Sep 15, 2026
On September 15, Corwin “Cory” Zass joined The Capitol Forum to discuss emerging risks across the life & annuity industry and the potential consequences of financial distress or failure at an insurer. 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.
Today, I’m pleased to be joined by Cory Zass, Founder, Principal and Consulting Actuary at Actuarial Risk Management. Cory has more than 25 years of experience advising life insurers on capital strategy, financial reporting, asset liability management, risk management and other complex actuarial issues.
Quick note, if you have listener questions, please put them in the chat, we’ll get to them towards the end of the call.
Cory, thank you so much for doing this today.
CORY ZASS: Absolutely, pleased to be here.
TEDDY DOWNEY: So, I think you’re a little different from some of the guests that we’ve had so far in that you’re not actually a private credit critic, but you have seen some problems developing in the industry. And so, I would love to hear a little bit about your background of what you think about the industry, how you’ve come into thinking about the industry and how your perception of the industry has changed recently.
CORY ZASS: Sure. Well, again, thank you for having me. I think my journey into the profession really started in a company that really didn’t work very well. It had shoeboxes and had duct tape holding everything together, and really had no real true understanding of the quality and the accuracy of the financial numbers.
So, in a way, I assumed pretty much the opposite of most actuaries. I assume every number is wrong and I proved to myself that it’s right. And I’ve taken that same ethos all the way through to my current day position. And we’ve had where the firm and myself have led financial examinations for states, checking the homework of other actuaries, the audit support for the financial audits by the accounting profession, done an enormous amount of due diligence on companies, really had killed a couple of big large deals, and tried to give the real truth of what I see underneath the hood. And here we are today kind of talking about something else that frankly is an area that is obviously gaining an enormous amount of publicity.
TEDDY DOWNEY: And you’ve been working on some companies that have either near failed or failed recently. Has that changed your perspective on how much risk there is in the private credit system?
CORY ZASS: I think I just want to be careful in just kind of using a broad brush and saying private credits. And there’s been companies that have had other meltdowns and other aspects that had nothing to do with the private credit. They could have failed because of bad actuarial assumptions. The long-term care market has had its fair share of problems and that had nothing to do with private credit. It had just an assumption that people were going to not keep their policies.
So, here in this last 15 years where you’ve seen a much slide in the interest rate environment, the fact of the matter is insurance companies their job is to be able to be around to execute on promises, but they’ve also got to make money. And when the interest rates were so low for so long there’s a part of the marketplace that certainly looked at other mechanisms to make money outside of a margin over some actuarial assumption. And that came on the asset side of the balance sheet. So, they started to explore other alternatives, expand into ones that appear to be more risky.
So, the failures really have come back to, if you think of some of the other ones, you take the Greg Lindbergh scenario, right? That was just pure fraud. You ended up having that kind of situation in which you end up seeing the assets loaded up with personal gains.
Then you go into the PHL variable, and that has its own flair on both sides of the balance sheet of both the liabilities as well as the assets. And then you have the more recent one that I was involved with, which was the 777 Re Ltd. in Bermuda, in which, what it did was it really cemented myself and my team that things work until they don’t. And if you look back at kind of how that all proceeded going forward, it took some real significant crash events, COVID. Then you had the interest rate spike in February of 22.
So, what it did was it really kind of reinforced our view that the stress scenarios need to be significantly stressed. And there’s definitely a lot of companies that have the interaction between the asset side and the liability side, and the actuary and the asset manager are very much in communication.
And then there’s other sides, frankly, and other companies, that it’s almost like one goes out the door at the daytime, and the other one comes in the door at nighttime. And they don’t really hardly even communicate, let alone understand what’s going on within the organization.
So, we see both ends of the spectrum there. But from what we saw in that one case that I was certainly put involved with, I can tell you that I was told that they didn’t think I was going to get out past a week after taking on the interim CEO. And we certainly persevered and didn’t have anything blow up in any of the jurisdictions, and kind of showed that there are ways to do workouts.
But again, it has to be done on a sound basis. But again, what it really still comes back to is, was there enough capital to support kind of this real stress scenario? And in that case, the answer is clearly no.
TEDDY DOWNEY: And you mentioned a couple of things here. One, you mentioned reinsurance. You mentioned communication at the company around risk. And then you just mentioned, do they have the assets to withstand a stress scenario? I’d love to ask you first about reinsurance. Do you think life insurers are using reinsurance for legitimate purposes? Or has it become a tool for manipulating capital requirements, taking advantage of lax regulators, and having an opaque environment for showing what assets you actually have?
CORY ZASS: Well, I’d want to push back on some of that. To simply say that all reinsurance is bad is certainly far from the truth. Reinsurance serves a very important role. Yet, it still comes back to is that is the underlying economics based on sound principles of understanding the risk, sound principles of truly understanding what can happen and what could happen?
Ultimately, the reinsurer has taken that risk. But if the reinsurer has its faults, it does revert back to the recedent, to the direct company. So, from the standpoint of the situation that we dealt with in Bermuda, it did come back to the U.S. entities. But then there was potential opportunities or not opportunities, but there was potential situations in which that impacted monies and blocks of businesses and so forth, going to other jurisdictions as well.
I think, if everybody started to set up in Haiti, at the Department of Insurance of that island, maybe we should be worried as an overall industry. But that’s not the case either. There’s benefits of going to different locations, but there’s also costs associated with going to different locations.
