Sep 09, 2026
On September 9, Kyeonghee Kim, Assistant Professor and Dean’s Emerging Scholar at Florida State University’s Herbert Wertheim College of Business, joined us for a discussion on her research on private equity ownership, asset management, reinsurance and regulatory capital in the U.S. life insurance industry. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Hello, everyone. Welcome. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And I’m very pleased to be joined by Kyeonghee Kim, Assistant Professor and Dean’s Emerging Scholar at Florida State University’s Herbert Wertheim College of Business.
We’ll be discussing her research on private equity ownership, asset management, reinsurance, and regulatory capital in the U.S. life insurance industry. This follows our series on private credit that many of you are familiar with.
In particular, we’re going to be talking about two of her recent studies. How does private equity impact insurer asset management and regulatory capital and asset risk transfer? These studies are so well done, so good, that we have written separate articles about just what Professor Kim has found. We’re going to talk about that reporting. We’re going to take questions from listeners. If you have a question, please put it in the chat.
Professor Kim, thank you so much for doing this today.
PROFESSOR KYEONGHEE KIM: Thank you for having me, Teddy.
TEDDY DOWNEY: So, I think I would like to start out—there are so many different places we could start. But maybe the best way to start is how did you think about writing about this space? What drew you to write about and explore some of the problems in the private credit space?
PROFESSOR KYEONGHEE KIM: Yes. So, before joining academia, I worked for a life insurance company in South Korea. And I worked for investment department. There, I observed that the company that I worked for was having some employees like me, in-house, but they also utilized outside asset managers, both traditional and alternative.
I also saw other life insurance companies have different models in terms of managing assets. I wanted to study that a little bit more rigorously than from the industry. So, I joined the academia in Wisconsin. Actually, my two coauthors, Professor Tyler Leverty and Professor Joan Schmit, they’re my advisors for my thesis. These two papers are actually from my Ph.D. thesis chapters.
So, the broader question that I wanted to understand was why do these models, different asset management models, exist in the life insurance industry? Because in equilibrium, you might expect insurance companies to converge to one model or to another, which was my real question.
By trying to answer that question which I still do not have answers fully I understood that in the life insurance industry, asset management is really important. Reinsurance transactions are not just about liability or reserve transfer, but it also has to do with asset risk transfer, which is the modified coinsurance paper.
Private equity firms linked to asset management companies, and then to life insurance companies, I think that is also part of my broader question. It’s not that they answer all the questions, but I thought the growth of the private equitylinked life insurance company has been fast and gotten bigger and bigger. So, that’s how I came up with the second research question.
TEDDY DOWNEY: Both super interesting papers. You’re looking at data. You’re making some really interesting conclusions. I’d love to start with the ModCo paper or the paper about Modified Coinsurance. Can you walk our audience through what that is? Because I think, even when you’re getting started out looking into private credit, it’s kind of confusing. It seems intentionally confusing, really, because there’s a lot of assets and liabilities moving around constantly. The game is to follow the liabilities and see if the assets are going with them. Who’s on the hook for providing the assets? Who’s on the hook for the liabilities? That can be a very complex game.
And so, you’re saying basically and I’d like to give you an opportunity to explain it. But for a layperson, it seems like that typical thing that you’re expecting, which is a reinsurance deal in which the liabilities and the corresponding assets are going to the reinsurer to take risk off of the insurer.
That’s not what’s going on here. Something else is happening. I’d love to get your thoughts on it and how you explain it and what’s going on.
PROFESSOR KYEONGHEE KIM: Okay. Let’s start with the basics. This applies to life insurance or property and casualty insurance, When an insurance company makes a reinsurance arrangement, the ultimate responsibility still stays with the primary insurance company using the reinsurance arrangement.
There are different ways of transferring the risk through a reinsurance arrangement. And in the life insurance industry, a lot of the liability risk has to do with mortality risk, which is true for life insurance or annuities. And because of that, unlike the catastrophe risks of the property and liability industry, a lot of the reinsurance transaction is by treaty, which is like a group of liabilities transferred to the reinsurance company.
And sometimes it’s similar to how health insurance is arranged when policyholders with health insurance see a coinsurance rate (they pay a proportion of the losses). We call this reinsurance coinsurance transaction. When a life insurance company tries to transfer some of their liability risk to a reinsurance company, they typically also have to transfer the associated assets supporting the liability.
