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

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!

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Check out the complete Transcript from this week’s podcast below:

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

Jeff Malec  00:06

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. Can’t believe the bevy of short rate positions I had on 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 Polanskij of Obra Capital joining us, we get into a lot of good stuff with Peter, including just what all that means structured credit insurance, Peters 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 alt 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 RCMs, 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, RCMs, 24 six, outsource trading group could be the answer, letting you offload as many trade execution pain points as needed. Check it out at RCM alts, calm slash 24 now back to the show you. All right, welcome back, everyone. We’re here with Peter Polanski of Obra capital. How are you, Peter?

 

Peter Polanskyj  01:58

Hey, how are you doing?

 

Jeff Malec  02:00

I’m great. Where are you New York?

 

Peter Polanskyj  02:02

I’m in New York in our office in Midtown, right by Rock Center.

 

Jeff Malec  02:05

All right. You guys always been there. Bounced around.

 

Peter Polanskyj  02:10

Our New York office has always been in this area. We have offices in in Vermont, several in Texas and one in Kansas City. So we’re the firm is kind of spread out, but we in New York have been in this office for a while now.

 

Jeff Malec  02:25

Vermont seems like the outlier there, and there was just one guy who said, I’m not leaving my farm. I’m in an office in Vermont. We actually

 

Peter Polanskyj  02:30

have a whole credit team up in Vermont. And so there was a pretty an established credit manager that had a really long history of being up there. And so we figured the team was to get deal. There’s a team up there. They were together. They were cohesive. We didn’t want to mess but so we kind of like 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 our part to keep, to not, not touch, not messing things that are not broken, right? Got

 

Jeff Malec  03:02

1. 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, so if you could, let’s just kind of go up with a 50,000 foot view, right? 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. 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.

 

Peter Polanskyj  03:39

I think they come 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 into 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 and hedge funds that focus on two things. One is longevity. And so we invest in 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, you know, we 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, you know, we think it’s unique. And so that’s kind of how we operate in that 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 exposure on the on the insurance special sit side, we have a fund that just basically is a provider to a provider of capital to the insurance and financial services industry. So we might, you know, we can lend, we can invest in equity. We can do to. Have a variety of transactions. We kind of form agnostic, but somehow, some way, make capital available to insurance or financial services in a variety of ways. And so again, that’s a that’s a newer of the two efforts longevity has been around, probably for since 2009 and the insurance special 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 last three years ago, when we launched a dedicated fund. So that, that dedicated fund has, you know, is, uh, is we had did the first close there, and then we’re gonna have a second fund coming in that space as well. And so, kind of a good split. But all those, all those kind of strategies are optimistic. They’re looking for kind of you

 

Jeff Malec  05:38

want to, want me to dig into those now and ask questions. You want to go through the credit side of them. I the credit

 

Peter Polanskyj  05:44

side then 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? 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 to touch parts of the market where it requires kind of a relatively sophisticated level of understanding to underwrite them, but in markets where, you know, maybe the largest institutions in the world won’t, 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 sophistication to attack these markets, but, but the, you know, the market size for those markets isn’t big enough where we’re competing with the people who have, those who have those skill sets as well. And so I’ll just kind of go through the various categories that we have. But like the first one, is just multi sector credit, where we deploy largely to, like structure products, ABS, you know, commercial mortgages, you know other forms of structure products, which are generally things that are backed by pools of assets. So the underlying assets could be anything, right, 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, you know, lease payments. Could be royalty payments. But it’s some kind of, there’s another blind asset that you’re then kind of, you know, let somehow lending against. We do that both in public markets, where we can, you know, trade securities, but we also do it on the private side, where we bilaterally negotiate transactions with people on an individual level. So we kind of, 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. So kind of in an equal

 

Jeff Malec  07:38

way. Quick definition, there. Abs, asset banks,

 

Peter Polanskyj  07:41

yeah, asset bank securities. So that’d be, like, things like I was saying, like, could be royalties that are underlying. It could be lease payments. Could be, you know, consumer debts could be small, you know, asset Small, Medium. Enterprise debt could be any, any kind of asset that has regular cash flow. You can basically put into these vehicles. And then you can try to kind of, you know, kind know, create a structure around them. And so this, it tends to be a very diverse space. It’s, there’s the answer. So you need to have, you know, 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 have, you have to be able to go underwrite, you know, whatever, consumer auto loan same time as you’re, you know, as you’re looking at royalty payments on, you know, kind of pharmaceuticals like that. And so that’s like, that’s the, that’s the biggest, biggest category that’s been most broad the next couple, you know, institutional credit. We do high yield loans and and high yield bonds in the form of Clos. And so that there, the specialty thing isn’t necessarily the underlying, you know, bonds and loans. Those are pretty normal, you know, to kind of, you know, high yield companies. But the vehicle in which we do it is a is a specialized structure. So there the, it’s like the vehicle we use to invest has had a structuring around it and has, you know, specialty aspects to it. But the that’s probably a space where we’re, you know, the most kind of normal, if you will, right, most typical thing,

 

Jeff Malec  09:05

clo collateralized loan

 

Peter Polanskyj  09:08

obligation. Sorry for the nomenclature. I’m

 

Jeff Malec  09:12

way back to my, like, series seven book myself. So, yeah, yeah.

 

Peter Polanskyj  09:16

So again, the issue kind of a cloud wise loan obligation, where you issue different tranches, so you kind of structure up the various liabilities of that fund. And so that’s the that that is, again, the more specialty part of it is managing around the rules of that fund that are created by all the by that structure that exists, right? So we kind of get to go buy whatever loans you want. We have to buy certain credit quality, certain characteristics, and operating within that, that rule framework is kind of the the specialty part of this space, right? It’s not so much while, while the underwriting of the credit is 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 in the form of a COVID loan obligation, is kind of what makes it a little bit more unique, I guess is what i. So

 

Jeff Malec  10:00

it’s a little bit like stock picking, but on their on their liability side, and then putting it into the CLO

 

Peter Polanskyj  10:06

Yeah, exactly, okay. We’re picking, we’re picking credits like that, stocks, yeah, exactly, exactly right. That’s exactly right. And so it’s like, that’s fine. That’s like, fairly normal. You know, every day a lot, a lot of people do that stuff, but, um, but the but the actual complexity comes in that the vehicle itself is actually complex, right? And the rules the road are complex. The next buckets asset based off just a credit and so that would be like, again, very similar to the to the asset backed securities market, but just not in securities form. Security you could have, you know, a variety of things. Could be consumer finance, could be litigation finance could be other, 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 credit where it’s not lending to it’s not like the CLO party not lending to corporates. There’s something else 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, 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