There’s no free lunch. But it all comes back to is there enough transparency throughout the ecosystem? Does everybody understand that there is risks on both sides of the balance sheet that’s going to get transferred? And for the most part, I would have to say that most of the rules that are in place in most jurisdictions have that as a principal direction, yet it may not be as evident to the public. It may not be as evident to others that are also in the industry which I think is some of the frustration in all honesty. But that doesn’t mean that there’s bad actors that are trying to push business into one of the jurisdictions and they’re really being aggressive on the assumptions.
Well, you’ve got to believe that the rules ultimately are going to catch that. Are they strict enough? Are they looking at the right places? I don’t know. But I think I can tell you that there’s plenty of surveillance. Can there be more surveillance? Absolutely, absolutely. But you don’t want to limit and put on so many more layers of rules that make it very expensive to the underpinning of the policyholder.
But at the end of the day, as everybody has to realize, the regulators simply are looking at what happens when things don’t work. That ultimately comes back to that same theme over and over and over again. I’m sure that there’s some bad actors out there. If they could hold $1 for $10 billion of assets under the management, they would sign up in a heartbeat. That’s irrational. It doesn’t make any sense. And I think what’s happening is where you’re seeing the actuary community being put in a position where they have to do more tests, more analysis, I think it’s slowly showing that the amount of stresses that need to be undertaken on both sides of the balance sheet. It’s not just one or the other.
So, to kind of say that the private credit component is one of the catalysts, it’s part of the entire enterprise of the ecosystem. And I think what needs to ultimately happen is that there needs to be more focus on the whole enterprise and what it really does and being able to convey that as your benchmarks. I think there’s a lot of different things that could be considered.
TEDDY DOWNEY: I want to take a step back really quickly. In terms of the amount of risk here or the amount of the seriousness of the problem in terms that you’re I just want to get a sense. I think a lot of our guests are at a nine out of 10, a 10 out of 10, in terms of the risk that is in the system right now because of potential lying about assets, hiding how many assets there are, there not being enough assets, very risky assets that are probably not going to be able to pay off policyholder promises.
And lastly, the difficulty of resolving failed life insurers. So, to the extent you have one big failure, let alone a potential cascade of failures that the system just simply can’t hold it from a high-level, what’s your concern level? Is it a 5 out of 10, a 10 out of 10, a 1 out of 10? And then we’d love to get your take on why.
CORY ZASS: I think there’s a couple of different things, Teddy, that we need to consider. What is the true makeup of the organization? Is it a single line of business? Are they putting a lot of focus on an asset allocation that is truly a specific type of private assets? Not all cars are made the same. So, I always want to be careful in saying, well, a Yugo is a Ferrari and a Ferrari is a Yugo. Sorry about the branding there. But at the end of the day, it’s the same thing here. Are there’s, if there’s enough transparency and it’s throughout the entire culture, then you got to believe that there is adequate information being portrayed.
Clearly, if there’s specific types of assets that are more opaque opaque that I can tell you can happen it’s opaque then to the rating agencies. It’s opaque to the third-party valuators. Yeah, the more you have on a balance sheet of that type, you should be somewhat concerned. More so as a comparison to if they had $10 of that, but they had a billion dollars of capital, I don’t think anybody would care, right?
It becomes more of, if those marks are wrong or if those assets start to deteriorate, they don’t have the liquidity that everybody thinks they need, the underlying collateral becomes PIKs, whatever the case might be, that cascades down. And if you have the capital to absorb it, then it becomes less and less of an issue, right? Whether you’re in one offshore jurisdiction or you’re in one of the states, you’ve got a captive there. It still comes back to the same aspect.
If there’s true recognition of the inherent risk in that balance sheet and being completely honest with all the stakeholders including the board, frankly. If the boards don’t understand kind of what some of the severity is, then they got the wrong board, but they probably got the wrong operator that’s got in charge of an insurance company, especially if they’re treating it more like a fund and not like a regulated insurance entity.
There’s capital needs. And I keep telling people that. For the last two years, I’ve been harping on it. There’s efficiency and there’s ways to optimize that. But that doesn’t mean that you are skirting it such that you’re making an equity truly look like a piece of debt, purely only to obscure. But when, in the stress scenario, it really is equity, it gets wiped out. If you had one of those on your balance sheet, fine. But if you have 30, 40 percent of it on your balance sheet, well, how is that going to do? If you assume that goes to 50 percent, 30 percent, 70 percent, if you end up wiping out the capital, then it is systemic.
But from the standpoint of understanding where it’s going, that’s where the actual profession has been and the NAIC has been informed that the ability to model and understand structured assets, private assets, private credit, anything that’s in those tail scenarios, is really the Achilles heel. That’s effectively, otherwise, it’s all false in really what’s there. But again, what it comes back to is I’m not going to die eating one Twinkie, but I’m going to die eating 100 Twinkies, right?
TEDDY DOWNEY: Yeah, and that’s taking not having enough assets to or not having enough capital to deal with your, the risk that you’re taking on.
CORY ZASS: It’s the risk. That’s the most important thing here, Teddy. Understanding the risk, the impact, and how that may change policyholder behavior. They get spooked in the marketplace, right? And then all of a sudden, they start phoning up and saying, I want my money. Mrs. Jones is calling up and saying, I want my retirement annuity that’s been sitting there in accumulation, I gave you guys three or four years ago. I want it back because I don’t have trust in you. That is a disaster for the economy. This is a disaster for the entire ecosystem of the insurance market. If those assets can’t be sold to liquidate, to provide Mrs. Jones her request, right?
