-01:21:14= Longevity insurance & flexible capital Follow along with on LinkedIn with Peter and Obra Capital, also make sure to check out Obra's website for more information! Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Happy Halloween. I think I'm going to go as a frustrated trend follower. I can't believe the bevy of short rate positions I had on. I saw I'm going to go as a frustrated trend follower. I can't believe the bevy of short rate positions I had on. I saw a massive reversal this month with rates shooting

up despite the Fed's first cut in four and a half years. You think the kids will get that one? Anyway, okay, on to the episode where we went outside the normal trend vol future space and talk with a pros pro in the structured credit and insurance space with Peter Polanski of Obra Capital joining us. We get into a lot of good stuff with Peter, including just what all that means, structured credit, insurance, Peter's background, some of the cool deals he's done, and more. And while the terminology, access points, markets, and more are as different as you might expect, the end result is trying to be the same as the other alts folks we have on here, searching for non-correlated returns with a great risk return profile. I think we can all speak that language.

Send it. This episode is brought to you by RCM's Outsource Trading Group. Starting up an ETF and need efficient futures market access? Have a unique options trading strategy that needs the orders to be handled with care? Or just sick of the cost and hassle of running your own trade desk in-house? RCM's 24-6 Outsource Trading Group could be the answer. Letting you upload as many trade execution pain points as needed. Check it out at rcmalts.com slash 24.

Now, back to the show. all right welcome back everyone we're here with peter polanski of obra capital how are you peter hey how are you doing i'm great where are you new york i'm in new york uh in our office in midtown right by Rock Center. All right. You guys always been there or bounced around? Our New York office has always been in this area. We have offices in Vermont, several in Texas, and one in Kansas City. So the firm is kind of spread out, but we in New York have been in this office for a

while now. Vermont seems like the outlier there. There was just one guy who said, I'm not leaving my farm. I want an office in Vermont. We actually have a whole credit team up in Vermont. There was an established credit manager that had a really long history of being up there. And so we figured the team was to get the deal. There was a team up there.

They were together. they were cohesive. We didn't want to mess with it. And so we kind of liked the credit culture and thought it was a good idea to leave them up there. They were close to us here in New York. And so, you know, that's, that is, I think, a decision on our part to keep, to not mess with things that are not broken. Got it. Love it. and so i'm not gonna lie i get excited about hearing all the cool stuff you guys are doing but i my head also spins around

a bit i'm just a old stupid futures trader here so right i don't know a lot of the lingo the acronyms and whatnot um so if you could let's just kind of go up with a 50 000 foot view all right is it insurance is it credit is it insurance? Is it credit? Is it both? Is it structured products? So all those terms kind of get commingled, if you will, in my brain. So let's let you take the floor for a minute and give us the 50,000 foot view of what you guys are,

what you guys are doing, and then we'll dig in from there. Absolutely. I think they're commingled in my mind too. So I'll try to keep it simple. You know, so Oprah Capital is a $4 billion asset manager and it has kind of a variety of vehicles and we put our business kind of essentially in two very big

buckets. One is insurance and one is credit. And so on the insurance side we have largely opportunistic vehicles. So like private equity style funds and hedge funds that focus on two things one is longevity so we invest in products where the returns are driven by longevity and mortality and

I think the way that we prosecute that space a little differently is that we do transactions that are both kind of long and short mortality, if you will. And so that's atypical in this space, I think, or at least we think it's unique. And so that's kind of how we operate in that vertical. We can do reinsurance transactions or we can just buy assets. But the idea is to run a book that is kind of balanced in terms of its exposure.

On the insurance specials SIT side, we have a fund that just basically is a provider of capital to the insurance and financial services industry. So we can lend, we can invest in equity, we can do kind of a variety of transactions. We kind of form agnostic, but it's somehow some way making capital available to insurance or financial services in a variety of ways. And so, again,

that's a newer of the two efforts. Longevity has been around probably since 2009 and the insurance specials since we've been doing it for the better part of probably, you know,

seven years or so. We didn't have a dedicated fund until I joined the firm about three years ago when we launched a dedicated fund. So that dedicated fund has, you fund, we did the first close there, and then we're going to have a second fund coming in that space as well.

And so kind of a good split. But all those kind of strategies are optimistic. They're looking for kind of – You want me to dig into those now and ask questions, or do you want to go through the credit side and then we'll circle back? Maybe I'll go through the credit side and then we can circle back. Yeah. So credit, credit, I think, so if you think about that insurance vertical, it's a highly specialized space. Like you have to under, you know, there's a lot of, there's a lot of regulatory issues. There's a lot of kind of understanding, but even just underlying risk, right? And so,

and so because of that, it's a very kind of specialized asset class and so i think on the credit side we try to take a similar approach the idea there is really to um to touch parts of the market where it requires kind of a relatively sophisticated level of understanding to underwrite them but in markets where um you know maybe the largest institutions in the world won't um won't find them attractive because they're not big enough of opportunities and so we kind of think you need the you know the kind of the world-class level of sophistication to attack these markets, but the market size for those markets isn't big enough where we're competing with the people who have those skill sets as well.

And so I'll just kind of go through the various categories that we have. But the first one is just multi-sector credit where we, where we deploy largely to like structure products, ABS, um, you know, commercial mortgages, um,

you know, other, other forms of structure products, which are generally things that are backed by pools of assets. So the underlying assets could be anything, right. Um, especially in the ABS space, it could be loans to people.

It could be car loans. It could be, you know, solar things. It could be, um,. It could be car loans. It could be solar things. It could be lease payments. It could be royalty payments. But there's another underlying asset that you're then somehow lending against. We do that both in public markets where we can trade securities, but we also do it on the private side where we bilaterally negotiate transactions with people on an individual level. So we take the same kind of underwriting skill set across all those spaces, which, again, requires a decent breadth of capabilities and apply it both to the public markets and private markets in an equal way.

Quick definition there, ABS, asset-backed securities. Yeah, asset-backed securities. Yeah, asset-backed securities. Things like I was saying, could be royalties that are underlying, could be lease payments, could be consumer debts, could be small, medium enterprise debt, could be any kind of asset that has

regular cash flow, you can basically put into these vehicles and then you can try to create a structure around them. It tends to be a very diverse space is the answer. You need to have the flexibility and capability to go look at all these different underlying assets and somehow underwrite them, which is why

again, we think of it as a pretty specialized space because you have to be able to go underwrite a consumer auto loan at the same time as you're looking at royalty payments on pharmaceuticals or something like that. And so that's the biggest category. That's the most broad.

The next couple, institutional credit, we do high-yield loans and high-yield bonds in the form of CLOs. So the specialty thing isn't necessarily the underlying bonds and loans. Those are pretty normal to high-yield companies, but the vehicle in which we do it is a specialized structure. So there, it's like the vehicle we use to invest has structuring around it and has

specialty aspects to it, but that's probably the space where we're the most normal, if you will, where we do the most typical thing. And CLO, collateralized loan obligation. Sorry, collateralized loan obligation. Sorry for the nomenclature. I'm pulling way back to my Series 7 book myself. Yeah, so again, you issue kind of a collateralized loan obligation where you issue different tranches. So you kind of structure up the various liabilities of that fund. And so that is, again, the more special part of it is managing various liabilities of that fund. And so that is, again, the more specialty part of it,

is managing around the rules of that fund that are created by that structure that exists, right? So we can't just go buy whatever loans you want. We have to buy certain credit qualities, certain characteristics. And operating within that rule framework is kind of the specialty part of this space, right? It's not so much, well, the underwriting of the credit is by no means like trivial. That's a more typical activity that you see a lot of asset managers do. The managing it in the form of collateralized loan obligation is kind of what makes it a little bit more unique, I guess, is what I would say. It's a little bit like stock picking, but on their liability side and then putting it into the CLO.