 

Jeff Malec  11:34

asset is that in air quotes? No, no. I mean, it’s not like you can’t go repossess it. It’s more of a revenue stream or something that,

 

Peter Polanskyj  11:42

I mean, yeah. So a lot of times the assets are financial assets. So like litigation finance, for example, that’s entirely a financial asset in but in, you know, things like auto auto finance, if you’re, if you’re providing a warehouse to to a subprime auto lender, is definitely, we have one. We have one of those house right? Then the, you know that, while it’s a loan, ultimately, the first piece of collateral, the ultimate piece of collateral, is actually a car, right? So, you like, there is a, you know, we have some, you know, we bought a back, we bought a book from someone which had a bunch of loans in it, but it also had some autos, right? So, the while the

 

Jeff Malec  12:22

defaults and I can get a deal on that’s only

 

Peter Polanskyj  12:25

the first question I asked. I was like, hey, what kind of cars are there? But I think, like, Yeah, but the so the normally it’s some kind of financial asset, but normally underlying it, there can be an actual physical asset that’s that, again, was the was the original source of value that’s being lent against. So it can make it go both ways, right? But I think the the big thing there is you’re not, you’re not like you’re not just relying on the credit quality of the borrower, right? You’re relying on something else, whether it be, you know, some receivable payment they own, which would be a financial asset, or some hard asset that they actually have. But you’re somehow, you know, and then you’re, again, you’re normally designing the the structure around the kind of cash flow characteristics of those assets. So if it has, you know, it’s like, let’s say it’s a car, it’s a car loan that, you know, that amortizes down right, like a mortgage, then you would, 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, that’s what is the most kind of unique. Here’s where there’s a lot of, you know, unique structuring going on. The Last one, last last category is real estate credit, and there we focus on transitional loan, 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, on on habitation or multi family or mixed use properties. So like, you know, 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, and then rent it to students, and they think they can get a better, you know, rent, rent outcome if they do that. And so we would kind of provide them financing that allows them to do that. Again, here that financing would be structured. So it might say, we may say something like, we will lend you X dollars on day one, and then after you’ve invested some more money in the property, will lend you more money, because you’ve invested more assets, more money into the property. And after you meet some rental hurdle, we might lend you a little more to finish, you know, to finish off all the, all the other improvements you want to do. And so again, there you can hear, it’s not just, you know, you don’t just make a loan and then kind of wait, right? You make a loan, and there’s like, follow on, you know, kind of the assessment of the risk is follow on, monitoring of what’s going on. And I think, again, kind of broadly fits with the 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 for the best. Yeah, exactly. You hear. You’re kind of like, it 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 it either 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

 

Jeff Malec  15:18

like I can maybe we’ll coin a new term partnership. Credit,

 

Peter Polanskyj  15:24

sure, yeah, yeah, that’s not a bad way involved. Credit,

 

Jeff Malec  15:28

maybe that’s yeah, involved. Let’s get into your background, because how do you keep this all straight in your head? Like, I say, right? Like all these, all these verticals, 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.

 

Peter Polanskyj  15:52

Yeah, so I’ll give my back, I guess I’ll tell you how we think about it. But my background is, I started out life in the 90s. I was a property casualty actuary. So I was an actuary in the insurance space, and then what I worked on, I worked in what’s called

 

Jeff Malec  16:07

an actuary, like dreaming of becoming a hedge fund manager.

 

Peter Polanskyj  16:12

I was a math major, and one

 

Jeff Malec  16:15

of, one of actuaries that actually move up the chain, yeah, I mean, we

 

Peter Polanskyj  16:19

I was a math major, and then, you know, it was like, What are you doing your math major? And I was major? And I was pure, I was pure math. It wasn’t a fly back. It was like, go prove this statement, right? And so you, like, took a bunch of, you know, like, x to the t and x to the n, and prove something. And so what do you do with that? And when you become an actuary? So that’s, that’s kind of where I went. And so I started doing that. And actually I worked on, I was, I was in my in my role, I worked on a catastrophe bond, right, which is one of the, one of the ways in which insurance crosses over into capital markets, right? One of the early ways actually that insurance crossover capital markets. And so I worked on that from the insurance side. And I kind of said to myself, like, if you could do this, which is, like, it’s really hard to analyze, you know, like, how likely are hurricanes and earthquakes and all that stuff, if you can you do that, and you can turn that into a bond, there must be a bunch of other things that are going on that are that look like this and require, like, the kind of the math skills that I, that I, that I had, And so that’s that’s when I kind of headed toward toward business school, and then to Morgan Stanley. And so I met Morgan Stanley, then what I ended up going to Columbia for business school, and then I joined Morgan Stanley strategist. But I was focused on credit, derivative, structure, credit and things like that. So I sat with people who were very, 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 applied. 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, using the tools of the derivatives role to to do things in that space. And so I was, like,

 

Jeff Malec  18:07

based off their default rates and things of that nature, plus, I think based on

 

Peter Polanskyj  18:12

fundamental views. You could say, like, hey, the market, by its pricing, thinks x, right, but they think

 

Jeff Malec  18:20

it’s a 20% chance. Yeah, you guys are dummy, it’s a 10% chance. There’s so you

 

Peter Polanskyj  18:26

can position that right. You can right. It might be some complex strategy that required to isolate that difference, but you can somehow position it, I think, you know, in equities, right, in futures and all that stuff, or, sorry, in commodities and, you know, in forex and all these things like those, those options values are well, well understood, well defined. They’ve been doing them for, you know, whatever, 55 you know, 50, 6070, years or longer than, yeah, in credit, this stuff didn’t, you know, wasn’t, it wasn’t that traffic then, 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 until the 2000s right? Because you always, you have a bond. You buy a particular bond, you know that has its terms, it has a maturity, has a coupon. That’s different than buying a stock, right? Because the stock is fungible with every other stock that particular bond, it might be, there might be 15 bonds in the capital structure, and they all look different. And so the idea that credits was the first place where you could actually kind of, 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 that’s what I worked on in the 2000s

 

Jeff Malec  19:33

just 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, oh, wait, like, too much complexity, too fast, or No, I

 