You’ve seen enough Wall Street Journal redemption, gated redemptions, and roadblocks and how much money you can get back. It’s the same thing, right? If it’s illiquid and you don’t have the ability to provide that sort of demand in the cash to pay for those benefits, then it does. It raises questions about what are you?
You were supposed to be an insurance company and you’re supposed to be there to support these promises. These people are taking money out of other things and putting it into something that is supposed to be deemed to be safe and stable.
Well, pure equity bets by the insurance company that flows down to the policyholder is not stable or safe. Unless you have enough capital to support that, to say, you’re right it’s not don’t worry, Mrs. Jones. We have this vault of cash that’s going to support you if things go say so. And I think that’s the concern.
Some companies are on a razor edge and others are working intensively on understanding asset liability management, looking at liquidity. What happens if there’s a certain event that happens? Do they have the ability to garner the cash to go with it?
Because a lot of times there may be some sort of parental component that says, look, we’ll pony up if things go south. Well, a lot of times what we’ve seen in our experience is that those things are great and valuable today in normal conditions. But they become somewhat worthless when everything correlates to one in a bad scenario. It just does, you know?
So, it becomes more of how does that help in the broader sense? And I think that’s where surveillance, that’s where a lot more of the understanding of what these what-ifs are in these tales. And some jurisdictions do a really good job at understanding that. And they say, look, if you have some aspect of the underpinning of the liabilities and the asset projections, and they show that things deteriorate a lot more than you think, well, it is what it is. It is what it is, you know? But that’s what you’re getting into the game of making promises, and you better be able to deliver.
TEDDY DOWNEY: You mentioned jurisdictions. Are there specific jurisdictions that you think are not doing enough oversight here? Like, obviously, we’ve written about Bermuda, Vermont, Delaware, where the insurance regulator allows for a lot of these opaque assets, these promises that you mentioned that don’t seem like they might hold up in a stress situation. Or is it more a case-by-case basis where you see a problem?
CORY ZASS: Well, I think some I think to a certain degree, every jurisdiction could open the kimono more, frankly. But it’s more of who should have the right? Should Mrs. Jones have the right to see everything based on the people that are giving her the promise? Or is it the competitors that are learning from that to try and replicate? You know, it’s a fine line. And then what is available to us may not be the same information that’s available to the regulator who’s policing.
I’m sure I haven’t seen anything along the lines that says that every jurisdiction isn’t looking deep into what these situations are and working with the other jurisdictions. I think that that’s clearly there’s no renegade out there that is sitting on an island or some state and saying, well, I don’t really care about the others. I’m going to just be reckless and allow these people to have something in their jurisdiction. I don’t see that happening. The regulators get regulated. The regulators have to have peer reviews by other regulators. So, that they can’t just act in that regard.
So, I think part of the challenge is that you only get to see what you’re seeing and you tend to then kind of make judgments based on what you don’t see. But clearly, if something blows up in a certain jurisdiction, the questions are going to be raised, right? Why didn’t we see it? Why didn’t we see it?
I can tell you coming out of the Bermuda workup that we did was, the question was, how do we prevent another one? And I’m not saying — I jokingly stated that everybody needs to up the game of surveillance and you don’t need to have CCTV kind of constructs where it’s in every board meeting and everything like that.
But it comes back to governance. It comes back to strong ethics. It comes back to recognition that there are really good stewards of Mrs. Jones’s promise, but there’s some that just simply aren’t. And they have their other motives in there and they’re going to push the envelope regardless of what jurisdiction you get in.
TEDDY DOWNEY: Yeah. I think we’ve definitely seen some real problems at Vermont and Bermuda among others, but we’ll have to see how that plays out. You mentioned earlier, are the policyholders going to want to pull their money? Then you mentioned some of the investors, potentially how they’ve been trying to pull their money out of some of these private credit funds.
A lot of people say, well, there can’t be a run on the bank in an insurer. But you just mentioned a situation where if you have an annuity and you think your insurer is potentially insolvent or in trouble, they might be incentivized to pull out their money. Do you see that as a real concern, a real problem, that as it comes out, as it comes to light, that some of these insurers don’t have the proper amount of capital, that you could see run on the bank type scenarios?
CORY ZASS: So, two things. One, I want to go back to the prior point. Whether it’s Vermont or Bermuda, I think their rules are what they have in place. Could every one of them be stronger to appeal?
TEDDY DOWNEY: But they’re making a lot of exceptions to their own rules. I think the issue is not just that they have rules. They have rules. They don’t enforce any of them. They create an exemption. They say, you want to violate the rule? You ask nicely. Sure, violate the rule. We’ll approve it. And that happens over and over and over and over again. And so, I fail to see the value of a rule if you permit people to violate it. I mean, we literally have quotes in our articles. Well, they allowed them to violate their own rules.
CORY ZASS: I’m not disagreeing with that. I think you want to have a level playing field for everybody that wants to participate in there. And exceptions certainly change the view of many that are on the outside. And whether the rules ultimately come back to them saying you’re allowed to perform other sorts of reserving or you only need to hold one third of the capital because you have it in a captive than something else, you’re right. There’s no denying that aspect, right? It becomes more of does it take a failure to potentially change that? Which is not the right answer.