One of the coinsurance types of transactions is modified coinsurance. And this is unique to the U.S. life insurance industry. I’ve not seen this, especially from the regulatory perspective, in any other countries or any other industry. And this one is a specific case where a life insurance company transfers some of the liabilities and associated assets to the reinsurance company. But there is no physical transfer. There is still a paper trail and arrangement about what type of risk goes to the reinsurance company. And there is a transaction in terms of paying the reinsurance premium and also receiving of ceding commissions from the reinsurance companies, which exist in the traditional life reinsurance transaction.
The uniqueness of this transaction is that there is no physical transfer. So, the balance sheet of the life insurance company that engages in the modified coinsurance transaction, it still reports the assets and the liabilities on its balance sheet. But when the regulators look at how risky the life insurance company’s liabilities or assets are right now in a snapshot measure using the risk-based capital (RBC) ratio, they take into account that there’s a reinsurance company making promises to the insurance company that they’re going to back up this risk. And the RBC ratio is counted based on that modified coinsurance transaction, similar to how ordinary coinsurance transactions will affect the RBC ratio of the life insurance company.
I know I went into too many details. If you have any follow-up questions, let me know.
TEDDY DOWNEY: I was able to follow it, but maybe if I can try to say it again.
PROFESSOR KYEONGHEE KIM: Yes.
TEDDY DOWNEY: In my own words, to make sure I’m following it correctly. I think it’s interesting to note this financial innovation is only allowed in the United States. That might say something about the permissiveness of our laws or the strength of other laws, but that’s a question for another day potentially.
But here, I think what you’re saying is really this is kind of some it seems like it’s insurance really for if the assets don’t perform. Or it’s related specifically to the assets, right? The performance of the assets. And so, instead of sending both the liabilities and the assets and having that be managed by the co-insurer, that risk be taken on and the assets taken on, you’re keeping both of those. But if the assets don’t perform as expected to meet the liabilities, someone else is backing those assets up. Is that a fair way to describe what’s going on?
PROFESSOR KYEONGHEE KIM: So, I think you hit some of the important features of the modified coinsurance. I think my understanding is that traditionally, modified coinsurance was permitted in the U.S. because regulators and some insurance companies were concerned about the financial strength of the reinsurer and whether they can actually back up their promises.
So, to some extent, modified coinsurance is useful for a life insurance company in the U.S. with good financial strength and good capability to manage assets, as you mentioned, so that they can hold on to and control the assets backing up the liabilities. But just in case of extenuating circumstances, they have a backup from a reinsurance company and they’re willing to pay for that reinsurance premium.
And in these days, I think modified coinsurance is useful for some of the variable insurance products, including variable life and variable annuity. Variable annuity and variable life insurance products are very different from other forms of life insurance/annuity in the sense that the market exposure affects the policyholders’ payout. That’s why life insurance companies are supposed to set up a separate account that designates those assets.
If you want to manage the risk of the variable annuity or the variable life insurance, the regulators do not allow you to just strip out the risk because the assets should be separated from the life insurance company’s assets. In this case, modified coinsurance is useful because they stay on the life insurance company’s books. But any risk that life insurance company wants to manage could be reinsured through the modified coinsurance.
TEDDY DOWNEY: So, there’s some circumstances in which it might make sense. But if you can explain how the insurer benefits, how does the domestic life insurer benefit from doing this? What’s the key benefits to them of doing it this way?
PROFESSOR KYEONGHEE KIM: As you suggested, I think the control of the assets would be helpful for them. Because there’s going to be a lot of differences across reinsurance companies. And as I mentioned, when they have a lot of variable products and they don’t have any other methods to hedge those risks, they can buy reinsurance. Because reinsurance is another form of financial risk management for life insurance companies.
TEDDY DOWNEY: And what did you find in the study when you looked into these modified co-insurance?
PROFESSOR KYEONGHEE KIM: So, research can only do a few things. And in that modified coinsurance paper, my question was mostly because this is not just liability transfer, this also has to do with the risk-based capital management of the assets of the life insurance companies. I was wondering if there are some positive externalities, such as when there is a bond downgrade that might affect a life insurance company balance sheet.
Thanks to modified coinsurance, does it help life insurance companies to not engage in fire sales? And I do find some evidence of it, although I’ll not state everything as causal because life insurance companies can decide whether to buy or not buy modified coinsurance, and there may be some selection going on. But that’s what I find in that paper.
TEDDY DOWNEY: So, they’re less likely to sell off the bad assets when they’re doing this.
PROFESSOR KYEONGHEE KIM: They can hold onto it, and maybe they can sell it later when the market is a little bit more stabilized. I didn’t find I didn’t study that part, but that’s my assumption.