Peter Polanskyj  19:46

mean, I would like, I think the, you know what, if you look at a lot of the Clos, for example, through and a lot of the kind of protocol, first order type stimulation, they all. They all worked like the best performing CEOs 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, from 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 ran into problems, right? That’s where you had problems. Take all the like, the first order stuff generally performed as it should, right? In the market environment. It was the outcome you had, like, so faith, like, if you did a mortgage securitization and bunch of mortgages defaulted. Yeah, the guys the bottom of the stack they’re supposed to contain, yeah, that’s what happened, right? And then, but, and then, so that all like function, but I think it was when you added, you added, like, extra layers and leverage, yeah, yeah. And that’s when you really have problems. But, like, a lot of products, you kind of did, they’re 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, right? And so, so I think, like, it wasn’t, it’s not just the that that was the, you know, that that would be like the cause. I think it’s kind of like, you know, when you, when you start doing things that, like, are hard for for people to actually underwrite. That’s where you kind of end up with problems, right? So, so anyway, I, I was there from 2000 to the eight, and then 2008 I joined OXF, and I was responsible for investing in a lot of those products as they were, you know, as they were, as they were, trading very cheaply. And so we saw a lot of them come back. Because, you know, that was a lot of them ended up fundamentally performing, right? So you had to dig in deep and do a lot of analysis to get that. And so I was, I was doing that, and then just 12 we launched the CoLo manager. I was involved in in the launch of that, and worked very closely with the team there. I was ultimately running that business, and I left to join over. And so you can hear, from my background, that that was a fundamentally, like, you’re buying individual loans in that business, again, where the vehicles are kind of complex. So that was the fundamental credit kind of, kind of responsibility. So you can hear the, you know, I was doing, you know, at insurance, I had kind of a quantitative credits and derivative and then, and then fundamental credit as well. So I, like, I kind of touch all these markets. So that’s how, you know, Blair Wallace, the CEO here, when he was, when he was, kind of, when he was, we were talking about me joining, he was like, Look, we do all these things that you’ve done. And so, you know, so he thought it was a good fit. And I, I agree. And I think, you know, obviously nobody can be a master of everything right, like you have to have your special specialties. But I think, you know, the team here, you know people, people touch the various parts of this. So we have, like, you know, people who are bankers, but who focused 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 these things we do are, they’re multi dimensional, 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, yeah, like, you care about how good that company is, in most cases, it’s very high quality. And you also care about, like, when these payments are going to happen, and so those are underwriting the credit quality of the of the counterpart that’s going to pay you, and underwriting the when I’m going to get the when these cash flows are going to happen, are like two very disparate skill sets, right? And so no one’s gonna 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, you know, the other, the other specialists in, or how to loop it in, and how to, kind of, you know how to how to bring in the right parts 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 specialist business. Same thing our specialist business, we often describe it as we live in the like we live in the in the giant cavern between insurance and credit. And what we mean by that is insurance, insurance people generally hate counterparty risk, right? They hate like, yeah, or they’re not allowed to take it for regulators, right? So if you are 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 right, that deductible, those deductible amounts, and on the credit side, because

 

Jeff Malec  24:45

then you can’t pay the mom, mom and pops, right? Yeah, exactly. That’s right.

 

Peter Polanskyj  24:50

Your job isn’t to take credit risk. It’s to, you know, take insurance risk, and so you’re not supposed to do that, and they don’t right. So most, most risk takers on that side, you. That’s kind of with lodges, they just go, oh, I don’t do counterparty credit risk, right? That’s not our job. And then the credit people will say, like, look, I want to look at EBITDA and company financials and and, you know, and all these fundamental, like, you know, financial characteristics. I don’t want to talk to you about, you know, how likely a policy is to lapse. If that’s the like, collateral I’m taking, or, you know, is this gonna be our policies? Are people gonna 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. Tool kits underwrite

 

Jeff Malec  25:39

a place like John here. I don’t even know who does but, but I’m gonna John Hancock popped in my brain. Yeah, right. Those are basically two different floors, like, there’s the insurance floor, there’s the credit floor. I don’t mean for lunch,

 

Peter Polanskyj  25:52

I don’t know, but I guess I think you’re right conceptually, yeah, I agree with you. So I think we try to bring that together, right? Is really what we try to do, and so so that, I think that’s, that’s the special, if you will. That’s a special sauce, because there isn’t a lot of competition in that market where those two things, 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 combine 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 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 the maybe the counterparty trade six or five 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 translates to work. And I think the idea behind that would be, when we took that, let’s say, Yeah, we only do the hard work, right? Well, like, go dig, Go, find the value. And so we tend to see these, all these insurance right? There’s a lot of, you know, like, if there’s a shirt situation, that’s, I’m not going to say, like, stress. Let’s say it’s stressed. Like, that’s, like, there aren’t a lot of people who look at those right situations. Like, most of the insurance industry does not want industry does not want to deal with some kind of financial stress, they’re gonna go miles away from it. We see lots of those because we’re precisely the guys who will kind of roll up our sleeves and dig and see if there’s a way to kind of make it, you know, make value there somehow, right? And so, but

 

Jeff Malec  27:36

you’re not a distressed debt hedge. That’s where it gets confusing. But, and how does an insurance get stressed? Quote, unquote,

 

Peter Polanskyj  27:44

it could be, like, it could be, you know, simple as, like, right now in Florida, there’s probably insurance they’re stressed from the hurricanes, right? And it doesn’t mean that they’re not, you know, like, it’s not distress, right? 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? That’s kind of, they

 

Jeff Malec  28:06

have a billion dollar pool, and they’re going to get nine, 50 million of it called, they’re stressed, right? It’s like getting 2 million called, is distressed. Yeah, there

 

Peter Polanskyj  28:15

might be, yeah, there might be, like, liquidity, it might be liquidity problem, issue, or something like that, right? So 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 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 there’s, 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 lay in my capital load and miss the part that I find my such thing 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. So I think there’s a kind of, you know, there’s a business. It’s always happening, right? But it’s always, but there’s always uniqueness, and it’s normally bilaterally negotiated, and you’re kind of, you’re trying to solve some kind of, you know, kind of problem or or goal on behalf of our counterparties. Like, again, the way we think of the world is, you know, this threshold, for example, is very much like, hey, there’s a six pie, right? And I want to, like, get as much of the pie as I can, right. And our, the way we behave with all our counterparties is kind of just the opposite, like, can we make the pie bigger, right? Is there a way for us both to win and, you know, and that’s how we approach it. I think that’s why our counterparties kind of, you know, once we do the transaction, we’re hopeful that they’ll like, come back and do another one, because, again, it’s fairly specialized, or a lot of people have to do it. And also, because, you know, we created value for adults, but we also created value for our counterparties.