TEDDY DOWNEY: Well, some of these jurisdictions will even give you an exemption and they’ll say, yes, we’ll count this line of credit as an asset, right? They’ve changed this. The rules are about solvency and they’ve changed them to be about like something else. Liquidity, I mean, I don’t even know what. Some of the stuff is so absurd and ridiculous that you’ve changed the incentive of the rule. You’ve actually changed the purpose of the rule by allowing for so many of these exemptions and such perverse exemptions from the rules. I think it’s really hard to even say that they are meaningful rules at a certain point.
And it alarms me. I don’t even have an annuity. But it alarms me for all the annuity holders. And I think that gets me back to this point where if any of this starts to come out in a more outside of the private credit crisis podcast and gets into the mainstream more, as it is with this Walter situation, wouldn’t you expect investors in the funds and then also the policyholders to say, I want out? Like, just give me my money. I don’t want to see how this plays out.
CORY ZASS: Again, if you want to look at it and say that if the same depth of actuarial analysis is done, regardless of jurisdiction, and truly stresses whether you can call upon that parental ask or that promissory note or whatever the case is that someone has — using your word permitted, then it’s all going to fall out. It’s going to show that in the stress scenarios, that’s probably not as worthy as one thinks. And you end up raising capital.
And I think that’s kind of the whole impetus here is that if you’re doing the tests and you’re showing degradation or the real ability to access whatever those pieces of notes, those other assets that are sitting there making the balance sheet balance. But in the tail scenarios, if they don’t actually become something of value and they become worthless, then it should show up as being that you need more capital anyway in the tail, which ultimately should flow through into the actual calculations.
So, I may look at it and say that, on average, they’re getting an exemption and they have enough liquidity and this piece here doesn’t need to happen. But if everything goes south on the liability side, you need the liquidity and you have to call upon this winning lotto ticket that you have sitting in the drawer that you’ve used as an asset to be extremely critical to the extent of what that could be, at the end of the day, if the amount of capital that was truly measured is having to be in there and you actually had to put real capital in not a promissory note, maybe that’s your point. It just becomes, in your mind, and a lot of others, that it’s really a fake asset that really can’t help you in crisis. I think is the whole point that you’re trying to make. Not whether
TEDDY DOWNEY: That’s my concern. That’s certainly my concern. I mean, you seem concerned about that too. I think maybe I’m a little bit more alarmed by it than you. But you share that concern, it sounds like.
CORY ZASS: I share the concern that the risk of the business on both sides of the balance sheet, for some organizations, is not measured properly, is not stressed enough. And thus, creates a bigger demand for additional capital than what is currently there. Without a doubt. There’s no denying that there are aspects of that.
One could even look through to marks of valuations on assets, right? At the end of the day, you could have a ton of capital, but it’s only a fraction of your assets. At the end of the day, if there’s a systemic problem with valuations, then it doesn’t need everything else could work out perfectly. But if all the valuations were off by X percent, does that chew up all your capital?
Well, that had nothing to do with the rules, right? That had nothing to do with prescribed. That had everything saying that we were using the wrong barometer or we’re using the wrong thermostat to check the temperature. And that’s a whole different issue.
TEDDY DOWNEY: It’s a whole different issue. But at some point, if you’re not asleep at the switch and you’re a regulator, you would be curious about whether people are systemically lying about the quality of their assets. I mean, you don’t have to do much research to figure out that there’s some lying going on. You can literally have the same asset held by different insurers and they’ll just be putting different risk weightings on them. We had that explained to us in our last conference call. I mean, how can you possibly not flag something like that? So, I do personally hold these regulators accountable, even if it is a lie that technically otherwise, would be within the rules.
But I want to come to a point here that you made, which is what happens if one of these insurers fails? And I would love to get your thoughts. I know I’m extremely skeptical that any kind of major failure, or even a minor failure, could go through a resolution process in any way that would be orderly because of the way the state insurance regulators are set up, because of, in my opinion, all the sort of lies that are scattered throughout these balance sheets.
But I’m curious to get your take. What do you think would happen if a major insurer failed? Do you think that the state regulators could handle it? Or would there need to be some kind of intervention?
CORY ZASS: There’s already a failure out there, right? There’s still policyholders that have business with Executive Life. There’s still policyholders that have links to global bankers and Greg Lindbergh. There’s PHL Variable.
So, there have been policyholders affected by failures. And it all comes back to is there mechanisms in place to prevent it from getting to that point? I think that’s part of, is there a way to mitigate the risk of anybody ever slipping into that situation? And where are all the stakeholders showing that there is enough capital, there is enough governance and transparency, to show that the company is acting in good faith for that.
But clearly, I think the Guarantee Association that came out, I think NOLGA was formed in like in the 80s, if I recall. So, there are mechanisms to try and be that safety net, no different than the FDIC or the PCLB for the corporate pensions.
So, at the end of the day, there are mechanisms to facilitate this. Are they more reactive than they are proactive? I think probably that’s probably the best way of responding. It’s more needs to be done sooner. And more needs to be done to the extent that maybe the ones that were causing the problem that got it into the hot water that it is, maybe aren’t the best stewards to actually help try and work it out, right? I don’t want to say that that’s the wolf watching the henhouse and saying, well, keep watching it.
At the end of the day what it comes back to is the more you kind of publicly let something know that there’s a problem, then it affects everything. The asset values get affected, policyholders get affected. So, it becomes a death spiral to a certain degree and then they have to take the keys, right?