TEDDY DOWNEY: Interesting. We’ve got a listener question here that’s related to what we’re talking about. Let’s see. How is modified re-insurance different than credit risk transfer transactions banks are doing?
PROFESSOR KYEONGHEE KIM: Credit risk transactions?
TEDDY DOWNEY: If you have any more details or examples, anonymous listener, please feel free to re-ask the question.
PROFESSOR KYEONGHEE KIM: I’m not well-versed in bank transactions.
TEDDY DOWNEY: So, we’ve looked at the benefits to the life insurer here. They can manage their own risk a little bit better, potentially sell off assets later, hopefully when there’s more of a market.
I have a quick question. Does keeping the assets on balance sheet also make them able to extract more fees potentially or sort of control? This gets into your other paper a little bit, but you have control over the asset management when it’s on your balance sheet. So, you have more control over that ecosystem. That would seem to be a benefit to your private equity parent company or what have you in these circumstances.
PROFESSOR KYEONGHEE KIM: I have not specifically looked into that data. So, I don’t have a concrete answer to that. My understanding is that when I was working on the modified coinsurance paper, I had access to some of the modified coinsurance contracts of a few companies. And depending on the reinsurance company, the modified coinsurance transaction agreements stipulated what the life insurance company can do and cannot do in terms of its asset management. And the reinsurance company, as an involved party, had a say in it. But as I said, I cannot generalize it because different reinsurance transactions may have different clauses.
TEDDY DOWNEY: Here’s a follow-up to the question. Credit risk transfer is a non-recourse asset sale. ModCo is purchase of first loss covers on underlying assets and liabilities.
Well, Professor Kim’s not an expert on bank transactions. So, we’re just going to keep going. This is good food for thought. Maybe I will pass this along to our esteemed colleagues here at The Capitol Forum to dig into this later. But let’s keep going. Okay. So, we’ve talked about some of the benefits. What are the risks of the proliferation of these modified co-insurance agreements?
PROFESSOR KYEONGHEE KIM: In the modified coinsurance paper, I have findings that I don’t identify as causal. On average, if two insurance companies have similar capital-to-asset ratio—not the regulatory formula, but the reported capital divided by assets—and only one is using modified coinsurance, the one using modified coinsurance have a higher RBC ratio, which is the regulatory metric.
I think my concern when I was concluding the paper was to understand if there could be a little bit more reporting about which asset is actually backing up the modified coinsurance deal. Even if that is transparent to the reinsurance company, I thought it would be better if it’s transparent to the regulators or the policyholders or society.
I think something similar is being done by the regulators right now. My understanding is that by the end of 2025, regulators require life insurance companies to report the total sum of assets and provide periodic reporting of those assets supporting the modified coinsurance as a restricted asset. And I think there is an ongoing discussion of whether the detailed life insurance company schedule could also tag whether this specific security is in the modified coinsurance contract.
I also understand that life insurance company investment reporting is probably the most granular across the finance industry, even compared to the GAAP reporting. And because of that, I think this becomes a little bit more of a transparency issue. Because, now that we know that which reserves are in the modified coinsurance, as an academic, I want to know which asset is in the modified coinsurance. I think there is some regulatory effort on that.
TEDDY DOWNEY: And just to stay on this point, when it comes to the modified co-insurance, do you have the similar issue with other reinsurance deals where they’re being done with entities that are offshore or regulated offshore, entities that push that transparency that you’re talking about into a more opaque system of where the assets are sort of like not where the assets are. But you have some less transparency, even though you still have the assets and the liabilities on the balance sheet, you still have an opaque, well, who is the reinsurer and what’s their situation? And it’s not that easy to dig into if the regulators are sort of in a race to the bottom and you’re doing these reinsurance deals with entities in those regulatory environments.
PROFESSOR KYEONGHEE KIM: Yes. So, as I mentioned briefly, the statutory statement filed by a life insurance company has a very detailed section on reinsurance transactions. It just doesn’t identify which asset is supporting each reinsurance transaction. But the schedule also reports the reinsurance company name, their domiciliary and the reserves. And if there’s an annual adjustment to the reinsurance transaction, they are all reported there.
I think if we focus on the first transaction, like the first reinsurance party, I think it’s probably not too opaque. And especially if we think about the modified coinsurance, even if we don’t know which asset is backing our modified coinsurance, at least those assets are still reported by the life insurance company. So, the book of the assets, such as private credit, is observable. It’s just the question of whether this private credit belongs to the modified coinsurance transaction or not. I think that’s the question.