Yeah, exactly. We're picking credits. We're like, that's stocks. Yeah. Exactly. Exactly right. That's exactly right. And so it's like, that's fine.

That's like fairly normal every day. A lot of people do that stuff. But the actual complexity comes in that the vehicle itself is actually complex. Right. And the rules of the road are complex. The next bucket is asset-based opportunistic credit. And so that would be like, again, very similar to the asset-backed securities market, but just not in securities form.

So here you could have a variety of things. Could be consumer finance, could be litigation finance, could be other kind of other assets. So here we have, you know, again, we have some consumer products that we do that are where we like warehouse them or provide financing to the originators of those. We have litigation finance where we finance, you know, kind of the acquisition of claimants for particular lawsuits and other things like that. So it's a very, you can think of it as private credit, but it's private credit where it's not lending to, it's not like the CLO part, you're not lending to corporates.

There's something else, you know, in a simple credit way, you're like, there's some asset there that you're using as collateral that's somehow different. And somehow you're finding a way to get collateral value from that asset, not from the credit quality of the borrower, per se. And asset, is that in air quotes? No, I mean, it's not like you can't go repossess it. It's more of a revenue stream or something like that. I mean, yeah, a lot of times, yes, they're financial assets.

So like in litigation finance, for example, that's entirely a financial asset. But in things like auto finance, if you're providing a warehouse to a subprime auto lender, for example, we have one of those house, right? Then while it's a loan, ultimately the first piece of collateral, the ultimate piece of collateral is actually a car, right? Then, you know, while it's a loan, ultimately, the first piece of collateral,

the ultimate piece of collateral is actually a car, right? There is a, you know, we have some, you know, we bought a book from someone which had a bunch of loans in it, but it also had some autos. It's an actual car, right? So, while the

I don't know if that's defaults and I can get a deal on something cool. That's the first question I asked. I was like, hey, what kind of cars are there in that portfolio? But I think like, yeah, but normally it's some kind of financial asset, but normally underlying it,

there can be an actual physical asset. That again was the original source of value that's being lent against. So it can go both ways, right? But I think the big thing there is you're not just relying on the credit quality of the borrower, right? You're relying on something else, whether it be some receivable payment they own, which would be a financial asset, or some hard asset that they actually have.

But you're somehow, again, you're normally designing the structure around the kind of cash flow characteristics of those assets. So if it has, you know, it's like, let's just say it's a car loan that amortizes down, right, like a mortgage, then you would structure your deal around those kind of cash flows as opposed to like, you know, something that was more just paid interest or something like that, right? And so you have a different structure if that were the case. And so that's probably where there's the most unique. Here's where there's a lot of unique structuring going on. The last category is real estate credit. And there we focus on transitional loans, like relatively short-term loans for situations where there's a sponsor

who's going to make some change to the property. And it's normally on habitational or multifamily or mixed-use properties. So there's a rental building that's near a college campus that is not currently being leased to students. The sponsor wants to improve it and then rent it to students. and they think they can get a better rent outcome if they do that and so we would provide them financing that allows them to do that again here. That financing would be

structured so we might say something like we will lend you X dollars on day one and then after you've invested some more money in the property we'll lend you more money because you've invested more assets and more money into the property and after you meet some rental hurdle, we might lend you a little more to finish off all the improvements you want to do. And so again, there

you can hear it's not just, you don't just make a loan and then kind of wait. You make a loan and there's like a follow on assessment of the risk, there's follow on monitoring of what's going on. And I think, again, kind of broadly fits with the other things we do and that's fairly engaged, right? You're not just kind of writing a check and going home. You kind of write a check. I'm looking for the best.

Yeah, exactly. You're here, you're kind of like, in almost all these products, there's some level of engagement post-funding, right? Where you're either monitoring or tracking or assessing and, you know, making more capital available or making less capital available, depending on what you're seeing, but there's some kind of active, active investment process going on post the initial funding. It's almost like, maybe we'll coin a new term, partnership credit.

Yeah, sure. Yeah. That's not a bad way of credit maybe that's yeah yeah involved let's get into your background because how do you keep this all straight in your head like i'm saying right like all these all these verticals um i guess you're saying like they all at the end of the day kind of look like the same thing and you're just accessing them through these different channels um yeah so so i'll give my back i guess i'll tell you how we think about it but i'm my background is i i started out life um in the 90s i was a property cashier actuary so i was an actuary in the insurance space um and then where i worked on

i worked in what's called um an actuary like dreaming of becoming a hedge fund manager or how did you let's get into that right i i was a math major and that's probably a one of one of actuaries that actually move up the chain yeah i mean we uh i was a math major and then you know it was like what are you doing you're a math major and i was a pure i was pure math it wasn't applied it was like go prove this statement right and so you like take a bunch of you know like you know x to the t and x to the n and then prove something um and so what do you do with that it was you become an actuary so that's that's kind of where i went um and so i started doing that actually i worked on um i was i was actually, in my role, I worked on a catastrophe bond, which is one of the ways in which insurance crosses over to capital markets.

One of the early ways, actually, that insurance crossed over to capital markets. And so I worked on that from the insurance side. And I kind of said to myself, if you could do this, which is really hard to analyze how likely are hurricanes and earthquakes and all that stuff. If you can do that and you can turn that into a bond, there must be a bunch of other things that are going on that look like this and require the math skills that I had. And so that's when I kind of headed toward business

school and then to Morgan Stanley. And so I's when I kind of headed toward business school and then to Morgan Stanley. And so I met Morgan Stanley. Then I ended up going to Columbia for business school. And then I joined Morgan Stanley Strategist. But I was focused on credit derivatives, structure credit, and things like that. So I sat with people who were very kind of fundamentally driven, like the high yield train desk is a very fundamental place where people look at companies and say, like, I think this company

can pay this back or not. But I was like a quantity guy in that space. And so it was kind of this mixed world of fundamental like credit work and then applying it, you know, kind of in derivatives fashion, right?

So using the tools of the derivatives world to do things in that space. Based off their default rates and things of that nature? Yeah, I think based on fundamental views, you can say like, hey, the market by its pricing thinks X, right? They think it's a 20% chance of default, but you guys are telling me it's a 10% chance. default, but you guys are telling me it's a 10% chance.

So you can position that, right? You can position that, right? It might be some complex strategy to isolate that difference, but you can somehow position it. I think in equities, right, in futures and all that stuff, or sorry, in commodities and in Forex and all these things, like those, those option strategies are well, well understood, well defined. They've been doing them for, you know, whatever, 55, you know, 50, 60, 70 years or longer than that. Um, and credit, this stuff didn't, you know, it wasn't, it wasn't that trafficked in. Right. And so the idea that you could trade like a, you know,

a constant three year maturity credit instrument that didn't exist until kind of the, until the two thousands. Right. Cause you would always, you have a bond, you buy a particular bond, that has its terms, it has a maturity, it has a coupon, that's different than buying a stock, right? Because a stock is fungible with every other stock. That particular bond, there might be 15 bonds in the capital structure and they all look different. And so the idea that creditors was the first place where you could actually kind of generically trade the credit of a company. And so then all these kind of derivative strategies were built up around that.