But I think that it comes back to is, can you surveil and understand what’s going on an ongoing basis? Not doing a financial exam and waiting three or four years after the fact. The barn’s already burned down. It’s somewhat useless in my opinion.
So, you have to kind of look at it much more, use technology, understand what’s going on. And if you’re doing that, then you can be on top of anything and prevent it from failing. Will you still have failures? Probably, right? There’s things that can happen. You can have a pandemic and all of a sudden, 30 million people die, right? At the end of the day, there could just be a catastrophic event that no one even envisioned and you can go insolvent, right?
So, I think it’s all about understanding the enterprise, the risk, the interconnectedness, how these organizations are based on promises made what they’ve conveyed to the board, what they’ve conveyed to the stakeholders. I think it is all. There’s no one finger that needs to be pointed. It’s the whole systemic environment and the ecosystem that needs to be kind of self-looked at and say, maybe we have to admit that what we’ve been doing is wrong. It doesn’t work anymore in this kind of environment. And we just have to kind of say have the desire to kind of make a change.
But it’s also hard when some people have been in the game for 30 years and you’re trying to change the rules on them, right? It’d be no different than you. We’re playing Monopoly and you end up becoming a bigger placement and owner of hotels and houses. If I change the rules on you, you’re probably going to be a little upset.
TEDDY DOWNEY: I want to ask one more question and then we’ll get to listener questions. If you have a question, put it in the chat or the Q&A panel.
My last question is, we talked about Bermuda, but I would love to get and I know you’ve done some granular work there. Can you explain to us how investments held by reinsurers in Bermuda can be of lower quality or higher risk profile than those held by insurers in the States?
CORY ZASS: Each jurisdiction has put forth its own view of asset risk. Some are a little bit more on the level that they need to expand. The NAIC has recognized that. Look, they’ve expanded CLO treatment. They’ve expanded the amount of C1 charges and broadened the number of buckets, so to speak, that these assets sit in to try and be more specific. The reality is there’s no real credit projections per se in any of the jurisdictions. They apply static approaches and then use that within their projections.
You can go to three of the big houses on rating agencies that rate these things. Do they all agree? No. The answer is no. But the end of the day, it still comes back to is if you understand and that’s where I think the actuarial profession is, that there’s been this reliance on the asset managers and how these things behave in the tail. And if there’s more transparency, more challenging of the assumptions, you’ll end up finding that the ones that have been the good stewards aren’t going to do anything. But the ones that are the bad stewards are going to be the ones that are going to end up having to raise more capital. Because it’s going to be very clear that the inherent rating and the inherent capital charge for those may not be enough.
And the whole point is that, if you’re having multiples of these things held, that you would believe that it’s 99.9 percent is there a 110th to 1 percent chance that something’s going to blow up? Well, I think that’s part of the whole testing and the more across the enterprise that needs to be evaluated and not just look at things in silos. It’s the interconnectedness.
You can have all the capital in the world, but if you don’t have the right cash at the right time, it doesn’t matter, right? It’s do you have the cash when you need it? And can you get the cash when you need it? Because Mrs. Jones, all she cares about is getting the check, right? So, that’s the most important test in our view. And I think from that standpoint, whether it’s one jurisdiction or the other, we’ve compared them all. Some may have a little higher on one and a little lower on the other. But it’s not like hold zero on one and hold $10 on the other.
TEDDY DOWNEY: We’ve got a bunch of listener questions here. Let’s start with this one. Are state insurance regulators awake on this topic? If so, which jurisdictions are acting to ameliorate the situation and which are not? What prompted Bessant to meet with state insurance regulators and NAIC? A lot of questions in there.
CORY ZASS: Yeah, there is. I think if you think about the entire makeup of the insurance market, right? It’s state governed. It’s state policed. Some states rely more on others because they don’t have the bodies, the expertise, the staffing, the budget.
So, I think that from my standpoint, that even if it might be one state that is deemed to be asleep at the wheel which I don’t think is the case at all. It’s just more of they’re all affected. They’re all in it together.
Could they do more? Clearly, there’s a concern by the federal government. Elizabeth Warren threw a letter out a couple of days ago about potential fraud and other aspects. But they’re all working in concert. There’s a lot of conversations amongst the different states.
And where they are, as I said is the head actuary at the NAIC or one of the lead actuaries at the NAIC in early August at the NAIC meeting, made it very clear that there needed to be more work done and analysis and understanding of the assets. And almost to the point where it’s like, look, the actuary profession has done an enormous amount of work for the last 100 years and understand the liabilities. Let’s understand the assets in the equally the same realm. And kind of places itself.
So, are the states if there’s no state that’s aware of this and has a near at the top of the topic list, I’d be extremely concerned. But I don’t see that as being the case. What was the second part, sorry?
TEDDY DOWNEY: It was what prompted Bessent to meet with insurance regulators?
CORY ZASS: Yeah, you don’t have to miss many front page articles, right? Are there assets that probably were a little bit more interconnected than others? How widespread is this? Why did we miss this? Who missed it? I think from the standpoint, the concern of the federal government is going to be like you’d expect. Do we have a concern here that there is going to be more than one more than zero, one or more insolvencies? And what does that do to the local employment? What does that do to the federal aspect of having to step in? Obviously, it’s human behavior. When things go bad, people start pointing their fingers and say, well, how did you allow that to happen?