If we contrast that to, like, any coinsurance transaction where actual assets and liabilities transfer, I think, Teddy, I think this is where we might not know which asset is backing up the coinsurance transaction managed by the reinsurer. If that is private credit or a securitized loan, we don’t know about that.
So, to some extent, coinsurance is a little bit more opaque in that asset because it’s not reported by the life insurance company to the U.S. regulators. Did that answer the question?
TEDDY DOWNEY: Yes, yes. We’ve got another question here, and then we’re going to try to move on. We’ve got a lot of questions. You’re a very popular guest here. Have you found evidence that offshore PE type reinsurers may be leveraging the underlying ModCo assets via off-balance sheet transactions?
PROFESSOR KYEONGHEE KIM: The short answer is I have not looked into that. It doesn’t mean that I have or do not have evidence. And the reason is my research focus is on life insurance company balance sheets, and I don’t have access to the reinsurer balance sheet in this setting.
TEDDY DOWNEY: Is there a concern that there’s some conflict of interest that would create an incentive to do something like this? Are there reinsurers that are subsidiaries? Are there reinsurers that have some affiliation where this would even be possible? It seems sort of dangerous to do it if this was going on. Yeah, that would seem very problematic.
PROFESSOR KYEONGHEE KIM: There is a group of researchers at the Fed, Nathan FoleyFisher, Stephane Verani, and Nathan Heinrich, they have a working paper that looks at the affiliated asset manager, not just the private equity, but including alternative asset managers, who also have an arm in the so, these are life insurance company affiliated alternative asset managers in the U.S., and they sometimes have a reinsurance subsidiary in Bermuda or an offshore domiciliary with a little bit more lax regulation.
I think there is an existence of that type of ownership structure. I just didn’t look at that. But the Fed researchers, they do talk about that. And I think their conclusion is that the potential triangle is between the U.S. life insurer and the asset manager that is affiliated with the reinsurer, which is also affiliated with the U.S. life insurer. This is not just about private equity asset management. It includes the alternative asset managers.
TEDDY DOWNEY: Anything else to add about the modified co-insurance paper before we move onto your second paper? All right. Let’s keep going. Let’s keep going. We’ve got a lot of questions. So, we’ve got a lot of ground to cover.
So, your second paper, how does private equity impact insurer asset management? Let’s talk about opaque credit ratings first. If you can define opaque ratings for us, I think that would be a helpful place to start.
PROFESSOR KYEONGHEE KIM: Yes. I want to make sure that I define opacity in my paper in a certain way and how industry or the regulators discuss opacity might be different. I just mainly focus on the reporting requirement of the life insurance companies when they have a security, which I focus on bonds. If they have a bond investment and for some bonds, insurance companies can get the public credit rating from the credit rating agencies. But for some bonds, mostly because of the characteristic of the issuer being private, there is no public credit rating available for that bond or the issuer.
In that case, I think, according to the regulatory guideline, insurance companies can do multiple ways of reporting it. And my research focuses on the years before the reform actually went into effect, which is pretty recent. And my sample period is from 2011 to 2020. So, it might be a little bit outdated.
But during the sample period, I look at opacity as when the regulator did not rate the security. And the regulator here I’m talking about is the insurance SVO, the rating agency within the insurance regulatory space. And they rate the private bonds. And some insurance companies cannot find the rating in the system. And in that case, they can either assess the bond as a highly risky category, which is NAIC designation five or six, or they can actually acquire letters from the credit rating agencies, a credible credit rating from the accredited agency approved by the regulator.
And I’m focusing on these securities or bonds where the rating is not done by the regulator. If the rating is not self-reported as the NAIC five or six risky designation. Even if the insurance company did not get it from the regulator, if they say it’s risky, I consider that less opaque. But everything else, I’m just considering it as opaque. Because unlike these days, when the private letter rating is actually identified and reported by the insurance company, during my sample period, I couldn’t find that tag. So, I wasn’t able to distinguish whether this is inherently opaque or a legitimate rating obtained from the credit rating agency. So, my opacity is a little bit broader than what other people might be talking about as opacity in this current era.
TEDDY DOWNEY: So, is it opaque if you’ve got a private letter rating? That would be considered opaque?
PROFESSOR KYEONGHEE KIM: In my paper, yes.
TEDDY DOWNEY: That seems fair to me personally. But it’s not nearly as transparent as if you got it from the regulator or the alternative there. So, can you talk about how you did this study and what data you used and what you found?