 

Jeff Malec  29:58

Yeah. 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 into the nitty gritty there. But the team, yeah, to be extremely talented, yeah, and all this. So the

 

Peter Polanskyj  30:13

longevity team, you know, again, we have, like, that’s a very big team. We have, we have servicing, which is, I think over 20 people. We have probably about the same number working on between portfolio management, underwriting, you know, origination, things like that, on that team. And then there’s obviously, kind of a few senior folks on the pm side. Specialist team is about six people just on, kind of, you know, just on doing the bilateral transactions. Multi sector credit team is similar size. Our institutional credit team is has roughly 10 analysts on it currently, and several PMS and then on the asset and asset base really falls into the you know, our search for pause team that would like 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 low double digits, like, you know, more than 10 folks in on that team, working on origination, legal and all that stuff. And so, yeah, it takes bodies 150

 

Jeff Malec  31:18

ish plus one. Yeah, someone add that up. Which don’t answer this, but which is your favorite team? Oh, I

 

Peter Polanskyj  31:28

can’t, but that’s like the part. The best part of my job, actually, is that I get to do on one day of working on a transaction where we’re, you know, running a two we’re like, signing a 200 page document, and wiring money to someone, and on the next day, I’m 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? Yeah, 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. You work on a structure for a year. You finally get it home. You’re like, sign a document. It’s like, a great moment. And then other things, you know, 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? You the structure is pretty well known. And you can, you can transact in that, in the product. And so to me, that’s the fun part. Is that diversity of of stuff, right, both on keeps how you’re doing it and what you’re doing, yeah, and it keeps you, keeps you sharp, right? Because

 

Jeff Malec  32:43

if you guys weren’t doing this, who else is doing? Where is this happening elsewhere, inside investment banks, inside Goldman, inside hedge funds. All the above,

 

Peter Polanskyj  32:51

I don’t I think there’s very few places where all of this is happening in one place, and there’s competitors in all these markets, right? And I think as you go into the credit, as you go into the more we all describe it as, like your Q sip, standard products, right where you go, more things that are syndicated there. 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, you know, are we have some products which are, they’re basically like an alloy. The Sandbox you have is all the kind of the entire 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 triple A Clos. And like, I think we want to be more kind of thought of that and say, Hey, we want to 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, giving us some 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 kind of like

 

Jeff Malec  34:11

a beta versus an alpha. Or even outside of alpha, it’s like, here’s what that client, that allocator is looking for, yeah.

 

Peter Polanskyj  34:17

I think it’s like, yeah. It’s like, almost, I mean, I guess it would be ask the alpha, but like, yeah, exactly right. Like, we’re not trying to be bid 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, and again, let it give us the freedom to kind of operate in the space, right? And, but you’ll get this instead of buying, you know, iG, COVID bonds, you can buy all these other things that are also IG or investment grade, right? And they’re not corporate 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, this entire universe of people, but I think we try to design a product that’s more that is relatively neat. So if you look at the products that look exactly. Like, ours, there’s, like, 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,

 

Jeff Malec  35:10

yeah. And I asked the question, partly was less, who competes within, 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

 

Peter Polanskyj  35:19

think that’s right. And so, like you get, yeah, can you go to, if I was trying

 

Jeff Malec  35:22

to order it, Alec part, I’d have to go for 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,

 

Peter Polanskyj  35:31

so on the on the credit side, think there’s plenty of capable players out there on the insurance side, I think, you know, particularly in longevity space, I think I would observe that there’s, there’s a limited number of managers that have scale, right? There’s some, there are some. But again, if we got them on one hand, that actually have scale in these spaces, there’s lots of other competitors that we think of that are, like, much, much smaller, right? Like they may have 20 million bucks, a million or something. And so there’s this kind of dual equilibrium of, like, 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, 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, you know, don’t have the, you know, the capabilities 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 they think and and just like, What the Why on that is because, like, for example, servicing, if you do it in house, it’s not a for profit business, right? We’re not trying to, like, contact, you know, do the do the servicing at the cheapest possible cost and the cheapest possible effort, like, if our if we do servicing, and that prevents us from kind of doing a bad trade, you know, that that that savings, or the or the, you know, the or the P L, that we’re going to get from that, from that, like, what happened there is probably like paying for that, for that whole servicing operation. For servicing

 

Jeff Malec  37:17

is like processing payments, yeah, that money, and that’s yeah,

 

Peter Polanskyj  37:22

all the details, right, all the little details of these assets that you have to look at and again, like that. That’s a, it’s not a profit center for us. It’s a cost center, right? And so their job is to help us make sure we don’t make mistakes, not the process, as much as possible with this little bit of

 

Jeff Malec  37:39

or do you get the Intel of, like, hey, this one, these payments are starting to lag by or this is not look good. Yeah, that’s exactly

 

Peter Polanskyj  37:45

right. And so, like, so having that internally is, I think we take 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, of 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, amen. You can, you know, tweak transactions, change things like, you know, again, in the constructive ways, 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 sounds

 

Jeff Malec  38:24

way better on a due diligence call, like we’re much closer to the asset, right? We’re as close to the assets as we can be. Sounds better than like, well, we don’t touch the it’s a 10 foot pole, and we have no idea what’s going

 

Peter Polanskyj  38:37

on over there. Yeah, we hope so. We hope so, right? And then

 

Jeff Malec  38:41

when, when are you guys actively out there searching for these? 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?

 

Peter Polanskyj  38:55

Yes is the answer, right. But, like the specialist, is a good example. So the special assists group, you know, before, like, you know, before I joined the firm, what was a very insurance channel driven originated, so, like, they had a bunch of touch points on the insurance side of the business, you know, you talked to those, like, that whole ecosystem of people. And then, kind of, when I joined, what I what I brought, and then some of the others, who joins incentive bought is like a capital market side, right? So sometimes things are being banked, right? It means, like, 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 financial category wants to do something, and it’s being banked by a bank, not by an insurance broker, right? And so we see more we see other origin 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 like that’s kind of a point of for us, a point of differentiation. Because we’re trying to, you know, like, if it’s, we don’t care where it comes from, right? We just want to see it, yeah. And so, like, touch, as many of these have these parts of the market as you can and and again, you’ll be in the flow, right? And so then once you 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 that you then you see calls coming the other way too, right

 

Jeff Malec  40:24

when I’m get emails or a guy calls up is like, Hey, I’ve got this great deal. I’m like, by the time it got to me, you’ve probably ran out of everyone good. Do you have to be careful that? Like, if the bank or whoever’s bringing it to you, like, yeah, that’s your reaction is, like, put up my guard a little like, well, if you’re trying to get rid of get rid of this. What’s wrong with

 

Peter Polanskyj  40:41

it? Yeah. So I would say, on the, on the, for example, on the reinsurance side, right? Like, there’s lots of big, global, gigantic reinsurers out there, who can, you know, look at, look at the risk, and decide that they don’t want it. 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 is, we try to do kind of what are called, 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 the bad way in like, 25 different lines of 25 different businesses for, like, the whole thing to actually go, you know, 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, right? 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 will be, there’s other other factors. So it’s like, it’s either speed, right? So the all those fathers of lots of large insurers out there, they are dead and generally not fast moving. And so if there’s a tight deadline or something like that, we could be responsive when those institutions with their processes really can’t be. And so that’s one that’s it’s

 

Jeff Malec  42:08

an easy, quick, sorry, quickly is an easy definition for reinsurance. Just it’s something the insurance company doesn’t want or can’t handle on their balance sheet. And right, 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.