TEDDY DOWNEY: Just a follow-up question here on this related to you mentioned Elizabeth Warren. There’s some predictions now that the Democrats could win not only the House but the Senate in the November elections. Would you expect more scrutiny from an Elizabeth Warren as head of the Banking Committee in this area? Do you think it merits more scrutiny? And what other what would you recommend to policymakers in Congress or in state government to create more transparency or otherwise get out in front of problems that you’re seeing?
CORY ZASS: I think there first has to be an admission that we really think that there is some problem, right? Whether that’s in a private, closed door meeting or in some sort of public forum. Clearly there’s been companies that have come in to try and get into the insurance market for all the wrong reasons. And how do you prevent that? You’ve already let some in. What is the case? But I think from that standpoint, there needs to be some true recognition that there is a problem to begin with.
And then you’ve got to look at it and say, how do we work within all of the jurisdictions, local and foreign, and say, is there something? You can look at it and say, the Asian market is tightening its capital requirements and what’s happening? Well, they’re leaving, right? But if there was no other places to go to, then could they leave? Would they leave?
So, I think it’s really that broader understanding of, if everybody is transparent and everybody is trying to ensure that Mrs. Jones is going to be taken care of, then it shouldn’t make a difference. And I think that is my concern where some are just purely skirting the need to hold capital when they really do need it. And from that standpoint, I think the jurisdictions need to work together, but they also need to be completely honest. What works and what doesn’t work?
TEDDY DOWNEY: Yeah, I mean, I think about this conflict of interest or you pointed out, like, why are you in this business? Are you in it to extract fees? Or are you in it to serve policyholders? And I think that is a fundamental question worth asking.
Here we go. Another question from our listeners. Are there any funding risks related to funding agreement-backed notes? How much rollover risk is being introduced into the insurance landscape? Have you done any work on these FABNs?
CORY ZASS: Again, it becomes where the promises are made to someone by someone. And whether it’s a corporation saying that they can pay down debt that they raise in the public markets or at some other funding agreements, at the end of the day are they going to work the way everybody thinks they’re going to work? And does everybody understand the risks associated with them not working?
Again, remember what I said when I first kind of got into my job. I had to assume everything didn’t work and prove that it could work. And when you assume that you understand the tail scenarios and how things don’t behave, the better you’re going to be to understand and make the promises.
So, I don’t want to be, I don’t want to get into any specifics on that specific question. But again, it’s just someone’s making a promise. Someone’s accepting that promise. And is it going to work 9 times out of 10? Or is it going to work 99 times out of 100? And are you being paid for that additional risk? Simple as that.
TEDDY DOWNEY: Yeah, I mean, I’ve always thought of the FABN issue as being it doesn’t seem like the investor is really doing any due diligence on the solvency of the insurer, the ability of the insurer to actually repay. They just assume that it’s money good. But this introduces a different it sounds like there’s rollover risk, that maybe these investors just don’t come back, right? They just say, hey, we don’t want this product anymore. And that becomes like a liquidity issue.
CORY ZASS:Yeah.
TEDDY DOWNEY: That’s an interesting way to think about it as well.
CORY ZASS: Again, a lot of these conversations, Teddy, can be taken into different contexts of different take it outside the insurance market. It’s the same issues, right? It becomes where if, at some point in time, the participants in the local fair don’t like the game, they think it’s rigged, then they’re not going to play the game, right? It’s no different. No one’s going to buy a lotto ticket if they think that it’ll never pay off, right?
TEDDY DOWNEY: So, these FABN notes could dry up. Your access to them could dry up the minute that they started thinking that there’s a problem. Which is exactly when you might need that kind of shorter term liquidity.
CORY ZASS: Right.
TEDDY DOWNEY: That seems not great. All right, another question here. We already did that one. Okay, we’ve got a bunch of questions here. Has the underlying credit deteriorated?
CORY ZASS: Has the underlying credit deteriorated? I am assuming we’re talking about a specific type of private asset, direct lending or whatever the case is.
TEDDY DOWNEY: Yeah, I’m guessing they’re talking about private. I don’t know. I actually don’t know. It says, here’s the full scope of the question. Has the underlying credit deteriorated? Is this similar to the high yield bond crisis in the last century? I mean, I’m not sure if these are related or separate actually, but I don’t know. Let’s move on, since we don’t know what credit they’re talking about. I mean, I’m assuming they’re talking about —
CORY ZASS: Well, I think we could talk about that.
TEDDY DOWNEY: Yeah, let’s talk about that. Like the loans, private credit. It’s loans to these portfolio companies. Has the quality of that deteriorated?
CORY ZASS: Well, I’ve always believed that is there going to be a limit on the amount of good credit out there? Is there enough good manufacturing companies that are going to take the loan? Is there enough good credit?
And then clearly, once you start kind of going down and saying, well, these companies, this is the collateral, this is the security for that promise, is that being scrutinized as much as probably should be? Arguably the answer is probably, you can always evaluate it more and understand whether there truly is a risk. Is it in a sector that is a little bit more susceptible than some other sector? The potential, the answer is yes. So, is there enough scrutiny if it’s all the BBB? But that comes back to where these tests that I was distressing, right?
At the end of the day, if you assume everything is pristine today, but they’re still in a different level of credit quality from A’s to the BB’s and everything in between, every flavor of ice cream. If you assume everything is good, at the end of the day, what we’re trying to do is determine do we have capital when they all don’t perform to be good, right? And that’s kind of the whole point is that if you do the testing the way
TEDDY DOWNEY: Your assumption is that this is actually tail risk.