And so that's what I worked on in the 2000s. Just a quick interjection there. Do you think if it was so new and people were rushing into it in the early 2000s, like that's what became that caused 08? Like too much complexity too fast or no i mean i would like i think the the you know what if you look at a lot of this like silos for example in it through um and a lot of the kind of round call first order type situations they all they all worked like the best performing silos ever were the ones done right before the crisis right because the managers could reinvest in cheap assets and create a bunch of value and so they like they generally worked when it was i think what you know for my mind what drove that out

what drove a lot of that was when you did it on like second order things you took a you know you took like a derivative of a derivative, right? That's where I think you ended the problems, right? That's where you had problems. I think all the, like, the first order stuff generally performed as it should, right, in the market environment with the outcome you had. Like, so, hey,

like, if you did a mortgage securitization and a bunch of mortgages defaulted, yeah, the guy's the bottom of the stack. They're supposed to feel some pain. Yeah, that's supposed to happen, right? And then, so Iages defaulted, yeah, the guy's the bottom of the stack. They're supposed to feel the pain. Yeah, that's supposed to happen, right? And then so I think that all like functioned, but I think it was when you added like extra layers. And leverage, yeah.

Yeah, and that's when you really had problems. But like a lot of products, you kind of did what they were supposed to do. Obviously, you had economic problems, but the things reacted the way you would have expected them to in most cases. And then there are some exceptions to that, obviously. And so I think it's not just that that would be the cause.

I think it's kind of like when you start doing things that are hard for people to actually underwrite, that's where you kind of end up with problems. So anyway, I was there from 2002 to 2008. And in 2008, I joined Oxif. And I was responsible for investing in a lot of those products as they were trading very cheaply. And so we saw a lot of them come back because a lot of them ended up fundamentally performing. And so you had to dig in deep and do a lot of analysis to get that.

And so I was doing that. And in 2012, we launched the CLO Manager. I was involved in the launch of that and worked very closely with the team there. I was ultimately running that business when I left to join Obra. And so you can hear from my background, that was a, you know, fundamentally like you're buying individual loans in that business when I left to join Ogra. You can hear from my background, that was a fundamentally like you're buying individual loans in that business. Again, where the vehicles are kind of complex.

That was the fundamental credit kind of responsibility. You can hear that I was doing insurance. I had quantitative credits and then fundamental credit as well. I kind of touch all these markets. And so that's how Blair Wallace, the CEO here,

when we were talking about joining, he was like, look, we do all these things that you've done. And so he thought it was a good fit. And I agree. And I think obviously nobody can be a master of everything right like you have to have your special specialties but i think um you know the team here um you know people people touch the various parts of this so we have like you know people who are bankers but who focus on insurance as a banker or you know and so they touch both sides of the

equation right or other things like that where you're kind of multifaceted in your experience. And I think that proves to be super helpful because, you know, a lot of our, you know, a lot of the things we do are, they're multidimensional, right? And so, for example, in longevity, you care about the pay or you care about how good the quality of the insurance company is, right? That's one of your risks. They just don't pay you, right? And so, you know, like you care about how good that company is. insurance company is, right? That's one of your risks. They just don't pay you, right? And so you care about how good that company is.

In most cases, it's very high quality. And you also care about when these payments are going to happen. And so underwriting the credit quality of the counterparty that's going to pay you and underwriting when these cash flows are going to happen are like two very disparate skill sets, right? And so no one's going to be able to master both of them, but we have members of our team who specialize on one side and have seen the other, right? And so they know kind of where to bring the other, you know, the other, the other specialist in or how to loop it in and how to kind of, you know, how to, how to bring in the right parts of the firm when necessary. And I think that's kind of the key thing here is that you have to be able to do, in our special business, it's the same thing.

Our special business, we often describe it as we live in the giant cavern between insurance and credit. And what we mean by that is insurance people generally hate counterparty risk. They hate like, or they're not allowed to take it for regulatory. So if you are an insurance company and you have a big deductible to some individual company,

they will say you have to collateral... Your regulator will tell you you need to collateralize that. You can't just trust that that company will pay you those deductible amounts. And on the credit side... Because then you can't pay the mom and pops, right? The deductible, those deductible amounts. And on the credit side- Because then you can't pay the mom and pops, right? Yeah, exactly. That's right. Your job isn't to take credit risk. It's to take insurance risk.

And so you're not supposed to do that. And they don't, right? So most risk takers on that side, that's kind of where the line is. They just go, oh, I don't do counterparty credit risk, right? That's not our job. And then the credit people will just go, oh, I don't do counterparty credit risk. That's not our job. And then the credit people will say, look, I want to look at EBITDA and company financials and all these fundamental financial characteristics. I don't want to talk to you about how likely a policy is to lapse if that's the collateral I'm taking. Or are people going to decide to cancel their policies? collapse if that's the like collateral i'm taking or you know is this gonna be our policies are people going to decide to cancel their policies or will they do other things or will you know or

will you know medical insurance be outstanding for six months versus three years like those are things that were that are different toolkits underwrite so at a place like john i don't even know who does but but i'm gonna John Hancock popped in my brain. Those are basically two different floors. There's the insurance floor. There's the credit floor. They don't meet for lunch. I don't know, but I guess I think you're right.

Consumptually, yeah, I agree with you. I think we try to bring that together is really what we try to do. I think that's a special sauce because there isn't a lot of competition in that market where there's two things where you have both things together, because there's plenty of to do without having to like, look at the combined things. We think there are niches where if you, if you're willing to look at the combined things, there's great value, right? And we think the value is in that complexity, right? You can do things that are very high quality credit risk and exist because of, you know, for a variety of reasons that are kind of structural to the industry.

And, you know, that thing, it might not be, you know, it's not going to return 40%. It might return 10%, but that's a really good 10%, right? And so, you know, because maybe the counterparty trades at 6 or 5 or something like that, you know, and so we think there's a lot of value to be had in that, and that's what we do. Like, the name OBRA, right, it's like loosely translated to work,

and I think the idea behind that when we took that name was, yeah, we want to do the hard work, right? We'll, like, go dig, go find the value, and so we tend to see these, all these, and name was, yeah, we're going to do the hard work. We'll go dig, go find the value. We tend to see all these, especially insurance, there's a lot of, if there's an insurance situation that's,

I'm not going to say stress, let's say it's stress. There aren't a lot of people who look at those situations. Most of the insurance industry does not want to deal with some kind of financial stress. They believe they're going to go miles away from it. We see lots of those because. Most of the insurance industry does not want to deal with some kind of financial stress. They're going to go miles away from it. We see lots of those

because we're precisely the guys who will roll up our sleeves and dig and see if there's a way to make value there somehow. But you're not a distressed debt hedge fund. That's where it gets confusing. How does an insurance get stressed?

It could be as simple as right now in florida there's probably insurance that are stressed from the hurricanes right and it doesn't mean that they're not you know like it's not distress right it's just that they have a lot of there might be a lot of claims coming right you know and so like how do you manage that how do you deal with that process can you do things around the edges that help that process? If they have a billion-dollar pool and they're going to get $950 million of it called, they're stressed. Getting $2 billion called is distressed. Yeah, there might be a liquidity problem issue or something like that.

I guess I'm not trying to say that that's coming. I'm just saying like, that's the kind of thing. If you have a big event and you have to pay out and people have money invested, they may, they may look for a solution to, to, to deal with that.

And that's kind of where we get phone calls. Right. And so, and then there's this regular way stuff too, where it is, Hey, I want to, you know,

I'd rather, I have a bunch of, you know, kind of risk on in some part of the market i think this other part's super interesting so can i find a way to kind of lighten my capital load and miss the part that i find most interesting and move to that you know super interesting part over there like can i grow over there somehow and for that they might need outside capital and or they might need a partner to take some of that risk or a variety of things and so i think there's a kind of

it's always happening, but there's always uniqueness, and it's normally bilaterally negotiated, and you're trying to solve some kind of problem or goal on behalf

of our counterparties. Again, the way we think of the world is, the distress world, for example, is very much like, hey, there's a fixed pie, right? And I want to get as much of the pie as I can, right? And the way we behave with all our counterparties is kind of the opposite.