PROFESSOR KYEONGHEE KIM: So, in this study, I do a lot of things. But if you focus on the opacity, when private equity companies buy a life insurance company, my first finding on the asset management side is that the private bond holdings seemed to increase after the acquisition.
And I was wondering if it’s the opaque bonds that are increasing, because for corporate bonds, whether it’s private or public, in the sample period that I studied, the regulatory system focused on the credit risk of the bond. And the credit risk was based on the credit rating of the bonds. And as I mentioned, there are a little bit different channels for how the rating could be obtained.
That’s why I wondered whether or not, the tilt to private bonds, and especially the privately placed corporate bond is a little bit more opaque ? And I do find a little bit more tilt toward opaque private corporate bonds—I will say private corporate bonds rather than private credit because some people use private credit to include securitized bonds, and I am not looking at those—than the comparable life insurance companies that are not acquired by private equity.
TEDDY DOWNEY: Interesting. So, once you change that incentive, it’s a private equity owned insurer. They’re perhaps predictably using more opaque private credit or private what did you call it? Private?
PROFESSOR KYEONGHEE KIM: Non-securitized private corporate debt.
TEDDY DOWNEY: Non-securitized private corporate debt. Than the more transparent publicly tradable debt, corporate debt.
PROFESSOR KYEONGHEE KIM: I didn’t compare with public debt. I compared it with life insurance companies acquired by private equity and life insurance companies not acquired by private equity.
TEDDY DOWNEY: I see. So, they’re just moving more into that opaque form of debt.
PROFESSOR KYEONGHEE KIM: Yes.
TEDDY DOWNEY: Which makes sense because that’s their affiliated business, right? Like that benefits them, the parent company, to do that.
Now, staying on this, I think another thing that you had in this industry was you come at this from a human perspective in that you used to work at one of these companies. And you saw, wow. When they come in, they say they’re going to reduce make things more efficient and reduce costs. But really what you found was that they cut a lot of pay to the workers and then they push up their fees associated with the asset management, at least when it comes to the asset management side of the business. Can you tell us a little bit about what you found there? I think that’s really interesting. I mean, I guess also in line with incentives, but something interesting to discuss quickly.
PROFESSOR KYEONGHEE KIM: I really want to clarify that. I What I find is that I only observe what’s reported in the statutory annual statement. And in the statutory annual statement, I observed a detailed breakdown of the expenses, separated out by insurance business and investment business. And within the investment business, I look at salary items. That’s what I think you mean by pay, Teddy, which is the employee expenses—employee salary and employee benefits.
The other, I call them non-salary investment expenses. I observe that when private equity companies buy life insurers, on average, the salary to the in-house investment employees and their benefits, they do reduce. But the non-salary investment expenses, one of which could be fees, they tend to increase on average. And I could never say if it’s the fee driving the increase or some other non-investment salary. It could be some advisory or some custodian cost. But I do observe that non-salary investment expenses increase on average.
TEDDY DOWNEY: And we’ve talked about two potential problems here from misaligned incentives. Did you have any recommendations for policymakers or anything that you think would address the opacity problem or these sort of incentive problems when you have affiliated entities involved?
PROFESSOR KYEONGHEE KIM: Yes, I do. I am a person where I think more disclosure is useful to society. Even if I understand that it is more costly for the regulators and the insurance company to produce and monitor.
I think my understanding is that different state regulators have different requirements when it comes to affiliated asset management transactions. And some states require life insurance companies to disclose the dollar amount of asset management fees sent to the affiliated asset managers. But some states do not require that. And I think if that could be reported by more life insurance companies, I think that would answer many practitioners’ and regulators questions about whether there is an affiliated asset management fee payment that may or may not be useful for the life insurance company policyholders.
TEDDY DOWNEY: Yeah, we actually did a big interview recently with a lawyer who is suing these private credit companies for not marketing to market their assets, having them be too highly rated. And the associated fees, since they’re done on a percentage, are inflated and harming the investors in those vehicles.
So, you can see how lack of transparency becomes a big problem, not just for the investor, for the workers, for the policyholders, and a big headache for the regulators if they have to clean up the mess later because of some lack of transparency.
We’ve got a couple of questions here. I’m not sure how many of these we’ll be comfortable answering, but let’s ask the first one. There were findings in an NAIC 2024 study on rating company inflation on private credit loans on life insurance companies that was later pulled from NAIC website after pushback. We’ve written about this here at The Capitol Forum. Out of 109 samples, 106 private ratings came in higher than the SVO’s internal assessment. On average, private letter ratings ran 2.74 notches higher than what NAIC analysts deemed appropriate. A lot to unpack here. What was your take on this 2024 study, if you’re familiar with it?