 

Peter Polanskyj  42:24

Yeah. So they might, they might have too much risk for their 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? Yeah, you’re sharing this with the

 

Jeff Malec  42:35

with what I’m saying is any deal that’s brought to you by an insurance company, reinsurance or not necessarily,

 

Peter Polanskyj  42:40

not necessarily, like, you know, again, the name is almost doesn’t matter, right? Insurance contracts for an insurance company, so, like, changing is who the Counterparty is, right? So it’s like, it’s just another form of insurance. And so, but what I was gonna 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 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 they have to work for us. Has to work for them. And but you’re having a dialog. 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? Yes, yeah. I think more often than not, we do the other thing, which is, oh, here’s this 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, right, with other counterparties. But, you know, it’s worth it if we just do with them. But that’s kind of how we get, you know, that’s how we get, basically repeat business, right? Because if you go through that process with someone, and you came up with a good answer, and they’re happy, and you’re and that you’re happy. Next

 

Jeff Malec  44:05

time they’re like, how do we figure this out? Call Peter. They

 

Peter Polanskyj  44:07

call it. They probably call us, yeah. So that’s what we really try to do. 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, so there’s, there’s there’s all the other stuff that you get through normal channels as well. I think even there, though, you know, we don’t just again, we it’s rare that we like again, liquid markets aside, it’s rare that we like just take a transaction and accept it, right? You’re always somehow negotiating some parts of it with the counterparty to kind of, you know, to achieve our goal. So even if we’re in a, let’s say it’s a being, you know, 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. Number of multiple investors. And so you have the, you have the ability to actually make those kind of comments and get those kind of changes. And you know, that’ll be a, that’ll be an iterative process there, too. So again, that’s that the structuring, like the back end structuring of these risks, is a part of the in our minds, right? Like, if I can forget about, like, 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 we can accomplish that, then, you know, the return is that much more attractive, because on a risk adjusted basis, it just looks better, right? And so that two fold

 

Jeff Malec  45:41

with both those efforts, the underwriting efforts, basically. And then let’s not just have one big, huge special situation. Let’s do many and many of them. Yeah,

 

Peter Polanskyj  45:51

I think we’re always, there’s always the like, there’s the fundamental underwriting on the way in, right, which is the key, like, you go underwrite the thing and decide whether you like that risk or not. And then there’s the structuring on the back end, which is, can I make it, you know, can I make it defensive? Can I make it, you know, kind of somehow more appropriate for or better risk for my LPS or our investors in some way. So we view it as like a there’s two processes, right? There’s the underarm of the risk and on the way in, and then there’s the structuring of it on the on the back end, where we try to make it better, right? Which

 

Jeff Malec  46:23

could be something as simple as we’re last on the first, on the waterfall, or last, or however you look at, yeah, okay, yeah.

 

Peter Polanskyj  46:29

It could be, it could be little things, right? And we’ve got a lot of transactions where the protections are actually not inside the four corners of the document, like we’ve taken we’ve, 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 had a contract, the company had a contract with, was a very high quality Counterparty. So if they fail to do what they were supposed to do, that was a way that our, you know, our thing, could underperform. And so we said, well, if we get the rights to recourse against that high quality Counterparty, that’s like another credit protection, right? And it’s so it’s like a that’s not like out, but it’s not in. 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. It’s a different thing than just underwriting the bar with themselves, a separate kind of and then, by the way, it’s two counterparties, so they both have to do kind of bad things so that they not to work out that’s a joint probability that’s obviously better than any one of them doing the bad thing, right? So I think we try to do lots of things like that, where we try to be creative, to make the risk better. Again, which, again, like, Should burger should come with that, but, but we were as focused on, on protecting, you know,

 

Jeff Malec  47:50

then, at a portfolio level, putting 10 of those lower risks 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,

 

Peter Polanskyj  48:00

yeah, I think on the special set side, like we think our step fund probably has, you know, whatever, 20 or 30 positions, right? Maybe 40, right. But that’s like, given the scale of funding, given the scale the opportunities, that’s like, as much diversification as you get, right? And, and I think that’s, that’s, that’s, that’s fine. It’s not a, you know, broad index kind of situation, right? It is a special situation, right? And so. But I think inside those transactions, though, there is a total diversification. So lots of times, you know, the performance of those transactions, again, will not be reliant on a single counterparty just doing something. It’ll be, it’ll be reliant on, you know, whatever, 1000 insurance contracts, or, you know, 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, but there’d actually be a performance problem, and so you have a little bit of internal duplication as well, right? Because the nature of the transactions themselves aren’t just like I lent money to some company, right? They’re, they’re, they’re somehow, you know, have underlying assets that are not just, you know, the credit quality of that, of that, of that Counterparty, yeah,

 

Jeff Malec  49:12

layers upon layers. Let’s pivot here and talk about either some of these special SIDS, or we can go to, yeah, let’s just a couple of examples of what’s going on in special sets. That’s in multi sector as well. But yeah, sure on the special side, I

 

Peter Polanskyj  49:33

think one, one entity, transaction you’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, 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, because of the allowed things that the Bank of support 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 lane term loan, because if they file, the first thing terminal could be haircut. But we’re saying our instrument might not even get drawn. And so it’s not a it’s not perfect, right? Because you could have other situations where it will get drawn, but, 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 and so we’re and, but the thing here is, you can’t, I can’t go to some bank and buy that, right? We have, it has to be originated. And so we have, we worked for better part of a year with a partner to originate that that product. Work with them on kind of a partnership where they originated it. We’re taking that, we’re taking the credit risk, and we work together on underwriting the credit and all those things. And so that, just setting that, setting the whole thing up, took a year, and then it probably took another year just to ramp assets, right? So we took out of invested two years this thing that we invested, because we hope there’s lots and lots of more of that to do, but it’s but my point there is, we have to come up with, like you have to originate that thing. That’s not trivial, right? And so they happen to be in the business where that, like, they are close to those processes. And so that’s why we partner with them. But you know, the the things that are difficult to originate, right? Are another kind of reason, right? Another, another place where we tried to be different, like, oh, it’s hard to originate. Let’s figure out how we can do that. You 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 the documents, right? But it has to do with like, who is present 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 completely different thing, right? And so, again, I think it’s kind of multi dimensional in that way. But that’s like the special sauce, right? That’s so why is it’s good, because of that. And so we’ll go, you got

 

Jeff Malec  52:32

one, yeah, President Kennedy line pinned up somewhere in the office. We, we do it because it’s difficult, not because, yeah, what’s the I’m butchering the line. You know,

 

Peter Polanskyj  52:41

you’re right? Yeah, we do.