CORY ZASS: It’s tail risk. It’s all tail risk.
TEDDY DOWNEY: This question is actually no, it’s not tail risk. These assets have already deteriorated potentially. Or they’re concerned that it’s already deteriorated before there’s really an economic downturn. And we’ve certainly seen indicia of this that. Hey, there’s already lawsuits suing these private credit companies for inflating their assets when they can prove that, hey, you haven’t marked it down in this portfolio. But I can see it trading publicly over here, and it’s already worth a lot less. So, you’re charging me too many fees.
There’s also just the overall concern that you have an incentive to lie because (a) you earn more fees, but (b), you are routing loans into your own your captive insurer that, hey, if it fails, that gets put on the policyholder and the taxpayer, not the parent company necessarily.
And then that’s not even getting to just the broad, well, you can’t even sell these companies. You’re having to loan to yourself, make loans to your own companies that you can’t sell, that probably aren’t worth what you thought they would be. So, there’s a lot of reasons to think the underlying credit has deteriorated in these portfolios, isn’t there?
CORY ZASS: Well, I would think that, first, if you think about what is the purpose of some of this private assets, right? They’re filling in a void when the traditional banking sector got out of it. They lowered their risk appetite. They did whatever the case is. So, someone stepped in and said, look, all these middle market companies and so forth, need to function. They need to grow. They need to expand, whatever the cases may be.
So, at the end of the day, certainly to us, is that there’s plenty of rules in place that say how you are supposed to determine whether the collateral is good, whether the mark is good? Maybe we need to look at, as an industry, and say maybe that needs to be looked at differently. Maybe it needs to be benchmarked differently. I think those are all valid questions that would be posed back to kind of the stakeholders or the rule makers to say, maybe we need to look at this and say, how do we align these situations?
But the bigger concern is that tow truck company that got the loan and that loan is now sliced up across ten different companies, how does that impact it? And clearly, in private, you don’t have the transparency to know, well, are they just picking it? I can tell you in the situation that we saw, there was an amendment. It wasn’t one amendment or two amendments. It was like, damn near 30 amendments.
So, it becomes more of a problem when that is only unearthed after the fact. And there’s got to be some form of transparency through that. And then, again, there’s still a need to have valuators, auditors, examiners. There needs to be some mechanism that can look across, to your point, and say, well, you’re right. That tow truck company’s already sold three of its trucks and it doesn’t have anything else. So, how is it going to properly work in this circumstance? And I think that’s where ultimately we see what’s going to happen is you’re going to end up having where there’s more almost a depository on a lot of the information that’s underpinning all these assets. So, everybody on the regulatory side, on the audit side, can see exactly that situation that you’ve just talked there.
TEDDY DOWNEY: A couple more questions before I let you go. Why has the issue of moral hazard not been addressed? For instance, Apollo Athene lent billions to Hertz to refloat. Apollo made money, but Hertz has lost 96 percent of its value. Do actuaries look at these moral hazards? Also, part of Hertz was financed with Knighthead Life and Annuity in the Caymans. We haven’t talked about the Caymans yet here, but what’s your view on this?
CORY ZASS: I can’t speak on the specifics of that situation. I have no comment on any Apollo Athene Hertz transaction. And from the standpoint of the actuary, the actuary is looking at it, you know, from their view, it’s pretty binary. Are these specific assets — and they have to look at every one of them, in the tail scenarios or in all scenarios are the amounts of interest and principle coming through as described?
How it got there, to what degree is someone else holding the equity and someone else is refinancing, I’m going to be honest with you. They don’t care. Because that’s not their job to get into that kind of situation. Their job is to look at and say, these assets, are they going to behave in the tail or in the moderately adverse scenarios? And are they going to pay the cash for the interest and the principle when due? And that’s the liquidity test, in essence, that’s going to determine the true protections to the policyholder. So, I don’t want to get into anything else on that.
TEDDY DOWNEY: I mean, it is interesting to hear that liquidity and solvency. I think of it as a solvency issue, but you do hear liquidity a lot, which is an interesting way to think about it. I’ve got a last question here. RBC ratios and balance sheet are backward-looking KPIs. What forward-looking financial KPIs do rating agencies use the most?
CORY ZASS: Well, the rating agencies have put out their own they’ve made it very clear on what they look at. They have that post, I believe, on their individual websites. So, I would ask that you go and look at what those ones are. I think that they all are attempting to do the same thing. Is management capable of executing on the strategy and manage the risk that’s inherent on the balance sheet for the protection of those promises being made?
TEDDY DOWNEY: Do you have any thoughts on what stakeholders should be looking at to see if there is — or what they should be focusing more on? You know what they’re doing. But certainly, there are failures currently at the rating agencies in terms of how they are evaluating risk on some of these portfolios.
CORY ZASS: Well, I want to make sure that I understand, Teddy. Are we talking the securities themselves being rated or the companies and the rating of the overall company? I want to make sure — the insurance company is an example.
TEDDY DOWNEY: That’s a good question. Yeah, they did say RBC ratios and balance sheet. So, they are talking about
CORY ZASS: And I think you’ve got to remember the balance sheet is what? It’s a snapshot at a point in time. And the future looking is based on has the actuary done the testing? Do the RBC or the other forms of capital regimes have forward-looking analysis that says, okay, does this have what it does to survive? But the reality is it doesn’t include new business. It doesn’t include forward-looking decisions that are being made.