PROFESSOR KYEONGHEE KIM: So, I do not remember the details of the NAIC 2024 study. But one of the things that I studied in my paper on the private equity acquisition of a life insurance company using the period ending in 2020 I just want to make sure that the sample period might be different. One of the things that I looked into is holding fixed the private corporate debt because they also have a private placement number, which is an identifier. If you hold the same bond and different insurance company hold the same bond, I can follow them.
So, I hold a bond ID, the non-securitized private corporate debt ID. And I compare if the reported NAIC designation, which is a very cursory credit rating, if they differ across insurance companies. And I call that riskbased capital gap. Because my underlying theory is that the NAIC designation feed into the RBC charge. And if there’s a difference across insurers, which I think this SVO internal assessment is getting at, I was more curious about that.
Because even when holding the bond fixed, I find that some insurance companies report different NAIC designations. So, there are different ways to capture that gap, but I just did the worst case scenario where holding fixed the bond I look at the riskiest NAIC designation and I use that as a counterfactual compared to reported NAIC designation.
I find that the average RBC gap which is the difference between the worst, the riskiest category, and the reported category is higher on average for life insurance companies acquired by private equity compared to those life insurers that are not acquired by private equity. I think that’s a little bit similar to what Kevin is asking.
TEDDY DOWNEY: That is really deeply troubling that you could have different insurers with a different categorization of the risk of the same bond. That seems deeply troubling. In terms of reform, who is asleep at the switch here? Is it the NAIC? Do they need to improve their standards? Do they need to hire more people? What needs to happen so that we could at least get consistent reporting, some kind of more consistent rating, of the debt, of the risk here? What good is a capital ratio if everyone gets to just make up what the risk is for their assets?
PROFESSOR KYEONGHEE KIM: I really don’t have a concrete answer to that because I didn’t study all of that. And I didn’t even do any welfare analysis or anything that I can make a claim for. But I think the regulators are concerned about this. And my understanding is that SVO is broadening the type of bond that they’re going to rate. So, I’m hoping that it’s in the direction, the right direction that Teddy wants the regulators to act on. But, of course, everybody has limited resources and time. And I think we have to be mindful of that as well.
TEDDY DOWNEY: Yeah, I mean, I think it’s pretty low bar to just you guys have the same exact bond. You should have the same risk rating here. Here’s another question. I think I’m going to ask the question and maybe I’ll try to reframe it so that it’s more likely that we can discuss it. Can you ask about the Delaware Life, Mark Walter situation? Are you familiar with it and following it? Do you think this is a systematic issue and Delaware Life was the canary in the coal mine? Or is Delaware Life, Mark Walter the odd one out in terms of what they were doing?
I mean, do you want to answer that question? I could potentially reframe it to be a little bit more in line with what we’ve been talking about, if you’d like. Okay. So, I think, to me, what I think is interesting about the Mark Walter situation and Delaware Life is that they were lying about their affiliations. What we found in our reporting is that there’s no need to lie. You can just go to your regulator and get permission for whatever, in my opinion, crazy scheme that you have to cover up, hide, or otherwise lie about your assets and whether or not you have enough assets to pay your policyholder promises.
So, to me, from what I can gather about what the other PE-owned insurers, they laugh at Mark Walter because he got caught. He’s doing what everyone else is doing. But he got caught because he lied about it instead of just getting a regulator to approve it. It’s almost like the stupidity of it. Like, then you could just get the regulator to do whatever you want?
Now, this is a cynical way of interpreting it clearly, but you must have seen the permissiveness of the regulators to allow for sort of rampant affiliations throughout this whole ecosystem that you’re studying. Are you seeing a lot of affiliations and are you seeing a lot of that permission? Maybe not adopting the language that I use for it. But is that something you’re witnessing in a systemic way? Or is the Mark Walter thing, that type of affiliate relationship, unique to him?
PROFESSOR KYEONGHEE KIM: I know my answer is not going to be what you want, or the audience wants. I didn’t study specific companies. As an insurance economist, we are trained to look at what’s happening in general and report the averages.
So, I want to look at the averages. In my sample, we only focus on private equity-backed life insurers and I don’t consider them as private equity-backed life insurers. As Teddy was saying, they do not belong to my sample of private equity-acquired life insurers. I do read the news. I’ve seen these in the news. And that’s all I know, which is probably lighter than what Teddy knows or the audience knows.