 

Jeff Malec  52:43

We don’t do it because it’s easy. We do it because it’s hard. That’s like, I

 

Peter Polanskyj  52:46

should get that from the opposite sex, right? You have to

 

Jeff Malec  52:48

do it in the Boston accents because it’s hard. Yeah,

 

Peter Polanskyj  52:52

so that, but that’s a good example of that’s a more credit product, right? It’s not very insurancey, but the but what makes interesting is, because the instrument is something special, right? There’s something unique about how we’re doing the risk transfer that somehow differentiate from, from just going and buying, you know, the corporate bond of that company, right? And so that’s a good example. I would say. The other things going on in special sits are, we have loans where we were the collateral like so we may lend to, let’s say people who are this will be the first thing I know. 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 that broke commissions regularly. Well, it, you know, that’s the what, how much those how, how those commissions, like, sustain, and how, you know, if you have one to have, you have $1 commission today. What does that mean for we have $1 you know? How much will you have tomorrow, next year, and a year after that year? That’s an actuarial analysis you kind of do. And so what that means is you can put a value on that, on that potential stream of commissions that, again, requires kind of actuarial science, but, 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’s, you know, has some value and and we can use those co lend, but we’re lending maybe to an institution that isn’t as good as the the pay or here, right? So there’s a big insurance company paying a little broker, right? And the big insurance company might trade at 5% right on a like a, you know, a structurally Junior part of their their debt might trade at five or 6% or something like that, yeah, but they’re a very high quality Counterparty, 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, maybe 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 say, 12, right? We get a 12% return, but we have collateral. We.

 

Jeff Malec  54:59

That, which is basically they default, the insurance company will pay you direct instead

 

Peter Polanskyj  55:05

of you. Like, kind of, that’s, that’s the hard part is, how do you structure that? Like, how do you like, make sure those funds go

 

Jeff Malec  55:12

even get them on the phone, seems like. But how do you make

 

Peter Polanskyj  55:15

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.

 

Jeff Malec  55:23

And then, like, registrations and all that stuff involved in that too.

 

Peter Polanskyj  55:27

Got it 100% and, like, I said, like, and I think there, but there, but the, but the fundamental principles. So there’s a lot of complexity of noise around that stuff. But the reality is, what, what’s the, what’s the thesis? The thesis is really high quality, pay or I can pick receivables from them, those things traded, like, mid single digits, but I can get paid low double digits to lend with that as collateral, right? So I’d risk a word mismatched. And again, the hard part here in that space is making the thing going and remitting it going and, you know, like, I can’t pick up my phone and call my local you know, 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. So there’s some combination of, hey, I’ll do this combo of credit and insurance 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 of a lot in the reinsurance space as well. So that’s, there’s a the big like, the fundamental picture is, you know, this is only gonna get worse with the recent hurricanes, I think, is that, you know, you had a couple of taxes a couple years ago, you had a bunch of insurer a bunch of global insurers say, hey, we want everybody to, kind of, you know, co invest, right? So if you’re, if you’re, if we’re, if we’re ready, you reinsurance. We’re insuring you. We want you to keep some risk on your yourself. And so this is like, just, there’s a, there’s a dearth of capital. Yeah,

 

Jeff Malec  56:55

you can’t just sign a bunch of hurricane in the Gulf in Florida and resell it all. Basically, they’re saying, No, you, yes, yeah, you

 

Peter Polanskyj  57:02

keeps up, right? Or I don’t want any anymore, right? And so, and we don’t really do cat, we do mostly, we do mostly, like auto liability, general liability, things like that, and so, but there’s a ton of capital for all those things, right? And so. And so we could 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 insurance policy, and you like, 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 new today, last year or two years ago or this year. Like, that’s like, you’re not as screened about that. You kind of have a running book all the time. You went in and say, Hey, we will, we will support the writing of insurance for a year and and when the year is over, like that investor is over, we may decide to do it again next year, but we may do that have a different fund, and then they do have a different vehicle, but, but this transaction will only be in respect of you

 

Jeff Malec  58:02

don’t have a short put, basically, right? Yeah, yeah. Well, open ended always on, yeah.

 

Peter Polanskyj  58:07

So that’s what we’re not doing, right? We’re not like on the hook. We can choose to remain and do it, and from a commercial perspective, we try to do that right. We plan to do it next year, right? But this particular investor base isn’t isn’t automatically rolling, right? And so that’s the unusual thing, right? Is that, in that space, you know, like doing that discreetly, and then you know, having 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 coming 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, you just say, Yeah, I’m here. I’ll be here. I don’t care necessarily about I’d be getting my capital back, because that’s like a bunch internal budgeting exercise. It’s not an actual, like, 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, 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, like, terms, in terms of getting, getting our capital back out right, or at least the expected returns these things, are attracted for investors. That’s been a very busy space. I expect it’ll be busier because of this. You know, one, when you have these, like, large losses, there’s always there’s always implications. And two, the market was already kind of pretty hard, right? So there was already a capital problem, this kind of problem about capital. Like, there isn’t free capital everywhere for everybody. Yet, the market was pricing. Pricing was going up. And so that’s that demonstrates that there’s kind of a shortness of capital and like, and so that only you know, normally these big losses get exacerbate that. And so we see there’s an ongoing opportunity. Forward as well, because of the happenstance. What’s happening here?

 

Jeff Malec  1:00:04

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?