Can we make the pie bigger, right? Is there a way for us both to win? And that's how we approach it. I think that's why our counterparties kind of, once we do a transaction, we're hopeful that they'll come back and do another one because, again, it's fairly specialized. There aren't a lot of people out there who do it. And also because we created value for ourselves, but we also created value for our counterparty. And then I'll circle back for a minute, right?

You're saying you have this teams doing all this. How big is the team? How are they segmented? We don't have to get too in the nitty gritty there, but the team has to be extremely talented to be able to figure all this out. The longevity team, you know, again, we have like, that's a very big team. We have servicing, which is, I think, over 20 people. We have probably about the same number working on between portfolio management, underwriting,

origination, things like that on that team. And then there's obviously a few senior folks on the PM side. Special fits team is about six people just on doing the bilateral transactions. Multi-sector credit team is similar size. Our institutional credit team has roughly 10 analysts on it currently and several PMs. And then on the asset base,

asset base really falls into the, you know, our central product team. So the private and the public are done by the same people, right? So we have the, and then the real estate team, again, I think,

um, low double digits, like, you know, more than 10 folks on that team working on origination legal and all that stuff. And so, um,

yeah, it takes body. It takes bodies, right? It's 150 ish plus, but yeah, I don't, um,

I'm not, someone add that up. Yeah. Which don't answer this, but which is your favorite team? Oh, I can't answer that. But that's like the best part of my job, actually, is that I get to do on one day of working on a transaction where we're signing a 200-page document and wiring money to someone. And on the next day, I working on something where we're trading, you know,

bond that's like, you know, you traded, you're done, right. You bought it, you got a trade ticket that clears. And if those are very different activities,

right. And we kind of do those and everything in between. And for me, that's the fun part. The fun part is the diversity of things we do, not just in the underlying risks, but also in like the nature of the transactions, right?

So things are like, you work on them for a year, or you work on a structure for a year, you finally get it home. You're like, sign a document. It's like a bit, it's a,

it's a great moment. And then other things, you know, you're, you're like, you know, you're trading them with some regularity, right?

And it's, it's not like a two year process to structure it up, right? The structure is pretty well known and you can you can transact in the in the product and so to me that's the fun part is that diversity of of stuff right both on how you're doing it and what you're doing yeah and it keeps you keeps you sharp right i guess if you guys weren't doing this, who else is doing it? Where is this happening elsewhere? Inside investment banks, inside Goldman, inside hedge funds, all the above?

I think there's very few places where all of this is happening in one place. There's competitors in all these markets, right? And I think as you go into the credit, as you go into the more, I'll describe it as like QSIP standard products, right? Where you go into the more things that are syndicated. There's a bunch of banks and a bunch of asset management shops doing that stuff. And again, I think we try to be differentiated in the way we approach it. Like, for example, we have some products which are, they're basically like an alo, the,

the, the sandbox you have is all the kind of the entire box space. Right. So you say, Hey, you know, allocate to us. We will figure out in this little part of the market,

what is the most interesting investment, but give us the freedom to do that. I think a lot of the competing products in that space are super specific to like, Oh, I will buy, you know, only CLOs, only AAA CLOs. And like, I will buy, you know, only CLOs,

only AAA CLOs. And like, I think we want to be more thoughtful than say, hey, we want to, like some days that's not going to be the most interesting thing out there. And we want to like have flexibility to be able to allocate within, you know, given a certain credit quality within the various markets. And so we design our products to be a little bit more kind of allocator driven, not like, Hey, I want to access to this one very specific investment. Right. And so that's just kind of, um, like a beta versus an alpha or even outside of alpha. It's like, here's what that client that allocator is looking for. Yeah. I think, I think it's like, yeah, it's like almost,

I mean, I guess it would be, it has to be alpha, but like exactly right. Like we're not trying to be beta on anything, right. We want to be alpha everywhere as much as we can. And so, you know, do this thing that's slightly different, but again, give us the freedom to kind of operate in this space, right? And, but you'll get this instead of buying, you know, IG Cooper bonds, you can buy all these other things that are also IG, right? Investment grade, right? And they're not Cooper bonds, but we think the returns are,

the risk reward is way more attractive than that, right? And that's basically the pitch for those products. I think, so there we compete with like, you know, there's an entire universe of people, but I think we try to design a product that's more, that is relatively unique. So if you look at the products that look exactly like ours,

there's like, you know, you can have them on one hand, right? And so I think we're trying to be different by in that way i think in you know so same thing like you know yeah and i asked the question partly was less who competes with you and like where if i wanted all these one each of these pieces it's all at a different place it seems like right correct i think that's right and so like you get yeah can you go if i was trying to order it a la carte i'd have to go for to a hedge fund to get that piece i'd have to go to a hedge fund to get that piece.

I'd have to go to a bank to get this other piece. I'd have to go private credit somewhere, some other thing. Yeah, and I think, again, so on the credit side, I think there's plenty of capable players out there. On the insurance side, I think, particularly in the longevity space, I think I would observe that there's a limited number of managers that have scale. There are some, but again, if I count them on one hand, that actually have scale in these spaces. There's lots of other competitors that we think of that are much, much smaller. They may have $20 million a year or something. There's this kind of dual equilibrium of a small amount of large players and many tiny players. And I think we try to be the, you know,

we try to have the most, the most complete offering there, meaning we can originate, we can service, we can underwrite, we can, you know, we can trade, we can, we can from, from, you know, from the day the assets created to the day it's gone, we can, we can do everything in that everything in that space. Lots of our large competitors, they outsource significant portions of that. We don't really

outsource anything. And our small competitors don't even have the capabilities to do anything like servicing, for example, so that obviously has to be outsourced as well. So I think we try to do as much in-house and I think the why on that is because for example, servicing, if you do it in-house. And I think, and just like the why on that is because, like, for example, servicing, if you do it in-house,

it's not a more profit business, right? We're not trying to like contact, you know, do the servicing at the cheapest possible cost and the cheapest possible effort. Like if we do servicing and that prevents us from kind of doing a bad trade, you know, that savings or the P&L that we're going to get from that, what happened there,

is probably paying for that whole servicing operation. Servicing is like processing payments and telling people they owe this money. Yeah, all the details, right? All the little details of these assets that you have to look at. And again, it's not a profit center for us. It's a cost center.

So their job is to help us make sure we don't make mistakes, not to process as much as possible with a little bit of that. Or do you get the intel of like, hey, these payments are starting to lag behind or this is not starting to look good. Yeah, that's exactly right.

And so like, so having that internally is, I think we think a differentiator, right? And so we try to, you know, we try to do that as much as possible, like kind of, you know, be as close to the assets as you can be, because there's like information there, there's, you know, indicators of what's happening or the way things are going. And you can be respond. And again, if you're hands on, then you can respond to that, right? You can, you can, you can, you know, tweak transactions, change things, like, you know, again, in a constructive way, such that you're like, you know, you end up having a hopefully a better investment than if you sat there and did nothing, right? And so I think we're very,

that's a very... Also sounds way better on a due diligence call. We're much closer to the asset, right? We're as close to the assets as we can be. It sounds better than like, well, we don't touch the other. It's a 10-foot pole and we have no idea what's going on over there. Yeah, we hope so. We hope so, right? And then are you guys actively out there searching for these or are

they brought to you by third parties or a little bit of both how does that work of how you kind of fall into might be the wrong term but how you discover these opportunities uh yes is the answer right yes but like the specials this is a good example so the specials group um you know before like you know before i joined the firm um what was a very insurance channel driven originator so like they had a bunch of touches points on the insurance side of the business you know you talk to those like that whole ecosystem of people um and then kind of when i joined what i what what what i brought um and then some of the others who joined and sort of bought is like a capital market side, right?