I think this also has to do with a recent disclosure that regulators put into place, which is that for each security, insurance companies are required to tag who is the related party with this and if this an affiliated transaction. So, I think that disclosure itself probably might have played a little bit of a role in people knowing what’s happening with these companies. So, sometimes disclosure actually has some real consequences, like these companies. I think that’s all I can say.
I also want to add that a lot of research in private equity or affiliated asset management transactions, including the reinsurance offshore, it’s burgeoning. And I know a couple of researchers in Wharton, Amy Huber, Stefan Huber, Christina Zhu, and Bella Shan, their Ph.D. student, they have a paper that looks at this affiliated transaction. But they focus on the collateralized loan obligation (CLO) because that’s where the issuer of the loan could be tied to the ownership structure. In the non-securitized corporate bond, the issuer is different from who is actually acting as the intermediary, which is usually the asset manager.
That one is difficult to answer, but these researchers look at the CLOs and they do look at the affiliate transaction at the security level. Maybe you should invite them instead of me to answer this question.
TEDDY DOWNEY: I will. I will certainly look that up. That sounds fascinating and right up our alley. One thing in your paper, you mentioned you use a novel data set. I’m curious. Sometimes you can get some data in this space by pulling up all the regulatory filings and they are numerous and voluminous and there’s a lot in there. Often it requires some just hours and hours of sleuthing and my colleagues, Lisa and Kim, are the ones that do that to follow the money around.
I’m curious how you put together your data set, where you like to pull the data from. Is it the regulatory filings by the insurers to their regulator? Is there anything else? I’m just curious. The word novel data set stuck out to me. I know you describe it in the paper. Would love to hear it in your own words so we can share it with the audience.
PROFESSOR KYEONGHEE KIM: I should clarify that my paper is academic, and when I say novel, it’s compared to the established academic literature. So, it’s not probably novel to the practitioners or the regulators. Because as Teddy was mentioning, all of my data comes from the statutory accounting statement. And yes, it is hard work to understand all the definitions of the lines and the columns of the schedules. But that’s what I’ve been doing since joining academia.
TEDDY DOWNEY: We have a question here. Were they lying? Or is it a matter of one’s definition of an affiliated company versus a regulator’s definition of what is considered affiliated? Well, look, personally, this is not rocket science. These are captive subsidiaries often. Professor Kim, though, does also note that there’s another form of control that may be worth discussing here, which is controlling the asset management. Because that involves a level of control over the entity that maybe is escaping people’s viewpoint.
Obviously, a regulator that permits captive insurers from behaving in a way that allows for sham or otherwise, questionable reinsurance agreements. I think we can all agree that’s a lax regulator that is probably not I mean, I don’t want to speak for Professor Kim, but probably not doing what’s in the public interest.
However, there are a lot of other circumstances where maybe it is a little bit more questionable if it is affiliated or not. When you were looking at this, Professor Kim, how do you think about control of the insurer when it comes to controlling the asset management side of the business?
PROFESSOR KYEONGHEE KIM: I think it’s pretty difficult to understand all of the ownership structures, and also identify if it’s true or not true or whether it’s a lie or is it a differences of definitions, because I also only have access to the statutory accounting statement.
But what I found useful is that, since 2011, insurance companies, including Life and Health and Property and Casualty, they have a Schedule Y, which used to be just an organizational chart. But beginning in 2011, they now have to list all of the entities that are affiliated with the insurance company, including insurance companies and non-insurance companies. And from there, I could look at the list of the private equity fund. Because sometimes the funds are SPVs. So, they’re listed as an entity.
So, there’s a plethora of data that people can get access to. And many insurance companies post the statutory accounting statement, including this schedule, which is Schedule Y, on their websites. So, I’m really happy that there are so many people interested in the topic, because there are only a few academics who look at this.
And there’s also a great number of people in The Capitol Forum, but maybe some third parties, their pair of eyes, will look at these data and maybe that’ll really make use of the disclosure that’s already available. As I mentioned, I think this is the most granular data across the industry in the U.S. and across the filing forms. So, I try to be positive.
TEDDY DOWNEY: Yes. I commend you. I commend you for your optimism. I have come to be much more—this whole ecosystem really reminds me of what happened in 2008, where you had these lax regulators. You had these ratings that didn’t seem right. You had all these conflicts of interest. Sometimes when you go to the company or the regulator for comment, they don’t even know what you’re talking about. They have conflicting answers. It doesn’t even seem like they understand necessarily what’s going on in their own balance sheet sometimes. So, I’m much more pessimistic, sadly, but that might just be the way that I am. That’s just my personality flaw.