 

Peter Polanskyj  1:00:15

I mean, like the Florida markets been challenged already, like the giant percentage of the insurance in Florida is already done by the state, right? And so I think, you know, there’ll be, that’s not a new problem,

 

Jeff Malec  1:00:28

right? So it all be like state or even federal

 

Peter Polanskyj  1:00:33

war going that way. And by the way, anecdotally, like the homeowners market has been just far too like we’ve heard. You know, anecdotally, heard lots of like indications that, you know, that the large writers are playing to 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, people were, were 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 could, they should be able to. And so you have a people pulling back in the space. I that just probably is that certainly doesn’t get better after these kind of events. So I think there’s kind

 

Jeff Malec  1:01:18

of all the obvious stuff. There’s nothing crazy, right? Just like, yeah, so

 

Peter Polanskyj  1:01:21

and so we, we normally don’t. So, you know, a decent part of what we do, because of the credit investing expertise, is, is longer, longer tailed lives, so a general liability, right? Like you have, you have, you know, you have a whatever restaurant, you know, someone slips and falls, they might see you that might take three years to actually get paid, right? And so that’s a long liability. We we normally do those because you can, you invest the capital while you’re waiting, and so that that that gives you a buffer against performance, right? Because you invest it, you have returns associated with that investment. And so that gives you, like, kind of a buffer against under insurance side not being exactly what you thought 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 might have 18 months by law

 

Jeff Malec  1:02:16

or just expectation. How does that work? The laws are different, like, for

 

Peter Polanskyj  1:02:20

just, just the product, right? Like, if your house gets damaged, right, I need, like, all your insurance company, like, I fix my house, right? That doesn’t take three years. Why it shouldn’t take three years. It might take three years, you should like to assume for that. But, like, you know, regular way, like, hey, you know, whatever, something happened to my house. It got damaged. I want to file a claim that takes, like, weeks, or, you know, maybe months, not years, not years.

 

Jeff Malec  1:02:48

What happened? Let’s send someone out to see what’s going on. Exactly. Yeah,

 

Peter Polanskyj  1:02:52

so, like, just by the product, like it’s shorter, it’s shorter tailed, and so because of that, right, you don’t have this buffer of insurance, of investment, of interest, of interest, investment returns to like, offset losses. You just, you’re just paying out now. And so we, that’s why we tended to not be super involved in that space. But we’re even looking at it. We’re looking at it now. Because we’re here, we see all the challenges, like, Well, maybe you get the underwriting Right, right? And so you can make it a profitable line, right? And I mean, Nate again, we haven’t, like, committed to doing this, but like, that’s kind of what we’re thinking, like, oh, at some point, right. And I think we have, I think you have the opportunity to get the underwriting Right, right. Because the difference is, like, you have to get the you have to be super correct on the on the insurance side of this business. And so we’re like, Well, maybe you have the opportunity to actually get that right now. Because it’s so it tends to be challenged and like, so that maybe that’s, maybe that’s the risk you want to take, right but that’s a traditional context for you know how they have the industry set up right now,

 

Jeff Malec  1:04:00

across the whole book. Your other two, two most unique, coolest, whatever word you want to use,

 

Peter Polanskyj  1:04:07

which I think of one. So on the, on the we have a on the asset based, very simple one we have is, I’ll say it’s different. We have a program where we originate, you know, consumer loans that are focused on medical care, right? And so the idea there is that, you know, people tend to pay for medical care for the default experience must be better. We basically provide capital for, again, an originator that focuses on that space to to originate those assets where they’re effectively done at the point of sale, right? So you, 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,

 

Jeff Malec  1:04:54

it’s almost like a firm or something like the, yeah, yeah. But for, but for medical procedures. Basically nice and so

 

Peter Polanskyj  1:05:01

and so, that’s something we have. And we have a kind of open, kind of ongoing origination there. And again, it’s a pretty, pretty short asset. So it has, you have to recycle it a lot and but it’s a very different, that’s a very different kind of underwriting than what everything else I talked about, right? So highly known by, and I think, again, structurally there, the idea is, or the by the origin station, I guess, like it. The context matters, right? You might, you know, this same borrower might not, you know, have the same propensity to take it back, if they were, you know, buying sneakers with the money or something, because it’s like to do something medical, that they tend to be more thoughtful about, about those, those liabilities that, like, kind of comes out in numbers and you see that performance, and so

 

Jeff Malec  1:05:46

that’s crazy that you have to kind of get into consumer mentality at that point, right? Of like, what are they more willing to pay?

 

Peter Polanskyj  1:05:51

Well, that’s again, that’s again. That’s kind of, we’re not, we’re not the specialists. We’re working with the specialists. But, like, that’s what you have to look at it saying, What’s How does

 

Jeff Malec  1:06:00

actually, nobody’s coming to repo their Nikes, but

 

Peter Polanskyj  1:06:05

exactly, and so, you know, but so it’s like a that’s again, so you look at the you look at the specifics of what, what’s happening. You look at, you know, why? Why does this transaction exist in the first place? Is that constructive like to do? We think that’s a good or a 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, the other, very unique one, if, 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 that money to, you know, to prosecute, you know, some lawsuit, or maybe it’s already settled, and you’re just, you’re just advancing them on the settlements. Which is more, which is the more kind of thing we do,

 

Jeff Malec  1:06:55

Camp Lejeune, all those advertisements, yeah, so that

 

Peter Polanskyj  1:06:59

that’s a very well traffic one, right? Because that’s exactly why you see that. Because campus is interesting, because it is basically settled. The government has said reliable, and the government has said how much they’ll pay. And so the reason you see a million ads for Camp Lejeune is because it doesn’t have the risks that are typically in place for these kinds of assets, right? Basically zero rent, yeah, yeah. It’s like, the payers, the government, right? And they, like, kind of like, have said

 

Jeff Malec  1:07:29

effectively, that we’re not, we’re not appealing, we’re just, yeah, and

 

Peter Polanskyj  1:07:33

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, you know, is precisely because of there’s the other all the risks that typically exist in space, like, oh, you might think the payer might not pay. They may decide to fly off a bank see if it’s a really big case, or or your you know, or the you know, or the your your particular lawyers, 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 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 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, there’s a whole spectrum of those kinds of things that go, that go deep into, you know, like, you know you might not win. For example, there’s parts of that market where they may not you don’t know if you’re going to win. The philosophy, much less, much less get paid on the claims we took the folks in the very the final edges, where you’re really just kind of advancing against known receivables.

 

Jeff Malec  1:08:55

And is that these, like, huge law firms, right? Or could you have some single person, like, I’m thinking of the Grisham book, The 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.