So sometimes things are being banked, right? I mean, there are things that happen via insurance channels, and there's other things where it's like, oh, there's a financial seller here or a financial company wants to do something, and it's being banked by a bank, not by an insurance broker, right? And so we see other kinds of originations, again, with risk that's not crazily different than what we're talking about on the insurance side, coming through both channels. And so I think we strive to actually... That's kind of a point of,

for us, a point of differentiation because we're trying to... We don't care where it comes from, we just want to see it. And so touch as many of these parts of the to, you know, like if we don't care where it comes from, right? We just want to see it. And so like touch as many of these parts of the market as you can. And again, you'll be in the flow, right? So then once you're in the flow, you get, you know, then things kind of also, you're doing outreach,

but once people recognize that you're involved in the space, then you see calls coming the other way too, right? And you've got to be careful. Like when I get emails or a guy calls up and's like hey i've got this great deal i'm like by the time it got to me you probably ran out of everyone good do you have to be careful of that like if the bank or whoever's bringing it to you like yeah my natural reaction is like put up my guard a little like well if you're trying to get rid of this what's wrong with it yeah so i would say on the on the for example the reinsurance side right like um there's a lots of big global gigantic reinsurers out there who can

you know um look at look at the risk and decide that they don't want it and and like yeah you worry about adverse selection right yeah and so like we the way we try to approach that is a couple different ways one um is we try to do kind of um what i call like diversified or whole cap transactions where you take a little sliver of a bunch of different risks and so you're you're diversifying your exposure on the way in and so that means you can't massively outperform but what it means is also that like the kind of the outcomes are relatively hemmed in because you would need you know a bunch of things to happen the bad way in 25 different businesses for the whole thing to actually go the wrong way in scale. And that's a lot harder to do than if you're just doing it for one of those businesses.

So we try to diversify in the transactions. And then I think the other part of it is, you know, a lot of times, there'll be, there's other, other factors. So it's like, it's either speed, right?

So while there's lots of large insurers out there, they are generally not fast moving. And so if there's a tight deadline or something like that, we can be responsive when those institutions with their processes really can't be. And so that's one. It's an easy, quick, sorry, quickly, it's an easy definition for reinsurance.

Just it's something the insurance company doesn't want or can't handle on their balance sheet. And if they're coming to you and saying, hey, I've got whatever, 200 million over what I want. If you want to buy it, you're going to reinsure it. Correct. They might have too much risk for their own own own liking and they'll find partners capital partners who will who will share that risk with them that's what reinsurance basically is right

you're sharing risk with it what i'm saying is any deal that's brought to you by an insurance company reinsurance or not necessarily not necessarily but like you know again um the name is almost doesn't matter, right? It's an insurance contract for an insurance company. So like,

all it's changing is who the counterparty is, right? So it's like another form of insurance. And so, but what I was going to say

is the other way that it comes to us is that it's not fully baked, right? There's, there's a, there's a,

you know, there's a, there's a goal that someone's a there's a goal someone's trying to achieve they haven't like fully resolved how they're going to achieve it and these are the ones that take longer right but these are the ones where we also get a lot of kind of reputational capital out of them where you work with them jointly on like creating the way you get home right and it has to work for us. It has to work for them. And,

but you're having a dialogue. It's not, you're, you know, someone's coming to you with a, here's the like thing we want to do. Do you want to do this or not? Yeah.

Yeah. I think more often than not, we do the other thing, which is, Oh, here's the issue. This is kind of what we were thinking. And then there'll be a iterative process with the counterparty that goes on

for, you know, three to six months or something. And, and you come out of that with a relatively unique solution. And again, which we hope is replicable with other counterparties, but it's worth it if we just do it with them. But that's how we get basically repeat business. Because if you go through that process with someone and you came up with a good answer and they're happy and you're happy and you're happy next time they're like how do we figure this out call peter they call it they probably call us yeah so that's what we really try to do um but you know that's not those aren't

always those are those are you know those happen not not as regularly as we would like right and so um and so there's there's all the other stuff that you get through normal channels as well and i think even there though you know we't just, again, it's rare that we like, again, liquid markets aside, it's rare that we like to take a transaction and accept it. You're always somehow negotiating some parts of it with the counterparty to achieve our goals. So even if we're in a, let's say it's either being brokered or banked or whatever you want to call it, transaction, there's normally back and forth

about like what's acceptable to us if we want to participate. And again, and oftentimes, even if it's being, you know, like distributed to multiple investors, it might be, you know, a small number of multiple investors. And so you have the, you have the ability to actually make those kinds of comments and get those kinds of changes. And, you be an iterative process there too. And so again, the structuring, the backend structuring of these risks is a part of the... In our minds, right? If I can forget about what I'm making in return, but if I can hem in the risk, that's just as valuable as getting better return. Yeah. Right. And so a lot of times we're focused on the return is fine,

but can we make the risk way better for us or somehow defensive for us? And that's where we end up spending a lot of time because you can accomplish that. Then, you know, the return is that much more attractive because on a risk adjustment basis, it just looks better.

Right. And so. Is that twofold with both those efforts, the underwriting efforts, basically, and then let's not just have one big, huge, special situation. Let's do many of them. whether you like that risk or not. And then there's the structuring on the back end, which is, can I make it defensive? Can I make it somehow more appropriate or better risk for my LPs or our investors in some way? And so we view it as there's two processes. There's the underwriting of the risk and on the way in, and then there's the structuring of it on the back end where we try to

make it better. Robert Leonard Which could be something as simple as we're first on the waterfall or last or however you look at it. Yeah, it could be little things. We have a lot of transactions where the protections are actually not inside the four corners of the document. For example, we've taken someone's rights in a contract they had with someone if they failed to do something as collateral. And the reason we did that was because the person they had a contract,

the company they had a contract with was a very high-quality counterparty. So if they failed to do what they were supposed to do, that was a way that our thing could underperform. And so we said, well, if we get the right to recourse against that high-quality counterparty, that's like another credit protection, right?

And so it's like a, that's not like out, but it's not in the, it's not, you know, you don't see it as a part of, you know,

it's not going to be like, it's not, you know, it's not part of the actual borrowers, you know, kind of underwrite. You know,

it's a different thing than just underwriting the borrower themselves. It's separate. And by the way, it's two counterparties. So they both have to do kind of bad things for that thing not to work out. That's a joint probability that's obviously better than any one of them doing

the bad thing. I think we try to do lots of things like that where we try to be creative to make the risk better, which again, the return should come with that but but we're as focused on on protecting you know but then at a portfolio level putting 10 of those lower risk together right yeah like what's the upper limit of that just as many as you can get your hands on or some target number yeah i think on the special

side like we think our step fund probably has fund probably has 20 or 30 positions, maybe 40. But that's like, given the scale of funding, given the scale of the opportunities, that's like as much diversification as you can get. And I think that's fine. It's not a broad index kind of situation. It is a special situation. But is a special situation. But I think inside those transactions, though, there is internal diversification.