I do want to ask before we let you go, Professor Kim—well, if we have any more questions, happy to take more listener questions here. We’ve had an engaged audience.
What are you interested in looking at next? Where do you see other areas where there are potential conflicts of interest or lack of transparency that need more academic scrutiny or third-party scrutiny?
PROFESSOR KYEONGHEE KIM: Yes. I think some of that came out from the audience, and that’s why I couldn’t answer because I have no conclusion yet. But I am interested in how these offshore reinsurance balance sheets look when they have a U.S. life insurance company on the other side from the reinsurance perspective. Not just modified coinsurance, probably more for the coinsurance where we cannot even observe from the U.S. life insurers.
TEDDY DOWNEY: You talk a lot about the problems with having opaque reporting. I know I asked this already, but I kind of want to ask it a different way. Which is what we found is it seems like, when the insurer does not want to be transparent about their assets and liabilities, when they want to be able to fudge how many assets they’re holding against their liabilities, they do reinsurance deals with reinsurers that are located in these much more flexible regulatory environments that allow for all this opacity.
Would one way of dealing with that just be to not allow that kind of transaction or penalize the opacity or otherwise come up with a system to try to push that back into a transparent environment? Because what it seems like from a macro standpoint, if you take a step back, it’s imagine a bank that had a capital requirement and they just decided, I don’t really feel like having that amount of assets. I don’t really like this capital requirement. I’m going to go shop around for a place that lets me gamble a little bit more of this money or whatever, lend out more of this money to riskier businesses, et cetera. I don’t like this regulatory regime. And so, I’m going to shop around for a more lax one that allows me to have more leverage and make more money.
To me, if we were talking about a regulated banking system, this would be a real scandal. But because it’s complicated, it’s insurance, it’s state regulators, for some reason, this issue is, oh, it’s opaque. It’s not as urgent.
I guess my question is (a) is that an improper analogy in terms of what’s going on here? And (b) is there a way, if we can agree that we do have an opacity issue, do you have any solutions for pushing that accounting back into a more transparent ecosystem?
PROFESSOR KYEONGHEE KIM: No, I don’t have a definitive answer to either of the questions. I think from a philosophical standpoint, I believe in more disclosure. But I also understand the costs associated with disclosure.
On your specific questions about banning some transactions because of the concern, I wonder if banning would be the proper way of doing it? Because people will find ways to get around that ban in some way. I think that people are very clever at that. I think it’s just making the leveling playing field for everybody, which is the disclosure that I’m talking about.
TEDDY DOWNEY: Yeah, as long as you have transparency, compelling them to have transparency, or having some kind of rules about transparency, is the way to go. I will say this. I would love to have more transparency. It would be a lot easier to actually be digging into even more of these documents and see where the assets are, be able to see what’s going on with these reinsurers. That would be a lot more fun for me than to at the end when I’m making my diagrams and I’m doing my editing with my colleagues, I just have a big box with a question mark in it, reinsurer, which makes doing the job of journalism that much harder.
Well, but Professor Kim, I cannot thank you enough for doing this. You are doing incredible work. I think it is absolutely the type of rigorous academic work that is essential to having a functioning market and economy. I can’t thank you enough for doing this.
PROFESSOR KYEONGHEE KIM: Thank you. Thank you for all the discussion and the questions, thoughtful questions, from the audience. And I look forward to sharing future research.
TEDDY DOWNEY: Yes, and we have for you and for our audience, we have a big event in D.C., November 12th. We are going to have a big community of regulators, of rating agencies, of Congressional staff, of experts. It’s going to be the Festival of Private Credit. I hope everyone on this call can join us. Professor Kim, I know you’ve been invited. We’d love to see you there. I’m super excited about that event.
We also have our new podcast, “The Private Credit Crisis.” Please check that out on The Capitol Forum podcast. This will be on there, maybe not next week, but the week after. We’ve got a couple of great episodes. We’ve got one great episode on there. My daughter, my seven-year-old daughter, is providing the artwork. I hope everyone enjoys it. We’ve got new music as well. Probably a little too dark for Professor Kim’s tastes. But I enjoy it, certainly. But please check out the podcast. Check out Professor Kim’s work. And we look forward to seeing you on our next call.
Thanks again, Professor Kim. And thanks to everyone for joining us today. Bye-bye.
PROFESSOR KYEONGHEE KIM: Thank you. Bye.