Look, 1231 is an example as a year-end financial statement. Well, you don’t finish doing the analysis until maybe February, right? So, what decisions were made in January and February that could impede? If it’s material, then you’ve got to kind of incorporate that, right? It’s no different than if I valued a building at year-end and then the building burnt down in January. Well, the reality is I have to recognize that the building burnt down.
So, the forward-looking is, you’ve got to look at kind of past trends. You’ve got to look at the other pieces within the kind of the financial statements, read between the lines, read the footnotes. It’s not easy to be an insurance operator, let alone an insurance investor or rating agency or regulator. These are very, very complex machines that need to be managed.
And I think a lot of people take small pieces of information and extend that across. And I think that’s just dangerous as saying that the average temperature in the U.S. is 70 degrees. Well, tell that person in Arizona who’s planting trees. It’s meaningless, right? You got to get to the specifics of what it is on each individual company, each individual structure. And if you can’t get that information, then that just raises a different issue.
TEDDY DOWNEY: I actually have one last question and then I’ll let you go, I promise. If you were as concerned, as I am, that there are lies about the quality of the assets and someone like me is concerned about that or let’s say I’m in the government and I’m concerned about that what should I subpoena or what should I look into? How can I get confidence in, okay you think these assets are worth, like, what do I need to do to get them? What should I ask to get proof that the assets are worth what they’re worth? Like, where do I need to look? What should I ask for?
CORY ZASS: That’s a pretty loaded question. It’s like you’ve made me the sheriff and now we —
TEDDY DOWNEY: You’re the sheriff. You’re the sheriff. You think there’s a problem. You’ve got the power. What are you going to do to test out whether or not they’re lying about these assets?
CORY ZASS: Well, I think you’ve got to first look at it is it an over-concentration of one specific asset type in one company, right? Is there way too much of one area that has the potential for I don’t want to go to the extent of malfeasance, lying, whatever you believe is the word to describe it. But you’ve got to, you can’t just paint the entire industry this way.
We’ve got to say that, is there — if we took the entire life, non-life there’s assets on the non-life side. There’s assets all over the place, right? At the end of the day is there a way to paint that down into a smaller category and say, what are we really concerned with? Are we concerned that it’s 40 percent of the overall assets are affiliated? Or are we more worried that there’s two percent of the assets of that 40 that are really of the type that we’re concerned with?
I think you have to certainly first do a forensic understanding of the overall business as opposed to throwing wild subpoenas and sending the deputy out to kind of start knocking on doors. And I think that’s going to be what’s going to happen is you’re going to end up seeing where people are spooked and they’re going to just start knocking on everybody’s door. And I think you can be a lot more precise on the analysis and identify the ones that you can contain quicker.
And you’ve got to approach them. They have to de-risk. They have to somehow figure it out. Because they do, if they’re large enough and there’s few of them, but they can still create an enormous problem for the entire industry, right? Because ultimately, who picks up if these things fail, right? Ultimately, the good companies have to pay for the mistakes of the bad, right? Or the taxpayer is on the hook to bail them all out if that’s the case.
TEDDY DOWNEY: And the policyholders, they lose if they can’t get paid out. And these FABN holders, yeah.
CORY ZASS: And the taxpayers.
TEDDY DOWNEY: And the taxpayers as well. Citizenry, the citizenry really takes it on the chin, not the parent company. I think that is certainly a problem here.
Well, Corey, this was incredible. I learned a ton. Thank you so, so, so much for doing this today.
CORY ZASS: Absolutely. And I’m happy to come on or have a follow-up. If there’s any questions that didn’t get answered, I’m more than happy to spend some time and answer them. At the end of the day, I want to make it very, very clear. The insurance is in the promise business, to stand behind the promises and make sure that you have enough capital for the risks that are inherent on that balance sheet. That’s it. It’s not rocket science.
TEDDY DOWNEY: Yeah. No, and as you just mentioned, the citizens are on the hook here if these companies mismanage that capital and those assets and don’t have enough to pay out the promises.
CORY ZASS: Yeah. And you don’t have to constrain, to be honest with you, the competitiveness of the marketplace or that Mrs. Jones is now going to have to pay twice as much for whatever promises she was given because of new rules. In my opinion, there’s enough existing rules, that if we just look at it slightly differently, they’ll self-police themselves.
TEDDY DOWNEY: Well, thank you so much for doing this.
Before I let everyone go, if you enjoyed this call and want to be part of this community that is looking into risk in the world of private credit, please register for our conference on November 12th here in D.C. I think it’s going to be an awesome event.
Second, if you are on this call, you must be interested in private credit. You should be focused on how the elections will change the enforcement environment around private credit. We have our first 2026 election Outlook call tomorrow with our new partner, G. Elliot Morris. He is the best election forecaster out there, in my opinion. Please join us for that.
Third, please check out our Capitol Forum podcast. We’ve got a great series, including Second Request. This one is on private credit crisis and TCF Investigates. We also have Brussels Brief with my colleague Javier Espinoza.
And lastly, I want to thank my colleagues, Kim Geiger and Lisa Epstein. They are doing really pioneering work in the world of private credit. They introduced me to Cory and they’re the reason we’re doing this call.
So, Cory, thanks again. Thanks to everyone for joining us today. This concludes the call, bye-bye.
CORY ZASS: Thank you.