So lots of times, the performance of those transactions, again, will not be reliant on a single counterparty just doing something. It'll be reliant on whatever, 1,000 insurance contracts or 10,000, you know, policies or something like that. So you need, you'd have to have like a kind of, you know, a larger systemic thing happen for there to actually be a performance problem. And so you

have a little bit of internal diversification as well, right? Because the nature of the transactions themselves aren't just like I lent money to some company. They somehow have underlying assets that are not just the credit quality of that counterparty. Layers upon layers. Let's pivot here and talk about either some of these special sits or we can go to a couple of examples of what's going on in special SITs. Or if that's in multi-sector as well. Yeah, sure.

On the special SIT, I think one interesting transaction we've been involved in is we partnered with a provider to provide letters of credit to companies, right? And this is one where there's like additional protections. And so because of the circumstances of the letters of credit to companies, right? And this is one where there's like additional protections. And so because of the circumstances of the letters of credit, we think that a lot of times in bankruptcy, they won't even get drawn. So even if the company files for bankruptcy, right,

there's a large preponderance of instances where the letter of credit won't even get drawn because of the way the court process is handled and because of the allowed things that the bankruptcy court will let the company do. And so that's like this weird outside of the credit. There's no like security, right? But we think even if you file, you're like kind of senior to the first lien terminal

because if they file, the first lien terminal could be haircut. But we're saying our instrument might not even get drawn. And so it's not perfect, right? Because you could have other situations where it will get drawn. But we think there's a large set of instances where it won't be. And so that's all of a sudden a way superior credit instrument,

right? And so we're... But the thing here is I can't go to some bank and buy that, right? It has to be originated. And so we worked for the better part of a year with a partner to originate that product, to work with them on kind of a partnership where they originated it. We're taking the credit risk, and we worked together on underwriting the credit and all those things.

And so just setting the whole thing up took a year, and then it probably took another year just to ramp assets. So we kind of invested two years in this thing. Now, we invested because we hope there's lots and lots more of that to do, but my point there is you have to originate that thing. That's not trivial, right? And so they happen to be in the business where they are close to those processes.

And so that's why we partner with them. But the things that are difficult to originate are another kind of reason, right? Or another place where we tried to be different. Like, oh, it's hard to originate. Let's figure out how we can do that because we think the risk is really good. We'll take that risk.

And so here we did that partnership because of this unique characteristic associated with kind of the context of the letter of credit, right? It has to do with the actual, it's not in the letter, it's not in the documents, right? But it has to do with like who it's presenting to,

who it's actually benefiting and under what circumstances will they actually draw it. And that's all related to kind of, you know, why it exists, right? Again, it's like a, it has nothing to do with the credit quality of the counterparty, right? Well, that's the first thing you look at, but the, the reason we like the structure is because of the like why it exists.

And that's a completely different thing. Right. And so again, I think it's kind of multidimensional in that that way but that's like the special sauce right that's so why it's good because of that and so we'll go you got the uh president kennedy line pinned up somewhere in the office we we do it because it's difficult not because it's what's the i'm butchering the line you know you're right yeah we don't do it because it's easy. We do it because it's hard. I should get that from the office, actually. You have to do it in the Boston accents because it's hard. But that's a good example of that's a more credit-y product.

It's not very insurance-y. But what makes it interesting is because the instrument is something special. There's something unique about how we're doing the risk transfer that somehow differentiate from just going and buying the corporate bond of that company. That's a good example. I would say the other things going on in special assets are

we have loans where we're the collateral. We may lend to, let's say, people who are this will be the insurance thing, but they might be like someone who like a large insurance company pays. Like imagine if you had, you know, pick your gigantic insurance company and they have a broker that works for them and they pay their broker commissions regularly.

Well, you know, that's the, how much those, how those commissions like sustain and how, you know, if you have one, if you have a dollar commission today, what does that mean for how much will you have tomorrow, next year, and the year after that, and the year after that?

That's an actuarial analysis you can kind of do. And so what that means is you can put a value on that potential stream of commissions that, again, requires kind of actuarial science,

but we're going to use it as collateral, right? We're going to say, okay, we can value actuarial science, but we're going to use it as collateral, right? We're going to say, okay, we can value what we think that stream looks like. We think it has some value and we can use that as collateral to lend. But we're lending maybe to an institution that isn't as good as the payor here, right?

So there's a big insurance company paying a little broker, right? And the big insurance company might trade at 5%, right? A structurally junior part of their debt might trade at 5% or 6% or something like that. But they're a very high quality kind of party. So we could take the payable from them as collateral, right? And then, but the borrower here is not that company, right? It's some, their cost of capital

may be 15% or something. And so we can charge them something better than 15, which is why they would do it. And, but we get this, but again here, so we can get,

let's just say it's 12, right? We get a 12% return, but we have collateral that- Which is basically they default, the insurance company

will pay you direct instead of- Yeah, exactly. So we like kind of, that's the hard part will pay you direct instead of the Yeah, exactly. So that's the hard part is how do you structure that? How do you make sure those funds go? How do you even get them on the phone? It seems like the hard part.

But how do you make sure that those commissions go to a place where we have access to them if we need to? That's the detailed structuring that you got to do. And then like registrations and all that stuff involved in that too. Got it. 100%. And I think there, but the fundamental principles, so there's a lot of complexity and noise around that stuff.

But the reality is, what's the thesis? The thesis is really high quality pay or I can take receivables from them. Those things trade like mid-single digits, but I can get paid low double digits to lend with that as collateral. So I'd risk reward mismatched.

And again, the hard part here in that space is making the thing, going in and remitting it. I can't pick up my phone and call my local giant broker dealer and be like, I want to buy that because it doesn't exist, right? You have to go make it. And I think, again, there, that's the hard part there is to some combination of, hey, I'll do this combo of credit and insurance and stuff. And I'll go like, find a way to actually originate it somehow, find a pathway to actually create the asset itself. And so that's another one. And then we've been doing a lot in the reinsurance space as well.

There's a big, like the fundamental picture is, and this is only going to get worse with the recent hurricanes, I think, is that you had a couple of tax fees a couple of years ago. You had a bunch of global insurers say, hey,

we want everybody to kind of co-invest, right? So if we're ready, you reinsurance, we're insuring you, we want you to keep some risk on yourself. And so there's a dearth of capital. Preston Pyshko Yeah. You can't just sign a bunch of hurricane in the Gulf and Florida and resell it all basically. They're saying, no, you have to- Luke Gromen Yeah. Yeah. It keeps up, right? Or I don't want any anymore. and so and we don't really do cat we do mostly um we do mostly like auto liability

general liability things like that um and and so but there's a ton of capital for all those things right and so um and so what we can do is we can go in and as an investor we can be more discreet in our investment so if you're an insurance company, you write an insurance policy and you don't care if you pay, I mean, you'll be around, you'll be like an operating company, right? And so you're around to pay claims, right? Whether they were initiated last year or two years ago or this year, that's like, you're not as discreet about that. You kind of have a running book all the time. We can go in and say, hey, we will support the writing of insurance for a year. And when the year is over, that investment is over. We may decide to do it again next year, but

we may do that out of a different fund and then they do it out of a different vehicle, but this transaction will only be in respect of- Preston Pyshko, Right. Then you don't have a big short put basically, right? David Steinberg, Yeah. Preston Pysh, MD, MD, MD, MD, MD, MD, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, CREO, don't have a big short put basically, right? Open-ended, always on. Preston Pysh, MD, MD, MD, MD, MD, MD, MD, MD, MD, MD, MD, MD, Yeah. So that's what we're not doing. We're not on the hook. We can choose to remain and do it. And from a commercial perspective, we try to do that. We plan to do it next year, but this particular investor base isn't automatically rolling next year, right? And so that's the unusual thing, right?