 

Peter Polanskyj  1:09:11

It tends to be more institutional, yeah, more institutional counterparties there. 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 like, there might be, even be a settlement already done. And it’s just people want to, want to, you know, kind of, you know, kind of get access to their capital sooner, right? And so we, that’s kind of where we focus in that space. But it’s

 

Jeff Malec  1:09:37

not even like for marketing and advertising necessarily, can just be, hey, I’m gonna have this many clients, I know it’s this much revenue,

 

Peter Polanskyj  1:09:43

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 like we, we tend to want to be able to somehow think about undergrading the risk. And so when it’s a timing. Learning assessments, right? Where you have more certainty on outcomes, but it’s just a question of when those outcomes will come. That’s kind of underwrittable. When you get to, like, you know, other parts of market, it’s harder underwrite. You know that you actually have collateral, the returns are much higher, but you could have, you could get a zero, but I think we are, like, always thinking like credit investors, and so we’re thinking about recovery, right? If it goes bad, and recovery, if it takes longer than it’s supposed to, right? It’s 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

 

Jeff Malec  1:10:50

rather have, like, zero, yeah,

 

Peter Polanskyj  1:10:54

that’s, that’s like, a good point, like, in all these spaces, right? We kind of say, you know, if we, if it goes bad, right? We want to have a higher we want to have some hot or a reasonable recovery. Again, that’s where they like credit investor mindset comes in, right? And I think, again, like in a very in a variety of these spaces, there are products that are zero recovery, products that we won’t play in because, 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 the space, where they might do things because they’re diversifying. They may be like, have negatively asymmetric, right? But they’re diversifying. And so the price you pay is that asymmetry. We kind of try not to do that, basically, right? And

 

Jeff Malec  1:11:43

so are you. You’re not responsible for the proliferation of personal injury lawyer billboards here in between Chicago and Indiana, like every other one.

 

Peter Polanskyj  1:11:54

I think those were around well before we were exactly

 

Jeff Malec  1:11:58

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 in the insurance world in terms of an investment possibility. So you said it’s both long and short.

 

Peter Polanskyj  1:12:22

So traditional longevity investors would buy the wildlife settlements, they would they would just, you know, you buy the asset, you think it’s cheap, right, and so you think you’re gonna get a good return. And so I think you know, and then, but that is, you know could be you could be wrong, and it could just be you may not get what you may not get what you thought you were getting, or the probabilities you thought could be inappropriate, and so. And so that’s a very directional trade. And things 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 as you think it’s cheap. That’s one strategy, and that’s been the strategy in the in the longevity space,

 

Jeff Malec  1:13:06

that kind of, how do they view it as cheap? It’s based on a pool of lives, or a single life?

 

Peter Polanskyj  1:13:11

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, but that assessment is really what drives it right. And so those probabilities could be wrong, yeah, and so and so. I think

 

Jeff Malec  1:13:33

that wrong on like, a broad of all of America, or a section of America or a specific person.

 

Peter Polanskyj  1:13:39

Again, I think all these portfolios are not they’re not betting on entirely America. They’re burning on portfolio, right? So one portfolio construction, you want to have a diversified pool, because like anyone is always, like anyone is always going to be wrong, yeah. But the question is, when you have a diverse pool, will not, on average, be right? And that’s kind of the experience we have, is, on average, we try to be, you know, 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 there’s a longer, longer longevity, and so you can buy those kind 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, so that you can and then, in theory, if you think about like, you know, in the option world, or right, if you do the long and the short, you’re supposed to get the risk free return, right? Yeah, right. And, but, but my point here. That these are labor markets, right? And so if you do the long and the short, you actually don’t get the risk free rate. You get, like, a real decent, like a double digit return. And so that’s the key. Like, why take you know? Why do it directionally? That may be a nice return, but if you can also do it less directionally, right, and get a similar return like it, just, let’s do that to that instead. And I think that is the strategic shift that our that our longevity business, has taken in recent years, is to say, okay, maybe this, you know, this asset class, you know, it’s mature first of all, and so that’s part of it. And, and so there’s, you know, it has a larger investor base, so maybe, you know, it’s really you can’t source it at the kind of target returns you once had. So then, 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 that’s where we’ve put together what I think is a pretty unique strategy, because, you know, most people in this space, so you have to have the infrastructure. So we own an insurance company. You have to do you have to in order to get the risk. The other way might require, you know, certain licenses that people generally, like in this space don’t have, right? And so, so we’ve had to build the infrastructure to allow us to basically be a longevity mortality investor, and to be, ultimately, form agnostic right, to be to say, I can do this in a derivative form, via a swap, I can do it via some kind of insurance contract. I can do it by buying or buying a life, selling for someone, and to kind of just be agnostic on how you’re doing it, and assemble a portfolio of risk that’s, you know, that’s exposed to these things, right? But is it all one way, right? And then I think the returns are, 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.

 

Jeff Malec  1:17:02

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?

 

Peter Polanskyj  1:17:14

Yeah. I think if we try to be, yeah, I think we try to be in the space certainly more nimble. I don’t know if I would use scared. I think maybe I

 

Jeff Malec  1:17:21

was gonna use dumb, but I didn’t think you’d like dumb either. So I think we, I

 

Peter Polanskyj  1:17:26

think because of the flexibility of our capital, we’re not subject to the same stuff in

 

Jeff Malec  1:17:30

flexible. That’s much more polite. And I think that’s, that’s the key, right? We

 

Peter Polanskyj  1:17:34

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, right?

 

Jeff Malec  1:17:41

Oh, circle one last is at the I’m an allocator. How do I view this? What bucket do I put it in? Right? It seems a little bit bucket list me, but it’s like a bond replacement or, how do you, how do you view

 

Peter Polanskyj  1:17:53

it? Yeah, look our the we have long longevity. Special census funds are really alternatives, right? That’s how you think about those. Are multi sector credit the various credit products really are liquidity driven, right? So we have, like, the multi sector credit stuff and and the and the and the fundamental credit stuff that’s all liquid. And, you know, we have it in daily liquidity forms and so on. The more on, the more private credit stuff we have, again, private credit vehicles that have, like, you know, their 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 that, are that are reasonably have liquidity in them, right? So you can, they’re not like, closed end vehicles that you have to hold in 10 years. And so I think we have, we really measure on liquidity basis. So where we think, you know, we can we there’s liquidity. We offer products that are more kind of, you know, more available to be redeemed quickly. And then as we go into the more complex and more liquid stuff, because through to, you know, kind of less liquid fund structures, and ultimately to the closed end fund structure,

 

Jeff Malec  1:19:00

yeah, I’m going to think of it as the income replacement, right? If I’m trying to do my pie chart at the family office, like, okay, which either an alts or income replacement? Yeah, that right. It’s going to have more of that type of profile income from what’d you say? And in the old bucket

 

Peter Polanskyj  1:19:18

and uncorrelated, the people who had to talk to us are either looking at on a correlated bucket, uncorrelated bucket, so it’s not stocks and it’s not bonds, it’s something else, yeah, that’s, that’s a big bucket. We got allocators, but, yeah, but all of our stuff does cash flow, so you’re right, like, as a general principle, right? Irrespective of liquidity, like, we’re generally providing income, right? And that’s, that’s a fair statement to make. And the question is, correlated income. That’s the only and if you want to and again and like, depending on your return target is different liquidity profile for you. Basically,

 

Jeff Malec  1:19:49

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 burger 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.

 

This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.