Is that in that space, you know, like doing that discreetly and then, you know, designing the mechanics around how you get your capital back and when it comes back and how it relates to when the claims are actually being paid.

Those are the complexities there. And that's the hard part of doing it as an investor, right? Because if you're like an insurance company, you just say, yeah, I'm here. I'll be here. I don't care necessarily about me getting my capital back because that's like an internal budgeting exercise. It's not an actual return of capital for your investment for us. It actually is a return of capital for our investment. And so we really care about all those mechanics. And so that's where we, you know, that space, we try to do that.

And then we try to, you know, kind of to design them so that we have, while properly, you know, collateralizing all the risk, we have,

you know, attractive terms in terms of getting our capital back out, right? Or at least, you know, let's just say

that we expect the returns of these things are attractive for investors. That's been a very busy space. I expect it'll be busier because of this. One, when you have these large losses, there's always implications. And two, the market was already kind of pretty hard. There was already a capital problem.

Not just a capital problem, but a capital. There isn't free capital everywhere for everybody. Yet, the market was pricing. Pricing was going up. And so that demonstrates that there's kind of a shortness of capital. And so normally, these big losses exacerbate that. And so we see it as an ongoing opportunity going forward as well because of the happen of the happenstance what's happening here what do you this is maybe outside your expertise but just given your standing in the insurance space what do you think happens to that gulf of mexico western florida or maybe all of florida insurance market i mean like the florida market's been challenged already like the a giant percentage

of the insurance in florida is already done by the state right and so i think you know they'll be that's not a new problem right so it'll all be like state or even federal yeah you might have more going that way um and by the way anecdotally like the homeowners market has been just hard too like we've heard you know anecdotally heard lots of like indications that you know that large writers are pulling out at various states. And so it feels like there's a, you know, given, I guess, both social inflation and real inflation in terms of repair costs, right? People thought they were not charging enough for the product, and maybe they didn't get the approvals to raise rates as much as they thought they should be able to.

And so you have people pulling back in the space. That just probably is, it certainly doesn't get better, right? After these kind of events. So I think- Just kind of all the obvious stuff. There's nothing crazy, right? Just like, yeah.

And so we normally don't. So a decent part of what we do because of the credit investing expertise Right. Just like, yeah. that might take three years to actually get paid, right? And so that's a longer line of liability. We normally do those because you invest the capital while you're waiting. And so that gives you a buffer against performance, right? Because you invest it, you have a return associated with that investment. And so that gives you kind of a buffer against the insurance side not being exactly what you thought it was going to be. On the things like homeowners,

it's much shorter, right? You have to get the underwriting right because you don't have that time to invest the money, right? You only might have 18 months or so. By law or just expectation? Or how does that work? The laws are different? No, no, no.

Just the product, right? Like if your house gets damaged, right? I need that money. Call your insurance company. You're like, I'm going to If your house gets damaged, call your insurance company and you're like, I'm going to fix my house. That doesn't take three years. I shouldn't take three years. It might take three years for that.

But a regular way, like, hey, whatever, something happened to my house, it got damaged, I want to file a claim. That takes weeks or maybe months, not years. What happened?

Let's send someone out to see what's going on. Exactly. Just by the product, it's shorter tailed. Because of that, you don't have this buffer of interest

or investment returns to offset losses. You're just paying out now. That's why we tended to not be super involved in that space, but we're looking at it now because we see all the challenges. We're like, well, maybe I have an opportunity to get the underwriting right. You can make it a profitable line. We haven't committed to doing this, but that's what we're thinking. At some point, I think you have the opportunity

to get the underwriting right. The difference is you have to be super correct on the insurance side of that business. We're like, well, maybe you have the opportunity to actually get that right now because it tends to be challenged. And so maybe that's the risk you want to take, right?

But that just gives you some context for how the industry is set up right now. Across the whole book, your other two most unique coolest whatever word you want to use which I think of one um no so on the on the we have a the asset based I very simple one we have is does I'll say it's different we have a program where we originate you know consumer loans that are focused on medical care right so the idea there is that you know people tend to that are focused on medical care, right? And so the idea there is that, you know, people tend to pay for medical care, so the default experience must be better.

We basically provide capital for, again, an originator that focuses on that space to originate those assets where they're effectively done at the point of sale, right? So you will, you're at the like medical office and you're like i want to it's it's not covered procedure or something and i want to do you want to you know you can finance that like as as you're checking out it's almost like a firm or something like the yeah yeah but for but for medical procedures basically oh nice and so um and so

that's something we we have and we have an ongoing origination there. And again, it's a pretty short asset, so you have to recycle it a lot. But that's a very different kind of underwriting than everything else I talked about. It's highly driven by. And I think, again, structurally there, the idea is, or by the origination i guess like it the context matters right you might you know this same borrower might not you know have the same propensity to pay it back if they were you know buying sneakers with the money or something because it's like to do something medical that um they tend to be more thoughtful about about those those liabilities

that like kind of comes out in numbers and you see that performance. That's crazy that you have to kind of get into consumer mentality at that point, right? What are they more willing to pay? Well, again, that's kind of... We're not the specialists. We're working with the specialists. But that's what you have to look at.

Nobody's coming to repo their Nikes. Exactly. And so it's like a... a that's again so you look at the you look at the specifics of what's happening you look at um you know why why does this transaction exist in the first place is that constructive like do we think that's a good or bad fact pattern and can we give like some credit for that for the underwriting and so that's another example of the kind of that stuff. I think the other very unique one, unless you want to give a question on that one,

or do you want me to? No, that's good, yeah. The other one is litigation finance, where it's like a, you know, you have relationships with law firms where you basically kind of advance them money to, you know money to prosecute some lawsuit

or maybe it's already settled and you're just advancing them on the settlements, which is the more common thing we do. Camp Lejeune, all those advertisements and whatnot? Yeah, that's a very well-traveled one, right? Because that's exactly why you see that

because Camp Lejeune is interesting because it is basically settled. The government has said reliable and the government has said how much they'll pay you. And so the reason you see a billion ads for Camp Lejeune is because it doesn't have the risks that are typically in place for these kinds of assets, right? It's basically zero rent, yeah.

Yeah, it's like the payer is the government. And they kind of have said effectively that we're not appealing. And this is kind of how we think people should get paid. And so the reason there's so much so many people going after that is because

it's precisely because of all the risks that typically exist in space like oh, you might, it's precisely because of all the risks that typically exist in a space like, oh, you might think the payer might not pay. They may decide to fly off a bankruptcy if it's a really big case. Or your particular lawyer's bucket of cases might not do well in the settlement or something like that. Those are all things that are kind of not present in that situation, which is why you see people aggressively chasing it is because it's kind of

doesn't have all the risks associated with that. So that's a, that's a space we like, we probably are in the most, I would say the least risky parts of that space. So we tend to do things like after they're settled or things like that, where the outcomes are relatively well known. And so you can kind of somehow underwrite it. It's more of a timing assessment than it is, will or will it not happen, right? I think there's a whole spectrum of those kinds of things that go deep into, you know, like, you might not win. For example, there's parts of

that market where you don't know if you're going to win the lawsuit, much less get paid on the claims. We've got the folks in the very final edges where you're really just advancing against known receivables. And is that these huge law firms? Or could you have some single person? I'm thinking of the Grisham book book the uh rainmaker remember the movie with matt damon like he needed you guys he needed someone to be like here's the money to fight this thing

it tends to be more institutional um yeah more institutional counterparties they're not individual not matt damon yeah so to be focused on the most kind of on the on the like you know most of the facts are known most of it's. There might even be a settlement already done and it's just people want to get access to their capital sooner. That's where we focus in that space. It's not even for marketing and advertising necessarily? It can just be, hey, I'm going to have this many clients. I know it's this much revenue. It can be for a variety of things. Right. I mean, yeah, but I think,

but I think the point is that it's, it's like, it's just the, like we, we tend, we tend to want to be able to somehow think about underwriting the risk. And so when it's a timing assessment, right. Where you have more certainty on outcomes, but it's just a question of when the outcomes will come. That's kind of underwritable. When you get to other

parts of the market, it's harder to underwrite that you actually have collateral. The returns are much higher, but you could get a zero. We are always thinking like credit investors and so we're thinking about recovery if it goes bad and recovery if it takes

longer than it's supposed to right it is zero risk right it's just it's just your returns lower right because it's spread out over a longer period yeah as opposed to like in other instances if you're like there you know there is none of the facts are established or there's still litigation going on like there your recovery could be zero and that's where we kind of go like okay that's like we don't like that profile basically like we'd rather have like zero yeah we don't like zero you know but that's that's that's like a good point like in all these spaces right we kind of say you know if if we if it goes bad right we want to have a high we want to have a reasonable recovery. So again, that's where the credit investor mindset comes in, right?

And I think, again, like in a variety of these spaces, there are products that are zero recovery products that we won't play in precisely because of that risk preference. And so, you know, that's where I think, again, we're thinking a little differently than a lot of investors in this space where they might do things because they're diversifying. They may be negatively asymmetric, but they're diversifying. And so the price you pay is that asymmetry. We kind of try not to do that, basically.

And so you're not responsible for the proliferation of personal injury lawyer billboards here in between Chicago and Indiana? Like every other one. I think those were around well before we were in August. Exactly. But it sounds like that's not the kind of litigation anyway. There's no litigation there. They're trying to drum up the business let's spend a little time before i let you go on longevity i think that's probably the thing people most know of kind of um in the insurance world in terms of an investment

possibility so you said it's both long and short yeah so traditional longevity investors would buy life settlements. They would just, you buy the asset, you think it's cheap, and so you think you're going to get a good return. And so I think, but that could be wrong,

and you may not get what you thought you were getting or the probabilities you thought could be inappropriate. And so that's a very directional trade-off saying, hey, I think Apple stock is cheap, right? So I'm going to buy it. Well, if you're wrong about Apple stock being cheap, you're going to lose money, right? And so it's a similar dynamic here with just more complex variables, right? If you just buy it and ask if you think it's cheap, that's one strategy.

And that's been the strategy in the longevity space that kind of how do they view it as cheap it's based on a pool of lives or a single life yeah i think it's based on people will have life expectancies and there'll be probability curves and they'll assess like hey here's various points of time if you know if you have mortality here here's where it happens and you will um but that assessment is really what drives it right and so those probabilities could be wrong yeah right and so and so i think is that wrong on like a broad of all of america or a section of america or a specific person again i think all these portfolios are not yeah they're not betting on the entirety of America.

They're betting on the portfolio. So one, portfolio construction, you want to have a diversified pool because anyone is always going to be wrong. But the question is, when you have a diversified pool, will that on average be right? And that's kind of the experience we have is on average, we try to be very thoughtful and get that right. But the point is, you know, if you have a change in technology or medicine or whatever, that can have dramatic effects here. And so what we're doing now is also running a book of that benefits if, you know, and you can do this in the life insurance space where you can like, you know, there's a variety of instruments that will benefit if, if, if, if there's a longer, longer longevity. And so you can buy those kinds of instruments alongside the ones that are hurt by longer longevity, and that will result in a more balanced book.

Right. And so I think we're striving to do that now where, where we're trying to run it more as a kind of a long-short strategy. And then in theory, if you think about like in the option world, if you do the long and the short, you're supposed to get the risk-free return. Risk straddle, yeah. Right? But my point here is that these aren't labor markets, right? And so if you do the long and the short, you actually don't get the risk-free rate. You get a double-digit return.

That's the key. Why do it directionally? That may be a nice return, but if you can also do it less directionally and get a similar return, let's do that instead. And I think that is the strategic shift that our longevity business has taken in recent years is to say, okay, maybe this asset class, it's mature, first of all, and so that's part of it. And so it has a larger investor base. So maybe you can't source it at the kind of target returns you once had. So maybe then the directional strategy made sense. But today, you look at it, you go, okay, the strategy of being kind of less directional probably makes sense.

And I think that's where we've put together what I think is a pretty unique strategy because most people in this space don't. You have to have the infrastructure. So we own an insurance company. You have to, in order to get the risk the other way, might require certain licenses that people generally in this space don't have. And so we've had to build the infrastructure to allow us to basically be a longevity mortality investor and to be ultimately form agnostic, to say, I can do this in a derivative form via swap, I can do it via some kind of insurance contract, I can do it by buying a life settlement from someone, and to just be agnostic on how you're doing it and assemble a portfolio of risk that's exposed to these things, right?

But is it all one way, right? And then I think the returns are basically, you know, you can get pretty good returns doing that strategy. And so kind of we think that's the prudent approach to take. My main takeaway is you're kind of doing what the insurance companies are scared, too scared, too slow, or too regulated to be able to do. Is that a fair assessment? Yeah, I think we try to be in the space, certainly more nimble. I don't know if I would use scared. I was going to use dumb, but I didn't think you'd like dumb either. I think because of the flexibility of our capital, we're not subject to the same stuff. Too inflexible.

That's a much more polite way to say it. And I think that's the key. We have flexible capital. We can do things in a variety of forms. And that's a toolkit that most operators in this space don't have. I'll circle one last. I'm an allocator. How do I view this? What bucket do I put it in? It seems a little bit bucket list to me, but it's like a bond replacement or how do

you view it? Yeah, look, we have longevity and special assistance funds are really alternatives. That's how you can think about those. Our multi-se credit, the various credit products really are liquidity driven, right? So we have like the multi-sector credit stuff and the fundamental credit stuff, that's all liquid and we have it in daily liquidity forms. And so on the more private credit stuff, we have, again, private credit vehicles that have like, you know, they're private funds, but they have reasonable liquidity terms, right? And the same thing on real estate, those products have, you know, private funds, but that are reasonably have liquidity in them, right? So they're not like closed end vehicles that you have to hold for 10 years. And so I think we have, we really measure on liquidity basis. So where we think, you know, we we think there's liquidity, we offer products that are more available

to be redeemed quickly. And then as we go into the more complex and more liquid stuff, it goes through to less liquid fund structures than ultimately to the closed end fund structure. I'm going to think of it as the income replacement. If I'm trying to do my pie chart at the family office, either an alts or income replacement.

It's going to have more of that type of profile, the income profile. What did you say? And in the alts bucket. The people who tend to talk to us are either looking at the uncorrelated bucket, so it's not stocks and it's not bonds, it's something else. That's a big bucket we get from allocators. But yeah, but all of our stuff does cash flow. So you're right. As a general principle, irrespective of liquidity, we're generally providing income.

And that's a fair statement to make. And the question is- Non-correlated income. That's the whole idea. And if you want to, and again, depending on your return target, there's a different liquidity profile for you, basically. I love it. All right, Peter, we'll leave it there. Thanks so much.

Okay, that's it for the pod. Thanks to Peter and Obra for coming on. Thanks to Jeff Berger for producing and RCM for sponsoring. We'll be back next week with a retail option trader turned hedge fund manager. And then finish up our year with Zed Francis and Jason Buck, two close friends there,

coming on to talk through lessons learned in 24, the election aftermath, and what 25 might bring. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. This podcast is provided

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